Bernanke, The Blind Archer

Tyler Durden's picture

Via Sean Corrigan of Diapason Commodities,

The Blind Archer


Finally, the great day has come and gone when the Fed would once again ride to the action, not daring to be left behind by the ECB’s perverse vaunting of its new ‘unlimited’ programme of bond purchases and too impatient to attend the continually postponed policy shifts so long expected from both the PBOC and the BOJ. A few months of less-than-stellar macro numbers, coupled with a lull in the rise of the price indices which was helped along by the last cyclical downturn of commodity prices (alas, for the ordinary American housewife, long since reversed) and the Mighty Oz was free to rummage deep into his carpetbag of gewgaws and conjuror’s props, once more.


The rationale for this latest enormity is, frankly, hard to determine lest it be Bernanke’s eagerness to present whoever might replace him under an incoming Republican administration with a fait accompli and so to ensure his legacy as the worst economic ‘experimenter’ to be empowered since the dark days of Roosevelt himself (he of the breakfast egg gold price fixing; the alphabet soup price and wage dictatorship; and the enforced famine of mandated crop and livestock destruction).


So, when we received a little insight into the fevered mind of the Chairman – coming in the form of what he told an interlocutor from Reuters, when asked to explain how exactly he envisaged that his new, open-ended, $45-billion a month QEII programme would work - our first urge was to utter the obsecration: "Spare us, Lord, from the scheming of idiot savants!"


Apart from the fact that Blackhawk Ben here seemed to hew to a particularly crude version of the Phillips curve largely disavowed by even the most unreconstructed mainstreamers (one which imagines that extra jobs can be bought if only prices can be made to rise fast enough), after five years of ever more desperate flailing to restore false, Boom-time levels of activity, he appeared to have staked his all on bursting the piñata of the labour market by smacking it with the rough-hewn pole of the so-called ‘wealth effect.’


As he told the journalist in Thursdays’ post-FOMC Q&A: 

”The tools we have involve affecting financial asset prices… Those are the tools of monetary policy.  There are a number of different channels.  Mortgage rates, other interest rates, corporate bond rates.  Also the prices of various assets….”


“For example, the prices of homes. To the extent that the prices of homes begin to rise, consumers will feel wealthier, they’ll begin to feel more disposed to spend. If home prices are rising they may feel more may be more willing to buy home because they think they’ll make a better return on that purchase.  So house prices is [sic] one vehicle…”


“Stock prices – many people own stocks directly or indirectly. The issue here is whether improving asset prices will make people more willing to spend…”


“One of the main concerns that firms have is that there is not enough demand… if people feel their financial position is better… they’ll be more likely to spend, and that’s going to provide the demand firms need in order to be willing to hire and to invest…”

These few, brief sentences contain such a miasma of error that it is hard to know where to begin if we are to restore a fresh breeze of economic rationale to this swamp of non sequiturs and wilful misunderstandings. It is not enough that crude, Krugmanite Keynesianism clings to the cheap parlour trick of using money illusion to fool unemployed wage-earners into lowering the reservation price of their labour, but now we must battle against banal, Bernankite Bubble-blowing – the hope that money illusion will fool cash-constrained asset owners instead.


To show what we mean, indulge us while we parse the Chairman’s words:

“If we can artificially suppress interest rates to a low enough level, lots of people will forget that they got themselves into the current mess by borrowing too much the last time we did this and so they will begin to do so again – especially the would-be home-owners and condo-flippers.”


“If the price of homes begins to rise, those who have already borrowed to buy one will feel better off even though: (a) they will earn not one red cent in extra income because of that appreciation and (b) if they do manage to register a one-off capital gain, it can only come at the expense of the purchaser, whose acquisition of a durable store of shelter services will therefore involve a much greater, zero-sum call on his resources than otherwise would have been the case”


“The stock market should also rise just because there’s more easy money chasing after a parking place. Naturally, we at the Fed could care less about the quaint notion that equities should represent a sensibly valued claim on a company’s estimated stream of residual earnings, or that capital markets need genuine prices if they are to serve any useful social function by allocating scarce savings to the prospectively best investment projects.”


