The Fed's Failure Complicates Its Endgame

Tyler Durden's picture

Submitted by Charles Hugh-Smith of ofTwoMinds blog,

To demonstrate it hasn't failed, the Fed must taper/withdraw its monetary heroin.

That the Federal Reserve's policies have failed is now so painfully evident that even the political class is awakening to this truth. Rather than re-ignite broad-based, self-sustaining economic growth, the Fed's loose-money policies (zero-interest rate policy a.k.a. ZIRP, and quantitative easing a.k.a. QE or free money for financiers), have perversely distorted the economy and widened wealth and income inequality.

After six long years of unprecedented monetary expansion and intervention--more than enough time to have succeeded in its stated purpose of restarting the real economy-- political and financial blowback is forcing the Fed to withdraw its monetary heroin.

Unfortunately for the nation, the Fed's monetary heroin has addicted the economy to ZIRP, loose credit and free money for financiers. As a result, withdrawal will be painful, financially and politically.

The abject failure of these policies to aid Main Street while heaping wealth on Wall Street greatly complicates the Fed's endgame. Given the economy's dependence on the Fed's monetary heroin, declaring victory and beating a hasty retreat is not really an option: once the Fed stops delivery of monetary heroin, the economy will go into withdrawal, and the Fed's failure will be too obvious for even its most ardent backers to deny.

But if the Fed continues pushing its monetary heroin after six long years, its failure to energize the real economy will be equally obvious--as will the unintended consequences (blowback) of monetary heroin: malinvestment, systemic risk and a pernicious faith that the Fed will do whatever is necessary to keep the stock market lofting ever higher.

There are two basic schools of thought on the Fed's real agenda.

The mainstream view is the Fed is pursuing its stated goals of stabilizing inflation and employment. The other view is the Fed's real agenda is enriching its homies, the banking cartel, at the expense of the nation.

Since Wall Street has thrived while households and Main Street have seen earned income decline, the mainstream view is left with the unenviable task of explaining exactly how free money for financiers has helped J.Q. Citizen.

Household income has declined significantly in real terms: Five Decades of Middle Class Wages (Doug Short).

The first line of defense is the wealth effect, the notion that a rising stock market will make people feel wealthier and therefore more likely to borrow and spend money on stuff they don't need. This is of course the foundation of the U.S. economy: debt-based consumption, and it just so happens to generate gargantuan profits for lenders such as banks.

Unfortunately for the Fed apologists, only the top slice of wealthy households own enough equities to feel wealthier as stocks rise. Wealth in the U.S. is an inverted pyramid: the so-called "middle class" owns a small slice near the apex while the super-rich own the entire base:

The reality is the majority of households own a trivial amount of financial assets; the number of households with debt in collection far exceeds the number benefiting from the Fed's wealth effect, which not coincidentally has greatly enlarged the wealth of financiers and the few who own most of the financial assets.

This glaring disconnect between the Fed's publicly stated agenda and the results of its policies has created a political problem for the Fed. In the mainstream media's gauzy perception, the Fed is a god-like assembly that is above the grime of politics.

In truth, the Fed is as intrinsically political as any other branch of the Central State. The thundering gap between the Fed's stated goals and the results of its policies have, after six long years, reached the toadies and lackeys of the political class, who are now reluctantly stirring to the public demand to examine the Fed's closely played cards.

In other words, the failure of the Fed's policies has generated unwelcome political blowback. A few brave politicos have interrupted their campaign fund-raising long enough to grasp that the Fed has not just failed in some random fashion: the Fed is the problem, not the solution.

As a refresher, here is the Fed's Balance Sheet, bloated with over $3 trillion of freshly created money that was mainlined into the financial system:

Debt has skyrocketed under the guiding hand of the Fed's policies; GDP, not so much:

There is no mystery why the Fed's policies have failed. Fed policies have diverted interest income that once flowed to households to the banks, they've enabled the Federal government to borrow and squander trillions of dollars in deficit spending with no political trade-offs or consequences, and they've greatly incentivized malinvestments and risky bets.

Federal debt is borrowed from future generations. If it is squandered on consumption, it is effectively stealing from future generations, as their income will be devoted to paying interest on the trillions of dollars we have borrowed and blown propping up a bloated and ineffective Status Quo.

