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"We Can't Do This Forever," Fed Admits "Market Will Overwhelm Us"

Tyler Durden's picture




 

In a somewhat stunning admission of the truth in central planning (that the Swiss just experienced first hand - and perhaps Venezuela has been experiencing for years), The Philly Fed's Charles Plosser explains the following...

"It may work out just fine, but there’s a risk to that strategy, and the risk is that we wait until the point where markets force us to raise rates and then we have to react quickly and aggressively. I believe that if we wait too long, then we run the risk of falling very far behind the curve or disrupting the economy by rapid rate increases.

 

...

 

The history is that monetary policy is not ultimately a very effective tool at solving real economic structural problems. It can try for a while but the problem then is that it’s only temporarily effective, and when you can’t do it anymore you get the explosion yesterday in the Swiss market.

 

One of the things I’ve tried to argue is look, if we believe that monetary policy is doing what we say it’s doing and depressing real interest rates and goosing the economy and we’re in some sense distorting what might be the normal market outcomes at some point, we’re going to have to stop doing it. At some point the pressure is going to be too great. The market forces are going to overwhelm us. We’re not going to be able to hold the line anymore. And then you get that rapid snapback in premiums as the market realizes that central banks can’t do this forever. And that’s going to cause volatility and disruption.

 

...I think the jury is still out on the costs. Because the cost I was worried about was the longer-term cost of unraveling all of this. So maybe I was right, maybe I was wrong. That remains to be seen.

 

I do worry about the longer-term implications for the institution. Part of my criticism has been that we have pushed the boundaries into fiscal rather than monetary policy. That has brought us praise and opprobrium. Perhaps justifiably on both counts. I do wonder as I look down the road five or 10 years, how will that shape the institution? What happens to our independence? What happens to our ability to do things effectively? Given all that we’ve done — maybe it was all for the best, but even if it was — are there going to be longer-term ramifications that we may end up regretting later?"

*  *  *

So - what happens when the markets realize this?

 

Source: The Washington Post

 

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Fri, 01/30/2015 - 16:56 | 5726964 Clesthenes
Clesthenes's picture

“At some point… market forces are going to overwhelm us.”

True… very true.  And you’re dealing with fringe forces.  Let’s move the examination toward the core of the problem.

This requires an examination of un-anticipated consequences of governments’ attempts to guarantee bank deposits.

By these attempts, the government would seize a failed bank and guarantee all deposits up to, for example, $250,000; amounts over that limit would be lost.

This immediately created major problems for individuals and companies with larger deposits.  A company with a “cash” (checking account) balance of $500,000 (add as many zeroes as you like), was suddenly at risk to lose very large amounts of money.

A relative stampede ensued as large depositors sought means to avoid these losses.  A result was a so-called zero-balance checking account (aka many names).  By this operation, balances would be swept into US Treasuries at the close of business every day.  Then, if the bank failed (was seized) after closing, the company would lose nothing.

Soon, there weren’t enough Treasuries to meet demand.  This led to the huge demand for Mortgage Backed Securities (MBS) as alternatives to US Treasuries.

As a result of these operations, huge amounts of “money” disappeared from the so-called “monetary base”; which, formerly, consisted of paper currency and bank reserves.  Pre-crisis of 2007, this “monetary base” stood at $0.9 trillion, as evidenced by the Federal Reserve balance sheet.  The resulting invention of “cash equivalents” has ballooned to somewhere between $12 and $18 trillion.

So, in the time of some 7-8 years, the “money supply” has ballooned from $0.9 trillion to $15 trillion (approx.).  What Price Gold… will give you more dots to connect.

What do you think lies ahead?  That’s right: a hyper-inflation of the dollar to extinction; and it will take everything with it – on a planet-wide scale.

Fri, 01/30/2015 - 16:57 | 5726969 franzpick
franzpick's picture

Correction: My screens now say Monday-Tuesday will be the new Black Friday: DJI 16,800, SPX 1960, down 2% to the 1st lower low on the new bear market chart:

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=spx&insttype=&freq=1&show=&time=7

Fri, 01/30/2015 - 17:04 | 5727003 franzpick
franzpick's picture

Never Sell A quiet Market After A Rise.

This market? Run like hell. Futures just took off 250 DJI points in 90 minutes:

http://www.investing.com/indices/us-30-advanced-chart

Fri, 01/30/2015 - 17:06 | 5727016 yogibear
yogibear's picture

We should see the end result of endless money when Japan blows up.

We'll see our future.

Fri, 01/30/2015 - 17:17 | 5727078 Clowns on Acid
Clowns on Acid's picture

Japan is not going to blow up. The Sun is just not going to rise. 

