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David Stockman Pulls The Plug On Janet Yellen’s Bathtub Economics

Tyler Durden's picture




 

Submitted by David Stockman via Contra Corner blog,

Some people are either born or nurtured into a time warp and never seem to escape. That’s Janet Yellen’s apparent problem with the “bathtub economics” of the 1960s neo-Keynesians.

As has now been apparent for decades, the Great Inflation of the 1970s was a live fire drill that proved Keynesian activism doesn’t work. That particular historic trauma showed that “full employment” and “potential GDP” were imaginary figments from scribblers in Ivy League economics departments—not something that is targetable by the fiscal and monetary authorities or even measureable in a free market economy.

Even more crucially, the double digit inflation, faltering growth and repetitive boom and bust macro-cycles of the 1970s and early 1980s proved in spades that interventionist manipulations designed to achieve so-called “full-employment” actually did the opposite—that is, they only amplified economic instability and underperformance as the decade wore on.

The irony is that the paternity of this real world proof came from the Yale economics department, which was inspired in the 1960s and 1970s by one of the most arrogant, wrong-headed Keynesians of modern times—–Dr. James Tobin. It was Tobin’s neo-Keynesian theories and activist role in the Kennedy-Johnson White House which gave rise to the Great Inflation and its destructive aftermath.

Still, Professor Tobin could perhaps be forgiven for the original science experiment in full employment economics he helped author from his perch at 1600 Pennsylvania Avenue. After all, economists were just then enamored by newly invented large-scale math models of the US economy and their equations always generated beneficent results.

But there is no debate about what happened next. The Heller-Tobin CEA proclaimed that the America of the early 1960s—an economy that Eisenhower had left in fine, growing, non-inflationary fettle—was suffering from too much “slack”. This included unnecessarily high levels of unemployment (@ 5.5% in 1962!) and a general failure to utilize capital and labor resources at their full-employment level and thereby achieve “potential GDP”.

The latter was held to be mathematically calculable and was reckoned by the JFK’s Keynesian doctors to be tens of billions greater than reported GDP. Accordingly, until the nation’s economic bathtub was filled full-up to the brim there was an urgent need for more fiscal and monetary stimulus.

When conservatives protested that deficits should be reserved for national emergencies and were potentially inflationary, Tobin and his acolytes impatiently huffed that traditionalists didn’t understand economic “slack” and its policy cures. As they had it, “slack” was an economic free lunch that could be harvested by means of “accommodative” policy until the last steelworker was called back to work and every auto plant mustered a third shift.

Soon the experiment was off to the races with large deficit financed tax cuts for individuals, a generous tax credit for business investment, giant increases in Federal spending for the war on poverty and soon thereafter the war on Vietnam. And all this was accompanied by a steady drum-beat from Tobin for “easier” monetary policy. This encompassed feckless monetary experiments like the original treasury market “twist” and endless pontification about how the growing surfeit of unwanted US dollars abroad was actually a gift to the rest of the world.

If the Europeans wanted to redeem their excess dollars, as they had the right to do under Bretton Woods, Tobin had a plan: Instead of gold, give them 10-year US debt that would never be paid back.

Needless to say, the whole thing ended in calamity. Johnson’s guns and butter economy got red hot; inflation soared; widespread shortages suddenly materialized; large industrial strikes proliferated; the US balance of payments plunged deep into the red; and then a full-blown dollar and gold crisis flared up in the winter of 1967-1968. All the while, insuperable pressure was put on the Fed to “accommodate” fiscal policy until the politicians could screw up enough courage to take away the fiscal punch bowl.

History makes clear that then and there the Fed was housebroken. When Johnson closed the gold pool on his way out the White House door and Nixon performed the coup de grace by defaulting on America’s obligation to redeem dollars for gold at Camp David in August 1971, the US dollar left the traditional world of monetary standards. Thereupon it embarked upon the brave new world of the PhD standard that reigns among all central banks today.

But here’s the historic crime of the piece. The serviceable and experience-proven regime of a gold-based monetary standard was destroyed by the PhD’s the very first time they got their hands fully on the levers of national economic policy. In the argot of Breaking Bad, the blame for the immense economic disorder of 1966-1983 was on them.

Accordingly, here is where professor Tobin gets his nomination to the Eternal Woodshed. Rather than going back to Yale chastened by the disaster he had wrought, he spent the next decades teaching a whole generation of students about the virtues of bathtub economics and that levitating “aggregate demand” was the essential key to keeping the US economy humming tightly along the arc of its full-employment potential.

Stated differently, not withstanding his own abject failure as a policy-maker,Tobin remained an evangelist for the proposition that a tiny clique of economists can deliver macro-economic results that are far superior to outcomes on the free market resulting from the interactions of millions of producers, consumers, savers, investors, entrepreneurs and speculators.

As is well-known, one of Tobin’s first students to be conferred a PhD after he repaired from his Washington follies to Yale was Janet Yellen. That was 1971. If Keynesian economics in a national bathtub that was not at all a closed system was nonsense even then, it surely is nothing less than a laughingstock in the blooming, buzzing, churning global economy of today—-a place where the source of the marginal supply of labor and capital cannot even be pronounced in Washington, let alone be measured, calibrated and factored into a policy equation.

Yet here is Janet Yellen at a Congressional hearing yesterday faithfully lip-synching professor Tobin. She has not even learned any new jargon in 43 years!

“In light of the considerable degree of slack that remains in labor markets and the continuation of inflation below the (Fed’s) 2 percent objective, a high degree of monetary accommodation remains warranted,” Ms. Yellen said.

