How Dumb Is The Fed?

Authored by Bonner & Partners' Bill Bonner, annotated by Acting-Man's Pater Tenebrarum,

Bent and Distorted

This morning, we are wondering: How dumb is the Fed?

The question was prompted by this comment by former Fed insider Chris Whalen at The Institutional Risk Analyst blog...

[O]ur message to the folks in Jackson Hole this week [at the annual central banker meeting there] is that the end of the Fed’s reckless experiment in social engineering via QE and near-zero interest rates will end in tears.


“Momentum” stocks like Tesla, to paraphrase our friend Dani Hughes on CNBC last week, will adjust and the mother of all rotations into bonds and defensive stocks will ensue. We must wonder aloud if Chair Yellen and her colleagues on the FOMC fully understand what they have done to the US equity markets. […]


Once the hopeful souls who’ve driven bellwethers such as Tesla and Amazon into the stratosphere realize that the debt driven game of stock repurchases really is over, then we’ll see a panic rotation back into fixed income and defensive stocks.


They’re not the best map readers, that much is known for certain. [PT]


If you believe the newspapers, the Fed has begun a “tightening cycle.” It is on course to raise its key interest rate, little by little, in quarter-point increments.

It must know that this is a perilous thing to do. After so much market manipulation over such a long period, prices all up and down the capital structure – from junk bonds to quality stocks and solid real estate – have been bent and distorted.

After all, that was the idea: drive up the price of stocks and bonds by driving down interest rates. People would be forced to spend or invest their money rather than save it. And higher financial asset prices would make the rich feel even richer.

Walking down the street, the dollars would overflow from their pockets like turnips rolling off the back of a produce truck. They’d feel so flush, they’d buy, buy, buy… sending the plain people into a flurry of trucking, toting, and busting their humps to provide them with goods and services.

Then, after the rich were fully satiated (after all, how many martinis can the 1% drink?), they’d have to invest.

Cash would flow into money-losing start-ups like Tesla and Snapchat. Headline acquisitions, such as Amazon’s purchase of Whole Foods, would keep stock prices bubbling higher. And trillions of dollars in stock buybacks would make the rich even richer still!


What a wonderful work of art… the pièce de résistance of financial bubbles, the one you really had to see to believe. The red line depicts all the debt companies have amassed to grease the financial engineering wheels. This is a game that is indeed coming close to its end. US money supply and credit growth have tanked – the lagged effects of this change  in the monetary backdrop will play out. We suspect that the huge surge in corporate debt will become cause for big regrets at that juncture. [PT] – click to enlarge.


Money Mirage

But the feds could only work this miracle by buying bonds. And the feds didn’t have any money. What could they do? No problem! They used their fake money, the post-1971 credit dollars – trillions of them… money they could create at will.

From the post-crash bottom in 2009 to today’s top, U.S. stocks and bonds registered a cumulative increase of about $21 trillion. And upon that mirage now rest the hopes, dreams, and contentment of millions of people all over the planet.

One has planned his retirement based on his gains over the last eight years. Another has taken out a loan against his stocks to fund his business. Still another – a major player on Wall Street – has a billion-dollar hedge fund portfolio, a leveraged bet on “low vol,” which depends on further support from the Fed.

And look at super investor Warren Buffett… the latest headline news tells us his gifts to charities now top $27 billion. The money is to be used to fight illness and poverty worldwide. But the gifts came in the form of Berkshire stock – not cash. Imagine how the halt and the hungry will suffer if the stock goes down!


Homely Warren’s levitating gift. [PT] – click to enlarge.


Classic Credit Bubble

Which brings us back to our question: How dumb is the Fed?

As you can see from the foregoing, the boom of 2009–17 was wrought by the Fed and paid for with fake money. It is a classic credit bubble, in other words – not genuine prosperity.

Almost all the new jobs created during this period were low-wage or part-time jobs in health care or government, not high-value jobs in manufacturing. That’s why real earnings, per family, have scarcely improved – and real employment (as a percentage of the available workforce) has gone down.

