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Recent economic data, and especially today's unemployment numbers reveal the powerlessness of the Fed in the face of underlying economic problems that they fail to understand. The Fed has tried every trick in the book for the past 4 years to revive the economy only to see it continue to weaken. Unfortunately they only know how to do one thing—print. The ultimate effect of this will be more economic stagnation, not real economic growth. Here is why.

Central Banks came, stood and delivered… just not much more, although the (nightly) POBC cut (1 YRS by 31 to 6% and deposits by 25bp to 3%) had not really been foreseen. Second Chinese cut in as many month, the last one having been on 07 Jun (as well just ahead of the ECB meeting, then by 25 basis points to 3.25% and 6.31%). The Chinese move was good for a small uptick, rapidly squashed by the European serving.

ECB quarter cut and BoE GBP 50bn additional QE to GBP 375bn both already in the valuation ramp-out of late.

Hmmm… Non-event.

Then came the ECB press conference…

Three weeks ago, before Lieborgate broke and the world finally understood what so many had been warning about for so long, we noted something else: that not only was LIBOR manipulated and fudged daily between 2005 and 2008, but as the chart in the attached post shows, it has been gamed every single day in 2012 as well. More importantly, we noted something else - the transition at the top of the British Bankers Association: the organization responsible for compiling LIBOR submissions from member banks, and reporting what the daily Libor fixing is. Because in the second week of June, the BBA's new head became... the former head of lobbying for none other than Morgan Stanley, Anthony Browne, a firm which itself was just caught red-handed manipulating rating agency "independent ratings" to benefit its bottom line (and which itself miraculous was downgraded by less than what the market expected in order to allow it to avoid several billion in collateral calls). And what did Anthony do at Morgan Stanley until June 12: he was head of Government relations for Morgan Stanley for Europe, Middle East and Africa and was previously an economic and business adviser to London Mayor Boris Johnson.  That's right - "head of government relations" for a rather prominent TBTF bank, being put in charge of daily Libor fixing. But everyone is shocked, shocked, that gambling has been going on here for years.

In honor of the FDIC releasing the living wills for banks, we thought we’d offer up a shorter version that the banks could use. You're welcome.

The Fed, by buying Treasuries is making insolvent banks even more insolvent. It is a short-term gain (liquidity) for a long-term disaster: banks need as much collateral as they can get their hands on right now. And with Treasuries rallying (raising the value of the banks' assets) any aggressive Fed program to take Treasuries out of the system would be a MAJOR step towards another solvency Crisis a la 2008.

Wonder who was pushing Barclays to manipulate its rate? Why none other than the English Fed. From BBG:

• BARCLAYS SAYS BANK OF ENGLAND CALLED ON OCT. 29, 2008 ON LIBOR
• BARCLAYS SAYS DIAMOND MADE NOTE OF CALL
• BARCLAYS SAYS DIAMOND RECEIVED CALL FROM PAUL TUCKER
• BARCLAYS SAYS TUCKER SAID `CERTAIN' BARCLAYS DIDN'T NEED ADVICE
• BARCLAYS SAYS TUCKER SAID DIDN'T ALWAYS NEED TO BE SO HIGH (Supposedly LIBOR)
• BARCLAYS SAYS DEL MISSIER CONCLUDED INSTRUCTION HAD BEEN GIVEN
• BARCLAYS SAYS DEL MISSIER TOLD RATE SETTERS TO LOWER RATES

In other words, a central banks was directly and indirectly involved in manipulating interest rates. Say it isn't so. Fast forward two months when the BOE's Tucker testifies that the Chairsatan made him do it.

There is a saying that it is better to remain silent and be thought a fool than to speak out and remove all doubt. Today, the San Fran Fed's John Williams, and by proxy the Federal Reserve in general, spoke out, and once again removed all doubt that they have no idea how modern money and inflation interact. In a speech titled, appropriately enough, "Monetary Policy, Money, and Inflation", essentially made the case that this time is different and that no matter how much printing the Fed engages in, there will be no inflation. To wit: "In a world where the Fed pays interest on bank reserves, traditional theories that tell of a mechanical link between reserves, money supply, and, ultimately, inflation are no longer valid. Over the past four years, the Federal Reserve has more than tripled the monetary base, a key determinant of money supply. Some commentators have sounded an alarm that this massive expansion of the monetary base will inexorably lead to high inflation, à la Friedman.Despite these dire predictions, inflation in the United States has been the dog that didn’t bark." He then proceeds to add some pretty (if completely irrelevant) charts of the money multipliers which as we all know have plummeted and concludes by saying "Recent developments make a compelling case that traditional textbook views of the connections between monetary policy, money, and inflation are outdated and need to be revised." And actually, he is correct: the way most people approach monetary policy is 100% wrong. The problem is that the Fed is the biggest culprit, and while others merely conceive of gibberish in the form of three letter economic theories, which usually has the words Modern, or Revised (and why note Super or Turbo), to make them sound more credible, they ultimately harm nobody. The Fed's power to impair, however, is endless, and as such it bears analyzing just how and why the Fed is absolutely wrong.