“To the contrary, from our perspective, if Joe Soap wants to splash out to celebrate the entirely notional, potentially only nominal, and probably ephemeral gains on his 401k which we can bring about – without wondering whether the increase represents any lasting contribution to the aimed-for security of his retirement – well, in the long run, we’re all dead, aren’t we?”


“Companies don’t have enough ‘demand’, don’t you know, so if we can only get people to wave their cheque books at them, they will be so sure of being able to profit from this that they will offer every one of their new customers a job, on the spot!”


“Incidentally, we Keynesians are big on portraying consumer demand as being the driver of the economy, even though we’ve never quite been able to explain why it is that the ‘demand’ inherent in the existence of millions of hungry people in the world – all pathetically eager for an extra morsel of food – has not automatically brought about the necessary increase in agricultural output, investment, and employment in precisely the same manner that we are now presuming will be the case for, say, WalMart once we start buying in its customers’ mortgages.” 

Like most macromancers, what our esteemed Chairman is missing here is any concept of how a business actually functions, of how it and its peers interrelate in the overall structure of the economy, and of the critical role played by capital and time in the division of labour and the provision of goods. He is also prey to the superficial fallacy – a kind of inverted Say’s Law - that consumption somehow dictates the amount (rather than merely the composition) of production, something that has not been the case ever since Adam was condemned to earn his daily bread in the sweat of his brow and to till the ground from when he was taken.


Thus, rather than being fooled by the mantra that ‘(personal) consumption is two-thirds of the economy’, one should be clear about the distinction that its (imputation-boosted) count is actually only two-thirds of the highly-subjective statistical shorthand which is GDP – and that this is not the same thing at all! Gloves may well comprise 100% of the clothing I put on my hands in winter, but if they are all I don when I go out snow-shoeing, I’m not likely to get very far before some Good Samaritan of the Alps finds my half-frozen form and has to send forthwith for the nearest brandy-carrying St. Bernard so as to revive me.


This is a matter to which we have already devoted a great deal of time, but a brief synopsis here is probably in order.


Take, for example, the four years from 2006-9 inclusive which saw US GDP average just under $14 trillion while cash PCE came in at a mean $8.5 trillion (ergo, validating the shibboleth that the latter number equates to 60% or so of the first).  Mainstream thinking may stop short here, smugly satisfied with this trivial – and circular - QED, but this is not even half the story.


We say this because, over the period in question, aggregate business revenues – i.e., the best representation of the overall circulation of goods and services throughout the economy - amounted to no less than $33 trillion a year (the vast bulk of which receipts were subsequently disbursed again, whether as above-the-line costs, below-the-line outlays, interest, dividends, or taxes).


Thus, not only was the ‘economy’ almost 2 ½ times as large as the GDP count, but every $1 of that supposedly crucial personal outlay was matched by $3 of business-to-business spending.


So, if Mr, Bernanke really wants to get ‘demand’ going, the foregoing drops a heavy hint that he would be three times as effective as he has been if he and his masters in Washington could manage to do something (or, conversely, to stop doing much of what they counterproductively have been doing) which ends up promoting greater managerial/entrepreneurial belief that not only can profits be made, but that, once made, more of them will be retained by their rightful owners.


It should also be recognised that the vast bulk of that $25 trillion in B2B expenditures is every bit as discretionary as the outlays of the most finicky of shoppers: no businessman can be compelled to keep his store open, or his factory running, if he finds the game not worth the candle, even though mundane economic analysis tends to assume without question that, far from being an adaptive, calculating,  he is an unthinking automaton who can very much be relied upon to do just that, irrespective of his estimated remuneration.


