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Why PIMCO Thinks "The Bursting Bubble" Is Not The Biggest Risk
Authored by PIMCO's Paul McCulley,
When I entered the Fed-watching business over three decades ago, a clichéd phrase of advice from graybeards was: “Watch what they do, not what they say.” Thinking back, there was not actually much Fed rhetoric to either watch or hear.
Paul Volcker was new in the job of Fed Chairman, Ronald Reagan had just been elected President, and Ted Turner had not yet launched CNN Headline News. All three men are now recognized as giants of transformative change in America’s life, altering not just how we conduct our affairs, but also how we think about ourselves.
It really was a good time to be a newly minted graduate in short pants on Wall Street. The fiscal authority was pursuing something called supply side economics and the monetary authority was putatively pursuing monetarism. Keynes was in rehab for inflationary intoxication, and Friedman was the straw stirring the free-to-choose drink. The visible fist of government was cursed and the invisible hand of markets celebrated.
Ah, yes, a most interesting time to start a career on Wall Street: a time of existential ferment in our nation’s economic policy, best characterized by tight monetary policy, loose fiscal policy and blind belief in the ability and willingness of capitalists to regulate and discipline their own affairs. At such a juncture in history, the advice of the graybeards to me to watch what “they” do rather than what they say was sage counsel.
This was particularly the case in watching the Volcker-led Fed, which pegged short-term interest rates, but said it didn’t, maintaining that it simply controlled growth in the money stock via changes in “the degree of pressure on bank reserve positions.” Volcker also thundered that the Fed had virtually no influence over long-term interest rates, which were putatively sky high because of outsized budget deficits and inflationary expectations.
Accordingly, the Fed-watching community of that era was, in practice, a community of plumbers: We spent a huge amount of effort and time anticipating and reverse engineering the day-to-day flows (called “operating factors”) that drove the activities of the New York Fed’s Open Market Desk, which were necessary to maintain the existing “degree of pressure on reserve positions.”
Yes, we were obsessed with what the Fed actually did, which they ordinarily did at 11:40 Eastern time: customer repo versus system repo, term versus overnight, bill passes versus coupon passes and the dreaded matched sale. Were the operations strictly “technical,” orchestrated to sterilize the net of churning operating factors, or was the Desk implementing a FOMC-directed change in the degree of pressure on reserves – to wit, changing the FOMC’s implicit fed funds rate target?
To be sure, we Fed nerds were also expected to forecast such changes, with especial focus on changes in the FOMC’s “inter-meeting bias,” also known as the “tilt,” which granted the Chair authority to implement changes without further FOMC deliberations. But our day job was as plumbers, to literally figure out when policy changes were actually unfolding by chasing the Fed’s open market transactions through the banking system’s pipes.
Dot mavens
Now a graybeard, I preach to youngsters the opposite of the sermon I was given: Watch what they say, not what they do. The Secrets of the Temple that Bill Greider wrote so poignantly about in 19831 are no longer secret. The FOMC not only very publicly pegs the fed funds rate (albeit in a 25 basis point range, so as to maintain some degree of no-hands-Mom myth), but also provides “forward guidance” as to its fed funds rate peg: The FOMC forecasts itself!
Thus, the game of Fed forecasting is no longer an absolute sport, as in my youth, but a relative game: The FOMC’s dots are the benchmark, and forecasting is an over-under game versus those dots. To be sure, today’s game is similar to yesterday’s game, in that betting money on Fed forecasts involves wagering relative to market prices, notably the forward curve for future short rates.
What is new is that the forward curve is now an explicit instrument of monetary policy. More bluntly: The Fed explicitly seeks to influence and manage long-term asset prices, all of which, by the (Gordon) laws of financial arithmetic, embed expectations of future Fed policy.
The Fed doesn’t put it exactly that way, of course, preferring to speak of influencing “financial conditions.” Political correctness and all that. But “financial conditions” don’t have ticker symbols with prices: Long-term financial assets do – bonds, stocks and currencies.
Thus, central bank watching in today’s world is all about reverse engineering where central banks “want” those big-three asset prices, which are now Fed “targets,” in a fashion similar to the money stock “targets” of my youth. That is not to suggest, I hasten to add, that central bankers always get what they want!
