Former Fed Governor, Hedge Fund Billionaire Slam Fed: "Government Fiat Does Not Create Wealth"

Tyler Durden's picture

"Balance-sheet wealth is sustainable only when it comes from earned success, not government fiat," is the ugly truth that former Fed governor Kevin Warsh (amazing what truths come out after their terms are up) and hedge fund billionaire Stan Druckenmiller deliver in the following WSJ Op-Ed. The aggregate wealth of U.S. households, including stocks and real-estate holdings, just hit a new high of $81.8 trillion. No wonder most on Wall Street applaud the Fed's unrelenting balance-sheet recovery strategy.The Fed's extraordinary tools are far more potent in goosing balance-sheet wealth than spurring real income growth. Corporate chieftains rationally choose financial engineering - debt-financed share buybacks, for example - over capital investment in property, plants and equipment. The country needs an exit from the 2% growth trap. There are no short-cuts through Fed-engineered balance-sheet wealth creation. The sooner and more predictably the Fed exits its extraordinary monetary accommodation, the sooner businesses can get back to business and labor can get back to work.


Originally posted at WSJ

The Asset-Rich, Income-Poor Economy

By Kevin Warsh and Stanley Druckenmiller,

Economist Richard Koo diagnosed Japan's crash in the early 1990s and subsequent two decades of economic malaise as a "balance-sheet recession." That conclusion wasn't lost on the Federal Reserve during the financial crisis of 2008-09. The Fed engineered an emergency response to craft what can best be described as a balance-sheet recovery.

At its policy meeting earlier this week, the Fed made clear that it's scarred, if no longer scared, by the crisis. Extraordinarily loose monetary policy will continue in force. While the Fed's monthly asset purchases will decline, short-term interest rates will remain pinned near zero. And long-term rates need not move higher—the Fed assures us—even with improving inflation dynamics, credit markets priced-for-perfection, and stock prices at record levels.

The aggregate wealth of U.S. households, including stocks and real-estate holdings, just hit a new high of $81.8 trillion. That's more than $26 trillion in wealth added since 2009. No wonder most on Wall Street applaud the Fed's unrelenting balance-sheet recovery strategy. It's great news for those households and businesses with large asset holdings, high risk tolerances and easy access to credit.

Yet it provides little solace for families and small businesses that must rely on their income statements to pay the bills. About half of American households do not own any stocks and more than one-third don't own a residence. Never mind the retirees who are straining to make the most of their golden years on bond returns.

The Fed's extraordinary tools are far more potent in goosing balance-sheet wealth than spurring real income growth. The most recent employment report reveals the troubling story for Main Street. While 217,000 jobs were created in May, incomes for most Americans remain under stress, with only modest improvements in hours worked and average hourly earnings.

It's taken a full 76 months for the number of people working to get back to its previous peak, a discomfiting postwar record. Unfortunately, during the same period the U.S. working-age population increased by more than 15 million people. That's why the share of the working-age population out of work is now at a 36-year low. There are now more Americans on disability insurance than are working in construction and education, combined.

Meanwhile, corporate chieftains rationally choose financial engineering—debt-financed share buybacks, for example—over capital investment in property, plants and equipment. Financial markets reward shareholder activism. Institutional investors extend their risk parameters to beat their benchmarks. And retail investors belatedly participate in the rising asset-price environment.

All of this lifts balance-sheet wealth, at least for a while. But real economic growth—averaging just a bit above 2% for the fifth year in a row—remains sorely lacking.

Higher asset prices are not translating into meaningful increases in capital expenditures, and the weak growth in business investment is proving to be an opportunity-killer for workers. Those with jobs have some job security. But they are less willing to run the risk of finding a better opportunity, or negotiating for higher wages.

Those without jobs, especially in the younger cohorts without a post-high school education, do not attach to the workforce, thus never gaining the entry-level skills and discipline to build a career. The malaise in the labor markets—and muted business investment—help explain why productivity measures are a full percentage point below historical norms.

