Things That Make You Go Hmmm... Like The Fed's Logical Fallacies

Tyler Durden's picture

Last week, in Part I of “That Was The Weak That Worked,” we reviewed the equity markets in an attempt to see how equity investors managed to scamper through 2013 with the friskiness of puppies when all about them lay doubt and potential disaster.

We found the answer in quantitative easing — of course.

This week we will take a look at how the bond market managed to navigate the same 12-month period and see what can be learned about 2013 in order to forecast for 2014.

Let’s begin by considering the subject of logical fallacies — an endeavor rendered more obsolete with each passing day.

(Deus Diapente): The study of logical fallacies is useful in learning how to think instead of what to think. In learning how to deconstruct an argument, you learn how to efficiently construct your own thoughts, ideas, and arguments. You learn how to find fallacies in your own line of reasoning before they’re even presented, which is a valuable methodology for learning how to think. Which is a lot more honest, liberating, and possibly more objective than simply regurgitating what society, teachers, parents, preachers, friends, or politicians tell us…

“Learning how to think instead of what to think”?

The very idea is enough to send many into an Austen-like swoon, and yet within this relatively simple construct lies a principle that, if it were applied to today’s markets, would have every rational investor rushing headlong into the hills.

Allow me to demonstrate using everyone’s favourite logical structure: the syllogism.

A syllogism is classified as a point-by-point outline of a deductive or inductive argument. Syllogisms normally contain two premises followed by a conclusion:

Premise 1:Miley Cyrus is the most talented musician of her generation.

?Premise 2:The most talented musician of every generation achieves legendary status.?

Conclusion:Miley Cyrus is a legend.


The conclusion, from a purely logical standpoint, holds water. The problem comes when either of the first two premises is not accepted by the person to which they are proposed.

At that point, the argument starts to fall apart.

The common term for this kind of flawed argument is a “non sequitur,” which literally means “it does not follow.”

So let’s apply the syllogistic approach to the concept of quantitative easing and see how we go:

Premise 1:Central banks have been printing money like lunatics.?

Premise 2:Their printing of money hasn’t had any ill effects.?

Conclusion:Printing money doesn’t have any ill effects.

Right then. There’s our syllogism. Do you want to go first, or shall I?

Oh… ok.

Quantitative Easing IV (or “QE IV” — so-called because it was injected directly into the veins of the monetary system) was unveiled on December 11, 2012, when Ben Bernanke announced, as Operation Twist expired, that in addition to the ongoing QE3 program (which committed the Federal Reserve to buying $40 bn in MBS every month) he would sanction the additional buying of $45 bn in long-term Treasury securities. Every month. Forever. Until further notice.

The rest, as they say (whoever “they” are), is history.

The effect on the Fed’s balance sheet is plain to see:

That’s a very steady, predictable line; and markets, as we have discussed, LOVE steady and predictable. The consistency of this curve underpinned the strength in equity markets this year, as I demonstrated last week. But in Bondville? Well, that’s another story…


2014 is going to be a bumpy ride for bond markets, folks. Count on it.

Government debt is at levels that only governments themselves would pay, at exactly the time when they are trying to lean more heavily on the private sector to take up the slack — good luck with that.


Interest rates, bond markets, and the housing market are inextricably intertwined. They always have been and always will be. Period.

You cannot monkey around with one piece of that eternal triangle and expect the others not to be affected at some point, and just because nothing bad has happened definitely does NOT mean it won't.

It will.

2013 may well have been The Weak That Worked, but the odds on that continuing for another 12 months are very short indeed.

And so, as we wrap up this week, let's revisit the idea of logical fallacies and throw a couple more that the guardians of the global economy are relying on into the ring for good measure:

The Taper Syllogism
Premise 1: The Fed tapered its monthly asset purchases.
Premise 2: The taper had no major negative effect on markets.

Conclusion: Tapering has no negative effect on markets.

The Housing Bubble Syllogism
Premise 1: The government has all the data on the housing market.
Premise 2: The government sees no bubble in the data.

Conclusion: There is no housing bubble.

The Interest Rate Syllogism
Premise 1: The Fed sets interest rates.
Premise 2: The Fed has promised low rates of zero to 0.25 percent "... at least as long as the unemployment rate remains above 6.5 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."

Conclusion: Interest rates will stay at zero to 0.25% and zero to 0.25 percent will be appropriate "... at least as long as the unemployment rate remains above 6.5 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."