There are many slips between cup and lip, between instruments and targets. Reality has a nasty habit of intruding on wants and best intentions. And needs.
Doing what we were trained to do!
We Fed-watching plumbers of long ago now finally get to do what, for me, is most rewarding: reverse engineering the internal consistency, or lack thereof, in the FOMC’s theoretical musings. And, in turn, opining on the logic of the explicit FOMC forecasts of its own future behavior, in the context of those theoretical footings.
Yes, for me, it is the most satisfying time of my Fed-watching career. And not just because I’ve got a cool new job, though I do. What I pinch myself most about is actually one blue dot: the FOMC’s “longer-run” forecast of the steady-state “neutral” fed funds rate, which has a current “central tendency” of 3¾%, recently shaved from 4%; see the Dot-ology Box!
Recall: It was only in 2012 that the Fed began explicitly hanging its collective hat on a numerical longer-run forecast for its short-term peg! But the 4% “neutral” number has long existed in the ether of Fedspeak, notably since 1993, when John Taylor devised and divined his famous Rule, which postulates that a perfectly tamed business cycle should/will beget a 4% fed funds rate: a 2% real rate plus an at-target 2% inflation rate, in the context of at-potential, or full-employment, GDP growth.
Taylor’s Rule was and is a cyclical operating guide for the FOMC to modulate the fed funds rate on both sides of secular “neutral,” founded on the cyclical Phillips Curve trade-off between unemployment and inflation. Rational-expectations perfection would be no modulations at all: Markets would so understand the FOMC’s reaction function, efficiently discounting prescribed modulations in the Fed’s policy rate, as to obviate the FOMC from having to make them!
Indeed, Taylor argues – to this very day! – that if only the Fed had religiously followed his Rule over the last two decades, the U.S. economy at present would be in a much finer place than it is. Not a perfect place, to be sure, not even Taylor would argue, but a much better place.
I have no present desire to pick a fight with Taylor about his counterfactual assertion: Serenity starts with accepting that which cannot be changed, and that includes history. Forward!
But I do applaud John for the ubiquity that his Rule has achieved, because it conveniently frames conventional wisdom, which can also be called active intellectual laziness – which has plagued my profession pervasively ever since the Minsky Moment of 2007–2008.
The Taylor Rule was not designed for dealing with Liquidity Trap pathologies, because it was modeled on a time frame that didn’t include any Liquidity Traps! At least in the United States, and when Taylor published his Rule in 1993, Japan was in the infant years of its then-denied Liquidity Trap.
As a pragmatic matter, the Taylor Rule over the last half decade has been useful primarily in confirming the wisdom of Keynes’ parting observation in the closing chapter of The General Theory:
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”
The tenacity of some FOMC participants in defending the rounds-to-4% longer-run blue dot confirms too, perhaps, the robustness of yet another Keynes dictum:
“Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
Channeling Rudi
Long-time – and patient! – readers probably are now bracing for an ode to Minsky, a most unconventional theorist, an outcast and renegade in academic circles, whose Financial Instability Hypothesis has greatly informed and influenced my own work.
Gotcha: Ain’t going to do it!
Rather, I want to riff on the work of another (sadly passed) man, who was held in highest esteem at the highest rungs of the academy: Rudi Dornbusch. In 1976,2 Professor Dornbusch took on conventional wisdom that floating exchange rates – adopted after the breakup of the Bretton Woods fixed rate regime a half decade earlier – were inexplicably volatile, relative to the doctrine of monetarism, as espoused by none other than Milton Friedman.
Conventional monetarist religion had held that a regime of floating exchange rates would unleash market forces to adjust exchange rates in real time, guided by the lodestar of Purchasing Power Parity (PPP), thus truncating buildup of imbalances in trade, which had, in the earlier fixed exchange rate regime, begot violent volatility when governments were “forced” to break the fixes.
Reality did not conform to those monetarist promises, with wild over- and under-shooting of PPPs, and Dornbusch sought to theoretically explain why, developing his exquisitely simple, yet elegant model of rational overshooting. Its theoretical foundation is very simple: Prices on Wall Street move much more quickly than prices on Main Street.