All the bubbly action, in other words, is in the financial markets, not the real Main Street economy. And as the Austrian School economists tell us, every boom not financed on real savings must end in a bust.


Phantom wealth driver: the Fed’s electronic printing press. This orgy of money printing (TMS-2 is up more than 140% since early 2008) has driven asset prices to the stratosphere and has gone hand in hand with the explosion in outstanding debt depicted further above. Most of the “wealth” created in this manner is a mirage that will eventually  disappear, one way or another. It should be clear that it is simply not possible to print an economy to “prosperity”. [PT] – click to enlarge.


Nothing comes from nothing. Fake money produces fake prosperity. Take away the fake money… and the fake prosperity goes “poof,” too. Which is why the Fed will never, voluntarily, stop manipulating prices. It can’t let the markets return to “normal” price discovery. Because the markets are likely to discover prices a lot lower than Dow 20,000.

“Normal” may be a lot higher than a 2% yield on a 10-year Treasury yield, too. “Normal” may mean a deep depression as the economy shakes off the foolish investments and misallocations of the last eight years. “Normal” would also mean the disgrace of Janet Yellen and Ben Bernanke, who are largely responsible for this bubble.

But “normal” won’t stop there. The crisis of 2008–09 was a repudiation of the Fed’s fake-money debt bubble. The stock market crashed as the bubble deflated, just as it normally does. But then central banks went back to work, doubling down on their error with more hot air than ever before.

Federal debt alone almost doubled from about $10 trillion to about $20 trillion. Worldwide, $68 trillion in debt has been added since 2007 – a 45% increase – bringing the debt-to-GDP ratio to 327%.


Federal funds rate since 1978 – the recent tightening is historically still small, but one has to keep in mind that the end of QE was a tightening move as well. It is noteworthy in this context how quickly money supply growth has declined since its last interim growth peak in November 2016. [PT] – click to enlarge.


All of this debt now hangs on the feeble reed of more ultra-low interest rate policies. The Fed says it is going to return its interest rate policy back to normal…

No chance. It’s not that dumb.


Generally central planners do not have much of a clue. Evidence to that effect abounds, as do sound theoretical explanations as to why it cannot be otherwise, regardless of the knowledge, intelligence or intentions of the planners. What we can state is that the Fed is reactive. Since it has embarked on a tightening path, it will probably continue until something breaks – and that could happen very soon. [PT]


Indiana1 Dirtnapper Fri, 07/14/2017 - 08:59 Permalink

Yep.  I thought their gig would be up about 2015 when real interest rates had zero to keep the debt game going.  I wasn't imaginative enough for negative interest rates nor thinking central banks would buy equities and corporate bonds.  It's clear they are going to stop deflation at all costs, so ultimately we may skip that phase and inflate the money supply until it overflows to the common man. 

In reply to by Dirtnapper

sbenard Dirtnapper Fri, 07/14/2017 - 10:55 Permalink

Another important point that few people in finance recognize: If the Fed ever allowed interest rates to normalize or be market-driven, the interest costs on $20+ trillion of debt would consume virtually ALL revenue! When I last checked 3-4 months ago, the interest cost to the3 US Treasury, even at these near-0% rates, is about $600 billion per year! What if interest rates rose to just 4-5%? They've painted us into a corner. If they allowed interest rates to go back to normal, our interest costs could easily quadruple! After interest, there would be nothing left for national defense, social security, or any entitlement. We're doomed when the debt crisis comes. Calamity is certainty. Plan and prepare accordingly! 

In reply to by Dirtnapper

HillaryOdor Glyndwr will return Fri, 07/14/2017 - 08:53 Permalink

They can't be criminals.  They are the government.  They set the laws.  And everyone approves and it must be good because democracy is so wonderful.Whenever I see the words "democracy and freedom" together I throw up in my mouth a little.  It's democracy or freedom.  Take your pick.  You can't have both.  Actually you can't have freedom anyway, so it's democratic slavery or other slavery.  What difference does it even make?  This is why I never voted.