The Inflation Syllogism
Premise 1: The world's central banks have printed ~$4.7 trillion.
Premise 2: There is no noticeable problem with (official) inflation numbers.

Conclusion: Printing money doesn't cause inflation.




Full Grant Williams letter below...


Comment viewing options

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

The Fed is intentionally distributing wealth from the middle class to the wealthy.  There is no cognitive dissonance or logical fallacy.  The only thing that makes you go "hmm" is why more people don't see this.

Newsboy's picture

"Animal Spirits" now. It's not flawed logic.

It's an incantation to make the animal spirits rise again!

Ignatius's picture

"The only thing that makes you go "hmm" is why more people don't see this."


There are power dynamics that makes a strict academic analysis 'academic', as they say.

OC Sure's picture

You are too kind to call it a distribution; it is theft. More people, the "masses," don't see this because they are raised and indoctrinated to believe and trust their authority figures; no questions asked. Hmm, do you think more people could "see" if "education" was not assumed by centralized government? Why think for yourself when you can gaze at totem poles? Does public education pass the litmus test of the 10th amendment?

Now, where is that petition for a redress of grievances?

Lordflin's picture

The number of people who actually have wealth to be redistributed is at an all time low... Those who have already been fleeced have joined the perennial poor in desperation and are not all that interested... most of them.... in the grand picture. Most of those who still have something left to redistribute are being successfully redirected against those in desperation (as well as the perennial poor) who they have been duped into seeing as the problem.

That leaves the few of us who understand where our wrath should be directed to uselessly flail our fist at the clouds...

Or perhaps we could find better employment for our fists...

Or perhaps we could find something more useful than fists...

eddiebe's picture

Here's what I say: Fuck the Fed.

Dr. Engali's picture

Premise 1) Federal reserve notes are backed by nothing.

Premise 2)The fed prints money out of thin air.

Conclusion) I can use air for money.

disabledvet's picture

these are PENNY promises...not "taper", i mean "paper" promises. the "theater of the absurd is now CLOSED." Lord Keynes? Say hello to Sir Isaac Newton. In other words "Doctor Watson didn't just want to know how Sherlock Holmes knew he was coming...but that it would be him who would come." How is this possible using "deductive logic"...and of isn't possible unless you have an understanding of "the information age" and "what in fact is possible." ("very little" to be precise.) so we must order to determine...and in so doing we must move beyond making JUDGEMENTS and INFERENCES. hmmm. in other words..."give me a number? the one on the table is trillions" good doctor. state your "hypothesis" please and tell me how you would proceed.

U4 eee aaa's picture

And yet Yellen seems eager to put on that nice shiny new collar (maybe she practicing for a noos.....uhhhh, better not say that....NSA)

Goldilocks's picture

the muppets show intro (0:53)

The Muppet Show - We're Off to See the Wizard (3:02)

Muppet Show - Mahna Mahna...m HD 720p bacco... Original! (2:26)

OC Sure's picture

1. All men are mortal

2. Tyler is a man

3. Therefore, Tyler is mortal.

Upon this we all can agree. However, I am sure that regarding your syllogistic examples that Aristotle would advise you to check your premises to determine that your statements do not contradict what is. Of course, this is your point; that a syllogism, ah hem, propaganda, must be false if its premise is too. But then the term Logical-Fallicy is itself a contradiction in terms... Nevermind, I still like your analysis that is entirely factual where over the past several weeks/months you have pointed out by way of observation that as QE comes to an end then long rates FALL. A bumpy ride indeed.

Ham-bone's picture

Government debt is at levels that only governments themselves would pay, at exactly the time when they are trying to lean more heavily on the private sector to take up the slack — good luck with that.

It is clear there is no buyer in size to step in for the Fed anywhere near these rates as the Fed "tapers"...this is easily proven. 

Easily proven today's debt choked "economy" cannot fare well in a rising rate environment.

Easily proven QE cannot stop without taking us back to '08 (or worse). 

So is the Fed stupid for implementing a taper or intent upon a short term head fake or intent on taking us back to '08???

Now invest?!?!


Peachfuzz's picture

"It is clear there is no buyer in size to step in for the Fed anywhere near these rates as the Fed "tapers"...this is easily proven."

