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Guest Post: Mystery Solved - The Fed Indicts And Absolves Itself

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Submitted by Jeff Snider, President of Atlantic Capital Management, Alhambra Investment Partners

Mystery Solved: The Fed Indicts And Absolves Itself

Given that the economy markets have once again fallen into their annual rut it would make sense that policymakers would attempt to explain their persistent failures.  After all, this is not the recovery we were promised.  Not only is the real economy decelerating in the US, Europe is in re-recession (and a dark one at that) while China flirts with levels that a few years ago were considered the Chinese equivalent of economic suicide.  On top of the real economy, trillions in new currency units all across the world have not ended up in a re-liquification of the global banking system.  With academic measures of narrowly defined theories, central banks have implemented one dose of liquidity poison after another, perfectly ensnaring their intended target in the opposite circumstances than intended.  For every US treasury bond purchased by QE, that meant depletion of as many as four (according to IMF estimates of interbank collateral velocity) equivalent funding arrangements as the chain of rehypothecation was stressed.  The ECB repeated the mistake in its LTRO’s, creating nearly a trillion new euros that somehow ended up subtracting from general liquidity due to what seems to be a recurring blind spot of rehypothecation ignorance.  In short, there has been a lot to answer for recently, yet somehow capitalism is taking both the populist and elitist beating.

The lack of promised recovery and functioning banking system is still a minor issue when compared to 2008.  There has been hand wringing and hearings, papers and ink spilled over the topic in a less-than-determined effort to flesh out just how the crisis could have evolved in such a sophisticated, modern system.  In a July 12, 2012, essay in the Federal Reserve Bank of St. Louis’ Economic Synopses magazine, author Daniel Thornton, Vice President and Economic Advisor at the bank, appears to make an admission that monetary policy was a failure, or at least irrelevant, perhaps answering some of the critiques that continue to plague the US central bank regime.  Titled “The Efficacy of Monetary Policy:  A Tale From Two Decades”, the paper makes what looks like a refreshingly honest summation of cumulative failure:

“The fact that there is little difference in economic performance during the past two decades despite a marked difference in the stance of monetary policy is consistent with the theoretical and empirical evidence that monetary policy has no permanent effect on real variables and with skepticism about the efficacy of the interest rate channel of monetary policy more generally. It also raises a question about the possible effectiveness of the FOMC’s commitment to maintain the funds rate target at zero through late 2014.”

Mr. Thornton’s regression analysis demonstrates that despite a relatively tight monetary stance in the 1990’s (according to his assumptions and definitions) and a relatively loose monetary stance in the 2000’s, there was little change in the overall behavior of either inflation or unemployment.  It was as if monetary policy was invisible or ambivalent to the behavior of either variable:

“Absent recessions and the financial crisis the stance of monetary policy appears to have had essentially no effect on output growth or the unemployment rate.”

But what sounds like an admission of ineffectiveness is really a sly transformation into absolution of culpability.  One way to read this conclusion is that the scale of economic dislocation in 2008 could not possibly have been the Federal Reserve’s fault because the Fed’s monetary policy is inept in the real economy.  Since monetary policy has been shown “with the theoretical and empirical evidence that monetary policy has no permanent effect on real variables”, there is no way monetary policy could have contributed to both the Great Recession and the Great Waiting (for recovery). 

That theoretical evidence comes from the hardened philosophy of mainstream economic canon that money is neutral.  It is taken as a proven fact that outside of the short run, changes in money are neutral to the wider economy.  Mr. Thornton’s paper appears to back that assertion with empirical evidence.  But, just like the central bank blind spot over rehypothecation, there is every reason to doubt the “empirical” evidence owing to the modern mathematical tendency toward GIGO (garbage in, garbage out). 

The potential for monetary nonneutrality is not captured by mathematical variables and assumptions – neutrality is already baked into the models as “settled science”.  For one, while Mr. Thornton is comfortable removing recessions and the financial crisis from the data set to empirically validate his conclusions, logic alone cautions against such comfort.  If you believe, as he does, that recessions and the financial crisis were caused by unexplained exogenous factors outside the scope of inquiry, then it might make sense to remove them.  But if you were at all aware of the logical link between real estate prices, consumer spending and the explosion then implosion of shadow credit markets, at least moving beyond the simple mathematical assumptions can plausibly offer a more comprehensive pathology. 