Duh, you say, don’t we all know that? Yes, we do. But that reality is often assumed away in economic theory, most especially in high academic churches steeped in the efficient markets hypothesis, presuming that the invisible hands of markets all wear the same behavioral gloves.
They don’t. What Dornbusch demonstrated was that:
1) If a country has an “overvalued” currency on a PPP basis (its burgers are way overpriced relative to the rest of the world on the Big Mac Index) and is experiencing a growth-debilitating erosion in trade, and
2) If the country responds with a “shock” of monetary easing, slashing interest rates (as it is free to do under a floating exchange rate regime!), then
3) Its currency will rationally plummet not just to “fair,” but to “undervalued” on a PPP basis.
The reason:
1) A country’s Main Street prices (inflation) are very slow to adjust to the “shock” of monetary easing (reducing imports and increasing exports, improving growth), and
2) Until that adjustment has unfolded, global investors will be stuck with the country’s shocked-lower interest rates, and accordingly,
3) Will rationally be willing to hold the country’s bonds only if its currency plummets below PPP, fostering expectations of room for future appreciation.
Simply put: Rudi explained to us that global investors will buy a country’s rich bonds only if the country’s currency falls so far as to make its burgers dirt cheap.
Really, his model is that simple, yet profound (as all great breakouts in economic theory tend to be!). In turn, Rudi’s theoretical nugget provides huge insight into the why and how of escape from a Liquidity Trap: Wall Street prices move much more quickly and further than Main Street prices.
Wall Street’s unjust moment
Traditionally, the political catechism of monetary policy is that the Fed doesn’t really give a damn about Wall Street, that the capital markets are only the conduit between the Fed and Main Street. Main Street outcomes for employment and inflation are what really matter, we are taught, and thus the only “targets” of monetary policy. And so long as a Liquidity Trap can be avoided, this theological tenet has a loud ring of truth.
This was particularly the case before financial deregulation, when monetary policy “worked” primarily through the conventional banking system, with Main Street’s savers on the liability side of banks’ balance sheets, and Main Street’s borrowers on the asset side. Wall Street was a place walled off from the banking system (by Glass-Steagall, among other things), where people of money traded securities amongst themselves, while also channeling capital – notably equity – to the frontiers of economic growth.
In that catechism and that world, the notion of the Fed “targeting” stock and other long-term financial asset prices was blasphemy. And politically, it still is. But that world no longer exists: Wall Street and the deregulated banking system – conventional and shadow – have morphed into one.
In turn, when a Liquidity Trap hits, the Fed is in a pickle. The Fed can take its policy rate to the Zero Lower Bound (ZLB), but it will not generate a revival of either increased demand for or supply of bank credit and, in lagged train, upside action for prices and wages on Main Street. Such is the nature of monetary policy in a Liquidity Trap, which is akin to the position of a cheesecake vendor at a convention of recovering overeaters: The customers ain’t buying, even though they are known to like the product, and the price is zero.
In which case, the Fed isn’t impotent. But with the banking system and its Main Street customers locked in the Nurse Ratched Center for Deleveraging of Balance Sheets, where exuberance, rational and otherwise, is strongly discouraged, the monetary authority, by default, must turn to Wall Street for able-and-willing partiers.
Yes, it is a Hobson’s choice. Theoretically, the choice should never be on the table, if the fiscal authority is willing and able to party hardy, backed by the sovereign’s borrowing prowess. But if the fiscal authority demurs, for whatever reasons of defunct orthodoxy, the monetary authority must – unless it wants to nursemaid an enduring Liquidity Trap – dance with Wall Street.
It is not a tasteful choice for the Fed at all. It reeks with social injustice. But it also happens to be the only viable choice: Use all available powers, with whatever-it-takes abandon, to reflate prices that are amenable to going up: long-term bonds and stocks.
How does it work?
Printing money to reflate Wall Street prices is normally thought to “work” through a trickle-down channel: Make the wealthy wealthier and they will spend more ebulliently, stimulating aggregate demand more generally. There is indeed an element of this dynamic involved. But it is not, in my analysis, the straw that stirs the Liquidity Trap-escape drink.