Perhaps most perniciously, the Fed has nurtured a belief that has now taken on a quasi-religious certainty that the Fed will never let the stock market go down. The Fed has bolstered this faith by launching a new free money for financiers program every time the stock market faltered.

As a direct result, nobody believes the Fed will actually reduce its monetary heroin or allow interest rates to normalize, i.e. rise: traders, money managers and the financial punditry are convinced that the Fed will soothe any tantrum thrown by Wall Street with another dose of monetary heroin.

This greatly complicates the Fed's endgame, because nobody will believe the Fed is serious about ending its monetary heroin until it allows the stock market to plummet off a cliff without rushing to save it with more free money for financiers.

The Fed is hoping to manage expectations and perceptions with such perfection that nobody notices the monetary heroin is no longer flowing. But this is an absurd fantasy: having addicted the stock market and the economy to monetary heroin over the past six years, how can the addict go through cold turkey withdrawal without being completely disrupted?

And in a delicious irony, should the Fed come to the rescue with another round of monetary heroin (free money for financiers), that will only demonstrate the complete and utter failure of the Fed's policies to generate sustainable growth in the real economy.

If the Fed has to rescue Wall Street yet again after six years and trillions of dollars of free money for financiers, that will prove beyond a shadow of doubt that the Fed has failed.

To demonstrate it hasn't failed, the Fed must taper/withdraw its monetary heroin.If the stock market tanks as a result, and the Fed rushes to the rescue with more free money for financiers, that will also prove the Fed has failed: if the economy and financial system is as robust as the Fed claims, why does it need to be rescued yet again after six long years of unprecedented injections of monetary heroin?

It's a double-bind with no escape. No matter what the Fed chooses to do, the failure of its policies to help households and Main Street while enriching wall Street and the banks will be revealed to all.

Comment viewing options

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

This shit does not matter.  The Yellen Glory Hole will continue!!  Long live the Queen!!

surfsup's picture

Or she will be shitting  BRICS

max2205's picture

It won't end because it can't end

Vampyroteuthis infernalis's picture

Yes, it will end. When it FAILS everyone.

Save_America1st's picture

Talk about things ending...remember the London Silver Fix ending on August 17th?

Just received this alert from Bix Weir...the implications are substantial to say the least: 

ALERT: ISDA Announces that the New "London Silver Price" for Silver Derivatives is OPTIONAL!  Bix Weir:

The International Swaps and Derivative Association (ISDA) published their position on the changing of the "SILVER-FIX" with the new "LONDON SILVER PRICE" and the ramifications are earth shattering for silver derivative holders.

ISDA publishes Bilateral Form of Amendment Agreement for Certain Silver Transactions

When I first saw this announcement I had thought to myself, "It's about time the ISDA came out with a ruling to replace the 'SILVER-FIX' with something identical to use in the outstanding silver derivative contracts." After all, according to Bloomberg there are nearly $5T in silver derivatives traded every year!


Basically, the ISDA acknowledges the change in the form of an Amendment but then goes on to clearly state that the implementation of this contractual change it 100% OPTIONAL for all parties involved!!

"ISDA, in consultation with market participants, is issuing this statement in addition to the Amendment Agreement as a means of assisting market participants in treating Affected Transactions. Parties are not obligated to enter into the Amendment Agreement and may choose to negotiate alternative means of treating Affected Transactions."

Not only that but they clearly state that the "SILVER-FIX" and the "LONDON SILVER PRICE" are NOT interchangeable.

"The Amendment Agreement seeks to replace references to "SILVER-FIX" with a reference to a new Commodity Reference Price, which may include a reference to the new London Silver Price. Parties electing to amend the Affected Transactions through the Amendment Agreement may do so with effect from 15 August 2014."


At issue is billions of dollars worth of silver derivative contracts that mature after August 14, 2014 that have incorporated both the term "SILVER-FIX" as well as reference the ISDA and LBMA as governing bodies related to the setting price defined as the "SILVER-FIX".

So let me set the stage for you...

For decades the Large Bullion Banks have been suppressing the price of silver by selling silver derivatives contracts in massive quantities ($5T/year) in the Over the Counter (OTC) Market in London. Many of these silver derivative contracts are set to mature after August 14, 2014. Most of these contracts clearly references both the "SILVER-FIX" as the settlement price and the LBMA and ISDA as the governing bodies.