This was all by way of justifying the lunatic proposition on which the Fed is now operating: Namely, that for the 68th consecutive month it kept the money market rate at zero—a condition that has never previously occurred in all of human history. Well, outside of post-bubble Japan anyway, and its evident how well that’s working.

But under the Keynesian macro-models— zero interest rates are really nothing more than a magical “slack” fighter. The assumption is that the US economy—even as it prepares to enter it sixth year of “recovery”—remains deficient in that mysterious ether called “aggregate demand”. Therefore more of same needs to be conjured by the ultimate in low interest rates—which is to say, 5 bps on the federal funds.

Well, let’s see. Non-financial business has taken its debt from $11.0 trillion on the eve of the financial crisis 76 months ago to $13.6 trillion today, but this immense borrowing binge all went into financial engineering in the form of stock buybacks, LBOs and M&A deals. Actual “aggregate demand” for real plant and equipment outlays is still $70 billion or 5% below it 2007 peak. So how can another month of ZIRP accomplish what the first 67 months evidently haven’t?

And then there is the consumer, who shopped during the entire 40 years of Dr. Yellen sleepwalk, but has now finally and unequivocally dropped. Household leverage soared after the Tobin/Nixon/Milton Friedman depredations of the 1960s-70s, but it has now rolled-over. Stated differently, for 40 years the Fed tilted at the specter of “slack” by periodically slashing interest rates, but that only caused households to ratchet-up their leverage ratios—spending more today by hocking their future.

Accordingly, the Fed was not creating an ether called “aggregate demand” at all. It was simply causing consumer spending to be inflated by the layering of excess credit growth on top of available income. But with the leverage ratio now having just begun its long descent back toward solid ground, the Fed can conjure no ether of demand, but keeps banging the interest rate lever just the same.

Household Leverage Ratio - Click to enlarge

Household Leverage Ratio – Click to enlarge

The pathos of the Fed’s misbegotten ZIRP is even further evident in the chart below. Just how is it that zero interest rates generate any of that aggregate demand ether when nearly 100% of the gain in borrowing over the last year has gone to student debt serfs and sub-prime auto borrowers who will be underwater on their loans before the first payment is due?

At the same time, mortgage credit is not expanding, and appropriately so since its still stands at a 2-3X it historically ratio to wage and salary income. The only exception is a small pocket of jumbo loans to affluent homebuyers and a recent surge in floating rate home equity lines to upper income households. But do the latter really need ZIRP to fund another junket to the Caribbean? The fact is, the household credit channel is broken and done. Still, Yellen lip-syncs Tobin’s tired old slack song.

Then there is the public sector. But my heavens—do politicians need to be told for yet another year that they can push the treasury’s mountain of outstanding debt closer and closer to the front end of the curve where it will cost nothing? In fact, the Bernanke-Yellen Fed has become the great enabler of deficit finance by making the carry cost of the Federal debt so pitifully and artificially cheap that politicians have no choice except to go along for the ride. The Fed has effectively seized control of fiscal policy through the backdoor of ZIRP and QE.

The obvious point is that there is no rational economic justification whatsoever for 68 months of ZIRP. It is completely owing to an atavistic attachment to bathtub economics. It represents the triumph of pseudo-science over reason and history. It embodies a model based on aggregates, arithmetic and algorithms rather than the sound economics of prices, choices and markets.

And that gets us to Yellen’s insensible and terrifying case of bubble blindness. Actually, she belongs to the camp of the bubble mute as well, insisting on the phrase “asset value misalignment”. But the essence of Yellen’s startling obliviousness to the bubbles all around her goes all the way back to Tobin’s easy money teachings.

In short, when it comes to interest rates, Tobin did not teach economics; he lectured about monetary plumbing. Under bathtub economics, the Federal funds rate is a dumb plumbing control—-the pavlovian lever you pull when you want more aggregate demand. But here’s a news flash.  Its actually the smartest thing in the financial firmament—that is, its the price of hot money.

Indeed, its the most important single price in all of capitalism because it regulates the protean and  combustible force of speculation—that is, the deeply embedded human instinct to chase something for nothing if given half the chance. Accordingly, the very last lever the Fed should toy with is the price of money;  and the very last economic precinct it should try to “stimulate” is the money markets of Wall Street. That’s where the demons and furies of short-run, lightening fast financial speculation lurk, work and mount their momentum trading campaigns—ripping, dipping and re-ripping as they go.

Stated differently, the Federal funds rate is the price of trading risk—the regulator that drives the carry trades. It is the mechanism by which credit is expanded in the Wall Street gambling channel through the process of re-hypothecation.  When the funds rate is ultra low for ultra long it massively expands the carry trades. That is, any financial asset with a yield or short-run appreciation potential gets leveraged one way or another through repo, options or structured trades—- because re-hypothecation produces a large profit spread from a tiny sliver of equity.

Needless to say, the massive carry trades minted in the Fed’s Wall Street gambling channel are a deep and dangerous deformation of capitalism. In money markets that are not pegged by the central banking branch of the state, outbreaks of fevered speculation drive short-term market rates skyward in order to induce more true savings from the market or choke off demand for funds. The money market rate is therefore the economic cop which keeps the casino in check.

Accordingly, the carry trade profit spread can go from positive to negative quickly and drastically, meaning that there are always two-way markets in the underlying financial assets. There is no shooting fish in a barrel full of free money. There are no hedge fund hotels where carry-traders can drive in-the-money strike prices higher and higher because premiums are dirt cheap.

Needless to say, the Fed’s 30-year encampment in the heart of the money markets has destroyed them; it has turned price discovery into the primitive, computerized act of red-green-and-orange-lining the Fed’s latest meeting statement to see which word, tense or adjective has changed.

