Have We Reached Peak Federal Reserve?

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

As the Fed-induced asset bubbles in stocks, bonds and real estate follow the inevitable Supernova track to implosion, that we've reached Peak Federal Reserve will be obvious--in hindsight.

Billionaires and political lackeys alike have been falling all over themselves in the rush to praise the Federal Reserve's unprecedented monetary intervention since 2008. That billionaires and political hacks, apparatchiks and toadies cannot laud the Fed's Cargo Cult enough is no surprise: the billionaires and the government that feeds them both gained handsomely from the Fed's policies:

Government spending: up strongly since the Fed began pumping nearly-free credit and ample liquidity.

Corporate profits: soaring to new heights in the Fed-Bubble Era.

S&P 500: new nominal highs for stocks in the Fed-Bubble Era.

But what about the consequences for the non-billionaire, non-government, non-financial real economy?

Monetary base: this is what happens when the Fed creates money out of thin air to buy Treasury bonds and mortgages. Does this look remotely sustainable in the long-term?


Money velocity: in a strong economy, money velocity is high (for example, the mid-1990s) and weak in recessions (for example, 1973, 1982 and 2002). Money velocity has fallen to unprecedented levels, lower than any recession of the past 40 years.

Here's what all that Fed magic (jacking up money supply and lowering interest rates to near-zero) accomplished in terms of wages:

Here is household income, adjusted for inflation since 2000: it's hard to overstate how successful the Fed's policies have been in the real economy; no wonder billionaires and political toadies can't praise the Fed enough. Real household income only fell 7.2% under the Fed's billionaire-politico-friendly policies.

Employment per capita: this is employment adjusted for population growth: back to the levels of the late 1970s.

Full-time employment: all the way up to the same level of 13 years ago, while the U.S. population grew by 28%.


These charts provide ample evidence that we've reached Peak Federal Reserve: its monetary policies (zero interest rate policy--ZIRP, quantitative easing--QE, purchasing $1+ trillion home mortgages to jack up the housing market, etc.) have boosted the fortunes of billionaires and free-spending, easily-bought politicos but left wages and employment to stagnate.

All the Fed's goodies for the billionaires--the assets bubbles in stocks, bonds and real estate--have reached the point of "as good as it gets." From here on in, these bubbles have nowhere to go but down. As the Fed-induced asset bubbles follow the inevitable Supernova track to implosion, that we've reached Peak Federal Reserve will be obvious--in hindsight.

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Zer0head's picture


but Mr. Market appears to think that there may be the framework of a deal re budget/debt

Headbanger's picture

That is some scary shit on the money velocity and wages/M2 charts!

So it's saying mostly ALL of M2 is held by the 0.01% now and everybody else doesn't have the money to spend on much else but for survival!

Way to go Obozo!

Id fight Gandhi's picture

With velocity of money so low it means all that new money isn't going through the REAL economy. Employment, building things, producing etc.

Flip side is, if that were to tick up even a tad we would see hyperinflation as all that new money supply is in the system.

This is why we are seeing all the money stay in the markets it has nowhere to go.

NotApplicable's picture

The answer is simple. Will you still accept Fed Notes in exchange for goods and services?

The instant the answer is no, is the instant the peak is reached.

fockewulf190's picture

Two billionaires who see the real deal is Sprott and Hugo Sailinas Price, who wrote this article a few days ago. A potion of the article is below and well worth the 5 minute read.


When the world’s present troubles surfaced about five years’ ago, I recall reading articles whose central theme was: “there is excessive debt in the world. The amount of debt in the world exceeds the capacity of the world’s economies to service it and pay it down.”
To address the excess of debt in the world, four courses for action were mentioned:
The debt burden could be reduced by paying it down, via a policy of increased taxation.
The debt burden could be reduced by a policy of allowing mass bankruptcies to take place, which would write off substantial portions of the debt.
The debt burden could be reduced by a policy of massive monetary inflation which would devalue all debts and make them payable.
Alternatively, the intolerable debt burden and its absolutely inevitable reduction, nolens volens, would probably be achieved by a combination of all three policies.
In the intervening five years, the world’s excessive debt burden has not been reduced; on the contrary, it has increased. The governments of the world have behaved ostrich-like, burying their heads in the sand to ignore the problem, adopting infantile “extend and pretend” policy to debt and allowing further increases in debt in the hopes of spending their way out of difficulties by adding more debt to existing debt.