It's as clear as mud to me. I've been watching the reverse repo facility as it expands in size and duration. I've also noted that Cyprus was a template, and Poland nationalized private pensions. So when the taper begins, and the interest rises the price of the bonds fall. When the price of the bonds fall, the banks become unstable and need collateral. In the event of a tbtf bank failure, deposits (which come from unsecured creditors) can be reverse repo'd (or used on the treasury market, which ever is more convenient) and treasuries can be put on the balance sheet of the bank. This drives the interest rates back down at the unsecured creditors expense. If this isn't enough, all pensions in existence can be mandated to hold bonds. Please review this article for proof in the pudding, as they say.

   There's a bag holder for that fed liability sheet, but nobody wants to talk about it, because the resulting answer makes it apparent to all just what dhs was thinking when it bought all those Guns and Ammo.

Ham-bone's picture

“foreign” holdings of US Treasury bonds are a record $5.65 T of the $12 T public outstanding debt (vs. $2 T Fed holdings)  and foreigners are not selling off their holdings tells you they have been reassured QE is forever…otherwise they would soon be facing large losses as yields rose and bond prices collapsed…in other words, on a QE taper of Fed’s buying, Treasury still will issue in excess of $1 T plus foreigners would front run the exit…the Fed could not mop this up w/out a much increased QE and I know there's some lquidity but $5 T worth...that might require lots of selling causing other markets to tank (restarting '08).

Bail ins are possible but simply collapse the economy...and definitely would cause some major anger...

Peachfuzz's picture

Purchases of US Securities drop to fresh post-lehman low was the most recent post I could find, and up till that was this, but when I searched the archives, I found a slew of articles from 2012 forward indicating that they have been selling much more than they're buying. I'd also throw in there some references to the dollar dump from John Williams, G. Celente, or this article on the Globalist agenda from Brandon Smith

   If QE is forever, wouldn't you quietly front run the exit anyway? Who wants to own paper backed only buy military force that's worth less every day? Some might be more convinced to hold that paper if they knew it would be serviced at all costs by the citizenry of the country. It's a catch-22 at this point, as you point out bail-ins collapse the economy, but so does qe4eva. All I know is that this won't be pretty, and I don't think they've been floating the TBAC presentations and removing the safe guards on deposits for nothing.

   WWI was financed through the sale of US gov gold backed bonds. In 1933 Roosevelts rubber stamp congress repudiated the gold value of those bonds as it was 'against public interest'. They can and will do that again. It makes much more sense to start a war, legislate a mandate for the purchase of bonds by the citizenry to finance the war, and then reneg on the debt years later after the war. That way, there's no standing army that just got fucked out of their money.

   an aside; says FDR did it because the government didn't have the gold. Garret in "Burden of Empire" states that Senator Glass got of his sick bed to deliver an opposition speech to the delution of our money. He said that all debts outstanding by the US could be paid with approximately 1/3 of our nations gold (I'm paraphrasing as I don't have the book in front of me, but it's an awesome read if you have the time.) This was a part of the plank system of the communist takeover of this country, even then.

These days they don't have to repudiate the gold value of the bonds to pay them, they can just hit Ctrl P

Ham-bone's picture

Trend of Foreigner holdings of US Treasury debt since ’08…go check the source data and notice foreigners are maintaining just about record high Treasury holdings...

Jan ’08 $2.4 T foreign held US Treasury debt - new debt issued $1 T - (Fed held $400 B...purchased $0)

’09 $3 T FH's-      $1 T New Debt -      Fed bought $400 B QE1...$600 B Foreigners buying    ($0 left over after Fed/Foreigners)

’10 $3.7 T FH's -   $1.9 T ND -            Fed $0 treasuries...         $700 B in foreign buying      ($1.2 T left over)

’11 $4.4 T FH's -   $1.7 T ND -            Fed bought $0 Treasuries in QE2...$700 B in foreign buying ($1 T left over)

’12 $5.1 T FH's -    $1.3 T ND - $0....  Fed bought $800 B...        $600 B in foreign buying     ($-100 left over)

’13 $5.6 T FH's -    $1.35 T ND -         Fed bought $0...               $500 B in foreign buying     ($835 B left over)

Oct ’13 $5.65 T FH's - $700 B ND -     Fed bought $540 B in QE3...$50 B in foreign buying     ($100 B left over)

seems main reason for foreign holdings slowdown in ’13 was Treasury issued $680 B while QE was buying up $540 B…first qtr of '14 (oct-dec) budget is about $180 B deficit on target for about $750 B or likely closer to $800 B annual after sequester non-cuts...Fed purchased $135 B ($45 B left over...)

here’s the source data…

I'd gladly be wrong but we have to do our best to have a common understanding of where we are...and for now based on TIC there don't seem to be negative consequences or selling of US Treasury debt.