At the end of the day, the Fed has been implanted in the money markets for so long that it does not even recognize it own handiwork. The speculative disorders and financial bubbles which are the inherent results of its interest rate pegging are seen as exogenous forces which emanate from almost any place on the planet except the Eccles Building. And even if some ultimate responsibility is acknowledged as to errors inside the great house of monetary central planning it’s always put off to failures on its regulatory and supervisory desks, and always after the fact.

So the bonehead bureaucrats like James Bullard who have come to populate the Fed like to blather on with gibberish such as the proposition that bubbles are “obvious” but none are ever identified until after they burst. In this spirit, Yellen yesterday took the monetary central planner’s 5th amendment:

broad metrics don’t suggest we are in obviously bubble territory.”

These are the words of a Tobin acolyte— a trained monetary plumber. The reference to “broad metrics” is self-evidently the forward PE ratio on the S&P 500. But the leading edge of the market does not lie in the blue chips—it builds in the outer rings of speculation such as the Russell 2000, the junk credit universe and the global EM sector.

Yellen has no clue about markets, carry trades and the dynamics of the treacherous Wall Street gambling channel where she keeps banging the fed funds lever. She is merely reading from a list of bromides provided by the Fed staff.

But it’s a fact that margin debt is at an all-time high—both in dollars and as a percent of GDP where it currently tops out at 2.73% compared to 2.66% in March 2000. Might not this have something to do with the Russell 2000 having recently traded at 100X reported earnings; or the fact that it had risen from 350 in early 2009 to 1200—that is, by 250%—in the context of the most tepid recovery in the recorded history of the Main Street economy where most of these small caps function.

Then there is the junk credit world. CLO issuance has already exceeded the lunacy of 2007 on a run rate basis (nearly $100 billion). And Wall Street is again providing essentially repo financing to the fast money at 9:1 leverage on 80 bps of carry cost. That amounts to dirt cheap triple leverage on the LBO-CLO market.

Yes, the forward PE for the S&P 500 in October 2007 was a respectable 15X, but that was because it was based on “ex-items” and sell side hockey sticks showing 2008 EPS of $115. In the actual event, ex-items turned out to be $55 per share, and honest GAAP earnings for 2008 came in at $15 after massive losses were liquidated out of that particular bubble.

So here we are again at the same broad market multiple as 2007—-which happens to be about 19X on a reported basis. S&P 500 earnings have barely grown by 10 percent since late 2011, notwithstanding more than a trillion dollars of share buybacks. So there are bubbles everywhere— even the broad market is up by nearly 50% without any justification accept that the fast money traders know the Fed will keep banging the fed funds lever.

Yes, the Fed’s plumber-in-chief is still in her 40-year time warp. When the great Bernanke-Yellen Bubble bursts any time soon—-they will say once again that none was “obvious” on the way up.

As an institutional matter, Yellen and her merry band of money printers cannot possibly see any financial bubbles. Implanted squarely in the heart of the Wall Street speculation channel, bubbles is what they do.

 

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Thu, 05/08/2014 - 22:49 | 4742188 Slave
Slave's picture

Damn that picture, now I'm gonna have nightmares...

Thu, 05/08/2014 - 22:56 | 4742198 RafterManFMJ
RafterManFMJ's picture

It's touching that so many seem to still think this is all a mistake, mere wrong-headedness and why, oh why can they not see the error of their ways?

It's intentional.

"The best trick the devil ever pulled was convincing the world he didn't exist."

Thu, 05/08/2014 - 23:03 | 4742225 economics9698
economics9698's picture

She knows it is bullshit.  Her job is to shovel the money to the tribe and feed Main Street inflation.  That is her job and she knows it.

Thu, 05/08/2014 - 23:06 | 4742232 john39
john39's picture

What's worse, looking at her, or listening to that stupid contrived accent...

Thu, 05/08/2014 - 23:17 | 4742259 markmotive
markmotive's picture

I'm surprised CNBC gave David Stockman an opportunity to share his dire opinions.

David Stockman: Massive Bubble Inflating on Wall Street

http://www.planbeconomics.com/2014/03/david-stockman-massive-bubble-infl...

Thu, 05/08/2014 - 23:43 | 4742276 Dr. Engali
Dr. Engali's picture

CNBS has had a lot of bubble talk lately. I think they want to be able to say "see we told you so" when shit hits the fan.

Fri, 05/09/2014 - 03:02 | 4742600 wee-weed up
wee-weed up's picture

PLEASE don't stand up Janet! Please!!!

Fri, 05/09/2014 - 03:53 | 4742629 Rubicon
Rubicon's picture

Hung like a donkey apparently...

Fri, 05/09/2014 - 06:10 | 4742709 James_Cole
James_Cole's picture

That photo will really wake you up / strike the fear of gawd... yikes. 

Fri, 05/09/2014 - 07:04 | 4742764 linniepar
linniepar's picture

It is abundantly clear the fed is evil and their intentions are malicious.  Refer to income inequality for proof.

Fri, 05/09/2014 - 02:07 | 4742552 buyingsterling
buyingsterling's picture

^ Stockman for treasury sec.

^ Stockman for president

Thu, 05/08/2014 - 23:44 | 4742315 Dr. Engali
Dr. Engali's picture

One small correction. Her job is to shovel fiat. The fed's funny money isn't money.

Fri, 05/09/2014 - 13:58 | 4744139 daveO
daveO's picture

i don't know. I'd say that about Greenspan because he supported the gold standard, back in the 60's. Bernanke and Yellen seem to 'programmed'.

Thu, 05/08/2014 - 23:18 | 4742226 john39
john39's picture

The meat puppets may or may not know that they dance to the devil's tune... But the end result is the same.

