Markets threw a hissy-fit in the wake of the Fed’s widely ridiculed “None and Done” decision to hold rates at near zero where they’ve been through thick and thin since December 2008. So it was time for St. Louis Fed President James Bullard to distance himself from this debacle.
And he did on Saturday, at the annual meeting of the Community Bankers Association of Illinois, by shooting an expertly targeted broadside at the Federal Open Market Committee, of which he is a non-voting member this year. But the broadside was directed at a lot more than just the failure of the FOMC to raise rates at the last meeting. And shrapnel perforated his own foot.
The meeting was “pressure packed,” he said, and the decision was “a close call,” with “a large majority of the FOMC” expecting to kick off “policy normalization” – raising rates – “this year.”
“I would have dissented,” he said. But he couldn’t dissent because he’s a non-voting member.
Supported by a 33-slide presentation, he pointed at “the market reaction” – the fact that stock markets around the world swooned after the decision. Everything the Fed does and says is with one eye on the stock markets and with the other eye on the bond markets. Instead of pumping up the markets, as the Fed had perhaps hoped to do, the decision seems to have “created rather than reduced global macroeconomic uncertainty.”
“I argued against the decision,” he said.
He lamented the misconception out there that a measly 25-basis-point rate increase is being interpreted as being “restrictive monetary policy,” when in fact it’s still an “exceptionally accommodative monetary policy,” and just the first baby step toward “normalization.”
But “the case for normalization is simple,” he said. “The Committee’s goals have essentially been met”:
The Committee wants unemployment at its long-run level and inflation of 2%. The Committee is about as close to meeting these objectives as it has ever been in the past 50 years.
Most of the weakness in inflation was due to the plunge in oil prices, a “temporary” phenomenon, he said. “Oil prices will stabilize so that when you look at year-over-year inflation, it’s going to start coming back to 2% over the forecast horizon.”
And yet, “the Committee’s policy settings remain stuck in emergency mode,” with the Fed’s balance sheet having “ballooned to about $4.5 trillion,” from about $800 billion in 2006. And the policy rate has been stuck at about 13 basis points for “nearly seven years,” though “the Committee thinks the long-run level of the policy rate should be about 350 basis points.”
That’s 3.5%! That median of the long-run appropriate policy rate of FOMC participants is a world away from the current 0.13%. It would mean a revolutionary concept: capital would have a real, if still small cost! Good luck trying to get there, in these horrendously distorted markets, without crashing everything in sight.
So Bullard finally asked the totally obvious question: “Why do the Committee’s policy settings remain so far from normal when the objectives have essentially been met?”
And the answer? Um, well…
“The Committee has not, in my view, provided a satisfactory answer to this question.”
But Bullard has conveniently forgotten that Ben Bernanke already provided an answer back in 2010 when he was still Chairman: in an editorial, he called it the “wealth effect.” QE and ZIRP – “strong and creative measures,” as he called them – would lead to higher stock prices, which would boost wealth, spur spending, and crank up the economy, he wrote. He was right about the first part: asset prices soared. But he was wrong about the second part: it did not crank up the economy for the 80% or so of Americans who didn’t participate in his extraordinary monetary gifts. And hence, overall, the economy has been growing at a disconcertingly slow rate.
This monetary policy never targeted inflation and unemployment. From get-go, it focused on asset prices and on bailing out and enriching those entities and individuals that held most of these assets, per Bernanke himself. Consumer price inflation and unemployment have become more recent pretexts for continuing the original intent.
Bullard also shot at the inclusion of a reference to financial market conditions in the statement issued after the meeting, with more shrapnel hitting his foot:
“Traditionally, the Fed has not referred to financial market conditions when making policy for good reason: Financial markets tend to wax and wane, sometimes suddenly and monetary policy has to be more stable than that.”
