"Patient" - What's In A Word?

Tyler Durden's picture

Submitted by Sean Corrigan via True Sinews blog,

After yet another masterly performance before Congress – one which was immediately confounded by the usual cacophony of cross-talk from the Pigeons and Doves (no Hawks!) among her colleagues – Madame Yellen has left no-one really the wiser as to what the all-things-to-all-men Federal Reserve thinks it is actually doing with regard to monetary policy.

Is she ‘patient’ or not? And is ‘patient’ a nudge-nudge, wink-wink code for a period stretching beyond the next few FOMC meetings or is it just a tacit admission that the Fed will start checking its parachute harness only after the plane’s engines have at last caught fire?

Given all this prevarication, have you lost patience with the whole weary rigmarole, as have we, Dear Reader? If so, can we suggest you join us in setting aside your frustrations by concentrating on the one abiding truth of current policy: that even if there does exist a door marked ‘EXIT’ in the haunted house in which the world’s central bankers have long confined themselves, it would be one guarded by that most fearsome of all the ghastly bogeymen of economic myth – the Ghost of ’37.

But why not, you ask? Is the Fed not right to hold fire in this world of ‘secular stagnation’ Is it not only prudent to avoid tipping the country headlong into ‘deflation’ by spooking the financial markets and so risking a full-scale reprise of the Lehman moment of six years ago?

Perhaps not. For even as has been belatedly recognised by the ‘professional second-hand dealers in ideas’ who write, for example, for the FT – when not flitting to Davos or popping up to sing for their supper at self-flattering symposia sponsored by billionaire financial St. Augustins (‘O Lord, help me eradicate all inequality, but just not by setting a personal example’) – what the world urgently needs is not any further incentive to take on debt. but a means of expunging some of its gross, existing burden of the stuff.

Yes, without any acknowledgement of the error of their ways and lacking any display of contrition at the long misery to which their pontifications have greatly contributed, the Clerisy are starting to realise that they may as well help Atlas to shrug off his crushing load and that the world must thereafter be ordered to allow the newly liberated Titan to enjoy as much freedom as possible (‘structural’ reforms must be enacted, as they put it) if he is to help rebuild both his and our prosperity.

It is almost mischievous to say so but, in the circumstances, a genuine bout of deflation could actually represent a useful Plan B. After all, few can argue that the authorities’ Plan A has so far been a rather dismal failure; that the Powers-that-Be have not managed to alleviate the real impact of all that debt as they had planned, in an inflation of anything other than the price of prestige property, race-horse yearlings, modernist daubings, and all manner of financial assets. To their mounting frustration, their efforts so far have achieved little more than to ignite a version of inflation which has served only to aggravate the divide between the rest of us poor saps and the same plutocratic 1% which is so vilified by the very bleeding heart Progressives who are to be found at the forefront of the mob noisily advocating the current policy mix.

Without wishing to call the glib ‘liquidationist’ slur down upon our heads, one might point out that the one guaranteed way to cancel debt is to allow a sufficiently rapid deflation that creditors can no longer hold out for the soothing money-illusion balm of a repayment in debased coin but must instead face up to the reality that their debtors are unable to comply with the terms of their mutual contract as originally drawn up.

If you agree with a man that you will feed him and his co-workers for a month in exchange for them delivering a tonne of coal to you at the end of the period and he later finds he and his team cannot possibly comply with his undertaking, it serves no very great purpose to redefine the mass which makes up a tonne to half its former value in place of either accepting the reduced physical repayment your debtor can make for what it is, or of otherwise working out some alternative scheme of mutually-agreed recompense which will at least allow him and his mates the chance to continue to make a living – an activity from which you might yet hope to derive some ancillary benefits.

Inflation is not, therefore, a panacea, especially when the principal means of injecting the poison into the economic circulation is by encouraging people to continue to borrow more than they should.

Deflation in this sense is, of course, unmitigatedly ugly but it is at least a purgative. The soothing inflationary alternative nurtures a more chronic disease in place of that febrile crisis, but this is an illness whose mortality rate may well turn out to be higher, not lower, than its more acute cousin. Arguably, too, it is one which introduces even more inequity into the system for while neither the struggling debtor, nor the prudent, middling sort see any benefit from the asset-heavy, differentiated increase in prices, the members of  the speculative class make out like the state-sponsored bandits they are.