Thu, 05/08/2014 - 23:41 | 4742306 kchrisc
kchrisc's picture

"The best trick the devil ever pulled was becoming a bankster and convincing all the rest that their money was safe."

Fri, 05/09/2014 - 01:25 | 4742503 Space Animatoltipap
Space Animatoltipap's picture

Part of the trick is to make people believe a unit of currency is actual money. Actually this world is the land of the mystic yogis. Just study the kabbalah, the place of reception. Luckily God, the Almighty One, is always in charge. Not the mystic yogis. They are just hovering in the mist. Hare Krishna!

Fri, 05/09/2014 - 04:17 | 4742648 DavidC
DavidC's picture

RafterManFMJ,
You might be right but I don't think so. Some years ago a friend of mine, who was doing a PhD (not economics!), had a barbeque where he'd invited his professor. An obviously intelligent man (in the academic sense), he bounded around and behaved like a small child, it was VERY illuminating.

What I'm saying is that these people might be academically 'gifted' but they might have (indeed, almost certainly) have NO understanding of the real world.

Faber's said rightly that as a proportion of income the cost of necessities (food and fuel!) for these people is miniscule compared to those on low incomes.

DavidC

Fri, 05/09/2014 - 05:38 | 4742680 CuttingEdge
CuttingEdge's picture

Cost of necessities? Fuel? Seen the cost of keeping a Lear jet or three in service recently?

Joking aside, you're spot on with that last sentence. In the UK a guy on $30k a year who smokes a packet a day, likes a few pints down the pub once a week and drives to work, probably sees +75% of his income go to the tax man in one form or another (a similar list of hidden taxes to the one someone posted on ZH the other day relating to the US).

Fri, 05/09/2014 - 10:05 | 4743033 Chief Wonder Bread
Chief Wonder Bread's picture

Recently I was at a family dinner. One of the guests holds a PhD in Chemical Engineering.

He began to talk about Putin and the Ukraine situation. Really people can talk out of ignorance about things which they know nothing about. Expertise in one field doesn't guarantee expertise in another. What he was saying was straight-down-the-line regurgitated party-line neocon legacy media USSA BS.

I don't have a PhD so my opinion would carry no weight against his so I said nothing. Not that I could decisively counter what he was saying if I had chosen to jump in, it's just that I don't start with the assumption that .govUSSA is the hero. In fact, I tend to believe the opposite.

As far as people like Yellen with advanced degrees in economics, there's a reason economics was once referred to as the dismal science. Then you had Poppy referring to 'Reagonomics' as 'voodoo economics' without appreciating the redundancy: it's all vooodoo, asshole (not you, DavidC, Bush I mean).

Thu, 05/08/2014 - 23:01 | 4742220 Bernankenstein
Bernankenstein's picture

and what about those bubbles she blows out of her ass in the tub? Add that to your nightmare.

Thu, 05/08/2014 - 23:41 | 4742302 Eyeroller
Eyeroller's picture

Gotta hand it to ya, I thought it couldn't get any worse than the picture...

Fri, 05/09/2014 - 00:04 | 4742355 Slave
Slave's picture

Get it? BUBBLES!!

Fri, 05/09/2014 - 00:58 | 4742446 A Nanny Moose
A Nanny Moose's picture

Fear not. this is their M.O. Get over it.

Thu, 05/08/2014 - 22:59 | 4742214 Prairie Dog
Prairie Dog's picture

"Some people are either born or nurtured into a time warp and never seem to escape."

How apt! Indeed, in some people's minds, it is always the 1970s, no matter what the economy looks like. Some people have been predicting hyperinflation any day now... for six years and counting. Meanwhile, inflation languishes below the Fed's 2 percent target. Can these people learn from their mistakes, reexamine their model of the world and escape from their time warp? Nope!

 

 

Thu, 05/08/2014 - 23:07 | 4742231 economics9698
economics9698's picture

Uhhh deflation was 25% from 1929 to 1933 and inflation is 2% from 2008 to 2014.  Do the math or uhhhh count the trillions printed.  duhhhhhhh

Thu, 05/08/2014 - 23:36 | 4742290 Prairie Dog
Prairie Dog's picture

What's your point? 

Thu, 05/08/2014 - 23:48 | 4742326 kchrisc
kchrisc's picture

Is your point that the "printers" and thieves also do the measuring and reporting?!

If so, I agree.

Thu, 05/08/2014 - 23:26 | 4742271 Dr. Engali
Dr. Engali's picture

Inflation is at 2%, yeah right. Maybe the hedonically adjusted ex-food and energy and college tuition..... and healthcare is sub 2%, but I doubt that's even accurate. The last iPad I had for dinner was pretty pricy.

Fri, 05/09/2014 - 01:52 | 4742537 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

There's a few things that have saved their asses so far (we'll see for how much longer): 1. everybody's debasing at the same time (first time ever) 2. the scorecard (gold) has been financialized so it's price doesn't tell the truth any more; 3. globalization is keeping a tight lid on wage inflation that's fer sure, 4. automation and technology boost to productivity, and 5. the internet is hugely deflationary 

Thu, 05/08/2014 - 23:00 | 4742217 BandGap
BandGap's picture

Very.Disturbing.Picture.

Thu, 05/08/2014 - 23:08 | 4742230 scuttlebutt
scuttlebutt's picture

David, again you're bang on the dollar.

In any group, with too many like minded thinkers, there's little chance of learning anything new. 

Thu, 05/08/2014 - 23:15 | 4742254 Elliptico
Elliptico's picture

I took an International Econ course that Janet taught at Berkeley back in' '88, and while she seemed very pleasant in a munchkin grandmotherly sort of way, she didn't seem all that, what's the word.....umm....well....bright.