The dripping irony! Last October, as QE Infinity was being tapered out of existence, stocks were plunging. The S&P 500 was down a breath-taking, unheard-of, incredibly whopping … 7.4% from its crazy high at the time, and folks were fretting about a free-fall into a mild correction or something. But he came out of the woodwork, got on Bloomberg TV, and mused about “delaying” the end of QE. Markets turned around on the spot. And he became an instant hero, a one-man market manipulation machine.
And now that Wall Street is clamoring for a repeat performance, it’s inexplicably getting something else? No, it got a repeat performance: no rate increase. But the whole scheme is starting to be threadbare, and investors around the world are getting nervous that central banks cannot keep it upright much longer.
Bank shares got crushed in the US since the FOMC decision. Because not all is well in banking land. Read… Bankers Threaten Fed with Layoffs if it Doesn’t Raise Rates
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
let that sink in folks, the FED is openly admitting that what they are doing is NOT NORMAL!!
personally i’m getting sick of these real estate assholes walking around acting like they are some sort of financial geniuses by profiting in the most bizarre and abnormal market in history….i had to spend the evening last night with one of them.
when will things get back to normal?
You won’t like the answer … it involves a bit of reading. Grab your copy (i.e. save it to your PC as a PDF file) of this while it is available. Or buy the out of print book on Amazon which won’t be cheap (what I did – I have a hardcover version).
The first third of the book is narrative and very instructional. There is nothing particularly new about our present “monetary policy” situation – it is an age old problem told and retold throughout history. The ending has always been the same, and I don’t think it will be any different this time because we have electronic money or the internet.
If you can read the whole book and can follow along, you will have your answer.
Are you really going to drop a hyperinflation reference and then just leave it to marinate?
A brief justification of why you seem to agree with the assessment in the book would be appreciated :)
While our day-to-day financial markets are very complicated, the ideas which much be necessarily understood to have an idea which way the wind blows are not that complicated.
2/3rds of the book focuses on attempting to explain, sort of in laymans terms, how the author thinks inflationary processes work. So it is instructional in this sense.
While I was in the hyper-inflation camp for quite a while, I no do not think we will see hyper-inflation. The Fed is fighting deflation and that is what I am personally preparing for as an outcome. Just my two cents. I encourage everyone to spin up and make your own thesis/call.
If you have something specific, you are welcome to ask.
Never. The Fed cannot and will not risk the almost-certain depression that would result if policy rates were normalized. At real interest rates above zero, asset prices – stocks, bonds, and housing – would all collapse.
The problem the Fed has now is that it has run out of time and credibility. They’ve been talking about “green shoots,” a “nascent recovery,” and the economy reaching “escape velocity” for so long that nobody believes those lies anymore.
The world economy is basically like a brain-dead drug addict that has been put on life support for the past 6 years. The monetary heroin has kept the corpse alive, but has not restored it to health.
That is why policy rates cannot be normalized.
With the caveat that rates WILL go up at some point.
The Fed sets rates by buying or selling securities on the market. Over the whole yield curve, this is trillions and trillions in paper across various markets such as Treasuries, asset backed securities, etc. However, the Fed can’t buy EVERYTHING to keep rates where they want … as there would be no Treasuries/etc left in the extreme. When the Fed buys the first Treasury, there isn’t a concern. But when they buy the last one (of some maturity), banks and many other financial companies won’t own any of it and are going to be completely screwed.
Financial institutions have to have “high quality, cash like assets” to act as collateral when engaging in various transactions.
To be clear, there will come a day when the Fed has nothing left to buy, to influence the rate and achieve their centrally planned goal, without blowing up the financial system.
So, eventually rates are going to go up because they Fed can’t buy everything forever.
I can’t articulate it better than that … perhaps someone else can … here to learn!
Yes, of course. Another way to say it is that rates will increase when the Fed loses control of the financial markets and can no longer suppress rates or manipulate rates downward.