For, you see, Liquidity Traps are born of preceding (Minsky-type) excesses of debt-to-equity ratios. That is, there is too much private sector debt relative to equity, not too much debt per se. It’s a private sector balance sheet problem that begets an income statement problem, not the other way around.
To be sure, a recession in the wake of a Minsky Moment does create an aggregate demand, and thus aggregate income problem, as recessions poleaxe employment and labor’s bargaining power for wage gains. This dynamic turbo-charges Main Street’s woes in managing any given debt-to-equity ratio.
But the existential macro problem in a Liquidity Trap is a balance sheet problem: too little equity relative to debt. This problem can be mightily relieved by driving up the price of assets that are the collateral for debt, thereby restoring and creating equity.
Yes, “creating” equity: Capital gains – realized or not – are the only newly created asset without an associated, offsetting liability. “Paper wealth!” some of you are no doubt retorting under the breath. And arithmetically, I won’t quarrel with you. I will simply remind that a Minsky Moment itself is a “paper” problem: too much dodgy paper debt relative to the paper value of levered assets.
Accordingly, getting out of a Liquidity Trap with monetary policy playing the lead role necessarily involves a Dornbuschian sequence of rational overshooting: The Fed must drive up Wall Street prices, which move quickly, so as to get to Main Street prices that move up slowly, most importantly, wages.
This sequencing implies that Wall Street’s prices axiomatically will, in the short run, “overshoot” their long-term fair value, as the Fed appropriately and credibly commits to staying at the ZLB, until paper wealth creation endogenously deleverages private sector balance sheets sufficiently to restore animal-spirited risk taking on Main Street.
This sequencing implies that Wall Street prices must become very rich relative to Main Street prices in order to achieve so-called escape velocity from the Liquidity Trap. At the transition point, Wall Street prices will be rationally “overvalued” relative to their long-term “fair value.”
Rational? Ain’t it just a bubble? No, because unless and until Main Street prices go up, Wall Street prices will be rationally priced on the assumption – sometimes called a “Fed Put” – that the central bank will stay pinned against the ZLB.
As and when the Rudi Lag plays itself out, however, Wall Street’s prices must rationally re-price to two-sided Fed policy risks.
* * *
Bottom line
This process has been unfolding for well over a year now, ever since Ben Bernanke signaled a plan for ending QE3, a necessary condition for the FOMC to even consider lifting off the ZLB. The early stages of Wall Street’s re-pricing, now known as the “taper tantrum,” were rational, even if violent. Ever since, Wall Street has been in a “price discovery” process for what the post-Liquidity Trap “neutral” Fed policy rate should/will be, once the Fed begins liftoff from the ZLB.
Long-term bond prices have rationally not recovered all the ground lost in the taper tantrum: Removal of the Fed Put axiomatically should lift the term premium for duration risk. But yields have fallen, also rationally, as the market has rejected the FOMC’s rounds-to-4% blue dot: PIMCO’s New Neutral before your eyes!
Stock prices are, of course, higher than before the taper tantrum, and rationally so: If bonds reject the FOMC’s 4% blue dot, then stocks should, via a Gordon Model, rationally follow suit. And they have.
Thus, Wall Street has, so far, gotten lucky twice: the Unjust Moment followed by The New Neutral. Somehow, it just doesn’t seem right. And it isn’t; it just is.
But as Martin Luther King intoned long ago, the arc of the universe does bend toward justice. And as I wrote in July,3 I think it will do so with the Fed letting the recovery/expansion rip for a long time, fostering real wage gains for Main Street.
This implies that the dominant risk for Wall Street is not bursting bubbles, but rather a long slow grind down in profit’s share of GDP/national income. And you can stick that into a Gordon Model, too!
Bonds and stocks may at present be rationally valued, but borrowing from the lyrics of Procol Harum’s Keith Reid: Expected long-term returns are turning a more ghostly whiter shade of pale.
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Way too long for a Friday night.
The only take away you need from that long Friday night article is this: The concept of the free market no longer exists, everything (and they mean everything) is managed by the FED.