Thu, 05/08/2014 - 23:47 | 4742323 Babaloo
Babaloo's picture

You're not smart enough to determine her intellect. I'm amazed you got into Cal.

"She graduated summa cum laude from Pembroke College (Brown University) with a degree in economics in 1967, and received her Ph.D. in economics from Yale University in 1971 for a thesis titled Employment, output and capital accumulation in an open economy: a disequilibrium approach under the supervision of James Tobin and Joseph Stiglitz."

Do you have that kind of educational resume ?

Fri, 05/09/2014 - 04:49 | 4742657 kurt
kurt's picture

Hey!

Go jack off on a cracker.

Fri, 05/09/2014 - 06:44 | 4742745 Bioscale
Bioscale's picture

I wonder what incentives someone like you has to defend a banksters' muppet, hm?

And making an argument with Stiglitz boy, what the fuck

Fri, 05/09/2014 - 06:47 | 4742746 thelibcentury
thelibcentury's picture

Listen to her talk, man. If your argument is that she knows what comes out of her mouth is bullshit and she is just playing the role, then fine - she is a genius, and a witch.

But if we assume she actually believes the stuff she says, then it's pretty obvious she is not a strong intellect. Those w intellect don't believe in unicorns despite clear evidence for their lack of existence.

Fri, 05/09/2014 - 06:50 | 4742749 overmedicatedun...
overmedicatedundersexed's picture

babaloo, a relative of yellen we may presume, what new co did she start? how many did she employ? how many families did she support?..living in the ivy halls her whole life, then .gov, not a wit of real world work in her CV..a perfect shit for brains IMO, but hey she did tell sen sanders" she did not know what kind of economic system we have, she could not label it, capitalism or oligarc...that was the headline missed by ZH.

Fri, 05/09/2014 - 12:15 | 4743700 LooseLee
LooseLee's picture

Do you know what real 'Education' is? See Jiddu Krishnamurti's, "Education and The Significance of Life". There, my poor boy, you may learn the errors of your ways...

Fri, 05/09/2014 - 14:05 | 4744169 daveO
daveO's picture

Hey Janet.

Thu, 05/08/2014 - 23:26 | 4742274 Elliptico
Elliptico's picture

She has sublimated her desire for Tobin's schwantz by recapitulating his dogma.

Fri, 05/09/2014 - 00:13 | 4742374 Make_Mine_A_Double
Make_Mine_A_Double's picture

+ 100 - literay laughed out loud and scared the dog.

Fri, 05/09/2014 - 01:53 | 4742539 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

from the front or from the back?

Thu, 05/08/2014 - 23:31 | 4742280 kchrisc
kchrisc's picture

Send in the guillotines!

Thu, 05/08/2014 - 23:38 | 4742294 AdvancingTime
AdvancingTime's picture

Few people ready understand the economy. The study of economics is often baffling and confusing. Many economic theories exist but many are full of holes and conundrums. Much of how people react to a policy may have to do with timing and perception instead of reality. Economics is full of loops that feed back upon themselves and unexpected pitfalls based on expectations.

All this can become quite abstract. Economist predict events that never tend to unfold as expected or planned. Many of the "modern monetary theories" in use today have not been proven over time, but reflect an attitude that we can control  economic cycles better than in the past. We shall soon see if that is indeed true. More on this subject in the article below.

http://brucewilds.blogspot.com/2014/03/few-people-really-understand-econ...

Fri, 05/09/2014 - 09:51 | 4743099 Stuck on Zero
Stuck on Zero's picture

One of the simplest rules of economics is that if handing out free money is more effective than bombs at tearing apart families, communities, and states. 

Free money = poison.

 

Fri, 05/09/2014 - 11:53 | 4743608 franciscopendergrass
franciscopendergrass's picture

"Many of the "modern monetary theories" in use today have not been proven over time"

What difference is there between MMT and currency debasement?  I see none.  The term malinvestment does not exist with the MMTers. It all ends badly and the currency returns to PMs.  Rulers and politicans make all these promises with the power of the printing press.  It all ends badly when the printing press turns the currency into toilet paper.  TPTB and sheeple never get it.

Thu, 05/08/2014 - 23:43 | 4742312 AdvancingTime
AdvancingTime's picture

One area we should pay more attention to is how the different sectors of the economy dependent on discretionary spending fared. I contend a shift is occurring within the ranks of shoppers and consumers that is causing the little economic growth occurring to be the "wrong kind of growth" and not healthy over the long term.

Auto sales, student loans, and healthcare spending have become key drivers in this economy, below are the reasons each concerns me. Recent job numbers create a false illusion that mask over what is really happening as incomes grind to a halt and inflation nibbles at the buying power of the average American. In my opinion the wrong people are buying the wrong things. Below I reconcile the recent job numbers and why spending trends signal danger ahead.

http://brucewilds.blogspot.com/2014/05/reconciling-april-jobs-report-wit...

Thu, 05/08/2014 - 23:56 | 4742329 OC Sure
OC Sure's picture

 

 

 

 

Keynsianism "economics" is a ruse with the sole purpose of allowing those who produce nothing to steal from those who produce anything.

 

The cornerstone of Capitalism is not economics; it is morality.

 

Counterfeiting is theft and therefore the Federal Reserve System should be closed for business.

Fri, 05/09/2014 - 05:42 | 4742685 intric8
intric8's picture

Capitalists dont necessarily have to be moral for the system to work, but they must have inescapable, devastating consequences for making poor decisions. There haven't been consequences for many of these guys, so this cant be capitalism. Its just a big, crooked racket.

Fri, 05/09/2014 - 06:30 | 4742717 OC Sure
OC Sure's picture

There is a big crooked racket because counterfeiting is immoral.