Fri, 01/30/2015 - 17:09 | 5727022 AbbeBrel
AbbeBrel's picture

Dr. Copper didn't even notice the conversation. The poor depressed guy has been whimpering in the basement, sipping on cheap $WTIC and trying to forget those crazy nights in $SSEC.

Fri, 01/30/2015 - 17:13 | 5727051 NotApplicable
NotApplicable's picture

"I can quit anytime I want to." -- Every central banker, EVAR

Fri, 01/30/2015 - 17:45 | 5727198 khakuda
khakuda's picture

He is right. The markets will call BS I them at some point, maybe soon. The long term costs to all central banks credibility will be high long term. The reason currencies were historically backed by gold was to prevent exactly what central banks are doing today because the results are ultimately catastrophic. It's all fun and games until somebody gets hurt.

Sat, 01/31/2015 - 00:31 | 5728146 are we there yet
are we there yet's picture

Ponzi is everywhere

Fri, 01/30/2015 - 18:47 | 5727346 q99x2
q99x2's picture

Get everybody to go short sell before bringing the market down and that way it will be just like its going up and like most things these days up will be down and down will be up. You'll get to sell short the all time hight--SSTATFH bitchez

Make Right as wrong. Wrong as right.

And you'll be in the dough trannies more than a transvestite.

Fri, 01/30/2015 - 19:20 | 5727434 Heavy
Heavy's picture

Clown-pocaplyse?

Fri, 01/30/2015 - 20:30 | 5727601 homiegot
Fri, 01/30/2015 - 20:31 | 5727605 sheikurbootie
sheikurbootie's picture

The really sad part is very few see the giant elephant in the living room.  None of my friends believe this ride will ever stop.   I told a friend ($15-20 million dollar net worth) that I bought gold.  He sees everything bad with the economy and society, but doesn't know what to do.  Guys like this wait until the roof collapses to jump in and I'll be jumping out soon after.

The big question is where to put the money after gold's really big run up....I asked personally asked Jim Sinclair and you won't believe the answer. 

Sat, 01/31/2015 - 03:14 | 5728319 Bopper09
Bopper09's picture

Not that I'm a financial genius, but of all the reading I do, and what makes most sense to me, is trade silver for gold at their ratios.  I've been buying silver the last 3 years like it's going out of style, at about 70 to 1 ratio. I'll just keep my silver until the ratio gets down to 50 to 1 (of course if it does) and trade my silver for gold.  And, like anything else, hope I do it at the right time.  Either way, I'm sitting with a pile of metal.  Even if they swing down in price after a large upswing, metal prices will never be as low as they have been the last 2 years.

Fri, 01/30/2015 - 20:38 | 5727617 I Write Code
I Write Code's picture

Forever never comes.

If we're lucky.

Fri, 01/30/2015 - 20:39 | 5727618 razorthin
razorthin's picture

What markit?

Fri, 01/30/2015 - 20:55 | 5727649 R19
R19's picture

The best way to get over hookers and blow is to do as much hookers and blow as possible.

Best regards,

Ben and Janet

Fri, 01/30/2015 - 20:56 | 5727651 Stevious
Stevious's picture

So - what happens when the markets realize this?

So what happens is (as a possibility) the Feds increase, then increase, then increase, over and over...

And I who have about $10,000 in Visa debt that I just conveniently did a transfer on at 0% for a year (actually a bit more than 2% because of a 2% prepaid fee)

So my carrying costs on that debt are $200/annual.  But as soon as the Feds increase rates, those transfer fees will become 5%, then 7%, then 10% then 14%.  So my carrying cost will switch from $200 on this bit of debt to $1400, potentially a 7 fold increase.  Not a big deal to me, I can pay it off but consider that the average family has about $15,000 in Visa debt.  Multiply this times the # of family units.  Then start piling on intrest rate increases.  The net result will be a WAVE of families paying 30% annual interest.  This also holds true for ANY non-fixed loans (auto; college, etc).

Net result will be an enormous wave of essentially insolvent family units with net INCREASING debt loads.  Now, 15 years ago this would produce a wave of bankruptcies, but no more.  The powers that be took bankruptcy pretty much out of the picture.

So then what does 122,951,925 family unit with ever increasing debt (and ever decreasing credit score) do?  Remember the article here that said ~50% could not come up with $1000.  So let's say about 66 million households lose that one thing we hold so precious: HOPE.

Nice for the banking elite to have a few million indentured serfs, but what happens when that number turns to 66+ million?

 

Fri, 01/30/2015 - 20:55 | 5727654 nmewn
nmewn's picture

(Munching popcorn)

"The history is that monetary policy is not ultimately a very effective tool at solving real economic structural problems."

You don't say.

And it took you 7yrs and eight trillion debt dollars to state the obvious.

Fri, 01/30/2015 - 22:33 | 5727868 Element
Element's picture

It's another world these people live in. They're inimical to economic activity but can't ever bring themselves to admit their own complete lack of utility, or redemptive role.