The Fed's latest forecast has the economy growing above 3% during the balance of this year and next, and the unemployment rate falling to about 5.5% by the end of 2015. If the Fed's sanguine scenario finally comes to pass, interest rates are likely to move meaningfully higher across the yield curve. The money pouring into the financial markets may be redirected, in part, to the real economy. Stocks, leveraged loans and real estate are likely to re-price in a higher interest-rate environment. If rates move quickly or unexpectedly, the vaunted balance-sheet recovery could suffer a blow.

What if there is an unexpected shock that causes the economy to slow in the next year or two? The Fed would surely be called upon to bolster asset prices and stimulate the real economy. But would a return to $85 billion per month of bond-buying really be effective? We are skeptical that either Wall Street or Main Street would be comforted by quantitative-easing redux.

Balance-sheet wealth is sustainable only when it comes from earned success, not government fiat. Wealth creation comes from strong, sustainable growth that turns a proper mix of labor, capital and know-how into productivity, productivity into labor income, income into savings, savings into capital, capital into investment, and investment into asset appreciation.

The country needs an exit from the 2% growth trap. There are no short-cuts through Fed-engineered balance-sheet wealth creation. The sooner and more predictably the Fed exits its extraordinary monetary accommodation, the sooner businesses can get back to business and labor can get back to work.

What is the difference between 2% growth and 3% growth in the U.S. economy? As the late economist Herb Stein recounted, the answer is 50%. And the real difference is one between a balance-sheet recovery that helps the well-to-do and an income-statement recovery that advances the interests of all Americans.

Comment viewing options

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

Balance sheet wealth can only be sustained and grown by positive cash flow and savings arising from a market that is not constantly pumped and primed by central bank and government interference.

GetZeeGold's picture




Where has all that fiat gone again?


I haven't seen a damn dime of that money....and yest my grandkids are on the hook to pay it back.

dryam's picture

Government fiat does not create wealth, it transfers wealth.

CH1's picture

We already have the tools we need to bypass the Fed for a lot of our business: Silver, gold and Bitcoin.

We just need to USE them, rather than sitting around bitching.

God forbid that anyone should ever risk anything in their terrified little lives.

pods's picture

Why is it when I hear "billionaire hedge fund guy" I start to dream of them being in that basement at the end of The Girl with the Dragon Tattoo?


Occident Mortal's picture

90% of all Americans would be richer and enjoy a higher standard of living if they lived in Europe.




Median Disposable Income

























 United States









 Also, Healthcare in Europe is typically $5,000 per year cheaper than the US and Europeans have a higher life expectancy.



Strip out the huge inequality of the top 10% and the US is very average.

JRobby's picture

Junked by Troll. Some can't handle the truth.

dryam's picture

I did not junk the post, but I disagree with the short-sighted analysis. The real cost of living is fairly high in several of those countries listed. Also, the U.S.'s welfare system is quite robust and provides a lot to many who are not deserving (e.g. numerous people on disability who could clearly work, etc). In regards to our healthcare system, it's extremely expensive to society, but not to a majority of poor people. Poor people go to the E.R., get admitted to the hospital, run up a high bill, and then simply do not pay it. That's one main reason why healthcare seems so expensive; those with insurance & others who actually pay their bill without insurance end up paying for the large percentage who don't pay anything. I would suggest that this applies to Americans in general: the top 49% are getting an increasingly raw deal as they are supporting the bottom 51%. I strongly disagree that 90% of Americans would have higher standards of living in those countries listed. A huge chunk of Americans are poorly educated, fat, lazy, and full of a sense of entitlement. This wasn't the case in the past, but things have changed.

Additionally, looking at life expectancy is very shortsighted when comparing healthcare systems. There's a lot more that goes into life expectancy such as type of lifestyles people live & and what they put in their mouths.

However, after saying all that I do agree that the standard of living is in the United States is going to drop much more in the future in relative terms than anywhere else in the world.

whotookmyalias's picture

Back on point. Balance sheet wealth only works as long as the people have confidence in the entity.  Many of us do not, but the majority of Americans have no clue how rigged the casino really is.  No way people would have allowed this to happen 200 years ago.  In today's world, the central banks create wealth to line the pockets of themselves and their cronies. The banksters and the media all tell us how wonderful our lives are and how strong the economy is.  