In reply to by Glyndwr will return

aqualech Fri, 07/14/2017 - 08:44 Permalink

Even Bonner won't see or say it......the job of the FED is to maximize indebtedness of the US, private and public, to the global banks.This latest wealth creation is just some bread and circus shit to keep the rich/influential people in the country from objecting too much during this terminal phase of debt creation.

TeethVillage88s GunnerySgtHartman Fri, 07/14/2017 - 09:50 Permalink

Fed doesn't see a problem with:

- Exporting Tax Base of Individual Income Tax
- Exporting onshore Production both Services & Goods
- Importing Foreign Agent Lobbying
- Concentrating Money Flows to US Congress from Tech & other Corporations & their Executives
- Increasing Money Flow Subsidies from Federal Govt & Increasing Federal Control & Influence on Local Economies
- Increasing Deficit spending & Overhead at Local & State Govts
- Exporting Jobs for Bread Winners & Middle Class & Young Adults... with using Slave Labor/Black Market Labor/Illegal Labor/Those with no Worker Rights

What could go wrong with killing off small business economy & Mid Cap Economy... and retail economy along with services & goods producing economy?

- Dimon says 'bad policies' stalling economic growth...
- Retail sales fall AGAIN...
- Monthly Federal Spending Tops $400B for First Time...

- Now all we need are Pension Short Falls... oops
- Now all we need are junk rated govts like Greece & the PIIGS... to loose our Public assets & govt Assets... oops
- Now all we need is FISCAL & MONEYTARY IMBALANCES OVER A LONG PERIOD to hide realities of Finance & Normal Economies... while calling for less banking regulation & fewer capital controls... when 1 out of 3 never recovered from Global Financial Crisis... and we have 10 years on Manipulated Interest rates & QE3 & $4.4 Trillion on Fed Balance Sheet.


In reply to by GunnerySgtHartman

Snout the First DPLETTENBERG Fri, 07/14/2017 - 10:30 Permalink

No doubt about it. The government spends a lot of money having the military do things not in the best interest of the citizens. But I believe a quick glance at the budget will show the money wasted on the military is dwarfed by the social spending the government does to deliberately destroy America's people and society. Unless, that is, you think the Chicago and Baltimore they have created with your tax dollars have been splendid successes.

In reply to by DPLETTENBERG

J J Pettigrew Fri, 07/14/2017 - 09:23 Permalink

Bank earnings....ramp up wih the paying on idle reserves...Banks windfal.....bankers populate the Fed boards...bankers dont raise rates on savings accounts or CDs.....and get paid 1% on the reserves...nice locked in gig....just sit back and make the difference between the savings rate and what the Fed pays youfor taking that money and moving it to their column.  A lock.Meanwhile the Fed illegally pushes for inflation to increase its gap with short rates......theft by any other name in both cases.

Mustafa Kemal Fri, 07/14/2017 - 09:31 Permalink

"How Dumb Is The Fed?"Not dumb at all. Their plan is working perfectly. Just have to marvel: using QE and ZIRP to destroy the middle class, how they are going to use QT to continue that process.  Buy Bitcoin (sorry couldnt help autotrolling)

johnjkiii Fri, 07/14/2017 - 09:34 Permalink

"And look at super investor Warren Buffett… the latest headline news tells us his gifts to charities now top $27 billion. The money is to be used to fight illness and poverty worldwide. But the gifts came in the form of Berkshire stock – not cash. Imagine how the halt and the hungry will suffer if the stock goes down!" Cute line but laughable logic. How well will the "halt & hungry" feel if he never gave the gift in the first place?

