Confession Time: Money Printing Enthusiasts Should Admit The Obvious

Tyler Durden's picture

Submitted by F.F.Wiley via Cyniconomics blog,

Imagine a football coach who hasn’t caught onto the game’s complexities and continues to run the same play – call it a fullback dive – over and over. When I read calls for more monetary stimulus, I feel as though I’m listening to that coach’s brethren in the economist community.

These economists argue that the Fed should simply ramp the money supply higher and higher for as long as some economic statistic – GDP is a popular one – remains below a targeted outcome. Dive, dive, dive, punt and repeat.

 

There’s an important difference between football and economics, though.

One-dimensional approaches are quickly exposed in football, whereas economies don’t yield clear and timely verdicts on whether policies are effective. There are far too many moving parts to prove cause and effect in a way that everyone can understand and agree. Therefore, bad economic policies persist for a long time before they’re finally found out, and this may be the best way to describe the last 100 years or so of America’s economic history.

With regard to today’s passion for extreme monetary stimulus, once again there’s no scoreboard to tell us whether the Fed is leading us to victory or defeat. Money printing cheerleaders can deny unintended consequences of the Fed’s actions, for two reasons:

  1. Some of these effects aren’t directly observed. For example, we know that misallocation of capital occurs when free market price signals are suppressed, but the misallocation is impossible to measure. Also, the public doesn’t actually see the Fed’s odious wealth transfers to banks even as these transfers put smiles on traders’ faces on POMO days.
  2. Other effects won’t materialize for some time. For instance, zero interest rate policy (ZIRP) and quantitative easing (QE) make it easy for politicians to delay action on long-term fiscal challenges, but government debt can grind higher for years and years before the repercussions become clear to all.

Are the clouds beginning to part?

On the other hand, there’s one policy flaw that’s becoming more difficult to deny. The flaw is this: Much of the incremental growth achieved through extreme monetary stimulus is merely borrowing from the future. In other words, some of the growth that would have accrued in, say, 2015 or 2016, has instead been brought forward to, say, 2012 and 2013.

This approach of bringing future growth into the present defies the old-fashioned goal of achieving “long-run sustainable growth.” It’s one of the ways that interventionist policies can fail. Central bankers claim to deliver stability when in fact they’ve simply borrowed from the future. Rather than reducing volatility, we find later that they’ve increased it.

Half of the last four U.S. recessions followed this pattern; the 1981-82 and 2008-09 recessions were both explained by severe payback for several business cycles’ worth of short-term policies.

Where’s the evidence that policymakers are again borrowing from the future?

Well, it’s been hard not to see it in the past few weeks. For starters, it’s become even more obvious that today’s positive wealth effect is tomorrow’s negative effect. The higher that asset prices are artificially lifted, the faster they fall when prices revert toward underlying fundamentals.

In the same vein, economists are learning a lesson (once again) in the importance of market psychology. I recently shared this telling excerpt from a March interview with former hedge fund manager Stanley Druckenmiller:

Do you know what guys like me are going to do when they sell the first bond out of $4 trillion? And don’t think that letting the bonds run off isn’t selling. That debt has to be refinanced. If you just let all the bonds run off, that is still $4 trillion in selling … What do you think the markets are going to do when they figure out the exit?

For comments like this, Druckenmiller was ridiculed by Fed supporters who should have instead tried to learn from him. Not only was his warning prescient, but he may have understated the potential for asset prices to reverse direction, since falling prices over the last month had nothing to do with the Fed selling securities. The Fed merely signaled that the pace of security purchases would be ever so carefully tapered, and that was enough to trigger a major liquidation.

In my opinion, the clearest way to interpret the past month’s events is with a popular analogy – the one with the Fed as a drug pusher and the economy as an addict who needs ever higher doses to get the same high. It’s hard to see market reaction to tapering in any other way. And by using the monetary drug to the point where $85 billion in monthly security purchases is a bare minimum to keep markets happily stoned, policymakers compromise their future effectiveness.

Wealth effects have stalled out or reversed, mortgage rates have jumped over a percent, banks are laying off refinancing specialists, and countless types of carry trades are being unwound. Potential future growth has once again been sacrificed for the present (or recent past).

