Step Right Up And Test Your Central Banking Skills Against The Scariest Economy Of All

Tyler Durden's picture

Submitted by F.F. Wiley of Cyniconomics

Step Right Up And Test Your Central Banking Skills Against The Scariest Economy Of All

I offer a chance to test yourself as King of the World. By that, I mean top dog at the Federal Reserve Bank.

The test is based on two scenarios, one describing our circumstances today and I’ll explain the second in a moment, although you may figure it out without my explanation.

Here are a few characteristics of each scenario:

As you can see from the data, the second scenario would mean pandemonium at today’s Fed. The jobs picture alone would call for aggressive action. But the deflation, in particular, would have the FOMC in a tizzy.

In the economist groupthink of the last decade, nothing can be worse than a fall in prices, however slight the drop may be. Even a mild inflation rate of below the Fed’s 2% target is cause for alarm, as we saw in 2003 when core inflation of slightly above 1% prompted a cut in the federal funds rate to 1%, which we thought at the time was super low. Little did we know then.

Now let’s look at a few financial market indicators in the two scenarios:

On balance, there’s not much in the second table to suggest the Fed would ease its deflation battle in Scenario #2. Tepid house prices – slightly down on a two year look back as shown in the table – would only reinforce policymakers’ resolve to give the economy a boost.

And while stock prices are rising more quickly in Scenario #2 than they are today, that’s not unusual of an economy that’s pulling out of recession (recall from the first table that the last recession ended a couple of months ago). What’s more, the earnings multiple of 15.8 is well below today’s 17.5 multiple.

Have you recognized the second scenario yet? Here are more clues:

If you haven’t guessed, Scenario #2 is early 1928. Benjamin Strong was near the end of a long stint as head of the New York Federal Reserve Bank (he passed away in October 1928), where he enjoyed the same immense power that Ben Bernanke has today. The economy had just begun to recover from a recession in December 1927, and there was much unemployment and spare capacity. According to the Bureau of Labor Statistics, the jobless count jumped by 1,874,500 from the unemployment trough in 1925 to early 1928. Farmers were especially downtrodden. Agriculture was booming during and immediately after World War I, based on thriving exports to Europe. Overinvestment during the boom then gave way to stagnation in the 1920s.

The most worrying connection between 1928 and today may have less to do with the statistics above, though, and more with the global backdrop. Europe was in a bad state in the late 1920s, just as it is now. What’s more, two of the world’s three largest economies are now in Asia, and these economies face similar challenges to those of 1920s Europe.

Here’s my summary:

While analogies are never perfect, the parallels with early 1928 are troubling. When the world slipped into depression in the late 1920s and early 1930s, it was on the back of imbalances and debt overhangs that are oddly similar to those that we face today.

Put your beliefs to the test

Getting back to the test I promised, I recommend applying your economic and policy beliefs to early 1928 conditions, and then asking how your decisions might have played out. Imagine you’re Benjamin Strong, puzzling over a strange brew of rising stock prices, uneven economic recovery, suspect banking practices and unusual strains in Europe’s monetary system.

For background, Strong acknowledged that his July 1927 decision to lower rates was a mistake. The stock market seemed to interpret the credit easing as a green flag, taking off on a dizzying two year climb that ended with the October 1929 crash.  In a claim that reveals quite a lot about changes in central banking practices since the 1920s, Fed Governor Adolph Miller later called the 0.5% rate cut “the greatest and boldest operation ever undertaken by the Federal Reserve System, … [resulting] in one of the most costly errors committed by it or any other banking system in the last years” (as reported in Liaquat Ahamed’s bestseller, Lords of Finance).

Strong tried to correct his mistake by lifting rates in several stages, from 3.5% in February 1928 to 5% by July. It was too little, too late, though, as far as controlling speculative excess.

That’s not to say that a stock bubble and eventual downturn could have been averted completely with different interest rate policies. There was much more to the interwar boom/bust cycle, such as game changing innovations in money markets that allowed margin debt to reach ridiculous heights.

But the crazy part of the comparison to our current situation is this: It’s hard to imagine that today’s Fed would have responded to early 1928 conditions with anything other than extreme stimulus. Applying the Fed’s deflation phobia, full employment goal and formal inflation target to the data above, the case for stimulus was stronger than it is now.

