The Fed Won't Let the Economy Heal

Tyler Durden's picture

Submitted by Frank Shostak via The Ludwig von Mises Institute,

Most commentators are of the view that the massive monetary pumping of the Fed during 2008 prevented a major economic disaster. The yearly rate of growth of the Fed’s balance sheet jumped from 3.9 percent in January 2008 to 150.9 percent by December of that year. The federal funds rate target was lowered from 3 percent in January 2008 to 0.25 percent by December of that year.

According to popular thinking, the Fed’s actions have bought time to allow the US economy to heal — much like keeping a coma patient on life support. Consequently, popular thinkers are harshly criticizing commentators that advocate allowing economic recession to take its course.

Contrary to popular thinking, economic recessions or economic busts are not about the end of the world but about the removal of various non-productive activities, also labeled as bubble activities brought about by previous loose monetary policies of the central bank.

Observe that by means of loose monetary policy wealth is diverted from wealth generators to non-wealth generating activities. The stronger the pace of monetary pumping the stronger is the divergence of wealth. (Bubble activities, which don’t generate wealth, cannot exist without this divergence.)

Obviously then the longer the divergence of wealth takes place the weaker wealth generators become. Note that once the ability of wealth generators to generate wealth comes under pressure the so-called economy follows suit. After all it is the increase in wealth that supports overall economic activity.

It is increases in wealth that fund increases in productive and non-productive activities. So how then can aggressive monetary pumping by the Fed during 2008 have allowed the economy to buy time and to heal?

We suggest that the massive monetary pumping of 2008 has bought time for non-productive bubble activities. However, as we have seen, such activities undermine wealth generators thereby weakening the economy as a whole.

If loose monetary policy is enforced over a prolonged period of time it runs the risk of severely weakening the process of wealth generation. A situation can then emerge where the pool of wealth becomes stagnant or starts to decline.

Once this happens the economy plunges into a severe slump since there is now less funding available to support both productive and non-productive activities. In such a case, what is required to heal the economy is the fast removal of bubble activities.

This will leave a larger amount of necessary funding in the hands of wealth generators thereby strengthening the process of wealth generation — the key for economic recovery.

Again, we suggest that rather than healing the economy massive monetary pumping by the Fed during 2008 has strengthened bubble activities thereby weakening the economy.

To clarify our points further, consider a company that is comprised of ten divisions, of which six are making profits and four divisions are suffering losses. A responsible CEO would be expected to either restructure the four losing divisions or to shut them down. If he/she were to keep them going then this is going to weaken the company.

The profits from the six profitable divisions, instead of being used to strengthen the company’s ability to generate profits, will be employed to support the four losing divisions.

The longer this lasts the worse the fundamentals of the company become. At some stage, once the company’s ability to generate profits diminishes, it runs the risk of going “belly up.”

Would it be valid to say that by allowing the non-profitable divisions to stay longer the company buys the time in order to heal itself?

As we have seen, the longer the CEO keeps the losers the worse the company’s “bottom line” is likely to become. Contrary to popular thinking then, the sooner the cleansing takes place the stronger the company is likely to become and the better the shareholders’ interest is going to be served.

Obviously, the restructuring or the elimination of losing divisions is going to be painful for some of the individuals that are employed in these divisions. However, a strengthening in the company’s fundamentals is likely to increase their chances of being re-employed in other divisions. Likewise, with the elimination of bubbles in the economy individuals that were made redundant are likely to be re-employed in newly expanding wealth generating activities.


Summary and Conclusions

Most commentators are of the view that the Fed’s massive monetary pumping of 2008 has prevented a major economic disaster. We suggest that the massive pumping has bought time for non-productive bubble activities, thereby weakening the economy as a whole. Contrary to popular thinking, an economic cleansing is a must to “fix” the mess caused by the Fed’s loose policies. To prevent future economic pain, what is required is the closure of all the loopholes for the creation of money out of “thin air.”

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TeamDepends's picture

Ready to reach for the 1.5L Scotch and the sleeping pills?  Read this feel-good story first.

icanhasbailout's picture

My question is: Can this economy be healed? Or is the Rubicon already crossed?

NOTaREALmerican's picture

How do you define "healed"?   What would a "healed" state look like?