"Rational? Ain’t it just a bubble? No, because unless and until Main Street prices go up, Wall Street prices will be rationally priced on the assumption – sometimes called a “Fed Put” – that the central bank will stay pinned against the ZLB."
There can be no rationality unless you have a free market that allows for real price discovery, and it can only be assumed that the massive distortions caused by fed monetary policy and market intervention, have killed that possibility. This shit is not "priced in" because the information available to the participants is either wrong or unknown.
The only difference is that the fed has created the Bubble directly this time instead of simply fostering the conditions for it. This guy is an idiot.
Great comment. Really sums it up. There is no more market or fair market value, yet the author presumes there is, bending over backward to find "market" explanations for what has a much simpler explanation. Like theologists arguing how many angels fit on a pinhead. Or like a geocentrist adding yet more epicycles to a model that should just be abandoned.
The Fed juices the markets and provides gambling insurance for the banks when the eventual crash arrives - end of story.
Gross tries to justify it along the lines that forcing the needle of the thermometer up signals that the temperature will increase. It doesn't work that way.
There are plugins for Firefox and Chrome to read text for you. It's awesome.
Have you read "Monetary Regimes and Inflation" by Peter Bernholz? It's required reading.
+1 million for mentioning "liquidity trap"
good article, and a good reason to invest in health care stocks.
LOL @ 4% after 2016.
I'll take the under. US Debt will be over $20T by the end of 2016, likely about $22T. 4% is $900 billion. Not going to happen.
hah...like 2016 is actually going to happen...
Nice article but the dude might go broke thinking that way.
"the dude might go broke thinking that way."
The problem is that 'the dude' is your Government; and you have been securitized and sold via Treasury debt.
When the Govenment goes 'broke thinking that way' it will be because the majority of the citizenry have been completely exhausted and asset stripped via the Treasury complex.
Treausury 'debt' is NOT debt. Debt is designed to be repaid. Treasury 'debt' is NOT designed to be repaid.
Treasury 'debt' is actually a form of Perpetual Income Stream digusied as debt.
-It is the sale of future productivity of Taxpayers: feudalism via federal securitization of the productivity of the citizenry.
Useless to read, facts in disarray, incoherent babble, convoluted and boring. All middle, no beginning or end. In a way, a cult-like description of Wall Street. Had the author told the real story, that Reagan led a cabal of looters who created al-Qaeda, funneled in tons of cocaine into the USA via Mena Arkansas with the help of then horndog Governor Bill Clinton and cut taxes across the board for the .01% while increasing tenfold the number of IRS desk audits for the middle class (part of Stockman's numbers game), then this PIMCO drone would be in the market for a nailgun proof suit.
since the beginning of the crisis only a handful of analysts ever raised the pushing on the string analogy for why investment never picked up.
i don't buy your wealth effect effect as the savior of this economy.
the fed knows the only two conditioons for raising interest rates are demand causing the cost of money to go up or plain old printing money inflation. since there is no growth the latter is the chosen path. how will they do it? they already told us. they will deploy the helicopters for the direct cash drop. expect it to happen within a coupla months of the end of tapering.
inflation is the only cure for this mess so inflation it will be.
"i don't buy your wealth effect effect as the savior of this economy."
Nobody does. But it might be the only stated goal of the Fed that they actually mean.
he turned it into an elegantly dressed pig to give it renewed relevance. i think this is a bit of pimco snark. they know the west is about to massively inflate. the pilot light was lit by japan. the burner ignited with the euro and now the dollar has another trillion(someone do the math) dollar gap to play with. it will be exactly like the late 70s into the reagan/volcker recession when all assets inflated, bonds were loaded up for a run and equities kinda bounced around until they took off into irrational exuberance.
i'm not predicting the outcome. i'm trying to figure out what they are thinking. at the end of the stagflation 70s, caused by the rising oil price reset, all assets reset at a new higher plateau. the same thing happened when gold was exchanged for the petrodollar just a few years earlier.