As troubling as asset inflation has been in and of itself, monetary nonneutrality is far more sinister.  On a previous occasion, I wrote about what might be the worst aspect of this idea of nonneutrality.  For mainstream economics, of both the Keynesian and monetarist persuasions, the idea of aggregate demand is uncontroversial.  Upon closer inspection, the idea that any and all economic activity is a perfect substitute for any and all economic activity falls apart on its face.  Can anyone actually make the case that a government paying workers to build pyramids in the desert is exactly the same as WalMart hiring the same proportion of workers to work in its stores – even assuming the wage rate is exactly the same for both?  These two sets of economic activities would appear exactly the same in the economic accounts (DPI and GDP would adjust higher accordingly) but are carried out for far different reasons and intentions.  Conventional economics does not care nor distinguish since it is an accepted assumption that economic activity is uniform, and thus perfect substitutes.

The real economy apart from the academic framework, however, takes place far outside the here and now, and intent is all-important.  Maybe there is some equivalence to those kinds of activities in the very short run, but a healthy economy needs productive activities that are both profitable and sustainable.  True wealth is a measure of sustainable production beyond the here and now.  But as more money is pulled toward the government fill of “automatic stabilizers” in the absence of “private demand”, more productive capacity is transferred away from where it is most useful for future sustainability.  While some commentators call this crowding out, I think there is more to it than just that. 

Not all economic activity is the same, and the difference in the make up of the economy, meaning finding the right mix of activity, is what creates economic health (or repairs economic disruptions from dislocations, i.e., a recovery).  As much as money and monetary policies foster the “wrong” mix of activity, that speaks directly to nonneutrality.  If monetary policies can distort current activity away from the range of optimality as it pertains to sustainability, then it cannot be said that money exhibits neutrality because that will impact the longer-term trajectory of economic potential directly.  There likely exists (which I argue as highly likely) a very real opportunity cost for the types of activities that are sought out by short-run monetarism (and Keynesianism for that matter).

As the opportunity cost of the “wrong” mix, dictated by activist monetarism or fiscalism, grows relative to organic activity, you would expect the longer-term trajectory of economic potential to decline proportionally since the artificial, substituted growth contains little to no emphasis on sustainability. The possibility that generic economic activities are not perfect substitutes across the broad spectrum of possibilities cannot be modeled by current techniques, even if it was considered and absorbed into the theoretical framework of existing monetary “science”.  Neither can potential innovation.

As much as the worship of aggregate demand places a distorting emphasis on the short-run goal of activity for the sake of activity, monetary nonneutrality can potentially impact the vital role of innovation, and the related role of productivity.  As bad as the single-minded and narrow focus on aggregate demand is, nonneutrality in productivity and innovation may actually be far worse, and perhaps offers a far more complete theoretical structure for the Great Recession and the Great Waiting. 

A capitalist system needs competition.  Competition itself should naturally arise out of the ambitions of economic agents.  However, due to differences as diverse as talent, weather, regional characteristics, or just plain luck, competition is often reduced by the repeated successes of “winners”.  Some businesses are just plain “better” than others, and therefore can succeed at levels that outpace competitors.  Part of being “better” is innovation; those that can successfully innovate and incorporate innovation will win the race to the top.

The process of competitive innovation is what we call productivity, the ability to use inputs better or cheaper than others.  Successful innovation-driven productivity leads to an economy of scale as businesses successfully compete for market share.  The economic system, and society as a whole, benefits from this competition-driven productivity.  But the system has well-known limitations, especially as the economy of scale gets more and more concentrated.  As the “winners” of the race for scale and market share accumulate ever more scale, they begin to set marginal prices well below the ability of competitors to survive.  Eventually, given a large degree of difference in potential productive prices and scales, the system ends up with cartelization or monopoly (this is what happened in the agricultural sector to a large degree).  It is the central paradox of capitalism – successful natural productivity innovation through natural competition will eventually lead to anti-competition, and therefore disruption and long-term malfunction.

Fortunately there is a natural check on this paradox:  disruptive innovation (anyone thinking the FTC was actually the check on cartelization has not been paying attention).  Disruptive innovation is where new products or even industries arise out of the successful ambition to challenge the steady state of an industry, or even an economic system.  The true animal spirits in an economy are not financial.  Despite modern modeling techniques that assume otherwise, these animal spirits are not formulaic reactions to mathematical manipulations of financial inputs, they are the very human desire to build a better mousetrap that is wholly unrelated to the real rate of interest or the shape of the yield curve.  We see disruptive innovation at work in the so-called life cycle of businesses.  Small startups supplant “mature” and established businesses that were once the disrupters themselves.  The endless parade of disruptive innovation is the engine for re-establishing competition, checking the natural tendency toward asymmetric scalability.  