Caviar Emptor's picture

We don't need no stynkin economy!
Fed proved it.
We can all just accept hand outs and credits

NOTaREALmerican's picture

Well,  that IS an economy right?

The smart-n-savvy - the most fit, highest evolved humans - have the most, everybody else gets handouts and credits for some trinkests and bling to keep them happy.

What other system is more fair than that?   The most-fit people didn't kill anybody, they just took everything.   But, what would keep the smart-n-savvy from doing that?  You want them NOT to take the dumbasses stuff?  How would they prove - in a competative society - that they weren't the MOST fit if they didn't completely screw the dumbasses.   Weakness is NOT how the most-fit win.   If the dumbasses didn't get screwed they wouldn't respect the most-fit-members of society.

asteroids's picture

I wonder if the FED is a junky and can't help itself.

RevRex's picture

Cheap energy prices are the engine of economic recovery.


Gas was $1.79 when the Obowelmovement took over, left alone the economy would have healed itself.

SeattleBruce's picture

"To prevent future economic pain, what is required is the closure of all the loopholes for the creation of money out of “thin air.”

Now there's some pie in the sky..(wouldn't that be nice...)

ebworthen's picture

Rubicon crossed.

It would require productive industry and the rule-of-law.

It was crossed in 1913 and 1971, then in the 1990's (repeal of Glass-Steagall and off-shoring).

SDShack's picture

Exactly correct. The root cause of the problem is the disintegration of the Rule of Law. Sociopaths have gained control of the money supply, and through it, infected every facet of existance, including govt. They have succeeded in creating and enforcing a feedback loop of govt. benefits, debt, money printing, business control via crony capitalism, and an all encompasing and growing security state. All to both entice and coerce the masses to insure the Debt Ponzi is perpetual. The system is so corrupted, that we now have 2 sets of the Rule of Law, one for the elites, the other for masses. A "healed" state has only one true rule of law for all classes. The Great American Experiment really never accomplished the "healed" state, but at least had the chance to do it until about the 70's. Since then, it's devolved to the Feudal New World Order. The Rubicon has indeed been crossed. It will only change by revolution, and things will have to get much, much worse before the masses are ready for that.

NOTaREALmerican's picture

Re:  Rule of Law

The has always been laws for "the rich" and laws for "the poor".

How could ANY system be created where the smartest-n-savviest member of society wouldn't create bullshit for the dumbasses to actually VOTE to change the laws to benefit the smart-n-savvy people?   Hell,  remember when everybody loved Greenspan for saying how the banks were self-regulation because the banksters had such nice suits?   Dumbasses ALWAYS believe bullshit, and the smart-n-savvy people create the bullshit for them to beleive.   

The smart-n-savvy won't completely and totally screw the dumbasses ONLY if they need the dumbasses for protection.   That's it, period.    If the smart-n-savvy know they are invisible, why would any smart-n-savvy person not kick the dumbasses in the ass?   That's what survival-of-the-fittest is about:  kicking the dumbasses in the ass and taking their stuff, and then laughlng at them.  

JR's picture

How can anyone, even Ron Paul, say that the Fed can keep doing this for years? I’m saying it can’t. When it increases its balance sheet 1000%, what’s going to happen then?

Gold-Eagle asked November 28, 2013: What is one to make of a balance sheet that has exploded from roughly $870 billion in 2007 to almost $4 trillion today. That is the balance sheet of the US Federal Reserve Board as the financial crisis of 2008 saw one of the largest bailouts in financial history followed by three rounds of quantitative easing (QE) plus Operation Twist whereby the Fed exchanged short dated Treasury maturities for longer dated Treasury maturities. It was with QE3 that the Fed began to purchase $40 billion a month of agency mortgage backed securities (MBS) every month greatly adding to its holdings of MBS….
–-The Fed’s Exploding Balance Sheet!

Frank Shostak says, and rightly so: To prevent future economic pain, what is required is the closure of all the loopholes for the creation of money out of ‘thin air.’”

Realistically, only one loophole needs to be closed. That’s the "loophole" that created the Federal Reserve System, for it is the Fed that creates the money out of “thin air.”

NOTaREALmerican's picture

The problem isn't coming up with nice solutions. 