What can we expect of all governments in the world, today?
Not one single government is going to raise taxes to pay off debt. Such policy is contrary to the prevailing Keynesian religion. Besides, the debt burden is so gigantic that the idea of paying it down is out of the question. Governments are not even capable of raising taxes to prevent increases in debt, let alone to pay it down. So the first policy mentioned above, is out.
A drastic reduction of the world’s debt burden by cancellation of debt would require its cancellation at national, state, municipal, corporate and individual levels. Cancelling debts means simultaneous cancellation of assets, because every debt is someone’s asset. Massive cancellation of debt would be extremely painful and the last thing that democratic governments want is to inflict pain. Therefore, a process of reducing world debt could not come about by any plan or agreement; it would have to be ignited by some financial fire breaking out, and governments are quite alert to the least signal of fire and will proceed to extinguish any such accident by all means. We may as well forget about cancellation of debt as a remedy for the excessive debt burden weighing on the world -though accidents do happen.
The fact remains: the world’s excessive, un-serviceable and un-payable debt shall be reduced; this is an unavoidable event, as unavoidable as the force of Gravity.
Therefore, what we will see, from here on, is the world’s great slide into the third avenue for policy: massive inflation of the money supply. We are given notice that the slide is now seen as imperative policy: it is announced as “Whatever It Takes”. See zerohedge.com (click here). Now, inflation is not painful like paying taxes or seeing your financial assets go up in smoke. For the majorities, inflation is downright pleasant, like sniffing cocaine or shooting heroin. It is only in the advanced stages of inflation that its painful effects become apparent. So this is unquestionably the policy that will be implemented to deal with excessive debt in the world.

robdashu's picture

By then, I think it's. Come and gone.

Racer's picture

It would be an incredible benefit to the 99.99% of the world's population if it were the end of the FrauED

prains's picture

Bukakkee Ben and The Splashtones


aren't going anywhere.......their MOAR schnozzle is full and liquidity abounds. The Fed is the Billionaire's Splash Park and we're not invited, get used to it, nuttins changin until they decide it's changin.


Revolutions take real people to enact, look around.....we're in short short supply

hyperfocus's picture

diminishing returns

Seasmoke's picture

Yes. But give those motherfuckers in 1913 some credit. 100 year charter. Perfect timing. Pretty impressive.

NotApplicable's picture

Impressive from the POV of making that ole self-fulfilling prophecy work, that is.

RaceToTheBottom's picture

I didn't think they would make it to have it impload at 100 years, but the last 30 years they were working hard.

km4's picture

A Funny Thing Happened In 2008 http://www.zerohedge.com/news/2013-09-20/funny-thing-happened-2008

From the 1950’s thru the 1970’s, our economy made great economic progress. We became a global super power, innovation and technological advances flourished and we became the beacon of prosperity around the world. With that, equity and real estate prices once again expanded at a tremendous rate. In the early 1970’s, with sky high interest rates and massive inflation, we saw yet another market bubble eviscerate. Ironically, all of these asset classes once again converged on gold in 1979. Only this time the bubble was larger from the 1929 bubble. The 80’s were ushered in by Ronald Reagan and a new feeling of optimism spurred in much part by patriotism and great global economic expansion. From the early 80’s to the present we have enjoyed much prosperity until 2008.

Excellent summary and from 2008 bigger and bigger bubbles !

Yes we've reached Peak Federal Reserve

NOTaREALmerican's picture

Re:  The 80’s were ushered in by Ronald Reagan and a new feeling of optimism spurred in much part by patriotism and great global economic expansion.

Not to mention doubling the deficit (debt).  

It's amazing how much optimism free money will generate.  

I think that's why Krugman was hoping the space-aliens invaded so that he could - once again - witness the "Keynesian" wealth created by increasing the size of Big-Mic.

Everybody loves the "Keynesian" scam they got rich off of:   That's not a centrally planned crony-socialist scam!   That's an investment in our children's future!