Another way to look at it is that Strong hiked rates three months into a recovery because he was concerned about speculation, and that kind of thing just doesn’t happen anymore. By comparison, Alan Greenspan waited 35 months to hike rates in the 1990s recovery and 31 months in the 2000s recovery.

And not only has Ben Bernanke never initiated a rate hike cycle, but his policy framework is based on encouraging rather than discouraging speculators. It’s no exaggeration to say that he’s trying to turn all savers into speculators, by reducing Treasury yields to a pittance and unlocking wealth effects that are a critical part of his thinking.

Of course, Bernanke’s approach is based mostly on his interpretation of the Great Depression. The risks that I’ve flagged in this article (and others) are the potential side effects to his depression-fighting remedies. And the 1920s experience suggests that these side effects could include, well, another depression.

(Click here for data sources and other technical notes about this article.)

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
IndyPat's picture

"to his depression-fighting remedies"...
Check your think this is about staving off depressions?
I see depression-magnification measures.
But I'm a cup half empty kinda guy.

RSloane's picture

It takes a special kind of stupid to assiduously study the Great Depression and its causes, then steadfastly repeat the exact conditions that led to it. Bernanke is the type of physician that would prescribe a heavy dose of leeches for curing sores and boils. Imagine the fate of the puss-eating leeches carefully applied to the economy....I mean patient. 

Stuck on Zero's picture

Leeches?  Are you comparing Wall Street to a bunch of leeches?


jbvtme's picture

all this banter about dysfunctional economies...this whole planet is on life support

CH1's picture

Central Banking IS THE PROBLEM.

mvsjcl's picture

And the people who created the problem are uniquely suited to craft and implement the solution.

hmmmstrange's picture

Maybe it's time to give distributed banking a shot.

CH1's picture

Maybe it's time to give distributed banking a shot.

Clearly, you are a domestic terrorist.

IndyPat's picture

Points to the pre-meditation of it all! This great scholar of Depressions
And the posts quoting this...
"Fed Governor Adolph Miller later called the 0.5% rate cut “the greatest and boldest operation ever undertaken by the Federal Reserve System, … [resulting] in one of the most costly errors committed by it or any other banking system in the last years” just selling the Bernank short. Those punks knew nothing of great and bold operations, or of costly operations committed.
Behold the wonder of the Bernank and of when we speak of him, "fuck you" is the proper salutation! I hope the history books don't overlook this.

maskone909's picture

I was just visiting with family the other day when i shifted the conversation to politics and finnance. Of course... I fucking read zerohedge and im paranoid and all that shit... Right? Any ways, i began to show the fam a couple of charts provided by the FED website showing the monetary base VS velocity. I told my bro, when velocity corrects and shoots north, we are fucked. To which he replied, "thats why im buying apple. They are going to do a huge buyback soon" At this point i threw in the towel.

Stoploss's picture

Ben is/will be the first in history to be forced to monetize into rising rates.  Whatever, LOL!!

Bring on the debt jubilee!!! WEEeeeeeeeeeeeeeeee..

But, but, this time is different!????

sgt_doom's picture

In looking at the "causes" of the Great Crash and Great Depression, one MUST examine all variables and all causation!

Just as those policies of Andrew Mellon must be closely examined, so to must one understand the "tax cuts" brought about with the absence of alcoholic beverage taxation due to Prohibition, when said "dark pools" were being laundered through the NYSE, and the rampant securitization of the 1920s (instead of the tranformation of debt into securities/bonds, it was the transformation of debt into stocks, etc.).

Securitization was halted with the passage of the 1933 Securities Act, but nothing of the sort has been undertaken this time around.

TheMerryPrankster's picture

indeed the antithesis of rational policy has occured, the looting has been amplified and no one has been prosecuted.

THe rot runs deep in this nation and its "markets"


NickVegas's picture

It is amazing to me how deep the rabbit hole goes in our thinking. As an engineer, a leech is a very elegant solution on a number of variables. It's free, it's painless, it is minimally invasive, and it does promte blood flow to the extremities, and God forbid, you can even use them without instruction in your own home. I believe, and I emphasize, I believe, that increased blood flow would in fact help you heal an infected sore or boil.