QE may thus prove to be little more in form than an issue of letters of marque to our era’s financial privateers on a truly unimaginable scale. Every new higher close on the stock market and every notch lower in bond yields and credit spreads should therefore be added to the charge sheet of financial larceny, even if the move does not end up inducing a panicky rush for the wheelbarrows.

But, in any case, what do we mean by ‘deflation’? In truth this should imply an increased perception that money has become more scarce, whether because the quantity available has actually shrunk or because money – final-settlement, trust-no-man money – is being demanded in place of the Good-time Charlie credit which was formerly allowed to assume some of its functions.

15-02-27 Bank Credit

On that score, we can hardly talk of the United States being at risk of ‘deflation’. To consult but two of the more timely gauges of the financial temper of the times, commerical bank balance sheets – minus the hoard of excess reserves they have been forced to pile up at the Fed – are again growing smartly, rising by 7.8% YOY, close to the best in five years and not too far removed from the 8.4% median of the two decades preceding the collapse of Lehman. Money proper is also not in short supply, rising 10.4% nominal, 8.1% real in the past twelve months and so moving far, far above the long-term trend.

15-02-27 USM1+

Even if we do succumb to the dubious practice of defining deflation by means of a simple fall in what we imagine to be the general price level, it is not at all clear that any ‘threat’ to any but the most confirmed sufferer of katatimophobia exists either at present.

Take the Cleveland Fed’ s Median CPI index, for example, an index whose primary virtue is that it throws out the outliers, high and low, and so is less affected by either positive or negative ‘shocks’ to small numbers of its constituents.

As it has for some little while now, this is giving a thoroughly, unexceptional, if not impressively stable reading: one which, moreover, manages to meet that cabbalistic ideal of modern central bankerhood of a rise of close to 2% per annum – at which sacred pace, we are constantly assured, the doors to earthly paradise will instantly be thrown open.

15-02-27 MCPI

And lest this observation give rise to the opposite argument that if the maintenance of this Babylonianly perfect rate requires no countermeasures on the downside, it need call forth no monetary tightening either, just be aware that, as for much of the past four years, this leaves the real Fed Funds rate at highly unsettling 2%-negative. For comparison, the seventeen years of the so-called ‘Great Moderation’ between 1992 and 2008 saw a typical CPI rate not much more elevated than at present – at 2.7% – but also experienced a nominal funds rate of around 4% and an ex-post real one of plus-1.2%.

Given that, with the benefit of hindsight, this supposed golden era was the one in which were actively sowing the seeds of our own ruin, it might give pause for thought about quite how much harm our masters ‘ stubbornly accommodative stance is causing us again today.

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Pool Shark's picture



By "Patient" they better mean: "Sometime next century" because the US$/Euro just hit 1.10 (highest level in over 10 years)



Go ahead Yellen; I DARE YOU TO RAISE RATES!!!!

kaiserhoff's picture

Good Point.  That's the most relevant pair trade by far.

On the other hand, why haven't we heard from pension pools, insurance companies, money market funds and others who are certain to be wiped out if this shit continues?  Anyone think they can survive negative rates?  How?

Also, riddle me this.  How do you sell state or MUNI bonds at zero interest?

Pool Shark's picture



"How do you sell state or MUNI bonds at zero interest?"

Simple: Because the buyer isn't looking for return, he's looking for appreciation.

It doesn't matter what the bond yields, as long as it can be flipped to another buyer for a capital gain.

[Especially if the currency in which the bond is denominated is itself appreciating relative to other currencies...]



kaiserhoff's picture


So I buy at negative 2% and wait for negative 4%??????

That's just insane enough to work for a week or two.  So why should I worry about minus 100%?

 There is this little problem of fiduciary responsibility, but nobody goes to jail anymore..., until they do.

Pool Shark's picture



I realize it doesn't make any sense, but that's how the new 'paranormal' works.


Since when did allowing bankers to create 'money' out of thin air make any sense?...


LawsofPhysics's picture

yes, it is insane, but look at the Swiss banks, right now.   WWIII cannot be too far off.

kaiserhoff's picture

Yup.  We've had negative real rates since Bernanke panicked in 01, but I think we are close to an event horizon.