Cooter, the Sanders/Paul Fed audit, and the Bloomberg Fed audit show that, between 2008 and 2010, the Fed made $23.8 trillion available to the western world’s largest banks. In other words, the Fed created $23.8 trillion out of thin air. Conversely, if the Fed can create $23.8, over a two year period, what is there to prevent it from destroying the $4.5 trillion, on its balance sheet, over a two year period? The Fed could easily forgive the debt in secondary market bought Treasuries and claim that most of the GSEs it’s holding have paid themselves out.
This action wouldn’t be unprecedented. Maiden Lane 1, the more than $29 billion in toxic waste from Bear Stearns, which Geithner and Bernanke told the Senate was bought at a fair price and backed by “good” collateral, almost totally imploded. But did the Fed show the loss? Impossible to know without another audit. Fat chance of that happening. Had the Fed not fallen on that $29 billion dollar grenade, it would have blown up JP Morgan.
None of this, of course, would change the fact that Main Street has the largest number of working age males, out of the workforce, since 1948, when records were first kept. Or that “Wholesale Inventories relative to sales have NEVER been higher”? While Wall Street is buying back its stock with virtually free Fed funny money, in order to keep stock prices at all time highs, retail America, Main Street, is in a recession — and retail Main Street ain’t ever coming back.
Outsourcing and automation are permanently eliminating the need for labor, and when those in the labor force finally run out of money to borrow, they can’t buy. This is the Main Street economy we presently have, and nothing the Fed can do, short of showering the hoi polloi with helicopter money, will change that.
These idiots have monitized government spending since 2008. Now the chickens come home to roost as the east is dumping dollars.
BBC interviewed me last week (they found me from here Wolf!) and asked what a rate increase would do the housing market. The short answer is: not much. At least not in DC.
If someone is getting a $500K mortgage and rates go up half a point, we’re talking about roughly a $150/month increase. Relatively speaking – that’s not a lot. Or, it shouldn’t be. If $150 is the tipping point for buying vs. not buying, then those would-be buyers have other issues – they were looking at the tip top of their price range. And therein lies the problem. Because of rates, prices are low and people are biting off more and more in terms of a mortgage. When rates go up and the housing market softens, which it will, the people who paid at the top will lose some value. And there is ALWAYS someone at the top left holding the bag.
And if history repeats itself, the people at the top left holding the bag will toss that bag off to everyone else and walk away from their “mistake.” Oh. And they’ll blame their real estate agent and their lender. Because you know, adults who pay too much for houses are never to blame.
Melissa, how about a negative rate? For example minus 25 bp? The latest Fed meeting has been hinting at this.
Glad to hear that the BBC reads my humble site and interviews WS contributors like you! BTW, Melissa, we’re all waiting for your next article!
“Tip top” of a price range can mean a lot of different things. For instance if I choose to take Zillow’s affordability calculators seriously, I can “afford” a million dollars house. From my perspective not only is that assessment speciously sales driven (what a surprise!), it’s speculative to the point of negligence; and I mean that quite sincerely.
This housing bubble is spooky and even more smarmy than the last, especially having just witnessed the fallout during and after the culmination of that event. And it is compounded in the Bay Area, where the latest round of digital marketing scams have our “best and brightest” clamoring to pay $750k for a 700SF carriage house in an increasingly parched and culturally bankrupt area when they could work from Sri Lanka if they so chose.
For my part, my maximum needs to be covered by one biweekly paycheck from the lower salary in my marriage. Mr. Richter might also have an insight, but what’s coming for the Bay Area is the Bubble 2.0 version of Fu#!€d Company; at least for “onshore resources” who will require more compensation than the lowered global wage that the oligarchs seek. Hence the need to prepare for the inevitable.
From my perspective, $150 IS a lot, especially when considered on a yearly basis, in the context of taxes and insurance, as it relates to total interest, and ESPECIALLY because these homes aren’t going to be increasing in value for quite a while once this ship really begins to take on water.