Pollygotacracker Fri, 07/14/2017 - 09:41 Permalink

Congress is the root of the problem. Not one person in our government, save former Senator Ron Paul, has the guts to stand up to these liars. How many FOMC meetings during the past eight years did they hint at raising rates and then they never did? Easy money for Wall Street speculators and nothing for Main Street. The stock market looks like 1929 and 2000 all over again. Wash, rinse, repeat. They aren't stupid, but they let this thing go on and on. Are they buying stocks? I believe that they are. And yet they are "strongly against a FED audit". When you aren't hiding anything you have nothing to hide. Audit the Fed.

NAV Fri, 07/14/2017 - 09:53 Permalink

As you can see from the foregoing, the boom of 2009–17 was wrought by the Fed and paid for with fake money… The debts pile up and the Main streets go down. Fake money is tyranny. Fake money means the bankers no longer need “earned” money for their investment projects.  They can print confetti for services and things saleable. IOW, the unbacked Federal Reserve note is no longer valid as a medium of exchange.  Hence, the wipeout of savers and their savings for the future.  Hence, the Fed note can no longer be used as a generic form of stored labor; it is no longer trustworthy. “Money is stored labor. Labor is part of human life. To devalue money is to debase life itself. “When the state declares the exclusive right of the issuance of money, freedom is impossible.” – Hugh A. Thomas. “Since the first TARP bill passed in 2008, we’re hard pressed to find a CD paying more than about 1.2%, which is 0.5% below the government-reported inflation rate. It’s also 6.8% below the Money Forever Reader Poll Inflation Rate.. -- Dennis Miller (2013 Casey Research)One more financial wipeout and it will be game over especially for retiring and retired Baby Boomers.

Clowns on Acid G-R-U-N-T Fri, 07/14/2017 - 10:32 Permalink

Jamie - by "stupid shit" do you include the "Liquidity Bailout" of JPM and subsequent QE immoral theft into your fuckin' pocket ?These immoral pieces of dung are now trying to call it "The Great Recession"  when in fact it was the "Great Popping of the Leveraged Bank Bubble".It's embarrassing being an American citizen and listening to the stupid shit you speak when everyone does / should know that you were CH 11 and your wealth should, actually did before Bailout and QE,  gone to zero.You will be rememebered.

In reply to by G-R-U-N-T

TrumpXVI Fri, 07/14/2017 - 10:04 Permalink

And look at super investor Warren Buffett… the latest headline news tells us his gifts to charities now top $27 billion. The money is to be used to fight illness and poverty worldwide. But the gifts came in the form of Berkshire stock – not cash. Imagine how the halt and the hungry will suffer if the stock goes down! Um, there is really no problem here.Our research lab is also funded by a philanthropic doner who's yearly contribution to our budget is made in the form of common stock.  Listen, one doesn't spend stock to run a research department.  Of course, as soon as we get the stock donation, we cash it in immediately and then use the cash over the course of the year....duh!

JailBanksters Fri, 07/14/2017 - 10:06 Permalink

Makes more cents than the FED trying to Taper a Ponzi Scheme and the FED trying to Raise Interest rates on money loaned into Existance that is used to repay the previous loans that were loaned into Existance.

brushhog Fri, 07/14/2017 - 10:42 Permalink

Just imagine a world without credit. Everything would have to be purchased through savings. Prices would plummet to their actual value. A house for 10k, a new car for 2k, etc.. Everything across the board would find its actual value based on existing supply and demand. The financial world would be alot less exciting, a lot fewer billionaires {if any}, but alot more stable. Wealth inequities would vanish as those with more money would be those who actually earned and saved more money....not those who tipped the board of easy credit in their direction through financial connections and slight of hand.

GRDguy Fri, 07/14/2017 - 12:28 Permalink

The book "Cost of Something For Nothing" was first published in 1904.That was before the Federal Reserve was created in 1913.You can bet the farm that the creators of the Fed knew all about it,and the folks they lied-to and stole-from didn't.

Last of the Mi… Fri, 07/14/2017 - 12:50 Permalink

How Dumb Is The Fed? Never see any articles titled "How the Fed is intentionally raping you and your next 3 generations with QE" Wonder where those articles are. Just sayin.