Go ahead as see what modern medicine has to help cure these aliments. Even an antibiotic would need blood flow to get to an infected area. Belief in western medicine is so inculcated into our thought processess, that people cut their tits off on a hunch by the quacks. In some ways, western medicine is a religion. Name a disease it cures, and yes, I do go to the emergency room for damage but not disease. Quit thinking like slaves. There is no magic wand controlled by the quacks.

ncdirtdigger's picture

Those 'quacks' did a fine job curring my wife (and millions like her) of breast cancer. 


Say, just how many goats have you sacrificed this month?

TheMerryPrankster's picture

yet they couldn't cure my father, mother and sister's cancers.

They are not gods, they are people like us making guesses.

We all heal ourselves, doctors cannot heal you. Only you can heal you.

Your health is yours, take care of yourself, do your best and still you will die, it will just take longer. Death is inevitable, enjoy your life, it is transient.

On a long enough timeline we are all dead.


God Bless The Virtuous's picture

If I might add some color on Bernanke.

First off, we have to remember that the word Depression is not a word that Hank Paulson and Bernanke could have gone in front of the American public back in the dark days of 2007 and said the pain will be epic but we will be better off going through the depression,( that was actually put off first by Greenspan(while Bernanke was his number one go to guy on said depressions), but "We had to do something" as in "Whip out the bazooka" sounded better at the time.

Depressions are cleansing cycles, deleveraging is a kinder way to look at it. The level of excess, the number one reason for our pains today, as then, boils down to one word folks, no matter what bullshit the talking heads throw at you,


There is now more leverage today, thanks to Bubble Blowin Ben, a moniker he will wear like a scarlet letter down through history! There is real pain to be shared and the PROGRESSIVE policies of this current administration will only usher in the mother of all global deleveraging routs.

Lets start with a somewhat easy entry point as to a cure, pension reform.

Every civil servant, and I was one so I feel I have a right to speak from experience here,(local 100), is going to have to give back and give back way more than they are being led to believe by their scumbag union rep's. The Richard Trumka's / Andy Stern / Stephen Lerner and the rest of Obama's henchmen,(the money men with George Soros and Bill Clinton / Ron Burkel)etc,etc, have a grand "Fabian Socialist" / Progressive solution that has been a hundred years in the making.

You have to study the history and the players, the so called endgame of their socialist dreams. Its called "Collapse the System" and was started by good old "Cloward and Piven", then you get the opportunity of "Top Down, bottom up, and Inside Out" of Valerie Jarretts favorite Czar, or should I say former Green Energy Czar, Van Williams.

If these peiple don't sound familiar, do some homework folks. Valerie Jarrett is Obama's EVIL BRAIN, just as it was Karl Rove who was purported to be Dubya's little genius!

Until we get the rank and file American worker to stand up for the benefit of the country and be ready to "Give Back", some of the so called promises made over the past 50 years(this will not happen and I predict that the union bosses will ultimately get their rank and file 100 % of NOTHING), because the un payable state and local obligations would bankrupt every municipality that tried to honor said pensions. The depression will wipe that slate clean, it will administer an equal dose of MASSIVE pain and if the socialist "CURE" is allowed to be brought out and floated as serious "REFORM" then it will have all been in naught and the "Top down, bottom up and Inside Out" PROGRESSIVE / SOCIALIST policies of the powers that be(republican as well as democrat) will have finally killed our experiment of the past 237 years in Liberty / Freedom and Man's self rule!

We can't even approach entitlement reform / tax simplification, so this might prove unachievable.

America will be as Obama,(One Big Ass Mistake America), had touted during his first run for President, "Fundamentally Transform America" into some big Government knows best Progressive / socialist utopia and we will never be able to return to the founders Guiding Principles of "God and Country" that has kept America and her dream of Freedom and Liberty for all the shining city on a hill the Lord has kept a watchful eye over for her history.

Before we had "in God We Trust" as our motto, one other contender as,

"Rebellion to Tyranny is Obedience to God"

and another little factoid from a far gone time was right on our early coins, and I quote,

"Mind your Business"

America and her people are exceptional, we are the greatest country the world has ever know exactly because through all the blood and sacrifice her people were always on the lookout for liberty robbing threats from the inside and out. But when you welcome the wolf into the camp, well now, things don't tend to end well.