More fundamentally still, it is the relationship (strictly, the ratio) between his receipts and his disbursements wherein the lies the difference between our hero’s commercial success – and so, his role in hiring, commissioning and the onward generation of orders for his suppliers – and his failure – hence, his sad duty to undertake lay-offs, cut-backs, and cancellations. Even absent net, new investment to improve and deepen the capital stocks and so raise real incomes, the overwhelming preponderance of that $25 trillion (in fact, all of it less an average $1.5 trillion before – and only $250 billion after – depreciation) represents a voluntary sacrifice of the enjoyment of present goods, undertaken merely to keep things running as they are


The idea that such a delicate network of relative prices and differential cash-flows can be not only maintained, but enhanced, by the clumsy process of artificially forcing arbitrary quantities of money and credit into the system is at best naïve and at worst astrological in its pseudo-rationality.  At root, such gross interventions as these, no matter how greatly they excite the raptures of the mainstream inflationists, ensure nothing more than the confusion of those critical accounting algorithms which help ensure that capital and labour are not being squandered. This is so because, not having the noble pedigree of the free, unhampered market, the infusions – being nothing more than the bastard offspring of the central planners’ hubristic conception - bear no definitive relationship to the generation and subsequent movement of the real goods and services whose value-giving exchange it is the sole purpose of these media to facilitate, both across space and through time.


To see this, take the simple – if extreme – example of the post-Lehman crisis itself. The Fed, we are told, by the newly-respectable brotherhood of NGDP targeters, ‘only’ had to ensure that the gross flow of money out of the funnel at the end of the economy (the $14 trillion per annum, principally in the form of final, exhaustive spending) remained unaltered and all would have been well. [We shall here ignore the fact that this would have been an impossible task to have undertaken in real time even if all the various rivalrous sects and sub-sects of NGDPers had managed to agree upon what means should have been employed, upon whether levels or growth rates of the aggregate should have been controlled, and over what horizon this was to be brought about].


But look at the facts of what did happen that year as the economy swirled around the ragged edges of a maelstrom of total collapse. Total domestic, non-MFI credit rose a modest 2.9% as the private component of this fell 2.5% while Leviathan’s appetite grew by a monster 13.7% (counting GSEs in with government itself). Meanwhile, M1 jumped 18.1%, ‘Austrian’ Money Supply (M1+, if you will) rose 25%, and M2 added a more modest 9.1%. Confusion confounded, you might say, since we are being exhorted to act to control one or more of these aggregates, depending upon which particular ‘new’ monetary school you choose to believe. But the difficulties do not end there, for worse was to come in the ‘real’ economy.


Here, the hallowed NGDP measure fell 3.7%, implying the Fed should have added X, or maybe Y, or Z in order to offset the switch in emphasis from credit to money and the concurrent slowdown in the immediate use or ‘velocity’ of that money.


But this was not the end of it, for private-sector NGDP (the important bit) fell a greater 5.7%, while the total business revenue measure which we have argued above is the real key variable, slumped to a crushing 11.5% loss. Within this the disparities were even more marked. Revenues among the extractive industries plunged 50.6% at one end of the spectrum as those accruing to health & social care rose 4.4% at the other. For profits – and hence, for both the means and the incentive to expand output and employment - the spread was even more extreme for the trailing four quarters to our two end-dates, ranging from a 73% contraction for the extractive sector to a 68% gain for the utilities (which, in part, benefited from the formers’ woes in the shape of cheaper energy inputs, again underlining the point that it is relative costs and prices which count, not absolute ones).


Again, we have to ask the targeters and reflationists: how, where, and when was the central authority supposed to have intervened in order to lessen the economic pain; and how do we know that same pain was not either intensified or prolonged, rather than mitigated, by the actions which were taken since these could not have done other than to have interfered with the market’s attempts to find proper clearing prices, to excise dead capital stock, and to marshal its combined entrepreneurial abilities for the task of laying down new capital where the evaporation of the prior bubble had revealed it to be truly useful (and, by extension, profitable) to do so?  


If the Bernanke Fed had any answers then – or, indeed if it has since achieved sufficient enlightenment to justify its present burst of activism – we should be delighted to hear them. Our breath is not being held.


As a practical matter, it should be noted that the final data which we use to plot these changes have only just begun to be made available on a delayed quarterly basis and, even then, a full check on their validity awaits the glacial progress of the statisticians at the IRS, whose findings can be up to four years in arrears!