A healthy capitalist system, then, features both productivity innovation and disruptive innovation at the same time.  Too much productivity innovation leads to the stagnation of cartelization, while too much disruptive innovation leads to chaos and disorder (potentially).  Just like the financial economy needs a healthy balance of speculation and investment, the long run trajectory of real economy potential rests upon the balance of these types of innovation.  Anything that disrupts that balance (and this is not a static equilibrium, it is a dynamic concept of human interaction) disrupts economic potential.  Both elements of productivity need the razor’s edge of dynamic competition.

As much as conventional wisdom posits the Great “Moderation” as the apex of modern economic understanding and the intersection with soft central planning, it featured a rather striking dearth of disruptive innovation.  Sure the Internet came of age during the period, but the Great “Moderation” was really just the payoff of earlier innovative work.  The tech darlings of that period, from computer and telecom companies to biotechs, got started in the 1970’s and 1980’s.  Where are the new innovative darlings that got started in the 1990’s and 2000’s?

For quite a period of time, the developed world (starting with the US) enjoyed a run of disruptive innovation that spawned new industries and productive capacity that could not have been dreamed of by the preceding generation.  It was matched, seemingly step for step, by productivity innovation as technology served to create new industries while simultaneously advancing the growth potential of many existing sectors.  Since the Internet revolution, however, there has really been nothing of that scale, no brand new industries to take the real economy into the next phase of productive potential.  Is it coincidence, then, that this donut hole of disruptive innovation has occurred at exactly the same time as the apex of monetarism?

Certainly correlation is not causation, but there is undeniable logic to this line of inquiry.  One of the striking features of the Great “Moderation” has been, again, rapid asset inflation.  This kind of monetary inflation has many pathways for sustaining itself, not the least of which is central banks intentionally turbo-charging the credit production system.  The methodology of circulating credit overstimulation determines the ultimate pathway for that inflationary money. 

For example, in the early and mid-1980’s, the US financial system saw its first real asset bubble in the junk bond space.  Junk bonds were especially useful as the means to finance privatization and merger activity (the birth of the over-indulged LBO).  In terms of asset inflation, these kinds of credit-based processes furthered the rise of asset prices by being conducted at hefty market premiums, while at the same time withdrawing or reducing the supply of equities.  In the real economy, the junk bond bubble was just the first application of asset inflation intrusion into the paradox of productive innovation.  Rather than helping disruptive innovation cull the herd of enlarging firms as they reduced productive price points through growing economies of scale, this kind of merger craze pushed the process of cartelization further upward, certainly beyond where it would have been without the monetary boost.  Big businesses got bigger, in many cases, solely because there was an artificial abundance of credit.  Access to Wall Street largesse was more important than successfully incorporating innovation and productive potential.

The mania of mergers and productive economies of scale has continued almost uninterrupted since the early 1980’s.  Digging into the Federal Reserve’s own Flow of Funds data (Z1) it is very clear that the marginal surge of money in the US system is not into equities, it is away from them.  To put it another way, these credit-based activities finance the withdrawal of ownership from the dispersed pool of individual investors to the concentration of larger and larger businesses among a smaller and smaller cohort of owners (generically speaking).  For all but a few years of the Great “Moderation” (1983-2007) there were negative flows to equities as credit money was used to extract ownership rights for productive capacity.  Since this process was accretive to asset inflation and the assumed “wealth effect”, it was encouraged by the regulatory framework and the tide of soft central planning.  Businesses no longer had to out-compete their competitors.  They could use cheap financing and over-abundant credit to simply buy them up without having to go through the trouble of actually innovating their way to the mature stage of the business cycle.

The reduction in competition and the diminished marginal level of innovation also bled past the productive innovation processes that were never born, into the vital arena of disruptive innovation.  So much of disruptive innovation is a result of competitors fighting for every last basis point of market share, as necessity breeds individual genius.  By removing competitive obstacles through the unhealthy shortcut of easy money, the monetarist impulse stifled the razor sharp edge of a healthy competitive, and thus innovative, environment.  Once competition was reduced without innovation, cheap credit served mature businesses as they sought to acquire or beat back potential disruptive rivals before they ever got going (i.e., Microsoft vs. Netscape).  The tide of monetarism was a blunt instrument to protect the vested interests of mature-stage businesses (what have those tech darlings done in the 2000’s, except defend their own turf?).