Radical Marijuana Last of the Mi… Fri, 07/14/2017 - 17:00 Permalink

The common theme of most of the previous comments under this article was that the Federal Reserve Board is an expression of the ways that human history has tended to maximize maliciousness. The only connections between the laws of man and the laws of nature are the abilities to back up lies with violence, which became integrated systems of legalized lies, backed by legalized violence, such as expressed by the ways that the Government of the USA enforces frauds by the Federal Reserve Board. One will generally NOT see articles presenting that view because of the ways that human history has selected for the only publicly significant "opposition" to be controlled. The deep degree to which the ways that people think are controlled result in public presentations of more radical truths becoming too unpopular to be approved of by enough of an audience to support the production of those presentations.The essential dilemmas of human history have been civilization was dominated by its murder systems, which were selected to become most successful by becoming as deceitful and treacherous as possible. Most importantly, since the murder systems backed up the money systems, the existing money systems, based on public governments enforcing frauds by private banks, tended towards maximizing maliciousness. Indeed, the Federal Reserve Board is the single biggest institution which manifests the ways that their enforced frauds are becoming exponentially more fraudulent, while the activities of the Federal Reserve Board are integrated into globalized systems based on being able to enforce frauds, which are supervised by institutions such as the Bank of International Settlements.The Federal Reserve Board MAXIMIZES MALICIOUSNESS,because MONEY IS MEASUREMENT BACKED BY MURDER.Natural selection pressures drove the development of artificial selection systems to become most socially successful by becoming as dishonest as possible, while prodigious progress in better understand the laws of nature have resulted in human laws becoming about exponentially more dishonest. However, since almost everyone, for generation after generation, lives inside sociopolitical systems based on being able to enforce frauds, despite those becoming exponentially more dishonest, there is practically nobody who is socially successful in any ways which operate outside of that overall frame of reference. Hence, the articles republished on Zero Hedge tend to almost always grossly understate the seriousness of the situation that Globalized Neolithic Civilization is based upon the excessively successful applications of the methods or organized crime through the political processes, which are manifesting more and more as runaway criminal insanities.Most of the articles republished on Zero Hedge tend to implicitly rely upon Hanlon's Razor, which mistakenly presumes that institutions like the Federal Reserve Board operate in ways which express apparent incompetent stupidity, rather than are the superficial expressions of deeper levels of maliciousness. While Hanlon's Razor is a valid application of the generally valid idea expressed by Occam's Razor, the particular applications of those notions should not be done in ways which deliberately ignore the abundance of evidence which supports the existence of mechanisms based on maximizing maliciousness.The title of the article above reflects the ways in which the author indulges in superficially correct analysis of the Federal Reserve Board, which may well be the only levels which are required in order to adapt to continuing to live inside those entrenched systems based upon being able to enforce frauds, despite that those are becoming exponentially more fraudulent. Indeed, it is a relatively typical pattern on Zero Hedge for many of the comments to be better than the original articles, because the original articles rarely engage in deeper levels of analysis regarding the development of the combined money/murder systems.Politics both IS, as well as should be, applied human ecology. However, the ways that actually developed were through death control systems whose most extreme forms were murder systems, which murder systems backed up the money systems. Hence, human history was driven to develop the most deceitful murder systems, backing up the most fraudulent money systems, within which context institutions like the Federal Reserve Board demonstrate the trends towards maximizing maliciousness. There is almost nothing but the central core of triumphant organized crime, namely banker dominated governments, surrounded  by layers of controlled "opposition" groups which stay within the same frames of reference. Since any genuine opposition would have to propose and promote alternative murder systems to back up alternative money systems, there is practically NO such genuine opposition. Hence, there are practically NO alternative articles which have a publicly significant presentation that admit and address the ways in which there necessarily be some death control systems, in