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4 Years Later, Fed Critics Explain Why Central Planning Still Doesn't Work

Tyler Durden's picture




 

On Nov. 15, 2010, a letter signed by academics, economists and money managers warned that the Federal Reserve's strategy of buying bonds and other securities to reduce interest rates risked "currency debasement and inflation" and could "distort financial markets." As Bloomberg reports, they also said it wouldn't achieve the Fed's objective of promoting employment. Four years later, many members of the group, which includes Seth Klarman of Baupost Group LLC and billionaire Paul Singer of Elliott Management Corp., explain why they stand by the letter's content...

 

Bloomberg News interviewed nine of the 23 signatories, and all of those who commented stood by the letter’s contents. Here’s what they said:

Jim Grant, publisher of Grant’s Interest Rate Observer, in a phone interview:

“People say, you guys are all wrong because you predicted inflation and it hasn’t happened. I think there’s plenty of inflation -- not at the checkout counter, necessarily, but on Wall Street.”

 

“The S&P 500 might be covering its fixed charges better, it might be earning more Ebitda, but that’s at the expense of other things, including the people who saved all their lives and are now earning nothing on their savings.”

 

“That to me is the principal distortion, is the distortion of the credit markets. The central bankers have in deeds, if not exactly in words -- although I think there have been some words as well -- have prodded people into riskier assets than they would have had to purchase in the absence of these great gusts of credit creation from the central banks. It’s the question of suitability.”

John Taylor, professor of economics at Stanford University, in a phone interview:

“The letter mentioned several things -- the risk of inflation, employment, it would destroy financial markets, complicate the Fed’s effort to normalize monetary police -- and all have happened.”

“This is the slowest recovery we’ve ever had. Working-age employment is lower now than at the end of the recession.”

“Where is the evidence that it worked? It’s just not there.”

Douglas Holtz-Eakin, a former director of the Congressional Budget Office, in a phone interview:

“The clever thing forecasters do is never give a number and a date. They are going to generate an uptick in core inflation. They are going to go above 2 percent. I don’t know when, but they will.”

Niall Ferguson, Harvard University historian and author of “The Ascent of Money: A Financial History of the World,” referred Bloomberg News to a blog post he wrote in December 2013, saying his thoughts haven’t changed:

Though generally regarded by a cause for celebration (even by those commentators who otherwise lament increasing inequality), this bull market has been accompanied by significant financial market distortions, just as we foresaw.”

 

“Note that word ‘risk.’ And note the absence of a date. There is in fact still a risk of currency debasement and inflation.”

David Malpass, former deputy assistant Treasury secretary, in a phone interview:

“The letter was correct as stated.”

 

“I’ve observed that credit is flowing heavily to well-established borrowers. This has worsened income inequality and asset inequality going on in the economy. You’re looking at the companies that got credit. The problem is the new businesses that didn’t get credit. The facts are that private sector credit growth has been slow. It is a zero sum process where each corporate bond issue was money that otherwise might have gone to a new business or a small business.”

Amity Shlaes, chairman of the Calvin Coolidge Memorial Foundation, wrote in an e-mail:

“Inflation could come, and many of us are concerned that the nation is not prepared.”

 

“The rule with inflation is ‘first do no harm.’ So you always want to be careful.”

Peter Wallison, senior fellow at the American Enterprise Institute, in a phone interview:

“All of us, I think, who signed the letter have never seen anything like what’s happened here.”

 

“This recovery we’ve had since the end of 2009 has been by far the slowest we’ve had in the last 50 years.”

Geoffrey Wood, a professor emeritus at City University London’s Cass School of Business, in a phone interview:

“I think everything has panned out. We should probably be more cautious about the timing. Economists should always be cautious about the timing. Timing is close to totally unpredictable.”

 

“The economy is growing. If the Fed doesn’t ease money growth into it, inflation could arrive.”

Richard Bove, an analyst at Rafferty Capital Markets LLC, in a phone interview:

“If interest rates are low, it means a large portion of the population was made poor because passive income declined.”

 

“If you take a look at the economy, I think that the economy has grown in line with the growth in population and the growth in income. I would argue that the bulk of this QE money never reached the economy.”

 

“Someone’s got to prove to me that inflation did not increase in the areas where the Fed put the money. We know where they put the money. And we know where they put the money prices went up dramatically. And we also know the consumer price index does not pick up either of those price increases. Housing prices are not in the CPI and fixed income prices are not in the CPI. So how do you know that QE benefited the economy?”

Stephen Spruiell, a spokesman for Elliott Management, declined to comment.