Though we must always exercise caution regarding any use of aggregates, a reasonable proxy is therefore what we need if we are to monitor developments, albeit using the broadest of brushes. For us the widely-ignored business sales data fits the bill for overall activity, while the ratio of its sub-components—retail sales versus those made in the manufacturing and wholesale sectors gives us an idea of gross saving/investment v end-consumption. Another way of showing this is to plot the monthly personal consumption estimates against those for business revenues. As the plot shows, this latter is highly variable and has been in decline ever since the financialization of the economy began in earnest in the early-1980s.


A falling ratio implies, to an Austrian, that a greater degree of time preference appears to be developing and hence, a higher natural rate of interest (the ratio of intertemporal prices) has come to prevail.


In contrast, an examination of the path of BAA bond yields shows that market rates (after subtracting consumer price changes) have been steadily falling over time, due to a toxic mix of loose money and abundant speculative leverage. The gap between what should be and what is, is therefore a widening one, suggesting that a mix of overconsumption and malinvestment, fuelled by increased non-productive indebtedness, is to be expected.


Chronic and often highly elevated current account deficits (not to mention the dire fiscal situation) testify to the overconsumption element, while the series of ever-more violent booms and busts, coupled with lacklustre real net investment and stagnant real wages, are symptomatic of the second, while the level of debt itself should itself need no further comment.


Given this malign constellation of factors, the Fed’s eagerness to suppress all interest returns for at least the next three years and for as far out the curve as its tainted grasp can extend is not likely to do anything to restore a much-needed touch of balance to the world’s largest (and formerly most vibrant) economy.


Bond yields have already been forced far too low, making stocks seem relatively well-valued, even as the underlying conditions deteriorate and the fatal dependency on the sweet neurotoxin of stimulus deepens its grip on the patient. By progressively suppressing the economy’s intrinsically-generated price signals in this fashion, a wholesale paralysis of the system may one day result.


What Bernanke’s intellect cannot seem to encompass is the thought that if a man has lost weight through an illness related to his previously poor dietary regime, it will simply not do to try to fill out his now-baggy suit by tempting him back into over-indulgence. Some glimmerings of this idea do surface in the occasional expression of doubt about just how large such shadowy entities as the ‘output gap’ or the ‘structural growth rate’ may still be in the aftermath of 2008’s debacle, but none of these misgivings ever seem to penetrate the cranium of a man who thinks he can meaningfully reduce unemployment by stimulating junk finance in all its many forms.


It is not only that Bernanke’s policies will inevitably assist the zombie companies and the obsolescent industries to absorb scarce resources (not least on bank balance sheets) to a much greater degree than is justified, thereby denying greater returns both to their better-positioned rivals and to those nascent endeavours which could better reflect unalloyed consumer preferences and whose growth could come to replace yesterday’s failures as tomorrows’ providers of income. There is also the danger that lax money misleads even today’s supramarginal businesses into over-estimating the depth and duration of demand for their products, ultimately undermining many otherwise sound undertakings and reducing these, too, when the cycle next turns, to the ranks of the Living Dead.


Gather ye rosebuds will ye may, for the bloom on this Fed rally, too, will eventually wither and fall.   

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Careless Whisper's picture

Ya gotta love all these bloggers who think Benny is soooo stoopid. He isn't. He knows what the ramifications are and exactly how this excessive printing will play out. People who buy into his "schtick" are the stupid ones.


vast-dom's picture

agreed. bernakzi can't be that stupid. they are engineering a massive correction. but before then think of the gloved hands as the 1% and the buck-naked body as the 99% and the st bernard as having very little brandy, which is moot since the hands can't be cut off from the body anyhow. poor fools....

Bernankenstein's picture

Hmmm, I think he could be that stupid, and that is why he is supported by his peers and all who gorge themselves and experience the best multiple financial orgasms due to his stimulus noninterruptus. They have struck gold in the unintentional genious of Ben's sheltered stupidity and ignorance. That was a confession. Boy do I feel better now.

new game's picture

the answer is simple or you are missing something! confusion is what economics is about.

ask anyone about economics, derivatives, math and you most likely get a blank stare-da wtf you talking about.

that said, the whole enterprize of power/politics of power prey on the majority of misunderstanding for there gain.

"just confussing enough"(by design), libor as an example or derivatives, to be manipulated for gain by a select few.

what scares me is how "open and notorious" the law breaking and no consequence has become. corzined to jpm...