Fri, 01/30/2015 - 23:19 | 5727960 nmewn
nmewn's picture

Some of them I think, they really believe they're doing good deeds, contributing to society "as they know it", as they've been trained to do...not even realizing what they have done until its too late.

I think my first act of rebellion will be to burn institutions of higher learning.

Fri, 01/30/2015 - 23:47 | 5728013 Element
Element's picture

Minski made fairly clear the phenomena of economic and financial stability innately being a progenitor of economic and financial instabilities. Prof Minski was also a higher-learned (and committed socialist Jew), so it's not like Greenspam etal and 'Great Moderation' FRB circus didn't know what they were setting up. The Academic deadwood just goes along with it.

Fri, 01/30/2015 - 21:03 | 5727677 fzrkid
fzrkid's picture

Hold on to your shorts (literally) cuz its gonna be a FAHKIN PAHHHHTY TIME...

Fri, 01/30/2015 - 21:16 | 5727703 devo
devo's picture

Holy shit balls. Can't believe he said this. Guess Goldman went short last week?

Fri, 01/30/2015 - 21:21 | 5727731 stormsailor
stormsailor's picture

yeah captain obvious,  but how much longer can it continue?  it has gone on and on way beyond what i thought was even possible, 99 percent of the people i meet have no clue.  but i really have no clue either, i rationalize that this has to fall, and as  events unfold i tell myself that this could be what causes it. but the next day the s and p rises again and the whole world just keeps humpity humpin along.

 

what will it be like 15 years and 30 trillion debt dollars from now will probably be what we see.

Fri, 01/30/2015 - 21:31 | 5727749 R19
R19's picture

'... are there going to be longer-term ramifications that we may end up regretting later?"'

Do these guys really believe? Biggest game of liar's poker ever.

Sat, 01/31/2015 - 01:17 | 5728228 Policraticus
Policraticus's picture

I wish you are correct on 15 years and 30 trilion in debt.  Actually it is more like 1 year and 125 trillion in debt.  Thank god many of us have mattresses, and many more have friends that are farmers.

Fri, 01/30/2015 - 22:01 | 5727809 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

Ploser is telegraphing that Central Planning is expecting all the banks to eventually go bankrupt. This is the swan song of CB.

Fri, 01/30/2015 - 22:41 | 5727888 Element
Element's picture

Edward Harrison had a nice clean take on things yesterday (outside of pay-wall too).

Why quantitative easing and negative interest rates will fail - Credit Writedowns

Sat, 01/31/2015 - 09:46 | 5728521 Hot Shakedown
Hot Shakedown's picture

Brilliant piece IMO- thanks

Fri, 01/30/2015 - 22:48 | 5727901 Debt Slave
Debt Slave's picture

The history is that monetary policy is not ultimately a very effective tool at solving real economic structural problems.

Um, like a chronic trade deficit?

Sat, 01/31/2015 - 03:52 | 5728337 Clowns on Acid
Clowns on Acid's picture

How about a $18 Trillion in debt ?

Fri, 01/30/2015 - 22:54 | 5727908 Atomizer
Atomizer's picture

Charles Plosser admission to guilt. I was just being a FED team player. Don’t nail gun me bro.

/sarc

Fri, 01/30/2015 - 23:32 | 5727995 deerhunter
deerhunter's picture

and you all laughed last winter when I said I fed the squirrels in the winter to keep them nice and fat????    Can you say stew anyone.  The key question in millions of homes across America will be "what's for dinner."  Squirrels,, rabbits,   ducks and deer bitchez,,,,, this won't end well.  Always keep one eye on your bobber,  good weekend to all u working folks. 

Sat, 01/31/2015 - 01:34 | 5728247 hedgiex
hedgiex's picture

Is Plosser sleeping ? Markets have already adjusted with most plays guessing the CBs.

Sat, 01/31/2015 - 03:26 | 5728326 SystemOfaDrown
SystemOfaDrown's picture

will all these toxic derivatives and collateralized debt obligations our gov't promise the banksters American Taxpayers would cover and pay are 'mortgage backed'. So what is the average life of a mortgage? 20 years?

[Crash of] 2008 + 20 = 2028. Fear Not Mr. Plosser. It's not forever.

Sat, 01/31/2015 - 03:51 | 5728330 Bopper09
Bopper09's picture

Question for all:  As a Canadian, my DC pension is in sunlife, with about 8 different 'choices' that I have.  But since our company match's 5%, I have to keep it with sunlife.  Every option of course includes 4 or 5 of Canada's big banks and a bunch of financial companies. 