Singer said in his firm’s July investor letter that “substantial inflation” is occurring in areas the Fed hasn’t “recognized or captured” in its analysis.

 

We continue watching with amazement the Fed’s magic act as it attempts to use quantitative easing and zero interest rate policy (QE and ZIRP) to create seemingly robust economic growth in the face of very poorly designed political, economic and fiscal policies, while keeping inflation within a narrow band. Substantial inflation is occurring in many asset classes and service sectors of the global economy, but is not presently recognized or captured by the traditional metrics upon which the Fed relies. This inflation is spreading in both scope and intensity. If and when it breaks out in an inescapably broad way, there will be a crowd of seriously confused policymakers making excuses and claiming that inflation does not in fact exist; it is not their fault; it was completely unpredictable; and/or it will actually be good for people.

 

We believe that if and when inflation goes from being something that affects only a particular list of assets (a growing list, presently a combination of things owned by the well-off plus a number of things that are basic necessities) to a widespread “in-your-face” phenomenon affecting the cost of living of almost the entire population, then the normal yardsticks of risk, return and profit may be thrown into the garbage can. These measures may be replaced by a scramble by citizens and investors to preserve value on a foundation of shifting sand, together with societal unrest that may make the current politically-useful “inequality” riffs, blaming the “1%” and attacking those “millionaires and billionaires” who refuse to “pay their fair share,” look like mere warm-ups for real class warfare.

Baupost's Seth Klarman recently noted,

"It’s not hard to reach the conclusion that so many investors feel good not because things are good but because investors have been seduced into feeling good—otherwise known as 'the wealth effect.' We really are far along in re-creating the markets of 2007, which felt great but were deeply unstable when shocks started to pile up."

 

"Even Janet Yellen sees 'pockets of increasing risk-taking' in the markets, yet she has made clear that she won’t raise rates to fight incipient bubbles. For all of our sakes, we really wish she would."

*  *  *

 

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Thu, 10/02/2014 - 18:51 | 5282358 TeamDepends
TeamDepends's picture

Better never than late.

Thu, 10/02/2014 - 19:00 | 5282394 Looney
Looney's picture

Every time I hear or read "FED", I want to kick myself in the balls! ;-)

Looney

Thu, 10/02/2014 - 21:22 | 5282722 BuddyEffed
BuddyEffed's picture

“The clever thing forecasters do is never give a number and a date. They are going to generate an uptick in core inflation. "

That translates to : "Just trust us.  We saved your bacon before, and we are saving your bacon again right now.  Though we can't provide conclusive evidence of that, we do have several guys who will stand up and provide testomonials that is exactly what we did and are currently doing, and that we all should be thankful and grateful, and not making any waves or questioning any of it.  And be glad we did it because if we didn't do it, you and all like you would be much worse off right now as a result.

Thu, 10/02/2014 - 23:37 | 5283193 All Risk No Reward
All Risk No Reward's picture

Folks, don't be duped.  The Fed isn't stupid, they just follow Sun Tzu's admonition to pretend they are stupid while they financially gang r*pe entire countries.

If they were stupid, they'd be out of business.  Instead, they are above the law, their front corporations are tied to the Treasury to cover losses while they collect the profits, they launder trillions in tax free drug profits (even when they get caught - there is no IRS in site!), they use the US military to control the Afghanistan opium and marijuana production (#1 source of poppies and heroin on the planet), their cartels literally have the DEA escort their drugs across the US border so they can make it to your local school yard..

Oh, don't believe me?  You shouldn't, so here's the proof!

Documents: Feds allegedly allowed Sinaloa cartel to move cocaine into U.S. for information
http://www.elpasotimes.com/ci_18608410

Now, with what bank does sinaloa launder their $10s or $100s of billions in drug money?  That would be at least Wachovia...

How a big US bank laundered billions from Mexico's murderous drug gangs
http://www.theguardian.com/world/2011/apr/03/us-bank-mexico-drug-gangs

Now, where was the IRS when it came to taxing this nearly $400 BILLION drug money laundering operation?  MIA, mofo...  the Debt Money Mafia takes care of their own.

Oh, and when the drug runners claim they have direct deals with the US government, the US government seals the records...

Court Pleadings Point to CIA Role in Alleged “Cartel” Immunity Deal
http://narcosphere.narconews.com/notebook/bill-conroy/2011/09/court-plea...

Now, WHO'S STUPID again?

Yes, they think we are so stupid as to fall their stupid act.

We are stupid - that's why the roll over us like Muppets.