The bluntness of monetarism also extended into individual incentives.  Before the age of the activist central bank, the only clear path to untold riches was through the creation and building of a real productive empire.  Since the 1980’s, but especially the last two decades, the path to untold riches has been asset management and the financial economy.  The tycoons of the past were industrialists that created something from nothing.  The tycoons of today are hedge fund managers and Wall Street’s vast sales staff.  The pool of available individual talent has been skewed away from real productivity toward the financial economy – Ivy League math wizards who might otherwise have put themselves to good use creating new real economy technologies were pulled irresistibly into the Wall Street nexus of quant trading and “risk management”. 

Even outside the perceived top ability level, marginally in the last twenty or so years individuals have been drawn away from the real economy to the lure of financial money.  Instead of starting productive businesses, they became day traders and real estate flippers.  The scale of the asset bubbles meant that the opportunity cost to the real economy in favor of the financial economy just may have been a massive talent drain.  Thus, all the vast financial innovation of the past two decades was likely accomplished at the expense of innovation in the real economy.

On the whole, as the monetaristic drive into asset inflation further fueled the rise of bigger and bigger businesses, it drained the real economy of marginal actors who may have contributed to the much needed disruptive innovation that might have succeeded in breaking the paradox of capitalism.  In doing so, this rampant monetarism has superseded and replaced true capitalism with cartelization and cronyism by removing its own self-correction mechanism.  To that end, perhaps the most potent and reprehensible aspect of this very clear nonneutrality has been how monetarism has paved the way for big government.

The growing spending monster of the federal system in the US, and the more aged systems in Europe, would never have reached the heights they did without a huge boost of easy credit and asset inflation.  The combination of fiat money, the potential for vast fractional credit expansion due to the shift to interest rate targeting, and the embedded regulatory favor of “risk-free” government debt essentially withdrew any market self-correction from the growing global Leviathan.  Putting the regulatory imprimatur onto government debt incorporated a statutory level of demand that skewed the real cost of government borrowing, allowing borrowing levels to exceed any reasonable threshold by free market standards.  In fact, the monetaristic rise of the financial economy was perfectly aligned with the growing tentacles of political reach.  The banking system and the political system operated in a near-perfect symbiosis of monetary flow and regulatory favor.

Monetarism is really a perversion and distortion of free market capitalism, where that perversion is the fingerprints and fragments of nonneutrality.  It has led to this state of rising cartelization, concurrent to the exponential growth of the public sector.  The system that prizes aggregate demand above all else will eventually find the path of least resistance to that end:  cartels and government spending.  But such a system that seeks only generic, short-term activity will eventually find itself with too many people waiting to build those desert pyramids; it really is better that they work at WalMart.  Sustainability and the intent of economic actors matter more than activity for the sake of activity.  The backfill of automatic stabilizers and induced monetarism through credit only serve to fill the grave that the economy is already standing in.  The lifeline out of that grave is disruptive innovation and true wealth creation, but those are longer-term processes that don’t offer the easy answers of the distorted capitalism, and they don’t fit into the mathematical box of modern monetarism.  True capitalism is antithetical to any form of aggregate demand and central planning.

Now in the twilight of the apathy generated by the anesthesia of the Great “Moderation”, the status quo must be maintained at all costs:  once interests become entrenched, they must be served.  The models may not incorporate it, but aggregate demand and the perversion of capitalism, like true capitalism itself, have very real limitations.  The Great Recession was really nothing more than the failure of asset inflation to be irrevocable.  Without the mask of asset inflation, the atrophy of the productive capacity of the real economy in the US and Europe was laid bare.  The domination of the financial economy, due to nonneutrality, has led to the lack of productive and disruptive innovation to check the supremacy of cartelization at the margins (which are not insignificant), while eroding the razor’s edge of competition and productive capacity and the ability of ingenuity to break free.  The Great Waiting is nothing more than that diminished capacity matched to the echo of over-extended valuations of unanchorable fiat money. 

There is no mystery to the “headwinds” that continue to plague and mystify monetary policymakers.  The global economy is not pulled into re-recession by some unseen magical force, conspiring against the good-natured efforts of central bankers.  Instead, the very thing central banks aspire to is the exact poison that alludes their attention.  Conventional economics will continue to believe and empirically “prove” that the theory of the neutrality of money is valid, giving them, in their minds, unrestricted ability to intervene and manipulate over any short-term period (though it is getting harder to argue that these emergency measures are “short-term” nearly five years into their continued existence).  The occurrence of panic in 2008 and the unresolved and unremoved barriers to recovery in the years since, however, fully attest to nonneutrality, an ongoing form of empirical proof that their models will never be able to refute.  And we are all condemned by it.