NoWayJose's picture

Premise 1 - Companies are making their products smaller. Housing prices are up 12%. Big investors are buying up housing and are increasing rents. Obamacare is increasing health care costs. Tuition costs are at all time highs. Gasoline prices are at an all time high for this time of year. Apple has released a faster iPad for the same price.

Premise 2 - the government says there is no inflation.

Conclusion - the only thing the government uses to measure inflation is the price of iPads.

Johnny Cocknballs's picture

Yeah, not really a fallacy, just false premises, baby. 

What, say, a Krugman does a lot is affirm the consequent.  But of course that's something most economists of any stripe, and anyone with an agenda tends to do.  That's formal. 

What Krugmanbearpig excels at is informal, begging the question:


Any form of argument in which the conclusion occurs as one of the premisses, or a chain of arguments in which the final conclusion is a premiss of one of the earlier arguments in the chain. More generally, an argument begs the question when it assumes any controversial point not conceded by the other side.

To what extent this may be a result of Krugman suffering from some sort of taxoplasmosis due to his collection of centrally-planned cats is beyond the scope of this comment.


disabledvet's picture

"when dealing with markets logical thinking is the problem." in other words "you can't account for taste...but you can price it in." When I go to the store I don't just buy "bread." Instead I buy "Wonder Bread" or some other "facsimile of bread." If I have actual inflation...I can reduce "costing" by simply selling the loaf directly at market...growing it myself and selling it myself if need be. If its a problem the Government can simply "print bread" so to speak (as France did in the 1980's.) This time around however we seem to be printing "advertising" and "packaging" and that does not strike me as a "recipe for success." isn't the ACA a case study in this? "we paid for slick marketing campaign...but we paid a lot for it!"? so sure..."QE works"...but that's probably because "it's predictable" so in that sense I can "account" for what the Government is doing. (generating inflation, pricing away the deficit.) But Machiavelli says "look to the result" too...and in that sense I cannot "account" for behavior that is Aposite of the expectation...hence "the fallacy of logic" appears because it doesn't account for the actual data. This type of thing might be fun and games for computer types ("look at me ignoring the data! i'm so logical!") as well and good, but if you're running a multi-billion dollar cash register "you don't run it on a Silly-gism." (which can be done "logically" using the device of "rhetoric.") You run that thing QUANTITATIVELY...meaning "using numbers"...math. "logically" math does a lot of strange things..."formulas" can be changed to fit the data...but data can be absolute as well. in other words if you live in a time when prices fall "a number pops in your head"...a physical quantity. this is "absolute zero" for example. Logic says "such things cannot exist"...and then we are to proceed to "rhetoric" in order to determine outcomes or "truth." But this is in fact a FALLACY...meaning an empirically proveable short "I know absolute zero does exist and it is in fact a number." the question becomes for me therefore "does risk exist in markets?" I have made the argument for many years "buy, buy, buy." i've now completely sold out my entire belief system and moved to "short, short, short." i apologize for the inconsistency. but i am not attempting to be logical but RATIONAL in saying this. and i've really done a bad job i think of verifying this through data. (and my performance is not double digit positive...well, actually that's not true...i still did that as well, but i beat gold by a mile in ABSOLUTE terms) in short forget accounting for the moment and ask..."does growth exist? is there in fact inflation? can i "observe" (in my mind's eye or for real) the calculation and infer the expected result vis a vis expectations?" and in my view the answer is ABSOLUTELY YES. in short "we are not monetizing the debt"="taper is not tightening." a logical argument can be constructed to make this "seem" true...but the data is at such a variance that you're not just being contradicted by the evidence...but by math itself. "you only have one source for entire research?" that's bad math...still, it is better than "pure speculation." a scientist might ask Chairman Bernanke "how are you verifying that you are not monetizing the debt?" ...or "how do you know that tapering is not tightening?" so...and sorry for lack of sentence breaks here to make this more pleasing to the eye..."explain your reasoning or RATIONALE so that I may be better informed vis a vis the data that is clearly PRESENT." i would want to know this because "flying in the face of reality" in the world of finance says " windshield" to me. Obviously if i were running a billion dollar cash flow machine i wouldn't just want to know this...i would demand public. "I have enough trouble running a will i run the Government too?!" And I would explain it not using gold or some other "logical construct" (a "wonderful rhetorical device") but "a number." A trillion sounds "good" to me...and i ain't talkin' cash flow...because i understand "that's a number." logic might make it sound "payable"...but math dictates the opposite...and interestingly can "make it so" via forcing us to pay it back in pennies. and isn't that all that Taper is? "we will now monetize will now pay for it in pennies"? in other words "the heart of all philosophy begins with the patently absurd and then i try and construct a logical argument around it in order to see if it appears true." and to think people believe "it's all about the propaganda." REALLY? "not in the theater of the absurd." in that realm...and this was actually PROVEN as true..."anything is possible provided the logic is circular" or, even "better" so to speak..."that the method proves the means." would not use "logic" in markets at all. i like the part where he says "oh, yeah." what kind of "ultimate being" says "oh, yeah?"? right up there with "data" searching his own "data banks." hmmm. how is that possible. still..."makes for good show" i guess. oh, and as for "collars" ...all options "happen in the future" and therefore while they can be priced...cannot be priced in. here is an absolute: you are foregoing any gains AND income in the market by exercising this strategy (worked GREAT in the 90's.) but you do know your risk as you are not "naked" (meaning you have no ownership stake at all in the trade...which is definitely criminal in my view)...hard to do the box trade though because you get no return on your i've actually gone long treasuries "in defiance of the Fed" which now says "it can print trillions (of DEBT)" into existence "and pay for it in pennies."