order to back up the debt control systems. Rather, thousands of years of the history of militarism, which was basis for existing monetary policies, have maximized the maliciousness of the combined money/murder systems.Flashback: Graeber: On Bureaucratic Technologies & the Future as Dream-TimeSome interesting scholarship & speculations, that I comment on:"Post-modernism"  was originally advanced as the FAILURESof the future to realize its various impossible ideals.E.g.:Alvin Toffler was a reactionary revolutionary futurologist.The most important things which HAVEcontinued exponential growth were theexponential growth of FRAUDULENCE.Around the 20:45 mark of that video is mentionedGeorge Gilder came up with "divine theory of money"that creating "money" out of nothing as debt/creditwas analogous to the creativity of God making the universe.("In the 2009 book The Israel Test, Gilder reveals Israel as a leader of human civilization, technological progress, and scientific advance. Tiny Israel stands behind only the United States in its contributions to the hi-tech economy. Israel has become the world's paramount example of the blessings of freedom.")Flashback: Sachs chief says 'we do God's work' as he defends the bank's mega profitsNovember 8, 2009.FALSE FLAGS' FUTUROLOGY?Of course, continuing exponential growth of fraudswas accompanied with matching threats from force.In similar ways that the events on 9/11/2001were spectacular symbols of enforcing frauds,the allegations regarding the Apollo missions,physically "landing" some men on the moon,could have been profound propaganda ???Various radical truths generate possible Litmus Tests.The alleged significance of the alleged moon landingsis repeated in the video above several times, such as,at about the 25 minute mark, regarding some overallgeopolitical context surrounding the alleged landings.There are nested frames of reference ...which are profoundly wrong paradigms!Globalized Neolithic Civilization becamebased on enforcing frauds, while thatwas publicly presented as "creative,"regarding making the public "money" out of nothing as debts,as somehow doing "God's Work," or as being Good Creativity!"If history shows anything, it is that there’s no better way to justify relations founded on violence, to make such relations seem moral, than by reframing them in the language of debt — above all, because it immediately makes it seem that it’s the victim who’s doing something wrong."— David Graerber"Almost everyone was taught that money was invented to replace the messy business of barter. … But ... anthropologist David Graeber, and other experts on the history of money, say that this is a myth. Instead, they say that money was invented to finance war, and to keep score while armies went about pillaging and looting."Civilization was always based upon being able to back up lies with violence. The almost exponential progress in physical science enabled the social pyramid systems of Neolithic Civilization to grow at about an exponential rate. Within the life time of those still alive today, the previous systems of paper money frauds, backed by gunpowder weapons, became globalized electronic money frauds, backed by the threat of force from atomic bombs.ENFORCING FRAUDS BECAME EXPONENTIALLY MORE FRAUDULENT.In that context, the Federal Reserve Board is maximizing maliciousness, as it nevertheless is publicly able to continue to present doing so as being productively creative, although it is actually doing nothing more than legalized bookkeeping tricks. Mainstream economists are intellectual mercenaries, who make their living INSIDE systems where economics is actually a special case of warfare. Since successful warfare was based upon backing up deceits with destruction, successful finance became based upon enforcing frauds. Inside that context, the mainstream economists make predictions which are based upon continuing to support exponentially increasing fraudulence. Of course, they do NOT admit and address that fundamental fraudulence, but rather were selected to become the best available professional hypocrites who could spout bullshit about that."What Went Wrong?"Sociopolitical systems based upon making "money" out of nothing as debts, which then can drive those debts into the positive feedback loops of compound interest, are actually the exponential growth of the enforcement of frauds, whereby the death controls backed up the debt controls. Debt slavery generated numbers which became debt insanities. Runaway debt insanities will provoke runaway death insanities. The only theoretically possible realistic resolutions of those real problems might be to catalyze those eruptions of death insanities towards better death control systems, which depended upon better integrated human, industrial and natural ecologies, enabled by enough people understanding themselves as entropic pumps of environmental energy flows. HOWEVER, at the present time, the vast majority of people deliberately ignore and/or misunderstand almost everything in the most absurdly backward ways possible.

In reply to by Last of the Mi…