**** OFF TOPIC ****
I know this is off topic, but I felt you all need to be aware of this:
The CBC is warning Canadians about a U.S. program where America law enforcement officers — from federal agents to state troopers right down to sheriffs in one-street backwaters — are operating a vast, co-ordinated scheme to grab as much of the public's cash as they can through seizure laws.
http://beta.slashdot.org/story/207105
Protect yourselves and respond accordingly...
"the existential macro problem in a Liquidity Trap is a balance sheet problem: too little equity relative to debt. This problem can be mightily relieved by driving up the price of assets that are the collateral for debt, thereby restoring and creating equity."
Defaults and liquidations are a more direct and socially unbiased solution. Of course the Banking/Shadow Banking System and the paper asset Oligarchs must all accept their losses. Government/taxes must shrink/shed the regulatory apparatuses that failed and the overgrown bureaucracies that were inflated along with the taxation levels available during the bubble/maina phase of the expansion.
Neither the oligarchy or the bureaucracy will entertain this; and so we are being repressed and expropriated by them in concert.
"Yes, “creating” equity: Capital gains – realized or not – are the only newly created asset without an associated, offsetting liability. “Paper wealth!” some of you are no doubt retorting under the breath. And arithmetically, I won’t quarrel with you. I will simply remind that a Minsky Moment itself is a “paper” problem: too much dodgy paper debt relative to the paper value of levered assets."
How can assets be created out of debt and inflation? Simply stating something without giving a rational or a practical past example is the mark of charlatans and fools...
Equity cannot be created by nominally inflating existing share prices via systemic leverage. This only raises prices for existing assets and does not generate production with whcih to satisfy existing debt loads. This is precisely why debt to GDP ratios are blowing out: new debt extinguish old debt and leave less debt, only duration and interest rates can be altered. The principal owed cannot be payed back by rolling new loans to pay old loans, at best duration mismatch can be mitigated and interst vs cash-flow balanced in the recasting...
"Accordingly, getting out of a Liquidity Trap with monetary policy playing the lead role necessarily involves a Dornbuschian sequence of rational overshooting: The Fed must drive up Wall Street prices, which move quickly, so as to get to Main Street prices that move up slowly, most importantly, wages."
Wages never keep pace with inflation. The fact that main street lags wall street means that the first access to new credit/money has dibs on the profits of the inflation cycle. Wall street is skimming the profits before main street sees any labor gains. Same Old...
The real private sector economy engines of growth and jobs creation -the small business/entrepreneur- is starved and defaulted, over taxed and expropriated while The FED bails out the financial/mega-corporate/government sectors.
Labor deserves the with-held/misappropriated productivity gains of the last 30+ years be returned to it with interest equal to that which the financial sector and government sectors have siphoned off and exported to foreign lands via the globalist regime. The citizenry desrve the expropropriated social security payments stolen by the bureaucracy, etc...
Pay labor it's fair and overdue due and it will satisfy it's legitimate debts. The engine of wealth is production, not skimming, rentier schemes, taxation or expropriation.
The frauds and the parasitic government should be liquidated. These sectors have expropriated that which is not rightfully theirs and beyond that they have over leveraged/extended and ruined themselves despite the theft of the productivity gains of the last 30+ years.
"Accordingly, getting out of a Liquidity Trap with monetary policy playing the lead role necessarily involves a Dornbuschian sequence of rational overshooting: The Fed must drive up Wall Street prices, which move quickly, so as to get to Main Street prices that move up slowly, most importantly, wages."
Why does this sound like "Free trade will make more and higher paying JOBS in the USA"?
McCulley seems to be unaware that the Fed's asset reinflation program, which he lovingly describes, has failed to stimulate the economy.
18% of the economy is medicine...and almost all of that is tightly priced (and a good deal actually paid by) the government. That means there will be no raises for anyone in the medical field as the government spend on other things...ditto for military spending.
Other areas of the economy are also under tight federal control. There is simply no real way for 'prices and wages to rise'...unless the government agrees. Agriculture and mining are priced globally and there does not seem to be a lot of growth there. Other service industries are locked into what the wage earner can pay.
where oh where will these animal spirits, the ones that will be released to raise aggregate demand, come from?
It just is not a free market anymore, it is a government market and they are broke.
I see a long slog to the bitter end with no (even fake) recovery in sight.