So I’m not sure I understand why they’d be “issues” in the context of backing out as opposed to the potential of an informed decision. Obviously you know your buyers, and indeed, these psychos seem hell bent on making cash and labor worthless; but with all the uncertainty and unprecedented moves swirling, might some buyers be motivated by what seems to be a change in TREND?
The tradeoff of paying $150 more a month in a mortgage would be offset by not having to compete with a dozen other buyers (because the higher rates would make some exit the market.) So when you take some buyers and hence, some competition out of it, you can do interesting things like not escalate over asking. Bam. In many areas in DC that could save you $100K. And you can, gasp, actually do a home inspection which everyone is waiving so that the seller will just sell their house to them. But as we all know – a home inspection is your best protection against buying a host of problems – costly, costly problems.
So when you compare an uptick in rates with the offset – being able to actually DO and negotiate with the seller on a home inspection, and actually paying asking price (or less) then suddenly $150/month seems like nothing.
Reporting from Cali, the low interest rates are creating a mini bubble in the housing sector by allowing people to pay for higher home valuations with lower rates. Once those housing prices fall and rates go back up, things will even out and create a normalcy in the market, even in bubbly bay area. That and overvaluation in tech stocks will blow up the bay area run as well when overpaid programmers start losing their jobs and big paychecks from their non-income generating tech companies that will go under after the crash.
Melissa, in writing “Because of rates, prices are low”, using prices, do you mean mortgage payments are low compared to historic norms? Or do you mean housing prices are low, (which I doubt is what you meant)? What I am seeing in the market where I live and in those where I am considering buying my retirement home, is the 2005 practice of buying based on monthly mortgage payment. And, again in so doing, betting that everything in the buyers life being perfect for the next 30 years. And of course, housing prices continuing to rise to infinity.
Crap. Yes, you are correct. I meant prices high or cost to borrow low, but unfortunately converged the two ideas.
I always fail to explain properly to the DC Contingent who feel that prices really will rise indefinitely. Salary increases vs. home price increases – lay it out for them and they still don’t believe.
Have you looked into Modern Monetary Theory, Wolf?
Its interesting to me. Here’s a great video:
Prof. Mosler says that rates being at 0 would be viable indefinitely, and that its essentially a political decision as to whether or not the government charges interest on its spending. He act’s like its no big deal. That’s how the markets seem to also be acting, IMO. This school of thinking also says that monetary policy (interest rate manipulation) is not an actual tool to stimulate the economy, the greater tool is fiscal policy (government spending). And government spending is a good thing — crucial actually, in this paradigm — because as the issuer of a currency, the Gov is the only point at which new money can enter the system. There can be no private sector surplus, paraphrasing this thinking, without a public sector deficit. Public sector surpluses, on the other hand, have always (7 times in US history) been followed by depressions.
Its an interesting way of thinking about things and it certainly has me convinced. I think people waiting for ‘the government’s day of reckoning’ will be waiting a long time if this is true. Turning away from ‘free market fundamentalism’ and towards ‘socialism’ … that’s me right now. I think we have a religious-economic attachment to ‘pure capitalism’ among some people here that is similar to the religious-theoretical-economic attachment to ‘pure communism’ in the old days in Russia. That’s enough for now I guess. Laterz!
Ida, that was a thought provoking post.
MMT (like to many economic theories) is like religion: it requires a “leap of faith.”
Wolf, as you know, Bullard talks out of both sides of his mouth. He’s talking hawkish now, but just last October, he was talking up the dove position:
“I also think that inflation expectations are dropping in the US. And that is something that a central bank cannot abide. We have to make sure that inflation and inflation expectations remain near our target.
And for that reason I think a reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data dependent. And we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December.
So… continue with QE at a very low level as we have it right now. And then assess our options going forward.”
…And maybe it requires one to ignore some facts, like most (new) money in the US is created by private banks, for property transfers. “the Gov is the only point at which new money can enter the system. ” ??? Yup, quite a leap alright.