Sun Tzsu said, "pretend inferiority, encourage their arrogance" before you take the mofos down.

Time to read a real book - and hope top comprehend it in today's environment.

Fri, 10/03/2014 - 03:19 | 5283483 The9thDoctor
The9thDoctor's picture

@allrisknoreward
+1

Thu, 10/02/2014 - 18:53 | 5282361 X.inf.capt
X.inf.capt's picture

FIAT!

thats why it doesnt work...

paper is not money,,,

sheep skins, bronze ingots...even seashells..

gold, silver, copper= currency...

paper=fire starter....

Thu, 10/02/2014 - 23:39 | 5283197 All Risk No Reward
All Risk No Reward's picture

Debt paper is something - it is debt slavery backed by the gun of the Debt Money Monopoly financed cent4ral state.

Time to recognize.

Thu, 10/02/2014 - 18:53 | 5282371 fonzannoon
fonzannoon's picture

In response to those who signed the letter the fed released this statement earlier today

https://www.youtube.com/watch?v=sVzvRsl4rEM

Thu, 10/02/2014 - 18:53 | 5282374 NihilistZero
NihilistZero's picture

A bag of Lays Chips is down to under 10oz and list priced a $4.  That's down from 14oz+ and up from $3.  And these fucks still say there's no inflation "at the checkout counter"???  Fuck them.

Fri, 10/03/2014 - 00:08 | 5282695 GooseShtepping Moron
GooseShtepping Moron's picture

In my former life as a grocery night crew manager, I worked closely with many vendors and got to hear all about their lives on the inside of America's great food and beverage distributors. Frito-Lay (like its parent, PepsiCo) is a textbook legacy company with a significant wage overhang. Among their senior vendors it is not unheard of to make between $50,000 and $75,000 a year, and this is just for putting chips on the shelf. Due to the nature of the contract and bidding process for routes and the labor regulations, wages do not adjust downwards in difficult times and the company resorts to periodic hiring/promotion freezes and pension buyouts, resulting in a gutted workforce and the demand for the survivors to do more with less. Such an environment naturally conduces to a demoralized and restive employee base, and there are numerous opportunities for connivers to work the system and throw others under the bus.

The overcomplicated and patternized nature of the work, although in theory producing greater efficiency, is actually a drain on productivity. Frito-Lay maintains their own driver fleet (independent of the vendors), dedicated rolling racks in the grocery backrooms of every retail establishment, and insane time constraints on the vendors. They even ship their product in propriety reusable cardboard boxes. This attempt at creating an "ecosystem" without regard for the natural joints in the process leads to redundancies and poor communication, which results in a chronically revenue-starved company incapable of adaptation whose only hope of preservation rests with leveraging their sheer gigantism against the ever-eroding purchasing power of the consumer.

Their latest throw at innovation has been to put forth a bunch of gimmicky new chip flavors like cappuccino, mango salsa, and ginger-wasabi, which nobody is going to buy. These flavors are too specialized and, in the Baudrillardian sense, too "simulacra-ized" to have any widespread appeal. 25 years ago the world did just fine with four chip flavors - regular, barbeque, sour cream and chive, and cheddar - and the whole distribution process was more streamlined and simple. A profusion of flavors merely complicates stocking and ordering, wastes the vendors' time, and takes up retail space that would be better deployed otherwise.

Frito-Lay reminds me of a gnarled old oak that is nearing the end of its life cycle. Having already grown to immense proportions, it is no longer able to balance the light-gathering and nutrition-manufacturing function of the leaves against the water-needs of the entire plant and the energy requirements of the root system, so it starts dropping branches and going rotten in the heartwood. In a last, desperate bid at survival, it starts sending out an explosion of epicormic growth along the trunk (the new flavors), resulting in a shaggy appearance and all the incongruencies of youth mixed with age. It is the last step before senescence.

The whole thing was, after all, nothing more than the marketing of potato chips. In the future that we're heading in to, does it really make sense to pay somebody $75,000 a year for that? Is such a tour de force of mechanization and labor really justified by so mundane an end, in a world where resources are scarce and life hangs much more precariously in the balance? I think not. These legacy companies have nowhere to go but down, so it seems only rational that they would try to squeeze the last drops of disposable income out of any willing consumer. They are destined to be undercut and outmoded by nimbler competitors and less brand-conscious consumers. Vote with your wallet, cease buying their chips, and hasten the end of this monstrosity so life can get back on a more normal footing.