 


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Sat, 07/21/2012 - 14:47 | Link to Comment Tinky
Tinky's picture

I am often skeptical of various newly identified "disorders", such as ADD (Attention Deficit Disorder), but attempting to plow through this post leads me to the conclusion that I may suffer from it.

Sat, 07/21/2012 - 16:43 | Link to Comment RockyRacoon
RockyRacoon's picture

Maybe "plowing" is not the correct method.  I'd suggest "thoughtful reading".  You might get different results.

Laying off your laziness on a Newspeak disorder won't enlighten you.

Sat, 07/21/2012 - 16:56 | Link to Comment Tinky
Tinky's picture

Since my tongue-in-cheek post was apparently far too subtle for you, let me clarify:

I believe that the author could have made his points in a more concise manner.

Sat, 07/21/2012 - 17:24 | Link to Comment Precious
Precious's picture

Geithner and Bernanke said forget this shit.  They just want to know when the hookers are going to get here.

Sat, 07/21/2012 - 18:47 | Link to Comment RockyRacoon
RockyRacoon's picture

I am often accused of being rather literal and without humor, and rightly so.   The Tylers in years past have pointed that out to me all too often.   Therefore, I withdraw my opprobrium and apologize.   I do, however, advocate the careful reading of the article by anyone who has the time and patience.   It is a good piece.   The last paragraph does contain one error, as I read it: "Instead, the very thing central banks aspire to is the exact poison that alludes their attention."   I'm sure the author meant "eludes".

Sat, 07/21/2012 - 19:28 | Link to Comment francis_sawyer
francis_sawyer's picture

If anyone cares what I think...

I was just hoping you could give me some insight into the evolution of the market economy in the early colonies. My contention is that prior to the Revolutionary War the economic modalities especially of the southern colonies could most aptly be characterized as agrarian precapitalist...

Sat, 07/21/2012 - 22:06 | Link to Comment RockyRacoon
RockyRacoon's picture

You just got finished reading some Marxian Historian, Pete Garrison probably

Sat, 07/21/2012 - 14:52 | Link to Comment zero19451945
zero19451945's picture

I'll distill this down to a couple sentences:

The central planners refuse to stop interfering in the economy. This directly leads to bubbles, misallocations of capital, high unemployment, broken economic indicators and a lack of wealth-generating investment.

Look at the "markets": record high bond prices (despite record high insolvency), near-record high stock prices (and in some cases, all time record high), still over-priced real-estate ---> all of which exist in a world with depression-levels of unemployment, depression-levels of people on goverment assistance, crumbling infrastructure, and a government that ceased to function long ago.

Nothing makes sense anymore. They've destroyed any resemblance of the market as a pricing mechanism, they've detroyed interest rates, and they've turned the entire financial system into a corrupt joke. 

Sat, 07/21/2012 - 15:17 | Link to Comment SHEEPFUKKER
SHEEPFUKKER's picture

+ infinity mr. zero

Sat, 07/21/2012 - 22:36 | Link to Comment Precious
Precious's picture

"The central planners refuse to stop interfering in the economy. This directly leads to bubbles, misallocations of capital, high unemployment, broken economic indicators and a lack of wealth-generating investment. They've destroyed any resemblance of the market as a pricing mechanism, they've detroyed interest rates, and they've turned the entire financial system into a corrupt joke."

Memorize this.

Sat, 07/21/2012 - 15:25 | Link to Comment Buckaroo Banzai
Buckaroo Banzai's picture

Actually, it makes perfect sense. Go read the Goals of Communism, as entered into the Congressional Record back in 1963.

Goals achieved.

http://www.uhuh.com/nwo/communism/comgoals.htm

Sat, 07/21/2012 - 17:08 | Link to Comment falak pema
falak pema's picture

achieved by the uber capitalists; now aint that ironic. Its like the church of God in fact working for the devil; which is true as the Crusades and the Inquisition and religious wars proved over 5 centuries. 

Ain't human nature just dandy! We are our own enemies when we get stuck in an ideological rut, like seeing a commie under each bed! Hubris makes monkies out of men; its called regression. 

Sun, 07/22/2012 - 08:24 | Link to Comment AnAnonymous
AnAnonymous's picture

Goals achieved indeed.

------------------
8. Set up East and West Germany as separate states in spite of Khrushchev's promise in 1955 to settle the German question by free elections under supervision of the U.N.

---------------------------

But hey, when you convince of one thing even before being told, well, it is only reinforcement.