God save the Republic, one INDIVIDUAL at a time!

God    Bless   The    Virtuous

TrulyBelieving's picture

Gblv, That (even though it would never be acknowledged as such by most) was written with great insight.

All Risk No Reward's picture

If by the word "stupid" you mean Machiavellian treachery," then we agree.

Stupid, given its customary definition, belongs to the people who allow this criminal to get away with looting society of trillions of dollars and transferring it to his bankster overlords.

Look at the first chart to see the trillions in public debt being transferred directly to the bankster class - and that doesn't include all the off balance sheet debt...  yet!

Surly Bear's picture

If what we believe to be true were true, then this problem would be solved. That is, if everything Bernanke believes to be true were true, then this cycle would be a memory . If everything the classicist believes were true then inflation would through the roof etc. Economics isn't rational because people aren't rational, and truth, if can be known, is something else or in between. Word of advice? Sure, prepare for the worst. 

Arrowflinger's picture

They had the Strong dollar policy back then..

Sorry I could not help myself.

GVB's picture

I promis to pay you back in the future. I promise to not exceed the fiscal cliff. You see what's happening here?

Arbysauce's picture

You never let a serious crisis go to waste. Cut rates->boom->great depression->new deal->rinse&repeat

IndyPat's picture

Don't forget moar war! It's a key function to the formula

Seasmoke's picture

Free Beer Tomorrow.

Croesus's picture

@ Seasmoke:

"Why put off until tomorrow, what you can do today?"

I worked hard all day yesterday, and did about 2 days' worth of projects, so I don't feel like an alcoholic for relaxing with cold beer this early. 

Ironically, I am drinking free beer. Someone brought it over to my place on the 4th, and left it here. 



NeoLuddite's picture

If alcohol were discovered tomorrow, it would be hailed as the greatest medical breakthrough of all time.
That is until the residual effects became apparent...

Methinks there's a parallel here with the Bernank's FED ZIRP (Zero Interest Rate Policy.)

To illustrate:

Alcohol isn't a stimulant, it's a depressant.

Drinking too much often leads to impaired judgment, blurred thinking, a tendency to exuberant behaviour and memory loss.
Example - Hey! Y'all watch this!

Heavy drinking can cause verbal diarrhea followed by nausea and a prolonged deep sleep.

Excessive drinking usually leads to a severe hangover with no known cure.  "Hair of the dog" just delays the inevitable.

Croesus's picture

@ NeoLuddite:

Drinking too much often leads to impaired judgment, blurred thinking, a tendency to exuberant behaviour and memory loss.

It sounds to me as though the problem of the Sheeple is "Drinking too much", after seeing you describe the effects.....

Impaired Judgment, Blurred Thinking, Exuberant Behavior, and Memory Loss = Traits of a Sheeple.



Winston Churchill's picture

Can we get out of this Depression before talking about the next ?

jon dough's picture

Sorry, no, that would imply that we had exited the previous Depression when we all know we didn't.

Yes_Questions's picture



And then there's that.  This article carries water for those claiming there is recovery right now.  There isn't.  The ship is still sinking and listing badly.


But those deck chairs sure look great over on the highest decks.



All Risk No Reward's picture

The organic economy (not influenced by marginal debt issuance) is contracting $500 billion a quarter right now.

Given that, and the central banks are orchestrating higher interest rates, the logical conclusion is that something wicked this way comes sonner rather than later.

Third chart down:

Oldwood's picture

Depression is a state of mind. Think of it as the "new normal", or as Obama would phrase it, fundaMentally transforming America....and the world. Depression in deed! There is a significant portion of the world applauding what is transpiring here. Its about eating the rich and we aren't talking Rothchild here, we are talking anyone willing to work for anything above a government provided existense. Zombies hungering for brains! They will eat any living flesh for they are no longer alive, but its the brains they really crave. The part of us that makes all else possible.

disabledvet's picture

two months getting killed here. not for a double dip recession obviously and am not going to feel devastated by a 5-10 percent loss given the previous gains. simply put we're normalizing or "re-inserting risk" as it were. all commodities have gotten crushed but oil. that can be a sign that the recovery is being maintained. could be a sign that oil is a ridiculous outlier as well. either way sustained high oil prices are bad for the recovery...bu need not be materially so since natural gas is cheap and abundant. IMHO a new energy normal is well underway with (ideally) New York and Texas as the great energy super powers...not the least reason being they have some...although obviously all the other States have done wonders in extraction said resource and actually monetizing it.

maskone909's picture

Recovery? How long have you worked for CNBC/CNN/BLOOMBERG?

