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The Futility Of Our Global Monetary Experiment
Submitted by David Stockman via The Mises Institute,
Jeff Deist: The Fed recently announced just this past week that it would not use specific dates for targeting higher Fed funds rate this year and you almost get the sense that poor Janet Yellen is at the end of this Greenspan-Bernanke experiment and there’s not much left for her to do. I mean, what’s our sense of Yellen and her position?
David Stockman: Yeah, I agree with that. I think in some ways they’re petrified as to where they ended up or they should be. After all, we’re in an experiment of monumental proportions.
Let’s just assess where we are. If they don’t raise the interest rate in June — and I think all the signals now are pretty clear they’re going to find another reason to delay — that will mean seventy-eight straight months of zero rates in the money market. As I always say, the money-market price, that is the Federal Funds Rate or Overnight Money or a short term treasury bill, is the most important price in all of capitalism because that determines the cost of carry, the cost of speculation and gambling.
When you conduct a monetary policy that says to the speculators, to the gamblers, “come and get it,” you are guaranteed free money to carry your positions, whether you’re buying German Bonds or you’re buying the S&P 500 Stock Index or the whole array of yielding or price gaining assets that are available in the financial market. This monetary policy also sends the message that you can leverage and carry those positions for free and roll it day after day without worry because the central bank has pegged your cost and production, and in a sense has pledged on its solemn honor that it will not change without many months of warning. And that’s what this whole thing is about — changing the language and so forth. I think you have created a massive distortion in the very heart of capitalism in the financial system.
Second, I think even though they stopped actually adding to their balance sheet in October — when QE supposedly ended in a technical sense — the Fed has put $3.5 trillion worth of basic financial fraud into the world financial system and economy. After all, when they bought all of that treasury debt and all of those GSE securities, what did they use to pay for it with? It was digital money conjured out of thin air and they certainly haven’t destroyed or repealed the law of supply and demand.
So, if you put three-and-a-half trillion of demand into the fixed income market at points along the yield curve all the way from two years to thirty years, that is an enormous fat sum on the scale. That is an enormous distortion of pricing because you can’t have that much demand without affecting the price. Now, with the ECB at full throttle, and with Japan being almost a lunatic in its mimicking of QE, you are creating the greatest distortion of fixed income pricing or bond market pricing in the history of the world, and the bond market is the monster of the midway.
The distortion is tens of trillions of dollars big, and meanwhile, the central banks are in some kind of quasi-coordinated unison in levitating the prices enormously. They’ve brought the yields right down almost to the zero line — to the zero bound, as they call it, and therefore have set up the world’s financial system for a huge day of reckoning somewhere down the road and perhaps not that far away.
After all, only two weeks ago I believe, they had the German ten-year Bund yielding five basis points. That is crazy in any kind of world that makes economic sense or that’s sustainable. Already, some of the more aggressive bond traders in the world are jumping on that, calling it the short of a generation. We’ll see about that, but the point is, five basis points of yield even on the mighty German Bund for ten year money is just a major measure of the lunacy that has been injected into the financial system.
Jeff Deist: David, when you talk about the injections, when you talk about the thumb on the scale, as you discussed in Contra Corner recently, it’s not working, right? The commerce department just announced anemic first quarter GDP growth. I mean is there any honest growth in the US economy at this point?
David Stockman: No, and this is one of the things that I’ve been harping on. Sometimes we get so caught up in the monthly so-called incoming data and the short-term releases — that are seasonally maladjusted anyway and get revised four times over — that we really lose track of where we are. So, the other day I said let’s just look at two extended periods of time that occurred in different economic and policy environments and do an assessment of where we are.
I took 1953 to 1971, that representing the end of the Korean War and the beginning of the Great Prosperity in the middle century, ending in the August 1971 fatal mistake that Nixon made when he closed down Bretton Woods and the rest. I call that the Golden Era of Prosperity. During that period, the economy grew and I use real final sales to measure the growth because that takes out the inventory fluctuations and distortions that are in the GDP number per se. But, if you take real final sales for that eighteen-year period, it was 3.6 percent a year compounded during a time in which the Fed was run by William McChesney Martin, a survivor — or veteran, you might say — of the 1929 crash and the trauma of the 1930s. He was a man who wasn’t necessarily, in the classic sense, a hard-money gold-standard advocate, but he certainly was a wise financial hedge who understood the dangers of speculation in the financial markets and of too much heavy-handed intervention in the financial system.
During that eighteen-year period from 1953 to 1971, the balance sheet of the Federal Reserve expanded by only $42 billion over eighteen years. (Now during QE, that was about two weeks worth of expansion at the peak.) More importantly, if you look at it in real terms — in inflation-adjusted terms — the balance sheet of the Fed in that period grew about 3 percent a year, and the economy grew at nearly 4 percent. Therefore, the Fed was engaged in a very modest light-touch policy allowing the mechanism of capitalism, including the financial markets at the heart of it, to function. The balance sheet of the Fed grew by 0.8 percent of the growth in the GDP.
Now, let’s take the last fourteen years, we’re in a totally different world. Greenspan has changed the whole notion of the role of the central bank, followed by Bernanke and Yellen. During that period, GDP growth of the economy has down shifted sharply to 1.8 percent a year over the last fourteen years, half of what occurred during the golden era. By contrast, the balance sheet of the Fed grew from $500 billion to four and a half trillion. But look at it in the same annual terms: 17 percent a year growth in the balance sheet, and 15 percent after adjusting for inflation.