That should be amended to read “the Gov is the only point at which net financial assets can enter the system.” Private banks do create money, but it nets to zero ultimately. An agent in the private sector goes into deficit to create that money. If you have a car for sale for $1000.00 and I borrow the money from JPM to buy it, JPM wires the money to your account (new money creation), but I’m now at a -$1000.00 deficit that I’m obligated to pay JPM (with interest of course). That transaction nets to zero in the overall economy.
there was no reply button for your post. As you mention, private sector money created ‘nets to zero ultimately’. In practice this has never happened. The nature of the property market and wages means that netting to zero can’t happen. Also capital flight, and vast accumulations of claims higher in the financial system mean that the borrowers will never be able to actually earn the money to pay down their debt, net. Individuals yes, system wide, no. And this leaves private sector money creation as the major channel, not the government.
I need to correct that => …”will never be able to actually earn the money to pay down their debt…”
Net reductions in outstanding private sector debt can occur, but it can’t drop very far, because of the above.
Chance_Nation: “the Gov is the only point at which net financial assets can enter the system.”
But: “…According to the International Financial Reporting Standards (IFRS), a financial asset can be:
Cash or cash equivalent,
Equity instruments of another entity,… etc.”
The fact that the private sector can and does create equity instruments, (without netting to zero by something else) seems to imply there is a big problem with MMT.
“The fact that the private sector can and does create equity instruments, (without netting to zero by something else) seems to imply there is a big problem with MMT.”
Sure, the private sector can create equity instruments, but what are we using to buy those equities? Using our earlier scenario: You want to buy Apple shares, but Apple isn’t going to barter their shares for your car. So you sell your car to me for $1000.00, which I borrowed from JPM and I’m obligated to pay that back with interest. You use the money to buy 1000 bucks worth of Apple shares. Still netting to zero in this scenario, right?
actually, I was mistaken, the equity also nets to zero, it nets to zero because shares are liabilities of the issuer, and assets of the holder. And both parties are in the private sector. It doesn’t seem to me that it is about the money aspect, but about what the equity claim signifies, and both parties are in the same sector.
When the gov issues financial assets to the private sector, the liability side is held by the gov and so it is a sector balance thing. The sum of private sector and gov sector should also net to zero. The gov has gone into deficit, just like one of the parties in your example. But with the gov in a separate sector creates the imbalance, the net addition of financial assets to private sector.
What MMTers need to emphasize is why it is important that the gov adds net financial assets to the private sector. It is important because there needs to be an offset for demand leakages, savings desires. Gov adds financial assets when it is offsetting demand shortfall, by purchasing goods and services, by deficit spending. In other words, the addition of financial assets is part of what is going on, not the whole story.
Private sector netting to zero is almost a misdirection, because attention shouldn’t be on that, but on the need for additional demand to offset the demand losses.
The private sector does not net to zero if there is net change when looking at foreign and gov sectors also. (Sector balances.) The US has a foreign trade deficit of ~$40 B/mo., ~$500 B/ann. And so this is also one reason why the gov needs to be net deficit, to offset the foreign trade deficit. (In addition to savings, offshoring of savings &c.) Netting to zero only happens when nothing leaves, and nothing enters.
That’s part of what I was referring to above.
And so no, the private sector doesn’t have to net to zero.
Not only can the Fed never ever EVER “normalize” interest rates (i.e. 3 – 5%), but it can’t even raise interest rates 25 basis points!! The extra interest the US gov’t would have to pay on its $18 trillion debt would be $45 BILLION per year. Where are they gonna get that??? Apple Inc., who borrowed $60 billion to buy back its stock, would have to pay $150 million per year in extra interest payments with a 25 basis point increase. Absolutely no further discussion is required or appropriate regarding whether the Fed will raise interest rates in the coming FOMC meetings. They can’t. EVER. They’re hooped.
Ida, my Dear, you have drunk the Kool-aid. And when the whole thing collapses around your ears, and the government checks stop, the only place you will find sympathy will be in the dictionary between ‘shit’ and ‘syphilis’.