NOTaREALmerican's picture

It looks like "the rich" (previous thread) have access to more information than "the poor" too.

maskone909's picture


please consider removing the video banners

how can i pretend im being preductive at work while reading zerohedge

when advertisements decide to open blarringly loud? ;P

plus they kill browser speed

non video banner much better

maybe the asian broad with the big tits?

superflex's picture

cough, "Adblock plus", cough

Mark_BC's picture

If anyone missed my respnse to Charles Hugh Smith's OUTRIGHT LIES he presented the other day in his "Peak Government" post, I will provide a link here. Basically, he manipulates the numbers by selectively using NON-INFLATION CORRECTED data for certain graphs, and then conveniently, when it suits him, uses inflation adjusted numbers for others. He then compares the two apples-to-oranges to draw a conclusion which is COMPLETE BULLSHIT.

In reality, government spending as a % of GDP has barely expanded at all over the decades. CHS is either delusionally incompentent or an outright liar.


Bay of Pigs's picture

"In reality, government spending as a % of GDP has barely expanded at all over the decades".

LOL. You've got to be fucking kidding me.

Mark_BC's picture

Crunch the numbers for yourself. But don't let facts get in the way of some good ideology...

Bay of Pigs's picture

Numbers and facts? I don't know, maybe $17T in debt, with over a hundred trillion more of unfunded liabilities might come to mind.

Ideology? Sounds like your head is up your ass to me insisting that gov't spending has gone nowhere for "decades" (as compared to GDP, as you assert).

Mark_BC's picture

I'm not really sure how you can be disupting what I'm saying. The numbers are right there in front of you. It's very simple. You take Charles Hugh Smith's graphs and for each year you add together federal and municipal / state spending and then divide this number into GDP. You will see that government spending as a % of GDP has barely gone up in 40 years. You can use either inflation-adjusted or current, non-adjusted numbers, but what's important is that you are consistent.

$17T in debt? Yes, that's what an exponentially growing debt-based monetary system will give you ... debt must grow exponentially. You may also notice that the private sector's debt is ballooning as well.

Bay of Pigs's picture

Fair enough. My point is that we are screwed anyway you look at it. 

And I don't always agree with CHS either, but I think this article is spot on.


terryfuckwit's picture

missing the point completely mark.. GDP is now just another fairytale balloon money figure pumped by the same pseudo positive feedback loop that is creating all the other bubbles.. you argument goes like this "balloon diameters are prop[ortional to the volume of air in them therefore all is well carry on pumping"

Mark_BC's picture

I never said we aren't in a bubble and that the balloon isn't going to pop. Of course it's going to collapse. What I take issue with is the assertion aongst right wing circles that this is the result of the "unproductive" government increasing in size and squeezing out the "productive" private sector, when the data does not in any way support this simplistic explanation. There are several much more profound reasons explaining the collapse of the US economy, and they do not include out-of-control government spending.

terryfuckwit's picture

i still call the inflating of fairytale balloon bubble assets as unproductive goverment/banks (they are one entity) and government/central bank interventions guarantee gross malinvestment. It is very dangerous thinking to look at government as a victim. All fiat is ultimately totally elastic and all governments despite best intentions will enter the hyperbolic feedback loop of infinite debt expansion as all the graphs show. Looking at the debt explosion is key not volume of air /diameter of balloon ratio...Mal investment does mean squeezing out a potentially more productive private sector...

Mark_BC's picture

I don't really disagree about the bubbles and malinvestment, in fact I'd echo your sentiment exxactly. But the logical conclusion is not to shut down government and throw half the people out of work in a totally hopeless attempt to somehow balance the budget (it's impossible to balance the budget in a debt based monetary system) and expect that the private sector will be able to pick up the slack; it won't. There are very deep structural problems with both the US and world economy and simply doing the Austrian thing of letting the pain sort itself out isn't going to work.

Broomer's picture


The article above was published less than one month prior to the crash. They used the fucking "New Paradigm" kiss of death in the title.

Those times were a sight to see. It was in every way the same mentality from the times of the real estate bubble. Everyone here was screaming "silver to the moon". Math Man, like always, was making his jokes. I wonder why he was banned soon after the crash.

Fundamentals for silver are good. It is a non renewable resource, being extracted from ores with ever lower amounts of it. Hindsight is always right, but the price going up so much in one year should have raised some flags. Not to mention intervention to avoid price of an industrial commodity exploding, as well as the USD implosion.