ALL of the above has just been thrown into LEGAL CHAOS as none of the silver derivative contracts are legally binding after August 14th UNLESS both parties agree to the new terms set forth from the ISDA...which have clearly stated that the new terms are OPTIONAL!!!

If you were a BIG LOSER on your silver derivative book because you wrote massive naked short sale contracts to keep the price down..


We are at the End Game for silver manipulation and the Silver Bullion Banks have been given a HUGE back door in which to sneak away. I say LET THEM GO...

But let's just make sure that they don't try to get back in the game!

Da Yooper's picture

"the failure of its policies to help households and Main Street while enriching wall Street and the banks will be revealed to all."


The fed has & will fail because they have not learned what EVERY & I said EVERY business owner knows first hand




you want to see the economy fly ?????




THEY WILL SPEND IT & the economy will florish


But because we have a bunch of degreed assholes running things who have never RUN A BUSINESS


the economy will tank because people cant spend MONEY they dont HAVE


So simple a caveman could figure this out


TheRedScourge's picture

The government doesnt have any money. If it bails out the taxpayers, who's money are they going to do it with? Either corporate dollars, whereupon companies will lay off workers, thus cancelling out the taxpayer bailout, or money printing, which will merely destroy the savers and reward the debtors, whether corporate or individual.


You can't get blood from a stone.

SunRise's picture

It will end.  Perpetual motion machines are a myth.

Hal n back's picture

its time to distinguish between incuring debt vs just who is buying the debt--nothing has been said about cutting the deficits. This current cut back in deficit is related to higher Obamacare related taxes, while much of the cost of Obamacare has been delayed and the CBO is saying just that.


QE is just one part of this problem, the increasing deficit cannot be stopped unless we make a major change somewhere. Again, just who is buying the debt is a separate issue.


I'd still like to know who is buying the debt created by current deficits, and who will buy when the deficits ramp up which is what CBO said will happen soon.  Since I do not trust any govt data (unfair, there has to be some) Its hard to nail down anything.



doctor10's picture

Continue to look for economic data that will support discontinuing QE and raising interest rates.  "1938" will be upon us in about 18months after

surfsup's picture

What on earth does one expect from a PRIVATE central bank?   ????

NotApplicable's picture

What on earth does one expect from a CENTRAL bank?   ????


Four chan's picture

i expect it to enslave the population to debt, and confiscate all tangible assets and means of production through boom and bust it creates.

Dr. Engali's picture

The end game is simple, print, prop up stocks, buy treasuries, hammer precious metals, blame Russia for the mess, and have a war and let it all collapsed as a result.

insanelysane's picture

With ya Doc.  The FED is in extend and pretend mode until some event occurs and blame for a collapse will be placed on the event.

Winston Churchill's picture

Looks like they are running out of time, from the frenzied rush to start

WW111.I just wish I knew what broke last year, that caused the multiple

meets between Obozo and the bankers.Something big, but well hidden so far.

StychoKiller's picture

Running out of little podunk countries to steal gold from?

NotApplicable's picture

Which is in no way a "failure" on the Fed's part.

Sometimes CHS can be so fucking dense, imagining that the facade's script represents reality in any way. As long as people like him play these games, we're all FUCKED!

Sudden Debt's picture


If the economy is a dam...

and the water levels came to the top...

the time they need to react... and by that I mean politicians

is right after the gulp in the dam is about 200 meters and the floodings killed everybody...

that would be about right...


the time when the game is over, there will be a lot of people in front of their televisions to listen to those politicians listing to what they have to say about the mega crash. They'll all have something to say at the same time.

And everyody in all those houses will silence their kids so they can hear it all and won't miss a thing....


icanhasbailout's picture

This article seems to assume that present conditions are not the objective of Fed policy. I disagree.


The Federal Reserve is a foreign power and its aim is to subjugate us.

Sudden Debt's picture

and another silver attack just because they can I guess...


P Rankmug's picture

How about a nice little war to divert everyone's attention?  Fed problem solved.

yogibear's picture

Maybe it takes some BRICS through the Federal Reserve's windows to get the attention of these insane people.

buzzsaw99's picture

the fed only cares about billionaires and bankers

NotApplicable's picture

AKA "power"

"Got you in a stranglehold baby, then I crushed your face."