Sometimes confidence is gained based on sound practices, controls, and transparency. Sometimes it is created through smoke, mirrors, deception, the media, and slight of hand.  The Fed's balance sheet will create wealth for the lucky as long as they can convince the world that the US dollar is worth something.

venturen's picture

Sorry you are wrong...I lived in the UK and Holland....and have friends across europe. The healthcare isn't good....long waits and lots of deaths. If you compared regular people...not the democrat voting inner city scum, and included the 20% VAT find they are quit poorer. We do need to get rid of the government worker aristocracy here though. No government workers in europe make as much at the truly rich fireman, cops, teachers, state and federal workers. Was looking at the pay for VA workers....making $350000 for part time doctor work and pensions in the $100k. Europeans have much lower pay scale...and they live much more frugally! 

NidStyles's picture

Simply not true, those systems in Europe do not allow for choice in their markets. Their wealth is merely a by-product of not having to pay for their own defense for 60 years.

eclectic syncretist's picture

One need look no further than to the right on the screen and see the ad for a high-yield savings account at less than 1% to know how much the country is fucking savers.  One would need to have saved several million dollars to live off that in retirement.

JRobby's picture

Which some people might have done if they had knowledge in advance of the derivative / CDO time bomb and the eventuality of ZIRP that they caused.


No warning, you are fucked. Thanks for playing.

Flakmeister's picture

You realize that this is the first time that cheap money has not been able to result in new sources of cheap oil...

And that is the real problem....

Edit: There are at least 6 people here that are completely clueless about how an economy really works...

No doubt they worship at the altar of Von Mises and posit praxeological reasoning will produce the required manna..

Either that or they are simply hedgetards living in denial...

Possibly both....

NidStyles's picture

LOL! This guy thinks this has never happened before....

thisisjustarandomusernameicreatedforzerohedge's picture

explain to average joe why he should trade 1 manipulated 'currency' for any of those other manipulated and far more volatile 'currencies'

that's why they don't risk it

ThirteenthFloor's picture

I often wonder why more businesses/people just start taking PM coins for payment.  I sold a used car once and the buyer offered to pay gold eagles...why not, nothing to fear here. 

Gaius Frakkin' Baltar's picture

The idea one should have a job instead of a small business is decades old now. It will take a long, long time to convince people otherwise. And then it will take a long, long time for people to acquire the skills of small business and small scale production. It's basically a lost art. Creating or rediscovering an alternative currency is easy, being able to use it effectively in a micro-economy with The Empire still around is much harder.

Downtoolong's picture

It has effectively been transferred from savers and small investors to billionaire hedge fund managers and their ilk.


Pee Wee's picture

Tell your grandkids the same thing I tell mine, "shock and awe, baby, shock and awe."

ejmoosa's picture

Even better, tell your grand kids that they have no moral obligation to pay back that debt.  Those that loaned it knew there was gonna be a problem.  

How in the hell is it Constitutional to force those not yet born to pay off someone else's debt?

And what will be the best way to end that debt slavery altogether?

I think most of us already know the answer.


Da Yooper's picture

Where has all that fiat gone again?


Oy  such an easy answer


you can find it in the bankers bonus's 


For the rest of you



kita27's picture

What even is wealth? Who even knows anymore, humans are all so different and place different values on different things.

Not everyone perceives gold as worth anything at all, yet value social services as far more important.

Sex for example is a prime candidate. No commodity exchange required, no resources exploited, yet, 100 % satisfaction ( sometimes) is almost guaranteed. It is a trade in domestic human service only, and keeps millions of ppl happy and satisfied, this is true wealth! And if we were truly tied to a limited supply of fiat, far fewer than these millions would be enjoying this form of wealth that hurts nobody.

The beauty of a fiat system is it allows markets to form and wealth to be created, ( or desires if you will, to be satisfied to a much larger extent than a system tied to a gold standard.

The bad part is the economy expands at a rapid clip and is very hard on the environment.

We cannot deny today's world is much more advanced and wealthy due not only global trade, but the ability to expand the monetary base and to leverage it.