Fri, 10/03/2014 - 03:29 | 5283489 theprofromdover
theprofromdover's picture

FritoLay-

Exactly. The system only wants giant insider corporations, so no new competition can threaten them.

And any competition that looks like growing to any size at all, is bought out immediately.

We will be munching on Frito cos we'll be told to.

Fri, 10/03/2014 - 03:30 | 5283491 The9thDoctor
The9thDoctor's picture

Their marketing gimmick worked on me, I have to admit.

Those "Chicken and Waffles" flavored Lays were quite good, I also like the dill pickle.

Before that, I never buy Lays, and would rather get Boulder or Poore Brothers, so I bought a bag of Lays for the first time in years, a decade, idk it was a long time ago, because of the interesting flavors.

Thu, 10/02/2014 - 18:55 | 5282375 Honey Badger
Honey Badger's picture

It is easy to predict that you are going to die, it is difficult to know when. Timing is important.

Thu, 10/02/2014 - 18:59 | 5282385 ebworthen
ebworthen's picture

I believe the FED knows their "dual mandate" to maximize employment and moderate long-term interest is complete bullshit.

The only things they have done are to maximize bankster pay and moderate career employment.

Not to mention punishing savers while backstopping inveterate speculators and gamblers.

"Of the Banks, by the Banks, for the Banks".

That is the motto.

Thu, 10/02/2014 - 23:53 | 5283227 All Risk No Reward
All Risk No Reward's picture

Not only is the dual mandat enot bullchit, IT DOESN'T EVEN EXIST!

The Fed mandate is recorded in Section 2A of the Federal Reserve Act.  Who here as actually spent the 30 seconds required to look it up and read the actual legalese?

Oh, well, OK.  That's the first step.  The mandate is singular.  The expected benefits of following the singular mandate is triune - it isn't even dual!

Yes, they know what it is, BUT THEY THINK WE ARE TOO STUPID TO DISTRUST THEM AND LOOK UP THE ACTUAL LAW OURSELVES.

Let me help you all out as to why the criminal Debt Money Monopoly has used its Federal Reserve, government, media, banking, schooling, religious and every other asset they control to leave you with the false impression there is a dual mandate...  BECAUSE THEY CRIMINALLY BROKE THE SINGULAR MANDATE FOR OVER THREE DECADES!

Like a magician, they have their dupes looking at the wrong hand while the active hand does the "magic," as it were.

The mandate is to keep societal debt commensurate with societal GDP.  Period.

The Fed took debt EXPONENTIAL TO GDP - a flagrant violation of the black letter law.

But, alas, the Muppetry didn't catch on for three decades because they were busy focusing on unemployment and stable prices targeted for inflation.

Read the last five words of the sentence just previous to this one....  stable prices targeted for inflation...  repeat it as many times as needed to understand we are being forked a 2nd way by the criminal lying Fed.

Oh, and the Federal Reserve Act HAS NO "OR ELSE" PENALTIES - YOU KNOW, BECAUSE THESE CRIMINALS ARE SO STUPID AND THE MUPPETS ARE SO SMART!  -lol-

They can break every law in the act a million times AND THERE IS NO PENALTY!

Karl Denninger said he read FinReg over and there was not a single "or else" penalty in that either...  you know, the Banksters are so stupid that they didn't lobby for any penalties to imprison themselves when they flagrantly break the law.

What dummies!  So stupid...

Oh...

Wait...

A lack of penalties on laws that one has no intention of keeping is genius, just as long as the population is stupid enough to fall for it.

Thu, 10/02/2014 - 19:01 | 5282399 BabylonDeer
BabylonDeer's picture

Why doesn´t work? Because f*kin life is balanced, if you try to favor one side with your "planning", the other side will go down, and ontop of that, sides are interconected, so when one goes down, the other one follows until balance is restablished. 

 Stupid greedy humans dont get tired of repeating history.

Thu, 10/02/2014 - 19:06 | 5282408 KenShabby
KenShabby's picture

The whole thing is an obscene fucking joke. This site is the only thing that keeps me sane. It's not much of a comfort though.

Thu, 10/02/2014 - 19:06 | 5282411 AdvancingTime
AdvancingTime's picture

 If the economy was healthy and balanced we would not be experiencing slow growth while massive amounts of money are being printed and poured into the system. The crux of our problem remains in the fact that both people and governments have lived beyond their means by taking on debt they cannot repay. Over the last several decades we have created entitlement societies built on the back of the industrial revolution, technological advantages, capital accumulated from the colonial era, and the domination of global finances.

