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The Inevitable Failure of Mechanistic Monetary Policy
Submitted by Charles Hugh-Smith via OfTwoMinds blog,
Our current faith in central banks' ability to "make the economy all better, all the time" is horrendously misplaced.
We are living in the Cargo Cult Era of Central Bankers. The era began in earnest on December 5, 1996, when Federal Reserve chairman Alan Greenspan cautiously wondered aloud if the stock market was exhibiting "irrational exuberance."
The stock market promptly tanked. In this era, the utterances of central bankers exert more influence over markets than fundamentals.
This simplistic faith in the Cargo Cult magic of central banks is based on the absurd notion that two levers--interest rates and buying debt--can control and guide an immensely complex economy. Central bankers are well-versed in arcane incantations such as Operation Twist and aggregate demand, but if we strip away the mumbo-jumbo we find only two levers: interest rates and the purchase of debt.
Documentary film maker Adam Curtis explored the inherent limits of mechanistic monetary models in Episode 3 of his 6-part series, Pandora's Box (1992).
The wizards of monetary policy make the implicit assumption that monetary policy is the most important factor in an economy's expansion or contraction. But an economy is far more than interest rates, inflation and the purchase of bonds and other assets.
An economy is also the education or mis-education of the next generation of workers, the creative destruction wrought by technologies, the cultural appetite for risk and what I call the infrastructure of opportunity--the complex mix of attributes that either encourage social mobility or preclude it.
Two analogies will help us understand the absurdly simplistic myth of central bank magic. One is the forest fire analogy I discussed in The Yellowstone Analogy and The Crisis of Neoliberal Capitalism (May 18, 2009).
In essence, central banks no longer allow the "fires" of debt writedowns and credit contraction (i.e. recession) to burn away the dead wood that piles up after rapid expansion/good times/ leverage. As a result, the dead wood piles up higher and higher every season, until a chance spark (the infamous Black Swan) ignites the dry tinder and the subsequent conflagration burns down the entire forest.
The second analog is health-related.A fellow in very poor health goes to the clinic for a blood pressure test. He is overweight, dangerously unfit, smokes a pack a day and self-medicates himself with daily overdoses of alcohol. As a result of his disastrously poor health, is blood pressure is through the roof.
In our analogy, the stock market is the blood pressure reading. Markets (stocks, bonds, commodities, real estate, debt, risk, etc.) reflect the realities "discovered" by the interplay of buyers, sellers and information such as profits, debt levels, sales, etc.
Rather than address the underlying causes of the patient's poor health, the doctor (central bank) gives the guy two powerful drugs to slam down his blood pressure reading. This is the equivalent of central banks juicing markets with quantitative easing and zero-interest rates (ZIRP).
Is the guy healthier as a result of the massive injections of drugs? At least temporarily, his chances of dying are reduced by the drop in blood pressure. But over the longer term, this doctoring of one reading of health (i.e. the stock market) is not going to reverse the intensely negative consequences of poor diet, zero fitness, smoking and over-consumption of alcohol.
Our current faith in central banks' ability to "make the economy all better, all the time" is horrendously misplaced. Mechanistic monetary models are fine for manipulating a simplistic measure of economic health, but they are completely inadequate to the task of restoring fundamental health to a very sick patient teetering on the abyss.
Bonus analogy: here's the Fed's Cargo Cult vehicle to a 21st century economy:
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Get a good look while the wheels are still on this clunker...
DaddyO
The professor would have made a great economist.
And Gilligan would have made a great central banker.
No, Gilligan is waaaay over-qualified......
Can you hear the Skipper? Instead of "Gilligaaaaaan!" he is yelling "Janeeeeeeeet." Then he beats her over the head with his, uh, bamboo pole. "Yeah, that's the ticket."
<-- Yellen
<-- Lagarde
the New Normal "Ginger or Mary Ann" choice
Blasphemy you scoundrel!
<-- I'd do Ginger
<-- I'd do Mary Ann
Hard to believe they are 81 and 76. Ginger just popped up on my dead pool radar. Last pics of her looked like she was melting.
But we're stuck with Thurston Yellen the Third...
The western central bank cartel is a network of private corporations.
Legally, the management is responsible to produce the best return for their shareholders.
Unfortunately for the people, the interest of the shareholders and that of the people are a mutually exclusive set.
This of course explains why the middle classes have been eviscerated and everything else that has happened.
It is impossible for a nation to maintain it's sovereignty with a private central bank, which is what the ZWO has been counting on for 300 years.
True. But there is more to this. Who owns the Fed ? FRB is no more Federal than Federal Express. It is private, looking after private interests in the name of Federal.
Second when Jefferson signed Aaron Burrs bill to allow foreign land interests in USA, we were doomed. Aaron Burr went on to be the lawyer that allowed empire to reacquire lower Manhattan aka Wall Street.
Also read Wealth of Nations carefully .... Adam Smith was not a friend to America.
Foreign investment gains made on Wall Street are not taxed in America.... Ummm.
My Kia Soul .... in bamboo !
Mouse car
My previous faith in most peoples' "intelligence" was horrendously misplaced.
Arrogant and sociopathic humans make all kinds of crazy declarations and laws, they have throughout history. the laws of Nature and physics really don't give a shit.
Laws cannot be broken.
Rules are made to be.
You give people a choice between an easy, wrong way and a hard right way and a majority will try the easy way first. There will be a separation of wheat from chaff as there always is but the elite is creating a disaster of epic proportions to do it with because they think they can ignore natural law and entropy. This will NOT end well.....