wisehiney's picture

Yep, those higher rates defeat themselves.

Reaper's picture

The flaw in all the premisses is that what happens at certain levels may not, or will not, apply at different levels.  As example:  If I step on the gas, the car goes faster, applies in a range of speeds, but not at maximum engine power or at highest speeds.   The mathematical error in all the financial predictions is that they ignore how effects change after repeated use or as they move into other ranges of their data.   Our financial masterminds are victims of their short/small interval projections to determine long range outcomes.

Fíréan's picture


Premise 1:Central banks have been printing money like lunatics.?

Premise 2: Behaviour liken to that of lunatics is an ill effect  ?

Conclusion: Printing money does have  ill effects.

ebworthen's picture

Printing money causes obscene inflation whose wanker is only seen by those regualr folks on main street.

honestann's picture

Well, here is one important fact to remember whenever people talk about "thinking" and "fallacies" and "logic".

In reality, almost all actions have MANY consequences.

Even when one is careful to evaluate consequences in one domain, the conclusion can be utterly wrong, or entirely beside the point, or almost irrelevant, because of other consequences that were simply omitted from analysis.

This happens all the time.

I don't even know if this fallacy has a name!

Maybe call it "the fallacy of limited domains"?

Probably somebody already gave this a name.

But this fallacy is actually practiced all the time on purpose.  Almost every scientist being paid to "study" so-called AGW is a master in practicing this fallacy.  In fact, any scientist who refuses to commit this fallacy is not given the job in the AGW field, or edged out of the field if they somehow slip past the radar.

But as bad as AGW is, I don't want to pick on them (as much as they deserve to be picked upon).  Almost all scientists working on military, government or corporate projects must master and embrace this fallacy, or they can't do the work.

Of course, we won't even discuss fields like so-called "political science", since they manage to avoid recognizing the most extraordinarily fundamental fact that "government" is a fiction... which means their entire "science" is a fiction.

That is, unless you consider "political science" to be a study of the psychology of human behavior as distorted by their overwhelming and unquestioning belief in such blatant (not to mention nasty) fictions.  Actually, that is a worthwhile field... to identify what is fiction, what is real, and the endless insane, horrific, self-destructive consequences humans suffer when they believe overwhelmingly massive fictions are real.

Kuanyeah's picture

No noticeable inflation? Most QE money have gone to the rich 1%?

d edwards's picture

I would add to this article 0bozo's blathering the other day about how "one dollar in unemployment payments created two dollars (and jobs) in ecomomic growth" or words to that affect.

If this is true, then EVERYBODY should be on unemployment and the economy will boom!


Pure bullshit because that first dollar has to come from the taxes of someone already working so it's a zero sum game.


And now come "promise zones" and we know all about Baarakk's fucking promises.

Pseudonymous's picture

I suggest this be posted as Friday Humor:

The Adventures of Fallacy Man