Promises were made on the assumption that the advantages we enjoyed would continue in both Europe and the US. Ever greater prosperity and entitlements were to be sustained through debt financed consumption growth. In that eerie fantasy world, debt fueled consumption was to be the catalyst to bring about evermore growth. Debt does matter and the following article delves deeper into why kicking the can down the road will ultimately fail.

 http://brucewilds.blogspot.com/2014/08/modern-monetary-theory-is-wrong-d...

Thu, 10/02/2014 - 19:07 | 5282414 Yen Cross
Yen Cross's picture

 Hey Man ~~~~ Just BTFD... It's cool Man.

  Everyone's doing it Man... We all know where the exit is Man.. Timing is everything Man...Define your risk Man.

  I just bought my 3rd Unicorn Man....

 

Thu, 10/02/2014 - 19:12 | 5282424 Cognitive Dissonance
Cognitive Dissonance's picture

"It's different this time" - The last cry of a drowning in fiat Fed economist.

<Can someone please untie this Fed balance sheet from my feet?>

Thu, 10/02/2014 - 19:15 | 5282440 Fuku Ben
Fuku Ben's picture

Now that the magic has gone
You just wanna walk away
Nothing left to say, anyway

Thu, 10/02/2014 - 19:17 | 5282443 notsobright
notsobright's picture

Hmmm...

If we take things to the extreme end...

Why doesn't the US Government should buy EVERYTHING - and i mean EVERYTHING!

Print money and buy EVERYTHING.

All the gold, all the silver, every piece of art, all inventories of raw materials, all stocks on every exchange (i.e. every company in the world), all private companies, all property (house, land, commercial property - what ever) that it can get its hands on around the world , all mining rights around the world, etc. Everyting...

And if they have to pay 10x the value, hell 100x the value - just buy it all. Who cares.

Why not?

But let's not stop there - they also need to give everybody in the USA say $1 Billion dollars each.

Everybody is now rich.

No more poverty.

It is just printing money - creating wealth - from nothing.

It is MAGIC - I like. I like a lot.

The USA then would own everything. Americans would be the richest nation in the world.

Let's all retire - and party!

Why not - no sense in half measures.

They should just fucking do it!

What is stopping them.

Hmmm..

Problem solved.

All is good.

Thu, 10/02/2014 - 19:36 | 5282494 r00t61
r00t61's picture

What you are proposing as /sarc is actually a combination of the main points of Modern Monetary Theory + Social Credit.  Maybe with some Keynesian sprinkles on top.

 

Thu, 10/02/2014 - 19:22 | 5282460 Drummond
Drummond's picture

Bunch of muppets. The West is broke because the powers that be have decided to take us into financial war with the east until the last sovereign has been fought over and won.

Thu, 10/02/2014 - 19:37 | 5282496 Yen Cross
Yen Cross's picture

  All the kings horses, all the kings men, could NEVER an Air War win...

  Viet Nam mother fuckers.

Thu, 10/02/2014 - 19:39 | 5282498 VWAndy
VWAndy's picture

Thats some mighy fine dancing around the truth. All them guys wont say it.

Thu, 10/02/2014 - 20:36 | 5282638 XRAYD
XRAYD's picture

Four years later Idiotonomists still think the Fed programs were to help the economy and Americans, instead of their masters ... the big banks!

 

Thu, 10/02/2014 - 21:14 | 5282739 El Hosel
El Hosel's picture

Only the 1% never saw it coming, they were busy driving the train with their punch goggles and fairy wings on.

Thu, 10/02/2014 - 22:33 | 5283018 Downtoolong
Downtoolong's picture

If and when [inflation] breaks out ……. there will be a crowd of seriously confused policymakers making excuses and claiming that inflation does not in fact exist…..

I hear the Fed has already developed a new concept of Deinflation. Basically it’s the process of ignoring price increases in their inflation calculation whenever people can no longer afford to borrow and buy the stuff, even at the old lower prices.

Fri, 10/03/2014 - 06:50 | 5283655 Raoul_Luke
Raoul_Luke's picture

The reason inflation isn't widespread is the same reason QE didn't work, the low velocity of money, which is being depressed by the Obama ("you didn't build that") economic agenda.  There's just no demand for loans to build stuff.  Speculation and stock buy backs, yes.  But not for starting new businesses or building construction, etc.  If the money ever finds a reason to escape the bank balance sheets, the general inflation will show up.  Until then it's just going to show up in pockets (like financial assets, luxury goods, high end housing, etc.), because the bankers and the corporate CEOs are the only ones with a reason (and the ability) to spend.

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