This is when an understanding of “reserve” versus “non-reserve” currency is important. If Venezuela issued the major reserve currency of the world, they wouldn’t have the problems they have right now, would they? They would print (or borrow into existence if you will) and it would be everyone else’s problem.
I am buckling up for massive deflation … but that is just me.
Bullard appears to accept the role of offsetting the negative implications of the FOMC’s acts.
The failure to raise the interest rate was construed on Thurs. 9/17 to mean that the world economies are too weak for any rate increase, and the stock and commodity markets other than the precious metals market dropped through Friday 9/18.
Bullard’s criticism was publicized on Saturday 9/18, and on Mon 9/21 the markets other than the precious metals markets are in rally mode. Bullard’s comments are being construed as confirmation of the contrary view that the economies of the world are much stronger than anyone including the FOMC voting members believe.
It seems to me that Bullard’s comments are not really intended to show his real convictions, but rather merely to offset the doubts about the health of the world economies inflicted by the FOMC’s action of 9/17.
In my view the FOMC got it right. The economies of the world are extraordinarily weak and extremely fragile. Who knows what effect even a 1/8th percent interest rate increase would have in a world in which manufacturing and mining activity has been in such a 3 year funk that it has needed such extraordinary liquidity (almost free credit) just to stay afloat.
If market is that hyper-sensitive to 1/4 point interest increase by the Fed who is pandering to the banksters than this stock market is very weak indeed and in BIG trouble.
Fed should have raised rates earlier this year as it is out of ammo even if they unleashed QE4 when the market is near all time high. Bubble just keeps on getting bigger for the inevitable pop.
So, if rates rise we get nervous. If rates fall we get nervous. If rates stay the same we get nervous. When don’t we get nervous?
Raise the rates already! We are talking a idling .25% not 350 basis points (3.5%) where we should be to make saving PAY, and borrowing a cautionary endeavor as it should be!
As for the indebted, who cares? Raise my taxes!
Greetings from Finland!
I have, and have had for some time now, a few things i have wondered about some economical… things. I’m somewhat blind-eyed, stubborn and even simpleton what it comes to economical things, but one can always wonder and ask.
First one is the fear of deflation and the urge for inflation. I think i roughly got the basics of the latter, but i can not understand the first. I think i roughly understand the consequences of both to my own economy, either one having some good and not so good effects. Still i see both as a different sides of a coin, like waves on the ocean, like day and night. Both are different in ways, but as natural as can be and we should be capable to adapt, easily.
So the question is why to fear the deflation?
Another one is pondering with a kind of layman’s logic, or whatever one likes to call it, against logic of QE’s. Nature usually goes in it’s own logical ways which can be monitored, analyzed and even understood. People are part of nature and act like part of nature even when they deny being part of it. So when one has skyscraper which suddenly starts to lean heavily, say few degrees, to one side what one does? One gets ones wits and experience and starts to check things and analyze. That’s the layman’s logic, what one sees is the current situation, say truth, and the least improbable cause is where the answer most likely lies. In the case of skyscraper one quite likely ends up to find out something wrong with the foundation. So one would probably try to something with foundation. So with my redneck logic and sucking economy this means sovereign holds necessary banking structures up with necessary means and pumps a necessary amount of economical good to the foundation of sovereign, the People, to fuel up the economy. The People get money, they spend, they pay loans back, they save and so on, all of it trickling slowly back to companies and to bottomless coffers of the sovereign.
So the question is why to intentionally fuel up only asset markets as one knows from the start that it could not fuel up the whole economy?
Third and the newest subject of wondering is chairwoman Yellen. Why would anyone with the least bit of sense intact jump voluntarily (and smiling) under the falling sword of ones predecessor? What’s the reasoning behind taking a position with one of the greatest ever economical Gordion’s knots to be solved? Especially when one knows there is no way to do this without breaking something and crashing some other, at least wetting ones own feet and underwear, and only those if one is very very lucky?