A step in the right direction

Refreshingly, one prominent advocate of aggressive monetary stimulus concedes some of these points. While writing on Marginal Revolution about the Chinese credit crunch, Tyler Cowen discussed the Fed’s part in creating imbalances that are currently being unwound:

Note that a lot of the cheap credit has been funneled through a dollars mechanism … The relevant lever here seems to have been U.S. interest rates, I am sorry to say.

And then he took the mea culpa further in a post titled, “Krugman and I were both wrong about the Fed and interest rates.” He acknowledged that “[t]he low rates really have been an artifact of Fed policy, at least to a much higher degree than many of us had thought.”

Cowen also backtracked on his earlier disinterest in the whole topic of “bubbles” (see here), noting that “[e]merging markets tanked on the Fed communication, and so we have indeed been exporting bubbles through a ‘reach for yield’ mechanism.”

With a full dose of truth serum, the money printing lobby might admit to being wrong on other points as well, such as their argument (made by some) that stocks would benefit from a back-up in bond yields if it occurred.

And how about the Fed’s theory that the size of its balance sheet determines its effect on asset prices, with the pace of purchases being relatively unimportant? This belief in “stock” rather than “flow” effects seems incredibly naïve to many in the investment and blogging communities, as pointed out repeatedly by Tyler Durden of Zero Hedge. Ironically, the recent market sell-off shows that the truth may be not one but two derivatives removed from the Fed’s typically simplistic model. The stock of the Fed’s security holdings continues to grow as the flow gushes on, but markets corrected on plans for nothing more than a gradual reduction of that flow.

Unfortunately, we’re unlikely to see many more admissions like Cowen’s. Most policymakers and pundits just don’t operate that way.  More commonly, these folks follow Larry Summers’ mantra that you should never admit mistakes (as discovered by Ron Suskind in researching his bestseller, Confidence Men). Paul Krugman, for one, came up with a new narrative this week without bothering to acknowledge the failure of his old one (which seems to explain Cowen’s confession on his behalf). Cowen should be commended for not only adjusting his views to new information, but confessing prior errors.

Ben Bernanke also admitted some confusion, but that’s about as far as he went. In last Wednesday’s press conference, he allowed that the FOMC was a “little puzzled” by the sharp rise in bond yields that it prefers to see lower, not higher.

It remains to be seen just how badly the FOMC misunderstood the potential effects of its policies. June could prove to be a blip in long-term upward trends for both stocks and bonds. But the blip is already large enough to demonstrate that some of the apparent benefits of ZIRP and QE are at the expense of future economic performance.

Put differently, we’re having some problems with the fullback dive, with the opposition getting well used to it and adjusting strategy accordingly. Some pundits foresaw these problems, and others not so much, but everyone should at least acknowledge that they exist.

More links

Recent events also put a dent in the simplistic idea that current policies should be continued until we achieve a “self-sustaining recovery.” I’ve questioned economists’ theories about self-sustaining growth in several posts, including this one. For more recent articles that touch on the same topic, I recommend this post by Detlev Schlichter and also Peter Schiff’s perspective on tapering.

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wee-weed up's picture

They'll never quit printing!

kliguy38's picture

Oh, they will quit printing.....and when they do they will take every last dime off the table from the suckers still at the table.

Rainman's picture

....agree...and it's a huge table with many suckers, comrade. It has something to do with a golden egg and a slain goose. 

l1b3rty's picture

and 6,500,000,000 too few chairs, perhaps?

http://goldsilverbitcoin.com

Dick Buttkiss's picture

 

They'll never quit printing!

Until the dollar's value is less than that of toilet paper, of which there won't be any.

 

nmewn's picture

It looks like a nail...hit it!

neidermeyer's picture

They'll stop printing when the papermills can no longer produce due to their employees walking off,,, which will occur when they figure out that the paper dollars they're paid in cannot buy even a single loaf of bread.  Of course the digitizing will continue on autopilot.

Non Passaran's picture

Good to know, boss, but clearly they aren't printing fast enough.

It appears we need >$100bn a month to stop the fucking PM miner sector from collapsing. 

Ben has NO IDEA what it's like out there!

McMolotov's picture

There’s an important difference between football and economics, though.