 

Per the Coinage Act of 1792, the punishment for debasing the United States money is death. The consequences are there but not enforced.

 

And I did not mean to imply that we have Capitalism. We do not.

 

We live in tyranny.

We live in tyranny.

We live in tyranny.

 

Capitalism, the scapegoat for all of tyranny's poisons, is the cure.

Fri, 05/09/2014 - 10:45 | 4743292 OC Sure
OC Sure's picture

 

 

 

 

"Capitalists dont necessarily have to be moral for the system to work..."

Yes, they do.

Fri, 05/09/2014 - 11:59 | 4743644 sschu
sschu's picture

they must have inescapable, devastating consequences for making poor decisions.

Morality helps.  But in the end consequences often provide this morality.  Justice can be served. 

sschu 

Fri, 05/09/2014 - 00:10 | 4742368 Spungo
Spungo's picture

But who will pull the buttplug on Obama's bathhouse economics?

Fri, 05/09/2014 - 00:15 | 4742376 disabledvet
disabledvet's picture

Meh. Some dipshit with a PhD blew up the planet.

No news there.

The Bankers are made to manage risk and if Government deems banks more important than Government itself (or is it "they are Government now"?), well...nothing more need be said.

The simpler line of reasoning I still think is the most accurate: no one really knows what they're doing...but as we with most human endeavors of consequence "no one is allowed to admit to the fallibility of anything."

Trying to talk our way through the absurdity of it all probably makes it worse.

Fri, 05/09/2014 - 00:23 | 4742385 Spungo
Spungo's picture

I had a great idea. Stockman thinks consumers have too much leverage. Solution: the fed should bail out all debts of all Americans. This would cause the hyperinflation they want and it would allow consumers to leverage up again. Everybody wins! I think! We won't know until we test it!

Fri, 05/09/2014 - 00:31 | 4742398 Poor Grogman
Poor Grogman's picture

His best work yet.

I will be quoting from this one.

Fri, 05/09/2014 - 00:37 | 4742406 ebworthen
ebworthen's picture

I've got some "slack" for Yellen and other Tobin accolytes - on a hangin' rope.

Back my money with tangibles, pay me for my labor, and stop bailing out the corporatocracy while punishing We The People - or there is plenty of rope for you fuckers!

Fri, 05/09/2014 - 04:42 | 4742654 kurt
kurt's picture

I share your stark disappointment but I'm afraid they can slip that rope over out heads much more readily than we can theirs. 

They have never once tried stimulus, of any scale, directed toward those who would SPEND it, namely, us, the former middle class.

Furthermore, they slashed the interest on MY savings at the exact stage in my life when it would do me some good, and that I might be able to spend some, thus stimulating the economy. No, now I must hold on to it for dear life because my earning days are over.

What reward do I get? A concerted effort by Blackrock's Peterson to steal my social security, oh, I mean, "privitize" it. It feels better to imagine them swinging from a rope but this is the country which can claim to have 25% of the WORLDS prisoners.

Fri, 05/09/2014 - 05:52 | 4742690 OldPhart
OldPhart's picture

I'm damned near with you, Kurt.  I'm at the stage in my life where I have less than a pittance of debt, extra money and all I can find to safely purchase is gold and silver.

I stopped ALL contributions to my 401k back in 2009, and now have absolutely no access to that money due to the policies of the fund and my employer.  I can't even take out a fucking loan (again).

I really WANT to trust our financial institutions...But don't.  And probably never will in my lifetime.

I'm 54 and don't expect to see a single social security check.  I'm merely a thousandairre, my gold and silver wouldn't last me more than five years or so.  There is nowhere I can safely put my pitiful extra money.

I'm thinking I need to start acquiaring the taste for Tender Vittles.  The food storage will only last ten years or so, and I won't make much as a WangFong greeter.

My self prophesy of being a dried up, dessicated corpse on the side of a dirt road out in the desrt seems more and more likely.

Fri, 05/09/2014 - 06:27 | 4742731 kurt
kurt's picture

I'd see if I could redirect the "mix" in my 401K now. A "balanced" portfolio is probably a mistake, here, pre-crash. I think you might put it all in CD's or as close to a cash equivalent as possible. I switch to CD's right before the crash and saved my ever loving ass. Initially during the free fall they were threatening to not cover it 100% but did. As soon as I could I did a trustee rollover to a brokerage and began "self directing." As you near retirement stay the hell away from advisors who want to "manage" your 401K. I watched my co-workers get milked. Most had to go back to some hellish employ or disappear in shame, not being able to meet up at a cheap restaurant having lost all their money between the charlatans and the goverment through taxes and pre-mature distribution with penalties. Most of them had to "rescue" their own kids as their world collapsed as well.

I've seen bodies by the side of the road in mexico. Yeah, I'd get off the road. Some little gully where the rain would eventually spread your bleached bones and make some critter a home.

Fri, 05/09/2014 - 12:28 | 4743736 LooseLee
LooseLee's picture

You are not alone. We have similar demographics...

Fri, 05/09/2014 - 05:29 | 4742674 intric8
intric8's picture

your cash is backed by tangibles - relatively odorless, sepia colored paper called treasury bonds, which are redeemable in green colored, nice smelling paper called dollars! which color of tangible but intrinsically worthless paper would you prefer?

Fri, 05/09/2014 - 00:39 | 4742414 alfbell
alfbell's picture

 

 

The socialists, communists, fascists and psychos are in charge.

L. Ron Hubbard wrote... "The price of freedom is constant alertness and the willingness to fight back."

We the people have really flubbed the dub.

Fri, 05/09/2014 - 01:01 | 4742454 q99x2
q99x2's picture

Ok Mr. Stockman, how do you arrest them and bring the criminals to justice?