And the question obviously is why on the earth did Yellen took the position at the first place?
Corruption, who, what is it good for, absolutely nothing – say it again!
I’ll have a stab at number 2.
Corruption. The great wealth transfer. Actors doing the bidding of the oligarchs in a shadow plutocracy.
By giving ‘free money’ to these people and their affiliates, these plutocrats are able to further centralise their powers towards the kind of collectivised oligarchism you read about in 1984.
What ‘they’ have been doing seems illogical, to you, because your question was incorrect. (No offfence as the question is also legally sound from a sovereign member of a sovereign country).
Well, that’s it in a nutshell (after all, debravity is the soul of wit). To the extent that new debt can be hoisted on the backs of American citizens, their children and grandchildren, the Fed creates new money that it provides virtually interest-free to the very banks that own it- and as the Senate report showed, these banks are buying real resources for themselves. It is corruption pure and simple, so brazen that they now even feel free to not just pay no interest to savers, but to gouge them (bail-ins). The only Cabinet member to do time, Albert Fall, of Teapot Dome notoriety, went down for accepting a one million dollar interest-free loan (to grease the skids for Sinclair Oil’s getting leases in the strategic petroleum reserve). Compared to trillions for TARP and QE, Teapot was a pee-pot.
I don’t have any more time to post right now, but if I think about this tomorrow night, I will try to throw something out there. Check back in a few days.
Greetings from the Sunshine State. I’ll give your questions a shot.
Yellen took the job because no one else would. In America, women only get to the top when nobody else wants the job.
As far as the asset bubble goes, they gave the money to the top because politicians are controlled by bankers here as elsewhere. It was not politically possible for an administration pushing trickle down economics to do anything else.
Deflation is a problem because once the price levels drop, there is not enough value anywhere to justify the level of debt. This makes it look like they committed massive fraud.
Excellent – and distilled to its very essence!
I would only add to the latter that, given the FED is barely clinging to 1.27% capitalization, the most meager downward valuation in asset prices renders them technically insolvent. Who among us believes that this is not already so?
If money were backed by assets, periodic deflation would be healthy. However, our money today is backed by debt, so this can become problematic if it becomes “reinforcing”.
First off, inflation is an expansion of the money supply, which today means cash and CREDIT. You have to understand that when you take out a loan, you increase the money supply. That is to say that the bank “conjures into existence” money equal to your loan. *POOF*. If you did it, you would be counterfeiting and thrown in jail, but banks do it all day long. Per the law.
This has major implications. The new loan expands the money supply and paying off the loan collapses the money supply. Of particular note is the fact that INTEREST due on this loan is NOT conjured into existence. Therefore, all loans can never be paid back because there isn’t enough money in existence.
If credit contracts significantly, there is not sufficient money to pay back debts, which defaults debts, which further collapses the money supply (i.e. contracts credit due to higher risks). This is why modern central banks inflation target, lest the system implode.
Which it is going to do.
Deflation is healthy and natural. Technology is naturally deflationary. If a car is built completely by automation, why isn’t the price lower? Are products, such as kitchen knives more, or less, expensive to make? But deflation is hated because deflation can destroy the DEBT backed system.
A tree can not grow to the sky, it is as simple as that. But if you have a PhD in Econ this is really hard to understand. You use the term skyscraper, but you have the right idea. Things are unnatural and out of balance. Eventually it will fall over, it is just a question of when.
As to why, almost everyone acts out of selfish reasons, despite the optics. If you were a billionaire and could bribe a few folks to double your wealth, you would. I don’t subscribe to the over-arching diabolical plan to rule the world – I think the elites are much dumber and more selfish than that. They are just out to expand their own power, potentially at the expense of someone else. Or, as I heard it best put, “Never assume malice where incompetence will suffice”.