I guess what I'm saying is that there is no Main Street any more...just Uncle Same Lane...
Who's that nasty-looking drag queen in the picture?
Are we supposed to recognize the skank?
McCulley has a profound talent for pouring soothing oil on the roiled waters of very dangerous stock market valuations driven by th Fed. Poppycock combination of rational overshoot for prices which of course he claims will last a very long time, thus no need to worry about stock market losses. It just that prices won't keep climbing over the next 4 or 5 years. What he deliberately obscures is what happens when one or two players who are part of the quadrillion notional derivative game - all of which together and individually healthy can net out their individual risks to a net zero - are caught 'swimming naked" and break the chain of netting positions. What happens to the neatly netted derivative chains when all market participants keep driving down wages but expect sales and profits to rise? McCulley would have you believe that the Fed is the only and almighty economic actor. The ghost of Henry Ford is smiling. In the long run, the fed isn't in control of anything!!
TL;DR More Keynesian bullshit to justify the ongoing hijacking of the American economy by the banker/political class.
Impressively wonkie, well argued, backed by the authentic techno-jargon of a real insider.
That said, I still don't buy the conclusion. We're living in a psycho-pseudo-market that defies rational explanations.
Agreed. This guy has been at the charts far too long. Especially," fostering real wage gains for Main Street." Talk about an alternate universe. The world is at the brink of a robotic revolution and robots don't earn wages. Everything is on the verge of washing away as never before witnessed.
This article is taking alot of flak, but I read it 3 times and think it a very useful insight into the murky Keynesian-babble-speak of our monetary rulers.
This article is nothing more than an attempt at defense/apology for econoimic rape/repression.
That it is disguised as a technical assesment of policies does not lend credibility to the intention of the policies or make those intentionally pursuing them any less criminal..
He basically said: we know that we are stealing and we aren't going to stop; we have to steal if we are going to remain rich and in control of this ecnomic system and society. Don't worry: eventually we will throw the real economy some crumbs of it's own productivity so that it doesn't collapse altogether...
YES. What he said is nothing new. Most good traders know that the targets of the Fed & other collborative CBs (Europe & Japan) cannot be fought when they own the printing presses. Hence, you just skim on the overshoots.
The reality of a financial economy under captive by banksters that has caused all other prices not targeted by CBs to be on space walks with no longer any free market price discovery are the outcomes. The financial economy has to be in the center and at the expense of the Main Economy so decreed the Powers.
All economic theories that have predicated upon wages, inflation, etc as standards for functioning economies are now recycled trashes. They (including Minsky) do not work in captive market systems. (The rats in the granaries are just feasting with other species starving).
He has also glossed over the potency of other soverign creditors that can react to this BS. The creditors already know that US is no longer the House in the game but has become both the House & Player and they will play accordingly. Much more sinister in the new order is that the Creditors have no interest in restoring free markets that benefit the Debtors.
His spin is just another dance with the economic lasers and raps that he selectively pick to dull muppets from the crashes outside the discos. Must say a pretty good DJ...this guy.
Here is something for the author of this piece:
Use 20 paragraphs (if you need to) to explain away why $100 today buys less of a basket of necessities than it did in the year 2000. Much less in fact. And then explain how that continous decline in purchasing power ultimatley ends. And then another paragraph or 10, to explain how foreign policy in the wrong direction for 20 years+ accelerates that ending, exponentially in the final years. Thanks kindly.
You know when you get past about (5) paragraphs of 'wonk' to explain something away, it's time to bail.
Surprisingly, I actually understood all the wonkery(though not the references to the various quoted figures or economic models, since I'm no studied economist by trade) as an explanation for the (supposed) rationale of FED behaviour,
then the last paragraph stumped me, and I went back and re-read it again.
and then I just looked at the last two lines, and there it is: expect lower(to zil) long-term returns, we are not in for a bubble burst, we are in for long-term zombiefication.
This guy has been at the charts far too long. Especially," fostering real wage gains for Main Street." Talk about an alternate universe. The world is at the brink of a robotic revolution and robots don't earn wages. Everything is on the verge of washing away as never before witnessed.