Maybe, but the game is easily manipulated, and I'm worried this shit can keep going forever, much like Bo Jackson in Tecmo Super Bowl:

http://www.youtube.com/watch?v=8PBvOxicz-0

Sudden Debt's picture

here's a million for ya: 1.000.000$
most average people work their entire lives for it. it took me 2 seconds to create it.

neidermeyer's picture

When I gift cash I do it right ,, none of that digital trash for me ... I give people 2008 Zimbabwe $100Trillion notes.

Al Huxley's picture

100 Trillion?  Wow, that's extraordinarily generous of you!  Where do you get that kind of money?  Are you some kind of Saudi oil prince?   I wonder what you can buy with 100 Trillion?

Poor Grogman's picture

Let's say there was a small group of ruthless yet intelligent sociopaths who gravitated toward banking because it gave them incredible power over all the debt serfs, and they schemed up a way that they could all profit enormously, plus be protected by the government. They worked out the details of this scheme on a private trip to Jeckyl Island. Also working out how they would usurp the political process to achieve it.

The rest as they say is history...

SKY85hawk's picture

Speaking of history and lessons not learned:

 

http://www.zerohedge.com/news/2013-05-01/former-fed-governor-warsh-admits-there-no-plan-b

-           The effectiveness of monetary policy was last discredited in the 1970s. The persistent attempts to revive growth with easy money led to stagflation.  The real world has turned to be opposite to the favored positions of the economics profession: the financial market is not only inefficient but systemically bubble-prone. 

Trying to bring back yesterday through monetary growth will eventually bring inflation, not growth.  This is what the Gov’t wants in order to ‘pay off the Debt’. 

Source: http://www.zerohedge.com/news/2013-01-23/money-cannot-buy-growth

Who remembers the 70's? 

It was a time of Stagflation.

The 'Bob Hope" generation entered their 'spend less-save more' life stage.  OUR Parents!

It should be clear that the baby-boom is in the same life-stage.

Not one Politician will admit they are helpless to restart Economic Growth! 

They will wait this thing out, just like before.

Even if it takes 11 to 15 years!

 

 

Seize Mars's picture

This idea that the practices of the FED are "strategic" is bunk. The system is designed for one purpose: to rip you off and make you ( a lot) less wealthy. That's it. The rest is propaganda.

rlouis's picture

They will sink the ship to avoid walking the plank.

Dick Buttkiss's picture

I fear that you are right, given how utterly sociopathic they are:

 

The intelligence-security industry isn't about protecting the United States or you, except for extraordinary rare, virtually accidental occurences. It's about wealth and power. Yet every politician and ever government functionary speaks reverently of the sacred mission and crucial importance of "intelligence" in the manner of a syphilitic preacher who clutches a tatty, moth-eated doll of the Madonna, which he digitally manipulates by sticking his fingers in its orifices. Most people would find his behavior shockingly obscene, if they noticed it. But they don't notice it, so mesmerized are they by the preacher with his phonily awestruck words about the holy of holies and the ungraspably noble purposed of his mission. Even as the suppurating sores on the preacher's face ooze blood and pus, his audience can only grasp, "We must pay attention to what he says? He wants only the best for us? He's trying to save us."

What the preacher says — what every politician and national security official says on this subject — is a goddamned lie. The ruling class has figured out yet another way to make a killing, both figuratively and literally. They want wealth and power, and always more wealth and power. That’s what “intelligence” and “national security” are about, and nothing else at all. When you hear [NSA Director] Keith Alexander, or [National Intelligence Director] James Clapper, or Barack Obama talk about “intelligence” and surveillance, how your lives depend on them, and why you must trust them to protect you if you wish to continue existing at all, think of the preacher. Think of his open sores, of the blood and pus slowly dribbling down his face.

All of them are murdering crooks running a racket. They are intent on amassing wealth and power, and they’ve stumbled on a sure-fire way to win the acquiescence, and often the approval, of most people. They are driven by the worst of motives, including their maddened knowledge that there will always remain a few people and events that they will be unable to control absolutely. For the rest of us, their noxious games are a sickening display of power at its worst. For us, on a faster or slower schedule, in ways that are more or less extreme, their lies and machinations are only a Dance of Death.

http://www.globalresearch.ca/follow-the-money-the-secret-heart-of-the-se...