Just because you have a billion or two, doesn’t mean your smart. The world today is built and run by brilliant people, but none of them are billionaires. Smart people create and engage in the wonderful opportunity of life. Billionaires just horde points and manipulate people/the system/etc to those ends. We are long past the captains of industry that built from the ground up. The best manipulators make the most points; they are just insiders who cheat.
Banking is a man’s business at the top (sorry ladies, just making an observation). These are the worst of the worst high-testosterone hyper competitive sociopaths. To be honest, Blythe Masters is the only exception I have seen. When Yellen was first appointed, she dressed like she was heading to a funeral for a week. Go look up images from that time frame. I think she eventually got a tap on the shoulder and her dress style changed. She knew she would preside over the collapse. There wasn’t a single man at the top that wanted the seat (my opinion) – they will line up for the spot after she takes the fall. Up to her why she took the hot seat. But make no mistake, Greenspan and Bernanke will go to hell and back to pretend it isn’t their fault – it will be Yellen’s and she knew that going in.
If I had it to do over again, I would have been an economist. A job where one carefully collects and analyzes data, then rejects any that do not support a predetermined outcome. I wasted a lifetime in science, when I could have just capitalized on my ability to BS.
There needs to be a Monty Python skit of a Fed Open Market Committee meeting. If we can’t get useful monetary policy from them, at least we could get a few laughs at their expense.
Check out these guys:
Here’s the bio posted on the site:
“CLARKE, John, Dip Lid, PhD in Cattle (Oxen). Advisor and comforter to various governments. Born 1948. Educ. subsequently. Travelled extensively throughout Holy Lands, then left New Zealand for Europe. Stationed in London 1971-73. Escaped (decorated). Rejoined unit. Arrived Australia 1977. Held positions with ABC radio (Sckd), ABC Television (Dfnct), Various newspapers (Dcd), and Aust Film Industry (Fkd). Currently a freelance expert specialising in matters of a general character. Recreations: Whistling. Address: C/– the people next door. Or just pop it inside the door of the fusebox. Should be back Friday.”
Rageon, Thanks. I needed a good laugh and that did nicely. Strange but true, I was browsing through a catalogue earlier today and saw a Clarke & Dawe DVD. Will definitely be adding it to my order.
Looks like we go into the next recession (as if we ever got out of the last one!)with rates at zero. I maintain my view that we are still in the midst of THE crash. When you put a Band-Aid on a shotgun wound, it very soon comes loose. The latter is what we are now witnessing. Recovery, my a$$. If we cant handle a frikkin’ 25 basis point increase then we are so screwed that we are beyond screwed.
I would suggest there is already a Monty Python sketch that fits the need and that would be the Dead Parrot Sketch; the dead parrot being the US economy.
“It’s not dead, it’s only resting!”
ERG, are you suggesting that our economy is a Norwegian Blue?
Randombypasser I too am a layman; I started paying attention to this stuff when I began to notice contradictions, at first the grumbling about ‘predatory lending’ and then the collapse of the housing bubble. And while I really have nothing to add to what Cooter, Petunia, Debravity and Night Train have told you I would like to make a few philosophical observations. This slide into the abyss began over a hundred years ago, with the advent of the Fed. Perhaps these men were well intentioned but the road to Hell is paved with them. The first few decades coasted on the good reputation of hard money, then gradually morphed into the debt based system we have today. There were landmarks along the way, the shift from making things to pure speculation in the Roaring 20s, Roosevelt’s outlawing of gold in ’33, Johnson’s removal of silver from the coinage in ’65, and Nixon closing the gold window in ’71. After that it was Katie bar the door, and all we have left is a global fiat currency scheme that relies on confidence. And now that confidence is waning, and it won’t be an isolated Weimar or Zimbabwe or Venezuela type hyperinflation but a worldwide collapse. None of this is logical; these people believe they can keep it going by WISHING. And they will keep on wishing til the bitter end and reality crashes through all the layers that have hitherto protected them.