Kayman's picture

There is no more indirect, ephemeral economic lever than the Wealth Effect.

For the front runners the Wealth Effect is real and powerful as they take Ben's cash and run up prices.

For the rest of America the Poverty Effect still remains from the destruction of wealth, and collapsing incomes.

petolo's picture

Pour Fools. Lots of koolaid to go around.

pamriallc's picture

Simply put, the only reason Bernanke is "printing" is that Congress / House / Senate can't balance a budget. The FED is stuck doing the rest of the work which is, in aggregate, a long term "controlled printing experiment" due to the inability of government (or governments in general) to control their fiscal policy.  On that note, it gives central bankers throughout history (whatever they may have been called) enormous job security.  Leverage our expertise.

RSloane's picture

Brilliant per usual, WB. Where's our clap emote when we need one?

ptoemmes's picture

His countenance and eye-gaze is a bit alarming...I wanna see what he is aiming at!

JPM Hater001's picture

"Gather ye rosebuds will ye may, for the bloom on this Fed rally, too, will eventually wither and fall. "

Why do I feel like I am watching the Hunger Games played out on a grand market scale?

buzzsaw99's picture

i look into my crystal ball and see a halliburton death camp in your future

zorba THE GREEK's picture

Bernanke is doing his job. He is serving his masters well. If you want to know who

he serves, look at the 1st,5th, 6th and 7th letters of his name.

Mark123's picture

From Reuters:


The Federal Reserve will not waver from its aggressive policy stance when one of its two bond-buying programs expires at year end, and it is prepared to do even more to get Americans back to work...


Even more eh?  When the lies become so blatant, you know the game is almost over.

Junior Prepper's picture

I'd say the game is far from being over, in the contrary, TPTB are just warming up right now, preparing the play field.

Ned Zeppelin's picture

Now, assume Bernanke knows all of this is true, and in spite thereof, has proceeded.  Whose interests does he serve?

Mark123's picture

I would love to see just one banker in jail...real jail.

jeff montanye's picture

hundreds were convicted under ghw bush in the early '90's, none under his son or the democratic party version of same, less than two decades later.  from the rule of law, at least to a degree, to the rule of (lying and corrupt) men in less than a generation.  rome took centuries to fall.  we will beat their pants off.

James's picture

They did'nt use DPAs' in Herbert Walkers days.

Delayed Prosecution Agreements Bitchez.

I'll try to explain it.....................

Lenny Bruerer(sp)? over @ DOJ catches Jamie @ JPM embezzling 100mm.

Lenny meets Jamie for lunch and asks Jamie WTF Jamie?

Jamie says "OOPS"

Lenny says Damn right OOPS. And I'm only going to tell you 27 more times not to do that again.

Jamie says okay. How's the bisque?

Jamie picks up the check and they leave to get in their respective limos.


Edit: I had never heard of DPAs' until late last week where I read of this on the NakedCapitalism site.

A transcript of a speech by Lenny was offered.

Every paragraph,if you read it, will help you understand why their are no major arrests to date. And the criminality involved.

However, their have been a couple.

booboo's picture

"Everyone has a plan until they get punched in the mouth"

Mike Tyson




mharry's picture

I just need to grow the balls to buy that Barrett. I'm actually looking out the window for the black vans, if you don't hear from me, THEY did what THEY do.

booboo's picture





neutrinoman's picture

I used to think that the "declining savings rate" was a thing that showed that Americans were saving less. In fact, their savings continued to grow over the last thirty years.

The rate is a ratio, and it's the denominator, the national income, that was growing faster than savings, over the last thirty years -- fueled by debt unsupported by a commensurate growth in savings!

Mystery solved.

Count de Money's picture

Here's the problem when you try to artificially manipulate the market: It won't work if everybody knows it's being manipulated. It's even worse when you tell everyone that you're manipulating.


steve from virginia's picture


I like Sean Corrigan b/c he takes the time to connect the dots and build a substantial argument.


He's right of course, Bernanke would like nothing better than to inflate a replacement asset price bubble in the shadow of the late, lamented housing version.