Sun, 07/22/2012 - 10:24 | Link to Comment akak
akak's picture

 

But hey, when you convince of one thing even before being told, well, it is only reinforcement.

And with this statement from you, irony has just been raised to its ultimate zenith.

Sat, 07/21/2012 - 15:31 | Link to Comment Tinky
Tinky's picture

Good job! I can cancel my Ritalin order now.

Sat, 07/21/2012 - 15:36 | Link to Comment HD
HD's picture

All that the TPTB have demonstrated over the past five years is that they will "save" the banks and bail themselves out - regardless the cost.

 For everyone else, a harsh dose of reality. For the 99.9% they will cut your credit line or deny credit altogether, raise interest rates, take your job, your retirement, foreclose on your house, raise your taxes, devalue your currency all while food, fuel, education and health care costs spike.

The game has changed - scared chickens do not lay eggs. TPTB took away the incentives for the drones to stay on the debt slave treadmill.

Sat, 07/21/2012 - 16:02 | Link to Comment naiverealist
naiverealist's picture

Also, a main point has to do with monopolistic (mafia-like) business entities that do anything to stifle competition or products that will make their niche products irrelevant.

Consider why most of the nuclear reactors are of the uranium/plutonium model.  This is what the US has sanctioned because it wanted  fissionable atomic weapon grade byproducts during the Cold War  The reactor designs that came out of this have been developed by two large American companies who are bound and determined to sell these to everybody, notwithstanding their supressed safety concerns (i. e. Fukishima).  Needless to say, GE (BWR) and Westinghouse (PWR) have the approved design models for this.  Thorium based reactors are much safer, and are scalable, but all work towards designing and exporting these to energy needing countries is stifled by business as well as the US Govt.  (The Departments of State and Commerce have a lot to do with this).  Don't even ask how the NRC has been coopted by business.

Sat, 07/21/2012 - 15:13 | Link to Comment SWRichmond
SWRichmond's picture

How will we pay the debt?

Sat, 07/21/2012 - 15:20 | Link to Comment t_kAyk
t_kAyk's picture

We won't. 

It will never be paid.  Ever. 

Sat, 07/21/2012 - 15:44 | Link to Comment JLee2027
JLee2027's picture

Part of the "Great Waiting" is waiting for the Great Reset.

Sat, 07/21/2012 - 16:17 | Link to Comment Row Well Number 41
Row Well Number 41's picture

It's going to be interesting when people realize dollars ARE debt.  Buy your PMs and other supplies while it's cheap.

 

#41

Sat, 07/21/2012 - 16:36 | Link to Comment Offthebeach
Offthebeach's picture

You mean how will the children pay the interest on the debt. Stripper poles, escort service and soldering in Squid, Inc wars. Forever.

Sat, 07/21/2012 - 23:55 | Link to Comment mkhs
mkhs's picture

We?  I don't seem to recall signing up for any, myself.

Sat, 07/21/2012 - 15:20 | Link to Comment sangell
sangell's picture

Ecellent read! Money is fungible but investment is not.

Sat, 07/21/2012 - 16:38 | Link to Comment RockyRacoon
RockyRacoon's picture

I agree.  It is a well done piece of work.  If I learned nothing more, the realization that there is now a word to replace "capitalism" for what is actually going on made the reading worthwhile:

"On the whole, as the monetaristic drive into asset inflation further fueled the rise of bigger and bigger businesses, it drained the real economy of marginal actors who may have contributed to the much needed disruptive innovation that might have succeeded in breaking the paradox of capitalism.  In doing so, this rampant monetarism has superseded and replaced true capitalism with cartelization and cronyism by removing its own self-correction mechanism.  To that end, perhaps the most potent and reprehensible aspect of this very clear nonneutrality has been how monetarism has paved the way for big government."

Monetarism fits the bill.  I shall no longer us the "C" word.   I've been aware, as have many others, that capitalism no longer exists in the U. S. -- now there is a word to describe it.   Kinda like one of those things gnawing at the subconscious but you just can't put your mental finger on it.   I'm a slow learner, but once I have it, it's mine.

"True capitalism is antithetical to any form of aggregate demand and central planning."

Sat, 07/21/2012 - 15:31 | Link to Comment Grand Supercycle
Grand Supercycle's picture

As mentioned before, market intervention has only postponed the inevitable.