Demand deposits are just money in transit, but buying a bond at negative rates, would get someone's ass sued or worse.   That train wreck is in progress.

Interesting times.

Money Boo Boo's picture

CPI = Cornholing People Indefinitely

bnbdnb's picture

Look man its not that hard. QE only serves the rich and the banks, plainly because they get the money first. Don't need any other synopsis.

mtndds's picture

Transitory, BULLISH!!

KnuckleDragger-X's picture

Alan Greenspan perfected the art of stringing large numbers of words together conveying little or no real meaning and so that standard continues....

ebworthen's picture

No coincidence that "patient" is also an individual awaiting or under medical care and treatment.

Dr. Yellen gets her directives from Wall Street, and is told to keep bleeding her patients.

KnuckleDragger-X's picture

I'm sorry, the patient just died due to complications.....

rlouis's picture

On a scale from one to stupid, multi-unit residential investment properties have been pegged at stupid for a number of months now.  Didn't think it could have happened but damn it, it did.

kaiserhoff's picture

Could you expand on that?  Not at all doubting you, but interested.

rlouis's picture

In 2006-07 a client wanted to buy a 20+ unit property in N. Ca.  Everything we looked closely at because it matched the target criteria was overpriced at least 20% + and we didn't pursue it. I kept the data from that search and in December I reviewed the transaction history of 30 of the properties going back to 1960.  Most of those 2006-07 listings didn't sell at all at the peak, and the majority of those that did sell ended up in foreclosure. 

In the last month I was looking at two 20+ unit properties.  The current sellers (surprisingly) had both acquired the properties at the peak andn have asking prices to get their purchase price and closing costs. Rents have gone up which increases the property value but increased taxes and fees, environmental regulations, AFCA for employees, etc. don't support a higher price at all - especially if you add 6-10 years of depreciation in physical structures (class D properties.)

For a lot of tenants the higher rents of the last couple of years along with higher health insurance costs are a real hardship.  Student loan repayments have hurt a lot of grads that haven't been able to put their degrees to good use.

The bubble in investment properties is driven by artificial cap rates that don't reflect the risk of operating older properties.  Add to that the potential total loss of equity in a 3-5%  rate reversion to real market rates and the Fed is going to blow up a lot of investors.  Big REITS that have accessed long term funding for newer properties are probably ok.  The Fed can't be ignorant of this, and even the banks appear to have tightened lending guidelines from last April, but it is not pretty.



Bemused Observer's picture

So, a little asset-deflation might be just what the doctor ordered, huh?

LOL! A day late and a dollar short, as usual. The time for that was about 7 years ago...the market, if left alone, would have cleared all the bad debt and malinvestment away in short order, and we would be in a very different place today. Everyone would have suffered a painful, but short-lived, adjustment.

The assets that have been inflated happen to be the very ones that all the "gains" have been coming from. They are also held in the largest amounts by the very people who have REFUSED to take their losses in the past. Deflation would now hit THEM the hardest, because the great unwashed have already taken their losses by attrition over the past 7 years and they have nothing to deflate.

I can hear them now, these big "investors", warning the little folk that "Your HOUSES will be worth less!, trying to scare folks into giving a shit. Unfortunately, that argument only works if you have INVESTMENT property, or want equity loans. It doesn't have the same punch to the 'investor' who happens to LIVE in the home, and has no intention of taking on more debt.

"But what about your PENSIONS!" they'll scream as the stock market tanks...Yeah, the pension these same people have been trying to take from you anyway, and that you've already stopped counting on.

People only get worked up over the economy if it directly affects them. By marginalizing so many little folk, TPTB have ensured that THEY stand alone, and that fewer regular folks will give a shit when the pain starts.

LawsofPhysics's picture

"People only get worked up over the economy if it directly affects them. By marginalizing so many little folk, TPTB have ensured that THEY stand alone, and that fewer regular folks will give a shit when the guillotine starts taking the heads ot TPTB..."  fixed, but hey, I am an optimist.

Bemused Observer's picture

I approve of your editorial adjustment..."the pain" didn't really specify. Those with the most top lose are the ones who will lose the most during this coming mess. They'll lose a lot of fat. The masses have had 7 years to get all lean and mean.

LawsofPhysics's picture

In this case, Patient=NEVER.