A brief scan of the financial and economic landscape – both in the U.S. and abroad – offers ample confirmation that we are in the midst of a great reset. From a feint tickle at the turn of the new millennium to a persistent itch a decade ago, the preponderance of evidence in this regard is now much too painful to ignore. There’s no denying that things ain’t right.
Debt is increasing while GDP’s stagnating. Stocks are rising while earnings are declining. Incomes are flat-lining for the majority of workers while growing by leaps and bounds for the 1 percent. Plus there’s over $13 trillion of negative-yielding debt.
With all this going on, what’s become lucidly clear is the frank understanding that there’s nothing that can really be done to reverse it. No executive order. No monetary policy adjustment. No congressional stimulus package. No presidential candidate.
None of these, or any other conceivable command and control options, can really do a thing about it. In fact, at this point, even the most well-intentioned of government programs will likely make the ultimate breakdown and dissolution much, much worse. The hole’s already been dug far too deep to climb out of.
In short, the economic model of the second half of the 20th century is over. Increased issuances of debt no longer translate into increased economic growth. Instead, they produce wild asset price swings, casino style speculation, and epic bubbles and busts. Nonetheless, the technocrats continue offering up yesterday’s solutions with unabashed certainty.
Bird-Dogging the Fed
Many of the heavy hitters within the monetary policy realm have presently gathered in Jackson Hole, Wyoming, for their annual powwow. No doubt, they’re using the juncture to pontificate on the glories of an elastic currency. They’re also flattering the brilliance of a centrally planned economy.
Will they offer a hint or inkling about how much longer they’ll press the federal funds rate to near zero? This may be asking too much. After eight years they’ve yet to achieve their objective; consequently, they may never get there.
On Friday morning Fed Chair Janet Yellen will deliver her speech. Some believe she’ll use the occasion to provide clear and concise communication to investors. We have some reservations.
The scuttlebutt on the street is that the title of the symposium is “Designing Resilient Monetary Policy Frameworks for the Future.” We don’t quite comprehend what this means. But it may have something to do with the fact that stock market investors are bird-dogging the Fed, and the Fed doesn’t know what to do about it. Thus far, Yellen and her cohorts are petrified to do anything to upset them.
Hence, to achieve resilient monetary policy the Fed would have to do the opposite of what it has done since the advent of the Greenspan put following the October 1987 stock market crash. They’ll have to withdraw liquidity at the very moment that markets move against overleveraged investors.
In other words, they’ll need to accept a market crash, and subsequent economic contraction, in the hope of attaining some credibility. Not since the days of tall Paul Volcker has this been something the Fed’s been willing to do.
The Number One Factor Influencing Fed Monetary Policy
Perhaps Yellen will take the opportunity to make a big pronouncement. Perhaps she’ll admit to the immense wealth destruction the Fed has wrought over the last 100-years. She may even announce termination of the Fed, discontinuation of Federal Reserve notes, and a return to the gold standard.
Alas, this is all highly unlikely. In truth, it’s near impossible. But that doesn’t mean it’s wrongheaded to mention.
The point is, over the last decade – or more – we’ve consistently underappreciated the number one factor influencing Fed monetary policy. In particular, we’ve underappreciated the extent to which the dumbass factor has taken control of the hearts and minds of the money price fixers. Here we turn to Jeffery Miller, of StockResearch, for edification.
“Central banks keep reloading and doing dumber and dumber things, and since their stupidity seems to know no bounds, I’m willing to say that I don’t know how dumb things will get before they stop. What I do know is that locking in a guaranteed loss on bonds that are held to maturity is not a good way for investors to meet their long-term liabilities. Think pension plans and insurance companies for example. Central banks are eviscerating them. How insolvent pension systems and life insurance companies can be good for the global economy is beyond my pay grade, but then again, I don’t have a Ph.D. in economics.”
Here at the Economic Prism we don’t get it either. But what do we know. Realistically, Yellen will go dumber. Like her prior two predecessors she’ll do everything she can to bankrupt retirement accounts and pension funds because liquidity trap graphs tell her economic salvation depends upon it.
Good lord! Now that’s just plain dumb.