That means that the Fed’s balance sheet grew eight times more rapidly than the economy during the last fourteen years. That’s just the inverse of the relationship that occurred back in the Golden Era.
So, I think if you need any proof at all of this massive intrusion into the financial system isn’t working; the huge amount of money printing and balance sheet expansion; the unremitting financial repression and pegging of interest rates; look at the fundamental comparison that I just made. It’s not working in the real economy. That is, it’s not generating expansion and giving standard gains on Main Street.
The only thing it’s really doing is simply inflating the serial bubble that ultimately reach unsustainable peaks and collapse. We’ve had two of them this century already from that policy and we’re now overwhelmingly — if you really look at the evidence — in a third great bubble that is in some ways more fantastic than the earlier two. It’s only a matter of time before it bursts and implodes and we’ll then be back to square one.
Hopefully on the third strike, the people who gave us these bubbles will be out. I think that might be a fair metaphor or proposition to make. Hopefully, when this next big bust comes — and surely it will when you look at the degree of speculation of the stock market in the high yield market or many other sectors that we can talk about — there will be a great day of reckoning in the country in terms of demanding a fundamental change in monetary policy and we’ll see the resignation of all the people who are sitting on the Fed today that have led us right into this gargantuan financial trap.
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Who cares. Ain't nobody going to pay them back anyhow.
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For centuries, alchemists have been trying to turn lead into gold. Economists, our modern day alchemists, have managed to convince most people that paper is gold. The future will reveal these charlatans for the frauds they are.
Indeed.
"By your magic spell all the nations were led astray." - Revelation 18:23
You people got it all wrong, money is debt that you work for, and someone owes you something for that money...
They never intended to pay the money back, hence....
Plan A) The War on Cash... (So they can control all commerce digitally & MAKE YOU PAY DEARLY)
Plan B) Collapse the Banks (So they can mandate digital currency/banking.)
Plan C) Control the raging crowds with Jade Helm.... (Riots?? CHECK!)
Pland D) Destabilize the markets & cause massive inflation.... (Because they want you working for Peanuts)
Pland E) Stupefy the masses with more mind occupying BS 24/7 online.... (How are the Kardishans doing?)
Plan F) Come up with some totally believable lies to explain why you are being bent over 7 ways to Sunday.... (Goodbye Pensions)
Plan G) Draw us all into a Gigantic World War.... (Because less mouths to feed?)
If you underestimate your enemies & it will be YOU who pays the price...
Call me a conspiracy theorist if you want to, but I like to think of it as EXPECTING THE WORST!!!
Boris is much oblige. You are conspiracy theorist.
The fiat-money QE process has allowed:
1. The 1% ( and moreso the top 1/10 of the 1%) to grab vast amounts of money, and to buy up vast amounts of the national wealth of the Western nations;
2. Wall Street and London's City to continue their ponzi frauds;
3. Governments to meet ever-increasing social costs of unemployment and increasing poverty while funding a vast military, snooping, and state-security apparatus;
4. Corporate Boards to keep share prices up through share buy-backs, loading up balance sheets with cheap debt while stripping out corporate wealth as dividends and bonuses;
5. The political process to be hijacked through bribes campaign contributions;
6. The process of the transfer of power from nations to multinational corporations through "trade agreements";
7. The hollowing out of the middle class and the diminution of wages and workers' rights; and
8. The enslavement of the present and future generations of taxpayers who are saddled with vast amounts of present debt and future unfunded liabilities.
In summary, the fiat-QE process, following the great ponzi frauds of the central banks and huge financial houses, is the greatest transfer of wealth and power of the last several decades. The Oligarchs are winning. Democracy is losing.
Bitcoin is the antidote.
Sadly most people are too stupid to realize that in time.
Screw resignations. I want to see heads roll; literally. Let's get together and crowd fund a cheap, easily erected guillotine.
Human Nature is a constant.
Those who preside today don't care of that which they preside over,
be it War, misery, inflation, deflation, tyranny, Empire, collapse, whatever, - the ruler's a priori Subjective drive is attuned to "presiding", only.
Hence the coming deluge will be harsh so as to rid the World of this infestation of the eagerly corrupted and incompetent ones,
It is so written.
The event that will mark this change of Epoch will now come at any time, now, ie 2015 (it appears) as the loss of confidence by the unwashed in their masters is at hand.
Ho hum
"...a great day of reckoning in the country in terms of demanding a fundamental change in monetary policy and we’ll see the resignation of all the people who are sitting on the Fed today that have led us right into this gargantuan financial trap."
At this juncture, when otherwise intelligent people with a voice speak in disturbingly simplistic, naive ways -- that is the greatest cause for concern.
Show our drunken track record!
http://showrealhist.com
The problem with power is control. The problem with propaganda is control.
The problem with money is control.
https://contrarianopinion.wordpress.com/2015/04/14/plutus-and-the-myth-o...
This author does not get what bitcoin is or how does it work.
https://bitcoin.org/bitcoin.pdf
Capitalism has been severely distorted in the USA* by a collection of priviledged, rentier parasites who exercise immense influence in politics. And standing next to them on the podium, albeit in second place, is the willfully ignorant, apathetic populous. Whatever station in life we currently occupy, if we allow these parasites to drain the economy and corrupt our leaders, then we will get what we deserve.
Privatizing the profits and socializing the losses is not capitalism. Usher in the technocratic takeover. These sheep aren't paying attention.
* Not specific to the USA.