Best he can do is tread water ...

Schmuck Raker's picture

He and his ilk will tread water as the vast majority of us are drowned.

Same ol' - same ol'.

youngman's picture

I think as of today....Bernanke is going to have to buy either Japanese bonds very quickly...or US treasuries as the China-Japan game gets will be fought on Bernankes turf with his ball....he has to play or default....

Glasshopper's picture

All this talk of QE never ending ... but when's it going to start?

sangell's picture

An interesting thing about people who actually fix things and know what they are doing is that they determine what tools they need first rather than what tools are lying around and try and use them. Now Ben Bernanke said he had an emergency and didn't have the luxury of time to do that in 2009. Fair enough. He said he had a broken pipe and he only had a hammer so he beat the end of the broken pipe with his hammer to stop the flood. But now its 3 years later and Ben the monetary plumber is still running around fixing leaks with a hammer. He says he has a big rollaway tool kit but there he is with his big hammer beating on pipes till the leaks stop.

This is the Three Stooges in one of my favorites 'A Plumbing We will Go".  When the owner of the property objects to Larry excavating a giant hole in his yard Larry replies " Don't tell me how to do my job" and throws a shovel full of dirt in his face while Curly stops a leak by connecting the water supply to an electrical conduit. No one gives any thought to whare the problem lies and how to fix it they just react to each and every manifestation of it.

Ben Bernanke and his FOMC are the reincarnation of the Three Stooges.

Junior Prepper's picture

You have admit though that they earn a tidy bit more money than the Three Stooges, and also they don't waste time shoveling dirt. I guess I too would be tempted to engage into some monetary slap stick - if it would mean to flood the wallets of my beloved and friends with cash.

mharry's picture

I recently commented on here that he was a freaking moron. I wasn't implying that he didn't know what he was doing. 

mkhs's picture


nice word.  If the market is dead, do the macromancers become necromancers?

Just Ice's picture

The only possible saving grace for the Fed's taking of the dollar destructive QEternity pathway -- and it is not really a saving grace -- is if so much money is in fact going to money heaven, through losses and unwind in the shadow banking system, that Ben's printfest is only able to stabilize the holes enough that the whole system does not kerplunk.

Of course if that is the case, they, in their wisdom, or rather arrogance, have chosen not to disclose same since the little peoples surely couldn't handle the truth. With so much financial "innovation" that permitted all the fraudulent accounting off balance sheet entities to be created, for dumping and non-disclosure of debts and losses, I consider this to be a feasible scenario. Iow, rather than inflation, the rate of deflation is merely being slowed. And time is being bought through the continued propping up of entities that should be left to an effort to avoid a daisy chain systemic failure.

In the meantime, the rise of inflation expectations drives up costs while most borrowers do not benefit from debt minimization through inflation. While one's debt may be fixed in what are now worth-less dollars, the premise that one's income or wages increase under inflation is not true so long as labor overcapacity, aka unemployment, remains high, (or true for only a very small subset of people). There is simply no net benefit when one's labor is devalued (via paycheck or income in worth-less dollars) right alongside one's debt.

Financially insecure people, made that way by the fraud, theft and government interference in markets, business and lives, will scramble to save and not spend what little they have left.

Junior Prepper's picture

Excellent article. It makes me sad to see so much intellect wasted on the utterings of a halfmonkey who should be beaten up, dragged through the streets and lynched properly.

The legitimacy of central banks is built on sand. In the best case they are utterly unnecessary for the economy.

The whole price stability concept is flawed, it does not exist, nor is it desirable. The inflation/deflation concept is much more complex than its theory. Especially inflation has a quality component which i seldom see discussed: Give all new fiat money to a panel of (nat science) nobel prize winners and compare it with helicopter-dropping it over a hippie convention. Same inflation, but much different outcomes.

It's about time people stop accepting state-licensed paper money as surrogate for wealth.



Remington IV's picture

as long as my gold and silver rise ...

ptoemmes's picture

"...- well, in the log run, we're all dead, aren't we?"

You coulda used the quote in the upper right hand corner.

Flakmeister's picture

I gotta give somebody props for the Bayeux Tapestry.....