Fri, 05/09/2014 - 01:25 | 4742504 bobbydelgreco
bobbydelgreco's picture

Keynes would have told Lyndon imposing a war on a full employment economy without the appropriate tax increases would lead to inflation the fed's policies are all based on Milton

Fri, 05/09/2014 - 02:17 | 4742565 Atomizer
Atomizer's picture

Janet has just shit in her new Federal Reserve bathtub. She doesn’t know how to unclog the turd plugging the rising bath waters. We can only begin to believe this is the result of climate disruption.

 

/sarc

Fri, 05/09/2014 - 02:38 | 4742586 Atomizer
Atomizer's picture

Federal Reserve Central Planning Magic.

A Vaccine Against Magic! <<<<- Watch

 

Fri, 05/09/2014 - 05:31 | 4742604 intric8
intric8's picture

broad metrics don’t suggest we are in obviously bubble territory.”

Yet another example of an 'appeal to figures', a longstanding practice of a fed res chair. If they can point to numbers as a basis for making poor decisions rather than the decision makers themselves, they can absolve themselves of blame. Man up, yellen. how about saying "its my professional opinion that we are not in bubble territory yet"?

Will common sense ever be a metric?

Fri, 05/09/2014 - 04:44 | 4742655 bunnyswanson
bunnyswanson's picture

What is a bubble if not a Ponzi scheme.  Whoever pops the bubble is whoever pulls the most first.

Fri, 05/09/2014 - 05:56 | 4742694 OldPhart
OldPhart's picture

He who smelt it dealt it? No way, there's too much plausible deniability built into the lies.

Fri, 05/09/2014 - 05:41 | 4742682 Rogue Economist
Fri, 05/09/2014 - 06:42 | 4742741 giggler321
giggler321's picture

more like a Jacuzzi with the power turned up than a bathtub

Fri, 05/09/2014 - 06:54 | 4742752 Last of the Mid...
Last of the Middle Class's picture

Doesn't matter what she says, printing is locked in now. All the ups and downs of the market are contrived, fade a little and watch her tank, then all smiles with fresh dollars flowing from the latest "oh shit we can't do that again" fade attempt. The ride for the bottom 2/3's is going to be rough for the next couple of decades. The fed will do everything it can to squash states rights to keep the ponzi going at any cost and the press is not only complicit but part of the problem

Fri, 05/09/2014 - 07:53 | 4742812 FreeNewEnergy
FreeNewEnergy's picture

Necessities (in order)

Land

Seeds (non-GMO) - these first two, combined with water and sunshine (mostly free), gets you to >>>

Food

Trees (you can cut them down and build shelter, or burn them for heat and/or energy)

Alt Energy (this maybe should be top of list)

Anything that gets you off the grid and out of the matrix.

Next come the logical, but essentially, not necessary:

Guns

Bullets

Gold

Silver

Sex, Booze, Smokes (all of these you can make yourself... ;) especially the first one, you only need one hand)

Fuck the Fed

Hang Yellen (I'd say "Fuck Yellen," but, after that bathtub picture, banging that fat, old, stupid rag is just too disgusting to consider)

Fuck all forms of government

Fuck anyone who disagrees with you.

Personal, individual responsibility... Nothing more, nothing less will end this madness. Consider this a fight for your life (it is) and arm yourself accordingly.

Disclaimer: I am long the virtues espoused by three guys with three names: John Stuart Mill, Ralph Waldo Emerson, and Henry David Thoreau.

Fri, 05/09/2014 - 07:57 | 4742815 Itchy and Scratchy
Itchy and Scratchy's picture

More key critical details here: https://www.youtube.com/watch?v=4KmKkV3ddAo

Fri, 05/09/2014 - 08:50 | 4742919 AdvancingTime
AdvancingTime's picture

 Janet Yellen has been head of the Federal Reserve bank long enough that we no longer need to speculate as to her job performance. As we begin to critique her ability to perform we must remember perception is often just as important as reality. Another issue that comes into play is how you stack up or compare to the person who held the position previously, this often extends to style as much as it does to substance. 

As expected it appears Janet Yellen has chosen to take us down the same the rabbit hole as Bernanke on a journey to prove that if we just continue doing what is not working, all will turn out fine. More on Yellen as the head of the Federal reserve in the article below.

http://brucewilds.blogspot.com/2014/05/yellens-job-critique.html

Fri, 05/09/2014 - 08:54 | 4742921 just_askin
just_askin's picture

Don't disagree with Stockman's charts, and I own nothing but gold, silver, oil and ag, and clearly the Fed under Yellen is going farther down the rabbit hole with a perfect execution of Einstein's defnition of insanity - doing the same thing over and over again and expecting a different result. (Or maybe they know but don't really care?) But I don't get pinning the blame for the whole sorry mess on Keynes. it's useful to remember that the 19th century economy under the gold standard was also a roller-coaster boom-and-bust ride, and - just ask Andrew Jackson - the banks then were just as adept as now at starving the masses financially for the benefit of the banking class. Also that inflation in the 1970s, because the banks got caught flat-footed with portfolios of low fixed-rate assumable mortgages, actually served as a massive wealth-transfer mechanism from banks and other debt holders to the middle class. It wasn't until Volcker "broke" inflation, Friedman provided intellectual cover for the looting of public assets, and Carter, Reagan and Clinton dismantled a cumberson but at least marginally effective regulatory regime that the U.S. economy morphed into an aggregation of predatory cartels and  the looting of the middle- class wealth by the 1% began in earnest.  

Fri, 05/09/2014 - 09:20 | 4742993 RaceToTheBottom
RaceToTheBottom's picture

You have to add GW to your final list.  It will be shown that his changing of the bankruptsy laws to exclude education loans will lock in the present generation into a role of debt serf.