Kina's picture

It seems to me that the Fed must be extraordinarily dumb if at some early stage they didn't realise all that their policies did was transfer massive public wealth to the top 1% to be paid for by taxpayers over the next 100 years.

Now, when they own enough of the country it wont matter to the 1% what the USD or Share market reads....they will own all the hard assests and industries. At that time the Fed can throw up its hands and shrug.




Bruno de Landevoisin's picture

Bravo!  Right on target, so direct!

Texas Fold-em's picture

War is the most likely choice.

financialrealist's picture

This I agree with.  It give EVERYONE an out. And Ive said it before, EVERY war is fought because of eonomics.  Given the curent situation, the chess board is being set up nicely.  And when it happens, the enemy of my economic salvation is my enemy. 

financialrealist's picture

This is nothing new...we all know this.  FED is a failure, fake economy, ect, ect, ect...i want insight on is when the fiat based ponzi breaks. And thats something no one can answer. Unitl then its all noise.

Armed Resistance's picture

This is my favorite explanation for the Fed's policies:

If one wishes to truly understand the actions behind private Federal Reserve policy, one must come to terms with a fundamental reality - everything the Fed does it does for a reason, and the most apparent reasons are not always the primary reasons. If you think that the Fed simply acts on impulsive stupidity or hubris, then you haven't a clue what is going on. If you think the Fed only does what it does in order to hide the numerous negative aspects of our current economy, then you only know half the story. If you think the Fed does not have a plan, then you are sorely mistaken...

Central Bankers and their political proponents espouse a globalist ideology, meaning, they are internationalists in their orientation and motivations. They do not have loyalties to any particular country. They do not take an oath to any particular constitution. They do not have empathy for any particular culture or social experiment. They have their own subculture, with their own "values", and their own social hierarchy. They are a kind of "tribe" or "sect"; a cult, if you will, that views itself as superior to all others. This means that when the central bankers that run the Fed act, they only act with the intention to support and promote globalization, not the best interests of America and Americans.

The process of globalization REQUIRES the dissolution of the U.S. economy, as it exists today. Period. There is no way around it. America can no longer remain a superpower in the face of what globalists call "harmonization". The dollar can no longer maintain its petro-currency status or its world reserve status if total centralization under a new global currency is to be achieved. Globalists believe that America must be sacrificed on the altar of "progress", and diminished into a mere enclave, a feudal colony of a greater global system. The globalists at the Fed are no different.

Once this driving philosophy is understood, the final conclusion is obvious - the Fed exists to destroy the U.S. financial system and the U.S. currency mechanism. That is what they are here for.

This is why the dollar has lost 98% of its value since the Fed was established in 1913. This is why the Fed deliberately engineered the derivatives bubble crisis through the implementation of artificially low interest rates. This is why their response to the crisis was to create yet another massive bubble in stocks and bonds through QE stimulus. This is why the Fed is cutting stimulus today.
- Brandon Smith, December 21, 2013

Toolshed's picture

The arguement you present makes sense from a certain perspective, but it is very conspiracy theoryish. I do not believe the Fed's academics posses the level of mental acuity, or determination, required to devise, coordinate, and implement the complex strategy required to achieve that kind of result. I think it is more simple than that. The nature of the Fed makes it a bit of a Frakenstein's monster. It is a private bank that is nasty patchwork of public, private, and political interests. While it purports to be acting for the good of the nation, it in reality, is a tool of the bankers and politicians. So, regardless of it's public proclomations, it's efforts are aimed at supporting the banks and the US Treasury, and interest rates reverting to their historical mean would destroy both. The Fed will talk about raising interest rates, but it will not do so in a meaningful way. There may be small token increases in rates, but if the Fed loses control, due to rampant inflation for example, you can expect war as an end result. If inflation takes flight, which is likely if the dollar's status in the world continues to decline and all those dollars head for home, the US economy will collapse in a very dramatic fashion, and the elites running the show will be between a rock and a very hard place. Death at the hands of revolting citizens or death by foreign bombs. Nothing to lose in other words. But what do I know, I am just another tool.