They do however have a small cap, which I put 100% into last November.  (Understand, that I took the option to switch to a DB pension, guaranteeing a monthly salary when done, so this is just some of my pension)  This was the only one with some mining companies and some gold trust companies.  They only show you the top 10 earners on it, and consists of about 190.  I guess what I'm asking, is when the stock market collapses, will these small caps be a good place to be?  I like the mining / gold but that's only 4 of the top 10, and not sure of the rest.

Sat, 01/31/2015 - 06:29 | 5728396 El Hosel
El Hosel's picture

What stocks are "good" to own during a market collapse?....NONE

Sat, 01/31/2015 - 08:21 | 5728454 grekko
grekko's picture

This is more correctly stated as a fiat collapse.  That is the disease. The market collapse is just a symptom of said disease.  My advice, for what it is worth, is to do what Warren Buffet is doing.  Trade in your paper assets for commodity based productive assets, like rail (transportation), food (necessary comsumption), energy (presently oil), and of course the miners (copper, gold, silver, nickel, etc).  If you do this in stocks, then make sure your broker isn't holding them.  Have the stock put in your name exclusively and delivered to your possesion.  This isn't rocket science.  It is just plain old common sense.   After the crash, people still need to eat and food has to be transported, needing energy to do that.  Forget Apple, think of the basics needed for survival as they will recover first.

Sun, 02/01/2015 - 02:44 | 5730955 Bopper09
Bopper09's picture

Sounds good, that's why I put it into the small caps because it had mining, rail, couple grocery places.  I was more concerned about a small cap.  I just wish I had more control, instead of them assholes giving me the 'option'.  There's also an option for 'cash' which is just CAD treasury bills.  Fuck that.  Anyway, thanks for the info.

Sat, 01/31/2015 - 06:44 | 5728402 El Hosel
El Hosel's picture

"Might be behind the curve" ?   WTF does that mean?

We are proud of the Facade we built? This "Recovery" was Central Bankings finest hour?.... However, if "the Market" ever gets a wiff of the actual ramifications of our "Exceptional Policies" the shit is going to hit the fan like never before.

Wake up and smell the Ramifications, "confidence has been fully restored ".

Sat, 01/31/2015 - 07:32 | 5728430 Batman11
Batman11's picture

The banker pushmi-pullyu.

Central banks try and do one thing and investment bankers the opposite.

 

 

Sat, 01/31/2015 - 08:08 | 5728450 grekko
grekko's picture

When did Plosser stop drinking his own koolaid and sober up?  Like, now he starts to get a keen sense of the obvious?  First, his kind destroy price discovery in the market, then he worries that someday the market will over-run them and his institution of Ivory Towered Academics will fail? Gimme a break! We woudn't have this problem at all if they had told Nixon to remain on the gold standard.  Even better, if Wilson (another Ivory Tower Idiot) hadn't of signed the Federal Reserve Act into law.  Talk about selling us all down the river!

Sat, 01/31/2015 - 09:02 | 5728482 Last of the Mid...
Last of the Middle Class's picture

We've give trillions to the 1%, and about all the stuff we can to the free shit army. Those in the middle who work every day are just fucked.

Sat, 01/31/2015 - 10:03 | 5728543 RabbitOne
RabbitOne's picture

"… we run the risk of falling very behind the curve…" The Fed has spent years digging the 30 foot deep hole they now stand in as the water is rising up to their waist and will soon drown them so they exclaim in unison “…Hmmm, maybe it is time to fill the hole back in…” 

Sat, 01/31/2015 - 10:14 | 5728551 taketheredpill
taketheredpill's picture

 

 

 

Fed was holding onto a rising balloon. They realized finally that if they give up and let go they will break their legs but if they held on and went higher the damage would be worse.

 

SNB figured it out too.

Sat, 01/31/2015 - 12:58 | 5728880 Last of the Mid...
Last of the Middle Class's picture

Guess he means a bunch of people are going to have to get off the Trilion dollar government tit and move over to the obama's free shit army government teat. Bummer

Sat, 01/31/2015 - 13:02 | 5728892 the grateful un...
the grateful unemployed's picture

the academics and bureacrats in the Fed are no match for the real life bankers and their algorithms

Sat, 01/31/2015 - 13:10 | 5728918 Cycle
Cycle's picture

The Fed has spent six years bending the discounted future value of capital to its will.  In a free capital market, interest rates are a key driver of  business expectations with regard to capex and expansion. So Plosser's apologetics reduce down to the fact that when the market finally sees through the Fed's machinations, most of the investments made on false expectations will fail and vaporize whatever capital was invested. It has already started with the energy and base metal sectors, areas that are tied into the "real" economy.

Sat, 01/31/2015 - 17:51 | 5729813 Flying Spaghett...
Flying Spaghetti Monster's picture

R'Amen

Sun, 02/01/2015 - 14:00 | 5731784 GhostFly
GhostFly's picture

What is the outcome? And how do I protect myself?

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