True, it's a form of cheating, musical chairs even, but in the short term it is effective and keeps us all happy and motivated and employed. After all, the institutions, infrastructure, art etc cannot be taken back once the price of fiat returns to a more intrinsic value. We thus get people off their lazy assess and get shit done with fiat. And in the end, it is only the ignorant usually that gets fucked over and who cares about them anyway.

Personally, I'm a hard gold man, and I also believe this current system will inevitably collapse. But shit it has been fun while it lasted I guess.

It is a system whereby the weak are permitted to survive off other weak eg ( living in cities in a perpetually useless never ending circulation of money through menial and Mind numbing service sector work) while having their pockets picked by the smart and the strong and being none the wiser :)


Just make sure you cash your paper in for things that are truly, undeniably, universally valuable to all, Food, water, shelter, Guns, ammo etc before shit hits the proverbial.

Ps, remember that the interests of the individual, and the interests of the state he is a part of are not the same, indeed , they can be mutually opposing. If you cannot understand this simple fact, what are you even arguing for? Your arguments become completely contradictory.

I need only mention importers vs exporters, or exporters wanting cheap currency versus travellers who want a strong currency, both are part of the same system, but both want the system to represent their own selfish behaviours.

Economics and political economy are the most complex issues and I'm tired of one eyed people just putting across the same shit and not understanding the positives and negatives of each type of system. If you want everything YOUR way you are advocating a system based on power and force, so don't blame people with power when they force the system into a direction that is opposed to yours.

That would make you a hypocrite.

MFL8240's picture

Tell that to Dimon and his courrpt cartel!

Space Animatoltipap's picture

Haha, in other words we have been bailed out have become wealthier and we don't care the stupid labour slaves. That's for the government to deal with. Just tax these stupid slaves and give them some illusions. 

SDRII's picture

Fed issues response: so

fonzannoon's picture

How great is this chart? Starts to get you all misty eyed remembering 2008...

Dr. Engali's picture

Should it bother me that yahoo is telling me to buy gold?

Gold at $1,300 is still worth buying: Kilburg

fonzannoon's picture

Yahoo and Barrons pimping gold....


The Lindsey Group’s Peter Boockvar writes this morning that he’s watching gold and TIPS as a baromoter of the market’s view of the Fed’s credibility — and he reads the Thursday trading as a note of doubt:

Because of my amazement and surprise that the Fed didn’t alter one bit its comments on inflation in their official statement, barely changed its PCE forecasts and Janet Yellen referred to the recent higher inflation data as ‘noise’, I felt it important to mention yesterday morning that watching gold and inflation break evens were the two key indicators to watch as I believe going forward they will be a valid vote in giving their opinion on the Fed’s credibility with their policy relative to the reality of the data (in addition to the recent consumer price data, the CRB index is a ½ pt from the highest since September ’12) . While it was just one day, gold certainly spoke loud and clear on its thought of the new Fed forecasts with its biggest one day percentage rally since September and inflation break evens went up for a 3rd straight day with the 5 yr implied inflation rate at the highest level since May 2013. Based on this market response from both asset classes, I’m declaring Janet Yellen’s honeymoon as Federal Reserve Chair as officially over. This is not because I expect an imminent revolt in inflation sensitive markets to her inflation forecasts as this is always a process but because yesterday was the 1st time in her tenure that the market came out and blatantly disagreed with her and the committee as I believe they correctly should have. I expect this divergence to continue.

Notsobadwlad's picture

One of the biggest tragedies is that the banks do not need savers and do not want them. They can get an infinite amount of free fiat from the Fed or by creating it out of thin air themselves.

It sure does devalue that which is already in circulation though.

Pee Wee's picture

Fiat saving is extinct, as is wealth creation for the vast majority that need it. 

ZIRP is the biggest bailout of them all - might as well be deposit confiscation.

Puncher75's picture

That process can only last for a time

venturen's picture

A ReHypo a day keeps the savers away!

Peter Pan's picture

The FED has also made the tragic error of trying to restore the economy by inflating the balance sheet values. This is the equivalent of trying to make a car go faster by looking for the downhills.

gcjohns1971's picture

It would be more accurate to say that they are making a car go faster buy digging out "downhills" in front of it.