This happened before, with rhodium. Prices went to the Moon. This drove an intense effort to replace it wherever possible, bringing the price down back to Earth.

Now back to the point. Do you think that pointing graphs and using reason will avoid your comment to be drowned by the herd voice? That's not how Zero Hedge works.

world_debt_slave's picture

cool, now I have a chance to see a supernova and/er experience one

OneTinSoldier66's picture

Nope, it hasn't led to rising wages. But at least it has made sure that we have TBTF as a new normal, and that TBTF "Corporate" CEO's continue to get their multi-millions in pay and bonuses.



Bunga Bunga's picture

It's all Obamacare's fault.

HardlyZero's picture

16yrs of CRs + TEA party + ACA = CACA      a very potent drink !!!!

The TEA Party got there first...stir in some ACA....and poof !

Also 16 years of CRs led to the TEA Party.

It all started when Clinton was not up to developing a budget...he was busy doing other things.

Chickens come home to roost.

Better now than later.

ACA was the tipping point, the tripping point, the catalyst.


Anybody going long into this weekend or next, with all this CACA flying around, has to be seriously confused.  If this CACA is still splattering next week then next Friday will be very interesting at the close, and in 2 weeks that Friday may be last until the banking holiday.

CACA and Sh*t hitting the fan now....

moneybots's picture

"that we've reached Peak Federal Reserve will be obvious - in hindsight."


Kind of like that stock bubble Greenspan pretended he couldn't see until after it burst.

moneybots's picture

"The debt burden could be reduced by a policy of massive monetary inflation which would devalue all debts and make them payable."


How do you pay your debts when inflation drives the price of food and gasoline to where you can't afford them, which leaves one with no money to repay debts?

HardlyZero's picture

"Inflation is Taxation without Representation."  Japan is tyring to inflate now, so their existing debt will be 'easy' to pay off.  

If you have a fixed rate mortgage, and inflation takes off, and then you get paid 2x as much....in inflated dollars, then you can pay off your mortgage that much quicker. 

But....if you keep borrowing into the inflation, and can't pay off the higher rate debts...its "GAME OVER".  That is why this is so much high anxiety and 'gaming' the system.  Its very very risky to attempt this ...and the longer it lasts the higher the default rate.  Very risky.

shankster's picture

It's peaked! Now let's shut it down & move on to better things, better days.

Burticus's picture

ZH: "That billionaires and political hacks, apparatchiks and toadies cannot laud the Fed's Cargo Cult enough is no surprise."

Rothschild Brothers of London: "The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests."

Jumbotron's picture

We reached the Peak of the Federal Reserve the day after the Federal Reserve Act was enacted in 1913

OpenThePodBayDoorHAL's picture

Don't think we are at PEaK FED just yet. I think it was Kyle Bass who interviewed one fof the Fed Governors, who said "our balance sheet is at $3 trillion now...but there's nothing that prevents us from taking that to $6 or even $9 trillion"

AE911Truth's picture

Yes, the Fed has peaked! The nations of the world (as well as the state governments, and congress) are shutting it down as we speak.

Replacement in progress . . .

Where is the world's Gold? On deposit in 172 banks in 49 countries with about 360 accounts, one of which is the Bank of Hawaii (with 175,000 metric tons). 172,000 metric tons were buried under the World Trade Center and stolen just before the twin towers came down. The rest of the gold is buried in various hiding places.

Who owns it? It is in a trust, with humanity as its main beneficiary

Who controls it? I have suggested that the Bretton Woods institutions deal with the valid signatory authority at their upcoming Annual Meetings on October 9, 2013

Shouldn't the world know about this? Yes,

Why is this not being spread around the internet by alternative media? It soon will be. Here is a sampler:


Keep your eye on the ball: the Latter Day Saints (knee deep in the drug trade), the Chinese (trying to install martial law in the US), attempted revaluation of the Iraqi Dinar to finance the now bankrupt Federal Reserve System. They all see the writing on the wall and are making last ditch efforts in plain view that only serve to further discredit themselves.

Ref: Karen Hudes


robdashu's picture

How long is the road and how big can the can get?

Been expecting imminent blowup for several years...