Armed Resistance's picture

"I do not believe the Fed's academics posses the level of mental acuity, or determination, required to devise, coordinate, and implement the complex strategy required to achieve that kind of result."


So you're saying Bretton Woods, the closing of the gold window in 1971, the Petro-Dollar standard contrived by Kissinger in 1973 and all of the bubbles in between etc. are just merely coincidences that have brought us to this precipice?  

If I said to you that they manipulate every market would that sound "conspiracy theoryish" or would it be a fact?

If I said that the Gold in Ft. Knox is gone would that be "conspiracy theoryish"?


I think these fuckers know exactly what the have done, what they are doing, and what they plan to do.  But you are right about one thing:  They have underestimated the will of people and they will come a calling.

eclectic syncretist's picture

The Fed are tools of a few people not yet clearly identified here.

Toolshed's picture

I agree with you, but our perspectives differ. You appear to be commenting from the perspective that they are working on the globalization angle. My perspective is they are working from the pure, unadulterated, egomaniacal greed angle.

q99x2's picture

Arrest them. Throw them into prisons. Pretty F'n simple.

FightingtheFed's picture

Fuck the Fed!! I want them Eliminated!!!!!!

Nuke their ass!

They  have enriched themsleves while Molesting the American people in broad daylight for far too long!!

youngman's picture

They are in a corner.....rates cant rise or it will blow Obamas budget.....and they cant let the market fall or people will go into depression its print print print....and isolation is coming...we are becoming hated in the world..and many countries want to move away from us....and are doing so...all that paper we have out there will come back to us as inflation...soon i think

Toolshed's picture

"we are becoming hated in the world"

we are the most hated country in the world



JEHR's picture

The way I see it:  public debt is not a problem because a sovereign country with its own currency can afford to buy in dollars anything that it deems necessary (and it does not have to borrow money and the grandchildren will not be paying the interest on money that was never borrowed!); private debt is a problem for the average middle class person who because of stagnant wages or unemployment or lower income cannot maintain a decent standard of living when prices are going up.  The biggest problem is that the wealthy have more ability to get rich via the "fixed market" while the average person cannot afford to use his money to "bet" on the market AND he/she cannot even make a piddling amount on interest which the Fed has locked up at zero.  If after the financial crisis of 2008, some of the TARP money had been used for helping homeowners to modify their underwater mortgages, then the crisis would have been mitigated somewhat. 

However, the biggest fail was not putting in jail all the CEOs and CFOs of the big banks and other financial institutions by putting into effect Sarbanes-Oxley.  Political failure made financial failure possible and that includes the Federal Reserve and Treasury.


Itchy and Scratchy's picture

Yeah but ... I don't think the hedgies r rich enuf yet!!!!!!   The .00001% kneed to git moar rich!!!!

SheepDog-One's picture

It's not 'monetary heroin' it's more like pure crystal meth + adrenaline main lined right to the dead patients heart, making the body spasm and twitch.

edifice's picture

Forget 'inequality' and start thinking a repeat of the Guilded Age. You know, child labor, gross inequity, company stores/towns (slavery). Bolivia just legalized child labor for kids as young as 10. All of this will come home in a couple of decades.

Jacksons Ghost's picture

Can the Fed stop those Dollars from abroad, from coming home?   If so how?


Does this require a new currency to stave off hyper-inflation or is there another way to keep those dollars from coming home to roost?


Clearly the world is prepared to move on from the Dollar.  And the world is making plans to life after the Dollar.  What will be the Fed's response?  Is it as simple as War?  Is that their only option?

khakuda's picture

It was NEVER about helping Main Street.  They knew it wouldn't help Main Street - the Fed doesn't create jobs or raise wages which are set in the GLOBAL labor market, all they can do with their policies is inflate bubbles.

The policies were to bail out the fractional reserve banking system by raising asset prices so the banks weren't insolvent, indirectly helping main street by staving off an end to the financial system.

What Main Street consumer has been begging the Fed to create more inflation in his cost of living to decrease his standard of living?

Helping Main Street was never possible, it was just an excuse to keep the free money flowing.  It's like saying, "Honey, I'm going to keep having sex with the Russian nanny until Putin leaves the Ukraine alone."  One has nothing to do with the other.

Itchy and Scratchy's picture

Looks like Main Street got freshly paved??!!