Everything seems to be going fine, and speed picking up, until you figure out that A) you can't dig forever and B) Now you have to get out of the hole.

youngman's picture

It used to be if you had a would dig a hole to improve something...putting a sewer in for example...and then you company would get paid for doing that work..and your company would grow in with the printed money...your company just grows for no dont need the shovel anymore....its fake growth...

eclectic syncretist's picture

It is inflation of the sort that Thomas Jefferson warned about.

pods's picture

Sorry, Op-Eds from a FED guy and hedge fund guy don't really have the GRAVITAS that make my thing tingle.

It is cute how these skimmers are looking out for us.  How magnanimous.



Flakmeister's picture

Yes, skimming off 2/20 is a surefire way to wealth, at least for a few...

Colonel Klink's picture

And we all know who the majority of those few are.

eclectic syncretist's picture

We are well past the point of no return.  IMHO the FED, in collusion with their bankster owners, will buy up all the shares the banksters can sell to them, driving prices as high as possible, then let it all crash, blaming government policies for the resultant devastation.  At the same time the banksters will reap enormous profits on short positions that will later be deployed in picking up everything that had to be sold during a well-planned margin hell desperation, for bargain basement prices.  The shares that the FED bought will be worthless, but no more worthless than the imaginary notes that have not yet been printed into existence.  So the FED will lose nothing, as always, and the banksters will have maximal profits.

This of course assumes that the banksters are fully aware that the endgame is upon us and they have to go for it all at one fell swoop now.

ms8172's picture

When is this shit going to go down... I'm tired of reading Doom and Gloom news and the markets keep running up........ WTF?

ThirteenthFloor's picture

In case you haven't notice the "slow burn" is working quite nice for the Elite.  Take 'em out slowly, one city one demographic at a time....behind the scenes they laugh it up, lite up more cigars and toast to small victories.  Doom and gloom is a small business but growing business of folks betting the elite will get mad one day and overturn the tables....not likely while the slow burn works so well and is not easily spotted by Americans with an IQ under 90.

BeetleBailey's picture

Here's my thinking on that.

It's getting to the point - regardless of the doom and gloomers - that the next leg of money to be made/sheeple to be shorn/profits to be banked.....

is on the downside....

the planet Blue Orb is over-due for a;

false flag/natural disaster/another FOOKasheemer/asinine assasination/calamity

The YOU-kraine - EEEEE-rack and Bananastan not withstanding....some shit's gotta blow up (likely....on cue)

takes months sometimes to "rinse" the market....prep....

in this case...rigged...years....they've ran the count to 3 and 2 and the hitter keeps fouling off pitches....

but the next leg to make coin is the downside....

cue the event....

ThirteenthFloor's picture

Beetle, agree the juice is about all out of this pump cycle (no pun intended).  They will meet quietly on a Sunday morning as they did on 9.14.2008 and 9.9.2001 decide to dump(sell) or burn paper(eliminate obligation) and ride(buy into) next big swell into the beach.  Of course leaving their wreckage along the way.  They are getting smarter, like locking out shorts on financials in the middle of the dump, in '08.

50 to 1 long shot, someone breaks through and makes it to the endzone before plan is executed.

Seasmoke's picture

If I book your bets. And you lose $2000 this week, but only are able to pay me $1200.....How much did I "lose" ???

MrBoompi's picture

A balance sheet recovery for the benefit of the wealthy can be engineered by the Fed. An income statement recovery cannot. The Fed has never been in the business of helping the middle class or poor, unless one considers putting them in greater amounts of debt "help". If you read The Creature From Jekyll Island, you'll see the real reasons the Fed was formed, and you'll see they have been successful at doing what they are supposed to do.

intric8's picture

A V shaped recovery, with the tip of the V creeping in to the fires of hell

yogibear's picture

Tell us what we don't know.

The next plan is to keep destroying the US dollar until the sheeple figure out what's going on and do everything to dump the US dollar.

Then it's on to Plan B for the PhD Fed banksters., SDRs.

Devalue happens on a weekend when the media, CNBC has time to spin the news. Just like Goldman becoming a bank during a weekend so they had access to TARP funds.