Fri, 05/09/2014 - 09:30 | 4743014 wagthetails
wagthetails's picture

excellent recap.  Although this time, unlike "Johnson’s guns and butter economy got red hot; inflation soared;" we have brought all future GDP forward with ZIRP and deficit spending, as noted, there is no juice left in the engine, our econ won't get red hot...sadly this thing can't go to 11.  we'll skip inlfation and head immediately to hyper-inflation due to lack of faith in USD.  Last one out, turn off the light. 

Fri, 05/09/2014 - 09:43 | 4743057 Bub Ba
Bub Ba's picture

I clicked on this article and it triggered an ad for that douch bag Cramer.  Mary Singer would not have allowed that, Tyler has sold out.

Fri, 05/09/2014 - 13:36 | 4744056 RMolineaux
RMolineaux's picture

Is Stockman saying that Paul Volcker should not have intervened to bring a halt to the stagflation of the 70's?

Fri, 05/09/2014 - 14:00 | 4744145 RMolineaux
RMolineaux's picture

This item is very heavy on criticism, some valid,  but no alternative policies are even mentioned, much less demonstrated.

Fri, 05/09/2014 - 14:56 | 4744383 polo007
polo007's picture

http://uk.reuters.com/article/2014/05/05/usa-federalreserve-blinder-idUKL2N0NR01O20140505

May 4 (Reuters) - After an extended period of relative peace among members of the U.S. Federal Reserve's interest rate policy-making committee, fireworks will erupt in coming months as they debate how to reduce the central bank's multi-trillion-dollar balance sheet, a former vice-chairman of the central bank said on Sunday.

"The Fed may get more raucous about what to do next as tapering draws to a close," Alan Blinder, a banking industry consultant and economics professor at Princeton University said in a speech to the Investment Management Consultants Association in Boston.

The cacophony is likely to "rattle the markets" beginning in late summer as traders debate how precipitously the Fed will turn from reducing its purchases of U.S. government debt and mortgage securities to actively selling it.

The Open Market Committee will announce its strategy in October or December, he said, but traders will begin focusing earlier on what will happen with rates as some members of the rate-setting panel begin openly contradicting Fed Chair Janet Yellen, he said.

The Fed built up its balance sheet over the last five-and-a-half years as it bought securities to lower interest rates in attempts to stimulate the weak economy.

But hawkish members of the Federal Open Market Committee who worry about inflation, such as Federal Reserve Bank of Dallas President Richard Fisher and Philadelphia Fed Bank President Charles Plosser, are likely to call for aggressive sales and contradict plans by Yellen and other doves in the majority who want to keep rates low as long as unemployment continues at high levels, Blinder told the group of stockbrokers and investment advisers.

Blinder, a supporter of Yellen who served on President Bill Clinton's Council of Economic Advisers in the mid-90s, said the "perils of a big balance sheet are not so horrible."

The Fed held only about $900 million on its balance sheet before Lehman Brothers' collapse in 2008 triggered the financial crisis, but will "never go back there" from its current level of about $4.25 trillion, Blinder said.

A balance sheet of $1.5 to $2 trillion will likely be the new normal, he said.

He congratulated Yellen on artfully backing away from former Fed Chairman Ben Bernanke's assertion that rates can begin rising once the U.S. unemployment rate hits about 6.5 percent.

The Federal Funds rate that determines short-term interest rate will not rise anytime soon, Blinder said, noting guidance from Yellen that she is watching several indicators of the economy.

The housing market, consumer spending and other parts of the U.S. economy are still recovering very slowly, said Blinder, adding that it will be six to 12 months after the Fed completely stops purchasing securities before rates start to rise.

Fri, 05/09/2014 - 17:18 | 4744851 greggcwa
greggcwa's picture

 

“Lenin was certainly right”.

“There is no subtler, or surer means of overturning the existing basis of

society than to debase the currency. The process engages all the hidden

forces of economic law on the side of destruction, and does it in a manner

which only one man in a million is able to diagnose.”(1919)

 

John Maynard Keynes, an admitted Bolshevik, statist, economist, a key Fabian Socialist.

 

In other words, he is the hero of today’s governing ideologues.

Keynesian economic theory drives modern government spending and so forms the basis of modern

statism..... that is, big government. Keynes was regarded as a hero when he toured USSR. His

works were required reading in the USSR. He was one of the “(in)famous” Fabian Socialists

known as “The Bloomsbury Group” out of which came a re-formulated Marxism and Lenin and the Russian Revolution.

Fabian Socialism is the heart and soul of what became modern Communism.

 

The Austrian school of economics was formed by Carl Menger, Ludwig von Mises, Murray Rothbard

and Friedrich Hayek. It is basically the answer to the Keynesian poison that has spread through

American universities and their economics courses. Ayn Rand would be an “Austrian”. They stand

for individual freedom, a strong currency, free markets and small government. In other words, what

American capitalism really means.

 

Here is Ayn Rand:

 

“Money is the barometer of a society's virtue. When you see that trading is done,

not by consent, but by compulsion – when you see that in order to produce, you

need to obtain permission from men who produce nothing – when you see that

money is flowing to those who deal, not in goods, but in favors – when you see

that men get richer by graft and by pull than by work, and your laws don't

protect you against them, but protect them against you – when you see

corruption being rewarded and honesty becoming a self-sacrifice – you may

know that your society is doomed… Whenever destroyers appear among men,

they start by destroying money, for money is men's protection and the base of a

moral existence. Destroyers seize gold and leave to its owners a counterfeit pile

of paper.”

 

Atlas Shrugged

 

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