The problem is always:  how does the nice solution benefit the smart-n-savvy people who ALREADY own the existing system they are benefiting from and - therefore - have no intention of changing.

There's no way to get from here - the system greatly benefiting (roughly) 10% of the population - to there - the system benefitting the (uh) wait-a-sec,  who would benefit..  the "average guy"? 

yogibear's picture

The Federal Reserve figures it has the IMF as a backup and it's SDRs.

When the Federal Reserve blows it's onto the next global Ponzi and the SDRs.

SeattleBruce's picture

And then when the IMF/SDRs blow?

BeerMe's picture

Glass-Steagall never should have been put in place to begin with.  It just allowed .gov more economic control.  It was just another piece in the destruction.

ObamaDepression's picture

There is no Rubicon on the economy.

A free market is a process and that process can begin again as soon as we stop interfering by keeping dead banks afloat.

Yes, as one noted we need to return to the rule of law as well as reduce bariers to economic activity like extreme environmental rules.

Seek_Truth's picture

"There is no Rubicon on the economy."

You missed your calling: write song lyrics.

How misled can one person be?

NOTaREALmerican's picture

Now THAT'S an inflationary article. 

ebworthen's picture


Stop bringing her food.

Talk about enabling; she is Wall Street, and her enablers the FED.

Bring her two gallons of water, a multivitamin, and 3 cans of Ensure per day for a year and she'll be 180 lbs.

My question is, how in the hell does she take a crap?


NotApplicable's picture

I really didn't need that question. Really.

I did appreciate the stock photo of a lonely house though.


Yes_Questions's picture



on the off-chance ZH gets a cease and desist for using the Arrested Development "model" house, this is a good alternative photo.


as to the the other question, there is only disturbing answers.   

NoDebt's picture

"To prevent future economic pain, what is required is the closure of all the loopholes for the creation of money out of “thin air.”

You can begin holding your breath.

NOTaREALmerican's picture

Well, if most humans were rational the Libertarian might be right.   Unfortunately, everybody loves free money - it's the best kinda money there is (which is pretty rational, actually).

icanhasbailout's picture

Doesn't end up looking too rational when the consequences kick in.

NOTaREALmerican's picture

No,  but consequences are in the realm of morals.    

Normal humans only need morals when they use them against other people. 

Otherwise,  it's just the 4 F's of life:  Food, Fear, Fighting, and Screwing.  

Da Yooper's picture

"To prevent future economic pain



I gots to axe ( just working on my ebonics ) a question

What about the current economic pain?


NOTaREALmerican's picture

The top 20% aren't in economic pain.   Only the least-fit members of society are.   But, not THAT much pain, really.  We have the world's first kinder-n-gentler survival-of-the-fittest society.   The predators might eat their prey, but they don't eat all of it.  

Matt's picture

You think we've reached a sustainable equilibrium point? I suspect there is a lot further to fall before we get anywhere near equilibrium.

CrashisOptimistic's picture

Suppose the Fed is not the problem?  Suppose the problem is not solvable.

Oil was $20 in 2000.  It was $147 summer 2008, before anyone had ever heard of Quantitative Ease.  It fell to $37 in Feb of 2009 as all consumption stopped.  And now, $100+, reached in late Dec of last year before there was any Ukraine crisis.

Why in hell do these economists think they can grow at $100+/barrel?

NOTaREALmerican's picture

Re:  Suppose the Fed is not the problem?  Suppose the problem is not solvable.

Suppose the economists aren't really the problem either.   Suppose there's really NOT a problem.  

What IS the problem anyway?  Nobody is starving in the streets.   As the guy below said:  It's almost football season and soon his team will win and he buy a big shirt to advertize virility.   

What if nothing is "wrong"?   People have big shirt, blingmobiles with tinted windows, cable, food, entertainment.   What the hell MORE does the Trash Class want?

kareninca's picture

Thank you for your posts, notarealamerican.  I refuse to up-arrow them, but I always read them.

I Write Code's picture

You said:

Why in hell do these economists think they can grow at $100+/barrel?

Iz good question.

Yet the maldistribution of QE to banksters, banksters, and more banksters, is hardly the solution.

Nick Jihad's picture

"Professor, I did not hear the question, but the answer is to increase the money supply."