Despite short and medium term market vacillation - the following remains a constant :

>> USDX monthly indicators [ie big picture] continue to warn of significant long term USD upside. (thus EURUSD & AUDUSD etc bearish)

>> SPX monthly indicators [ie big picture] continue to warn of significant long term downside for equities which will be worse than 2008.

http://www.zerohedge.com/news/2012-12-24/market-analysis

Sat, 07/21/2012 - 15:37 | Link to Comment jo6pac
jo6pac's picture

Yep just need a little more time for the elections to happen then devalue the dollar 50% to finish crushing the middle class of the world

Sat, 07/21/2012 - 15:40 | Link to Comment Temporalist
Temporalist's picture

Black Swan?

House to vote on Fed audit bill on Tuesday

http://www.reuters.com/article/2012/07/20/us-usa-fed-audit-idUSBRE86J1CI...

 

Those two schmoes running for president have zero to say on this apparently. 

Sat, 07/21/2012 - 15:45 | Link to Comment JLee2027
JLee2027's picture

Sadly, this has no chance of passing the Senate. I'd love to be wrong....

Sat, 07/21/2012 - 15:50 | Link to Comment t_kAyk
t_kAyk's picture

Those two schmoes have very little to say on just about everything, other than what their masters tell them to say, but I digress.  I will keep my fingers crossed in hopes that this will pass. 

Sat, 07/21/2012 - 19:34 | Link to Comment knukles
knukles's picture

"Black Swan?"

By definition, not now that you mention it.

Sat, 07/21/2012 - 15:41 | Link to Comment blueridgeviews
blueridgeviews's picture

Blah, blah blah.  The problem and answer is simple.

Sat, 07/21/2012 - 16:19 | Link to Comment falak pema
falak pema's picture

the onus at ZH is that the CB scheme is running into the ground under its own impetus. In fact this is a well thought out scheme and its signalling the demise of nation states as we know them, using the transnational conglomerates as agents of change, using the "socialisation of debt/privatisation of profit" on both sides of the pond, with wealth transfer in stealth, to these very transnational corporations as the mechanism to engineer global change in first world and thence in global political structures who will all have to bend to the new power structure; as they will be isolated in their debt ridden nation states. 

This plan is well in place in the context of NWO. And the current "sheeple" suffering is the mechanism to soften people to accept the inevitable. It also involves manipulating all key elements of the global market to suit the Oligarchy profit plan by stifling normal market equilibrium. No place for small, clever people. 

Here is how the agents of this scheme speak about it in Europe :

Draghi et Schäuble veulent plus d'intégration européenne - Yahoo! Actualités France

As the battle for global engineering is currently centered in Europe, we are hearing these voices now being viewed as the only realistic solution to this crisis. "You'll end up like Greece or you learn to play the game and accept fiat devaluation and debt slavery" seems to be the end game to save the corpocracy world order...

Its a crazy world as the centrifugal, outward forces of rival Oligarchy groups who could go rogue on the global, inward looking, centripetal oriented, central bank manipulated plan, could bring the fragile Pax Americana controlled entente to tear apart, given the extreme volatility and resonance building up in system. 

We could tip over into Sarajevo moment anytime. The ingredients of Kissinger's detente, USD/OIl pact in ME, then the post Berlin wall implosion of USSR, the subsequent Chindia outsourced bonanza and complementary Euro monetary pillar construction, are ALL now fissured to the core. The financial crazy oscillation, the fiat pump drying up faced with asymptotically sterile liquidity measures confronted with structural chronic insolvency, and the general resultant oligarchy distrust in panic mode, can all help pull the whole curtain down as the center hollows out. 

As any good general knows, plans and strategic schemes are all fine on paper; on the field of battle good execution is EVERTYTHING. 

 

Sat, 07/21/2012 - 16:12 | Link to Comment disabledvet
disabledvet's picture

Yet again we are reminded "the human capacity for abstract thought presented abstractly" is affirmed as infinite. How about we throw in an actual thing called....THE INTERNET. Sure...i'm hip. "Data really isn't a factor in determining outcomes." To which i say "if that isn't, what is?"

Sat, 07/21/2012 - 16:21 | Link to Comment buzzsaw99
buzzsaw99's picture

It's only clownbux.

Sat, 07/21/2012 - 16:23 | Link to Comment TrainWreck1
TrainWreck1's picture

Sure, the Fed may be guilty of playing fast & loose with the economic system of the world, but deep down, they care.

 

Sat, 07/21/2012 - 16:49 | Link to Comment RockyRacoon
RockyRacoon's picture

I don't doubt that they care.  It's about what that is disconcerting.