 

paint it red call it hell's picture

They, whom ever They are designed the ship, built the ship ran the ship, prospered from the ship (as did middle class America) but what I take the real issue with is they scuttled the ship with deregulation, investment abuses and financial instruments that went from innovative to criminal.

And now, the plank that is being crafted is onto the new ship they have designed which we are expected to accept willing as the old one burns to the waterline. It's construction requires thwarting of the Constitution, global governance and constant surveillance so can it be a good ship??? Pisses me off

EclecticParrot's picture

Regarding football plays, Ohio ZH readers will view this as a "Metcalf up the middle" moment.  (Of course, just after we get rid of the guy, he becomes the world's best coach for the Patriots).

Ness.'s picture

Chicagoan's refer to this 'offense' as "Payton right, Payton left, Payton right... punt"  

Maybe next year.

How bout them Blackhawks?

Debt Slave's picture

Demographics are changing and so is productivity. Acknowledging and understanding the national complexion will be the key to survival in the 21st century.

The proper path was demonstrated to us in the last century. We need only be brave enough to follow it.

SKY85hawk's picture

Speaking of history and lessons not learned:

Who remembers the 70's? 

It was a time of Stagflation.

The 'Bob Hope" generation entered their 'spend less-save more' life stage.  OUR Parents!

It should be clear that the baby-boom is in the same life-stage.

Not one Politician will admit they are helpless to restart Economic Growth! 

They will wait this thing out, just like before.

Even if it takes 11 to 15 years!

 

 

http://www.zerohedge.com/news/2013-05-01/former-fed-governor-warsh-admits-there-no-plan-b

-           The effectiveness of monetary policy was last discredited in the 1970s. The persistent attempts to revive growth with easy money led to stagflation.  The real world has turned to be opposite to the favored positions of the economics profession: the financial market is not only inefficient but systemically bubble-prone. 

Trying to bring back yesterday through monetary growth will eventually bring inflation, not growth.  This is what the Gov’t wants in order to ‘pay off the Debt’. 

Source: http://www.zerohedge.com/news/2013-01-23/money-cannot-buy-growth

GVB's picture

They need to continue printing because their target is inflation, which in essence is expanding the currency supply through purchasing treasuries and through fractional reserve lending. I would assume all of ZH readers know that in a debt based currency system inflation is very much needed to be able to pay INTREST on this sick amount of debt. The system needs it as much as a normal human being needs food to survive. Therefore Bernanke is now thinking about printing even MOAR money.

He can also choose to pull the plug, but I was told the conference room in Bilderberg was fully booked up to 2018...

espirit's picture

They need to continue printing because the MIC budget consumes all taxes received.  That $85 mm / month printed out of thin air keeps the welfare queens from rioting, the loyalty of present/future public pensioners, and some semblance of a working social security system.

Oh yeah, it also bribes the banksters into keeping the $USD as the reserve currency.

It's just not that hard to understand that the Fed has to keep doing what they are doing until ~ someone ~ decides to pull the plug on the ponzi.

CrashisOptimistic's picture

Suppose the printing has been taking place, but the money supply has not been growing. Because of defaults.

Serenity Now's picture

Crash,

What defaults?  You are my favorite poster, but you are so cryptic!  Like Yoda.  Please explain more.  Thanks!  :)

BiPolarFrenchman's picture

Sounds like my high school coach

ebworthen's picture

This is an interesting article on Gold and prices and bubbles:

http://goldtrendsmagazine.com/articles/Gold-The-Ultimate-Un-Bubble

involuntarilybirthed's picture

On a long enough timeline ZH perdictions will come true.  In the mean time we will flounder along with minimal growth, high levels of unemployed youth, lowered lifestyles, expensive food and fuel, questionable healthcare, a broken education system and decaying infrastructure.  None which leads us to higher ground.  We have passed peak middle class living and economic gravity will pull us to par with other proletariate of the world.

Lmo Mutton's picture

Hail marries man,

They work every time...don't they??

desirdavenir's picture

Folklore is that Einstein once said that the major problems of humanity stem from the inability of humans to understand the exponential function. Once thing missing this analysis is that the price of everything (an integral) bought up with Fed's largesse is backed by the current flow from the Fed. To be stable, this requires an exponential flow, not a constant one. I guess the taper talk just made plain that the day the flow will no longer be able to sustain the price of the stock is near, but unless engaging in exponential monthly buying, this day would have arrived anyway.