El Vaquero's picture

Suppose having a system that requires sustained exponential growth that depends on cheap and plentiful oil is the problem, then you have to conclude that we might have been able to steer the ship in a better direction without that system that requires sustained growth.  Bankers, economists and the fed are a big problem, but they are not the only problem, nor are they the biggest.  There is room for growth with $100/bbl though.  Local growth, i.e. more necessities being produced locally.  Decentralization.  Or their would be if the fucking government would get out of the way. More and more people are wanting local foods though.  I saw locally produced cheese in the store yesterday for the first time in my life. 

NOTaREALmerican's picture

Re:  nor are they the biggest.

So,  what is the biggest problem then?   Oil?  

El Vaquero's picture

Oil.  But bankers, government, existing energy companies, etc... are standing in the way of either letting those of us who can adjust to a world with expensive oil or developing an alternative.  We have reached the end of global growth, but the cocksuckers want to keep it going, hence the fraud.  Doing what needs to be done would strip them of much of their power and wealth, and they're not going to give that up without a fight.

Da Yooper's picture

I spoke to a local science teacher today ( at a garage sale ) who thinks it will be perfectly ok for electric bills to double. He feels this would be good for the country for this to happen.

He admitted to voting for the HNIC

MORONS do vex me

El Vaquero's picture

I'll accept a doubling of electric bills if we can nix income taxes, property taxes and seignorage income for the government in return. 

Da Yooper's picture

From talking to this clown he felt everyone should be taxed & pay more but him after all he IS a teacher &he knows best - just ask him.

a real liberal wack job of the highest order

Oh & like the HNIC evrything is Bush's fault

After about 10 minutes I had to leave for my own saftey because I could not deal with that much stupid. He sucked up the NLP like a sponge.

Matt's picture

Tiered billing. $0.06 for the first 1300 KwH over 60 day cycle, $0.11 after that for mid-useage, and then something like $0.15 after that.

Unfortunately, the politicians here have screwed over our hydro-grid by mandating they buy power at above market rates from solar and run-of-river systems, and they're building a hydro dam just to power fracking and a LNG terminal to export the gas.

That, and they decided smart meters were such an amazing idea. Without those cock-ups, we'd be doing pretty good.

Higher rates will in theory encourage more efficient use, but with free public charging stations for electric cars and passing it on to consumers that need electricity for heat, cooking food, etc its kinda BS.

RafterManFMJ's picture

Who cares?

Is it footballs season yet? I must get together with my co-workers and do my fantasy draft. It is so fun!

My fantasy player will score many goals! I will wear the jersey of a big burly footballs player - because nothing communicates my virility to the ladies more than a 200 dollar billboard advertising a better man!

Ha! I loves the footballs season!

Oh boy, I'm off to make sure my cable is working as I don't want to miss a game! What fun! Can't wait to discuss the game with my coworkers! Did M'afume LaTondra spike the oblong brown pig epidermis? Ha!

His victory is mine!

God, how I love the professional sports! I'm just like you, except my team is winner - and that makes me winner!

NickVegas's picture

They don't score goals in football, Francis.

BeerMe's picture

Probably talking soccer.  World Cup Fantasy Team?

oklaboy's picture

and you think it is an accident? think again

buzzsaw99's picture

the fed exists to ensure that the wealth divide only gets worse

orangegeek's picture

the Fed has polarized wealth which has created a depression by killing velocity


the more that participate, through their own earnings, in an economy, the stronger it becomes


Yellen will never see any recovery at any time while the printing continues


government playing the role of redistribution through taxes is just another road block to recovery


centralized control and distribution is communist manifesto

Flying Wombat's picture

I interviewed Dr. Ron Paul today.  One of the questions I asked:  with 20/20 hindsight today, does he wish he had asked different questions of former Fed chairmen, or perhaps different follow-up questions when our dear Fed chairmen were evasive.  His respose speaks to how even Fed hearings on Capitol Hill are structured to preserve the status quo.  


Check it out:


Eric Dubin, Managing Editor, The News Doctors

lotsoffun's picture

wombat - thanks.  that was great.  he's a statesman.  i don't agree with everything and i don't have to, but the most important thing is, he's working for a world for everyone.  for everyone to live a life and be fulfilled (without fullfilment being 20 rolls royces).