Sat, 07/21/2012 - 16:51 | Link to Comment Offthebeach
Offthebeach's picture

I think The Fed officials need robes and funny hats like Catholic Cardinals. They need some mandatory Sunday service at the Fed temples. Maybe cut out the beating heart of a 8 year old boy while reading from St. Keynes, St. Friedman. ...
They need some showmanship, some wow factor. I"m shire it can be focus grouped and tweaked before rollout. Shlomo hits to go. He couldn't give away whores outside the gates of a logging camp.

Sat, 07/21/2012 - 17:02 | Link to Comment AgShaman
AgShaman's picture

'Yappa-rat-chiks':

"You need us.....no really, you need us!"

(Central Banking Credo)

Sat, 07/21/2012 - 17:56 | Link to Comment BeetleBailey
BeetleBailey's picture

The United States Federal Government of today is;

A bunch of baloney bopping, cheese-dicked douchebags that are as efficient as a piece of Dollar Tree toilet paper holding off a dam leak.

Liars, cheats, parasites off the people they are supposed to serve, this collection of dildo-shoving over-paid dickwipes is deplorable.

I wouldn't even fart in their general direction; they'd fuck up trying to smell it - let alone screw the pooch trying to rid themselves of the odor.

 

Sat, 07/21/2012 - 18:33 | Link to Comment worbsid
worbsid's picture

There are many factors left out of this dissertation though it is very good in what it addresses.

"Disruptive innovation and true wealth creation" are based on relatively cheap and accessible energy.

Nuclear energy never has completely included the cost of clean up. Natural gas through fracking does not include cleaning up the mess. Who will clean up the mess in Canada from the tar sands boom? Again and again private profits public liability.

Multiple billions of people using all sorts of commodities also add to the problem.

These are just a couple of omissions.

Sat, 07/21/2012 - 19:30 | Link to Comment Schmuck Raker
Schmuck Raker's picture

A good read that.

"An aristocratic body is composed of a certain number of citizens who,

without being elevated very far above the mass of the citizens,
are nevertheless permanently stationed above them-a body which
one can touch but never strike, one with which the people are
in daily contact but with they can never mingle."
- Alexis deTocqueville, Democracy in America
Sat, 07/21/2012 - 19:59 | Link to Comment world_debt_slave
world_debt_slave's picture

I imagine this to be a false flag to morph into something more sinister.

Sat, 07/21/2012 - 21:59 | Link to Comment blunderdog
blunderdog's picture

Best analogy is evolution.  Over time, some lifeforms adapt to certain roles, compete with their neighbors, etc.  The "disruptive innovation" that the author pines for is an environmental adaptation which is very quickly spread through the economy/ecosystem.  What makes innovation disruptive has a lot more to do with the speed at which it distributes than with the "scale" of the change.

In certain areas/industries, brief equilibria appear.  They collapse when the next innovation is adequately distributed.

Given an economic system in which a significant part of the benefit of innovation depends on keeping it out of the hands of others, it's a bit naive to EXPECT ongoing and frequent "disruptions."  Power institutions (as they're able) will do everything possible to prevent disruptive innovation from failling into the wrong hands.

Those "wrong hands" are obviously the competitors (and sometime victims) of the power institutions which have most successfully exploited the current environment.

On a global scale, the previous equilibrium is coming to an end, and everyone knows it, but if it can be sustained for another 10/20/30 years, so much the better for the folks at the top of the social heirarchy.  This has probably been underway since the distribution of the transistor.

    ----

Short version: "the economy" is a natural system, and the initial assumption of steady-state equilibrium is completely false, so virtually everything a traditional economist models MUST BE WRONG.  It's just a question of how long it takes us to realize exactly how and why it is wrong.

Sun, 07/22/2012 - 08:28 | Link to Comment AnAnonymous
AnAnonymous's picture

Best analogy is evolution. Over time, some lifeforms adapt to certain roles, compete with their neighbors, etc.

_________________

For it to be best, the comprehension of evolution should be right. Which is not the case.

Sun, 07/22/2012 - 10:25 | Link to Comment akak
akak's picture

Sauerkraut knobs and wax tadpoles --- fun for all brands of citizenisms.

Sat, 07/21/2012 - 22:36 | Link to Comment robertocarlos
robertocarlos's picture

Put all bad debts with the Fed and then collapse the Fed. Then start a new Fed with a new fiat currency. That will work for sure.

Sun, 07/22/2012 - 06:53 | Link to Comment Dollar Bill Hiccup
Dollar Bill Hiccup's picture

This warrants a closer reading, most definitely.

Mon, 07/23/2012 - 10:24 | Link to Comment Remington IV
Remington IV's picture

closer is close enough

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