It was no accident that HFT took off and took over under cover of the GFC. Fundamentals are meaningless in every tradeable market.
Axiomatic perfection in that pic from Gilligan's Island: wherever Americans go -- in this case "a desert isle" -- they create a car which is of no practical use in their stranded circumstance. Holograms have been around much longer than typically credited.
The Monetary Dark Age [Dec. 24, 1913 - ???]
- Term to be Coined by Some History Book in the Future
Ah, the Gubamint Motors 2016 Gilligan SUV with the deluxe Envy Green Keynesian Touring Package has finally arrived!!
You can't get any greener than this, Folks!
The newly re-engineered Flintstone drive train is 100% carbon neutral.
Fill that Gilligan with sensimilla and carbonated coconut water -and your good to go for up to 200 laps around the island!
“Bankers have only two levers: interest rates and the purchase of debt.”
Private debt spreading corporations have more levers than this, but the general idea is correct.
The other levers are the magick of swaps, changing the law, creating miss-matches, and creating new types of financial vehicles. Bail-ins are a good example of law change, and magick swapping Bank Stock for Credits on Deposit. Ostensibly, the swap is even value, but that is a fiction/fraud/conceit typical of magicians.
Example: Mortgage Backed Securities are created as a new financial instrument. This then causes Credit Creation at private banks, as SPV’s buy mortgages. The Special Purpose Vehicle came into being as law change, and the buying of Mortgages is a swap. The MBS attracts existing money out of the market.
However, this action then causes more mortgages and asset inflation, as credit is aimed at housing sector. Then there is positive feedback as prices drive up this sector, and people rush out to take out new loans. Banks then have insurance co-sign (law change with GLB overturning Glass Steagall) on the ledger, to make the loans “appear” better.
Later, Fed expands its balance sheet buying up MBS’s, thus removing the evidence of crime and Sheriffs investigations into robo-signing scandal. The law is skirted.
Housing as assets remain inflated as FED keyboard money (QE) chases after bonds, driving interest rates down, and hence refinance loans. (Money chasing asset holds it price high.)
The mismatch is MBS were fraud, and then fraud was rewarded.
Also, there is the swap of real property and real assets for fake financial assets. We use the same word “asset” but they mean two different things.
Asset stripping is another term for harvesting. Debt claims of a financial “asset” will claim real property to extinguish the claim. MBS, insurance Co-signing on ledger, and QE all were aimed at property. Then property was harvested.
Private Credit, about 70%, comes into being against land and property. This is a mismatch of what an economy needs. Lately, students have been taking out loans, and this money is driving the economy. Also, there are a lot of subprime auto loans, and this credit goes on to drive the economy. However, this credit wants to be recalled to the ledger for destruction, so there is no permanent money for savings. Credit tries to pull the future forward to today, but the future is always unknown and credit always asks more of the future through usury.
The lower loop of consumers is still in debt depression. QE chases after financial assets in an upper loop of debt holders. The lower loop of DEBTORS, are in depression.
So, the path private credit takes, and the magick of swaps redounds to help Oligarchy and will eventually rot-out and destroy civilization.
Lately, the FED is paying interest for money held in reserve loops. This is paying interest on a non interest bearing unit (credit as money). So, more mismatch, law change and magick.
Why do we give money power to un-elected fraudsters, whose only goal is to profit their in-group? How stupid are we.
Money exists by law, not buy nature. Private banking is a con-job, and they hold many under hypnotic spell with their magick.
www.sovereignmoney.eu
Indeed.
"By your magic spell all the nations were led astray." - Revelation 18:23, discussing the judgment of the global financial system, aka Babylon the Great.
Haha Great pic, Gilliagans island.
Ok, here's the 3rd and final time I will post this today (hoping that enough ZHers will educate themselves)...
1. I'd like to see things like MEFO Bills coming back into use. https://en.wikipedia.org/wiki/Mefo_bills.
2. Perhaps even Oeffa Bills https://en.wikipedia.org/wiki/Oeffa_bills
3. Guys like Gottfried Feder come along, to eliminate Usury-based money, but even Adolf had him eliminated (Night of the Long Knives), since he kept FRB.
https://realcurrencies.wordpress.com/2014/01/21/hitlers-finances-schacht...
4. I'd like to see a country arrest a Redshield guy, like Germany did:
https://realcurrencies.files.wordpress.com/2014/01/louis.jpg
5. Here is some useful info on Hjalmar Schlacht:
http://www.fourhourday.org/content/docs/Hjalmar%20Schacht.pdf
6. HORACE GREELEY HJALMAR SCHACHT (And the Magical Mystery MEFO Bill)
And here is the PDF of his book "The Magic of Money"
http://www.autentopia.se/blogg/wp-content/uploads/2013/09/schacht_the_ma...
7. And here's a fitting poem from Hjalmar Schlacht's "Confessions":
"Neither violence nor power of the purse
Fashion the universe.
Ethical action, spiritual force
May reshape the world’s course."
Thanks for your links.
However, 6. does not work.
You may have seen this?
http://www.ukcolumn.org/sites/default/files/Bankers%20Bradbury%20and%20t...!%2030:11:12.pdf
http://www.autentopia.se/blogg/wp-content/uploads/2013/09/schacht_the_ma...
http://www.gnosticliberationfront.com/Feder_Gottfried__Das_Manifest_zur_...