SKY85hawk's picture

Speaking of history and lessons not learned:

http://www.zerohedge.com/news/2013-05-01/former-fed-governor-warsh-admits-there-no-plan-b

-           The effectiveness of monetary policy was last discredited in the 1970s. The persistent attempts to revive growth with easy money led to stagflation.  The real world has turned to be opposite to the favored positions of the economics profession: the financial market is not only inefficient but systemically bubble-prone. 

Trying to bring back yesterday through monetary growth will eventually bring inflation, not growth.  This is what the Gov’t wants in order to ‘pay off the Debt’. 

Source: http://www.zerohedge.com/news/2013-01-23/money-cannot-buy-growth

Who remembers the 70's? 

It was a time of Stagflation.

The 'Bob Hope" generation entered their 'spend less-save more' life stage.  OUR Parents!

It should be clear that the baby-boom is in the same life-stage.

Not one Politician will admit they are helpless to restart Economic Growth! 

They will wait this thing out, just like before.

Even if it takes 11 to 15 years!

 

max2205's picture

When the guy running the ball is 10 ft 10 and has a machine gun it'll probably work for ever

Blue Dog's picture

They're not stupid. They're destroying the dollar deliberately. When the dollar dies most Americans will die too. It will create a crisis big enough to bring about the one-world government prophesied in Revelation. 

bnbdnb's picture

If you are unable to define losing, it means you aren't winning.

PT's picture

Is there anyone out there who truly understands the effects of compulsory superannuation?

20 years ago, here in aussie land, superannuation was made compulsory ( employers divert part of your income into super but you can choose any private fund to put it in.  There was also an absolute shitload of propaganda bombarding us, claiming that we'll all retire rich at 55 ... but we have to invest enough in super ... ).  Despite being a "dumb union worker", I was smart enough to know BS when its being laid on.  (Or maybe that's my Gen-X heritage - good news doesn't exist!)  In the past, superannuation companies had to earn their business by providing a decent return.  And they got to choose the cream of the available companies to invest in.  Now they have a shit-ton of money that they will be forced to invest in any old crap.  Let's say we have compulsory 10% super and work 40 years.  In my 40th working year, for every dollar I earn, 4 dollars that I previously saved (plus the theoretical compound interest) is now propping up the stock market.  Unfortunately, at this point, my brain stops working.  What does that even mean?  Can anyone out there fill the gaps in my knowledge?

Just recently, compulsory contributions have been increased from 9% to 12%.  Congratulations, the amount of compulsory money flowing into the ASX (and real estate), whether it can use it or not, has just increased by 33%.  Okay, some of that will go overseas.  Can we now predict that in x years, compulsory super will be increased to y% in order to maintain the S&P 500 at z?  Is there anyone out there doing that kind of analysis? 

As a side note, I tend not to think of "affordable retirement" in terms of dollars or people, but in terms of production.  If we can make enough stuff, then we can retire rich.  If we don't, we can't.  In a world where technology allows one man with a machine to do the work of one hundred - okay that's dampened by the fact that some people out there still only do the job of one person - I don't think productivity should be too much of an issue.  If it is, then where the hell are we hiding all our gains?

Thanks in advance.

PT's picture

Okay, I'm getting a little bit smarter.  The increase in super contributions today is needed to make up for any shortfalls to give to the increase in retirees today.  Again, is there anyone out there doing quantitative analysis of this stuff?

Two Feet Studs Up's picture

Fuck you Cam Cameron. Enjoy the swamp.

- Joe Flacco

overmedicatedundersexed's picture

seen all this before, rome's debasment of silver coins, Germany's little default, this time it is different...this new era requires unending debt, welfare, war, lies, and sociopathic leaders, who promote the above. This is the Fourth reich, which will last a thousand years..so we all just better get used to it. (note crime in this new world is called banking, so go where the money is, or print your own, buy a politician or better yet a whole party of em, D or R is being served to the highest bidder, Corzine has paid to be protected)