Pandorable's picture

If so many *amateurs* can see the dangers of current misguided Fed policy, the logical question is why does this ass clown still have any decision-making authority?

Or maybe a deeper question if Ben has covert objectives tied to his banker besties merits investigation.

To allow him to continue means we have no one to blame but ourselves.

IndyPat's picture

Lulz wut?
Allow him?

I didn't see his fucking name on any ballot. I looked extra close last election. And doesn't " Fuck you, Benny!" sort of hint at disproval?
I was down with the helicopter plan....until I realized it wasn't going over my house...just between banks. BoA and friends get the choppers full of cheese, we get the drones.

Oldwood's picture

The very fact that amateurs can see it tells the elite they must be right. Anything else would make their education and vocation a mockery. We are all "deniers" now, for if we do not fall immediately in line with what the "scientists" tell us we are only confirming our ignorance and stupidity. This cannot and never will right itself as long as we continued to dominated by those who would refuse to see facts over beliefs.

RSloane's picture

What is this "we" shit? After reading some other ZH articles' comments section it appears I've [as part of the great unwashed "we"] also been blamed for some other things, like the housing crisis and WS sucking off the gov't teet. If you want to feel guilty about or assume any responsibility for all this mess go right ahead, but please do not include me in the "we".

Now if you will excuse me, I will retreat to my "situation room" where I am baking homemade rolls and bread for a party/picnic later today, and NOT planning the explosion of one of the super economies of the world over which I have total control and authority to fuck with.

SunRise's picture

"We" is "Me" upside down with the change shaking out of my pocket!

All Risk No Reward's picture

Apropos - but you forgot the bankster with his cup below collecting it all for himself!

Yes_Questions's picture



I don't buy it.  This time is different.  


Greed and Manipulation are still the major actors, but the stage seems much different.


Was the FED monetizing then the way it is now?


Was an alien invasion pedestrian talk of economic stimulus?





I am Jobe's picture

Da Amerikan Dream

Got TV

Got College degree debt

Got 150 channels

Got college football

Good times are rolling. Yes we can Yes we can


sodbuster's picture

There is one comment missing.............Fuck you, Bernanke!!!! There- that's better.

Obese-Redneck's picture

excellent, EXCELLENT, article. Kudos to the  author and a free poke at my 300# wife, freebie.

moneybots's picture

"While analogies are never perfect, the parallels with early 1928 are troubling. When the world slipped into depression in the late 1920s and early 1930s, it was on the back of imbalances and debt overhangs that are oddly similar to those that we face today."


It is not at all oddly similar.  Back in somethiong like 1967, Alan Greenspan wrote that 1920's FED policy lead into the Great Depression.  Alan Greenspan DOUBLED DOWN on that policy.  When you do the same thing, you get the same result.

The question is- why did Greenspan do what he KNEW was wrong to do?  Why was Glass Steagall dismantled when they KNEW what would happen if they did?  Why were leverage waivers granted to the investment banks when the SEC KNEW would happen if they did?


Croesus's picture

@ Moneybots:


It was all part of the plan. I really liked JS Kim's article, which is worthwhile, if you haven't already read it:

It is patently absurd to accuse the TOP of being "stupid". They know exactly what they're doing, and what the outcomes are likely to be, barring a black swan event.

It's all about reducing the population. Reducing them physically, reducing them mentally, and financially. Control their lives, from cradle to grave.

Notice I did not say 'control "OUR" lives'; I don't think anyone who is a regular reader of this site, blindly goes along with much of anything that is being sold these days.


pndr4495's picture

Yep - make the owners of the Fed richer than they are already.  Didn't Ben Franklin say that the real , the REAL cause of the Revolutionary War was that the Rothschild led Bank of England was furious that the colonies iissued their own debt free money?  Of course that will never be taught en masse in our schools. Sooner or later the charade of The Federal Reserve System will be uncovered.


virgilcaine's picture

The Fed does not control interest rates. The Market does and always will.