Replacing old impaired debt with new impaired debt does not generate growth. Borrowing more money will not reverse financial death spirals. Sorry, Bucko--Europe is still in a financial death spiral. Friday's "fix" changed nothing except the names of entities holding impaired debt. We can lay out the death spiral dynamics thusly:

The markets are getting mislead, one more time, by the spin that Europe places on events; by the focus that the giant European propaganda machine spits out from various sources again and again and again. You may recall, in the not too distant past, how the firewall was the thing, how the money needed to be bigger and how we were all led to believe that this giant, massive wall of Euros would protect the core nations of Europe. These nations included Spain and Italy without question and now the first mighty oak has fallen as Spain stepped up to the plate and swung the begging bat. Firewalls, of any size, do not do one thing to stop the infection of those that are heading economically south and Europe has placed its full concentration on the totally wrong aspect of the problem which has been to ward off the evil spirits of the bond vigilantes instead of on fixing the financial problems of the nations and so the problems continue and worsen. Over the weekend Spain said their second quarter results would be worse than the first quarter and Italy said there may come a moment when she needs help and the basis of what is driving the markets heightens as the economies of a mostly recession bound Europe are getting worse. What have we learned in short, in brief, in actuality is that the concept of some mighty firewall is a failed concept and Spain has just proved the truth of that.

… But Receive Only a Light Slap on the Wrist

Understands who can… The Brussels nightly drama yielded first tweeted “results”, then none, then yes. Then some bickering, Southern drama, then truce. Then they still were not done haggling.

“A new breach in the dam”

With everyone scrambling to buy into the bathsalts rally, and shorts rushing to cover with a panic bordering on a QE-announcement, it is somewhat ironic that today's voice of muted reason comes from none other than Liebor expert extraordinaire: Barclays, whose suggestion is simple: lock your profits: "We remain bearish on EURUSD, expecting it to grind slowly down to 1.15 over the next 12 months. We therefore suggest investors look to fade this morning's European currency strength versus the USD and non European commodity currencies such as the AUD and CAD." Why? They have their listed reasons. The unlisted ones are the same that every other bank has for becoming bearish recently (we have recently listed Citi, Goldman, SocGen and DB to name but a few): for a real fiscal and monetary policy intervention to take place (i.e., a rescue package that lasts at least a few months, as opposed to today's several day max rally): the market has to be tumbling. That, as we have explained repeatedly, is the only way to get a powerful response. Everything else is (quarter end) window dressing.

Everyone knows that Italy's unelected PM, Mario Monti, is a former Goldman Sachs International 'advisor.' As such, it is only natural that being part of the banking cartel he would do everything in his power to promote an inflationary agenda, one that seeks ECB bond monetization intervention, (another central bank headed by a former Goldmanite of course), perpetuates the status quo, and one that naturally contravenes everything that German citizens have been pushing for in their desire to avoid the risk of another hyperinflationary episode. Especially if, as is well-known, resolving Europe's problems, however briefly, facilitates an Obama re-election campaign because as conventional wisdom is also catching on, should Europe implode before November, Obama's reelection chances plunge accordingly. And yet, even as Goldman's tentacles had spread all over Europe (as seen here), conventional wisdom was that Goldman's influence in Germany was relatively muted.

Wrong.

A week ago we noted that the departure of the Fed's PPT head, Brian Sack, whose tenure was set to end today, which we casually reminded the market about hours earlier, and his replacement with an academic, would likely be the greatest undiscussed S&P catalyst as the head of the entire US equity market, not to mention the Fed's POMO and various other known and unknown open market operations, would be none other than a B-Grade UCLA academic. Well, this has now changed, because as Dow Jones reports Brian Sack has withdrawn his resignation from the New York Fed, and will stay on as advisor to Goldman FRBNY plan Bill Dudley.

• BRIAN SACK WITHDRAWS RESIGNATION FROM NEW YORK FED
• BRIAN SACK TO STEP DOWN AS HEAD OF NEW YORK FED MARKETS GROUP
• BRIAN SACK TO STAY AT NEW YORK FED AS ADVISOR TO DUDLEY

The status quo must continue at all costs. And for those wondering why Sack must stay on at all costs, we bring your attention to the following post from December 2010: "Why Does Brian Sack Interact With Goldman's "FX Committee"?"