The Fed Has Painted Itself in a Corner

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Bernanke managed to shoot global markets in the head the day before yesterday, and then, as has become typical when investors throw brickbats at what the Fed has said, various mouthpieces go about talking the markets back up (this case, in the form of San Francisco Fed president John Williams pointing out that the central bank could ease off or reverse its QE exit if the economy faltered).

I welcome readers telling me I’ve missed something, but looking at the Fed’s problem from 50,000 feet, it appears that the the monetary authority appears to have set boundary conditions for its QE exit that it can’t meet.

1. The Fed is committed to communicating interest rate increases well in advance so as to give investors time to adjust exposures. This policy dates from 1994, when an unexpected mere 25 basis point rise kicked off a derivatives meltdown, producing more losses than the 1987 stock market crash. Punters had been almost universally of the view that any rate changes would be reductions.

2. The Fed designed QE by setting fixed amounts of purchases, and not by seeking to achieve certain levels for particular interest rates, or for MBS, spreads. This gives the Fed much less control in how it exits QE. As Marshall Auerback pointed out when QE was implemented, the central bank can’t control both the rate it achieves and the amount of its purchases. Choosing the latter meant it lost the opportunity to target the former. Thus, it can’t assure investors of a measured exit, since it can’t control rates when investors start dumping bonds.

In other words, the Fed wants a gradual exit,6 but the interaction of 1 and 2 means it can’t achieve that. And on top of that, we have:

3. By moving to influence longer-term interest rates and mortgage spreads, the central bank has come to have a bigger impact on more asset classes than it did in the past. So it has managed to set up a badly designed program with far greater consequences than anything it has done in the past. For instance, Nick Timiraos of the Wall Street Journal pointed out on Twitter yesterday, mortgage rates rose considerably after the Bernanke remarks. That’s not exactly positive for the housing recovery, such as it is.

So despite the Fed starting to try to prepare Mr. Market for an eventual end of QE, the factors above strongly suggest, as critics fear, that the central bank will tighten late. But that won’t necessarily be because they’ve read the data wrong. In fact, Fedwatcher Tim Duy’s latest article if anything suggests that the Fed is suffering from a bad case of confirmation bias. Since it needs to believe its policies are working, it is motivated to see a recovery in the data. Plus its need to promote the confidence fairy also biases its perception (studies have shown that lawyers who defend a client that they suspect is guilty often come to believe in his innocence by virtue of having to sell his case). Duy believes that the central back will back out the effects of “fiscal drag,” aka deficit cutting, from its assessment of growth, yet appears not to be allowing for how much worse unemployment is than the headline statistics thanks to the exclusion of discouraged workers (and that’s before we get to underemployment). The Fed thus seems to have a predisposition to read data releases in a self-flattering manner. That would tend to favor an early exit from QE.

However, the market upset it triggered should give some pause. It may believe it has successfully contained any damage; the Japanese market, which had a wild ride, with the Nikkei down 3.3.% in the afternoon, still ended the day modestly higher (although that had more to do with Kuroda than the Fed’s ministrations). But stock valuations in the US are looking frothy in the face of declining earnings, which increases their vulnerability to shock. So if mere talk of ending QE produces this sort of reaction, the Fed is likely to hesitate to end it, even if it does have a bias to optimism in its data readings.

The one reason this might not be as terrible as it sounds is that with labor markets slack, it’s harder to generate real economy inflation than you think. But the longer the Fed carries on with its poorly-designed QE, the more fear-inducing its end will be.

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  1. Ben Johannson

    I’d say the Fed can’t generate inflation at all, given we’re now back into 2010 disinflation levels.

        1. chris9059

          but never in wages. (except for the parasite class of bankers, hedgies and politicians)

  2. Brick

    I am slightly confused by one argument here about whether the Fed will tighten late or early. On the one hand there is the argument of confirmation bias and needing to see its policies are working before it acts, yet on the other hand is the argument that the data used for confirmation is wrong because it under estimates unemployment and reads data in a self flattering manner. Perhaps the real asnwer is that it will be too early for the employment and business community and too late for asset prices.
    As to whether the Fed as painted itself into a corner then I think, the answer is a bit mixed. On the one hand you have interest rates rising potentially at the end of QE along with possible losses on derivatives and hedging, but on the other hand you increase the availability of good quality collateral which should help lending through increased liquidity.
    As QE tapers off, the shifts in real economy interest rates are likely to be volatile (The Fed will lose some control) and there is a risk that a financial institution will get caught out. On the other hand there will be some major shifts in wealth, possibly even affecting inequality. The biggest danger might be that the FED will be very timid, let an asset bubble rip and a financial institution will fail once the bubble bursts. For me the key is not the switch from bonds to equities/commodities on exit (although this might create an equities bubble) but the change in availability/price in high quality collateral which will set off big capital flows leading to volatile exchange rates and commodity prices. For me the Fed’s mistake was not size as opposed to a target (although I agree it makes the market less confident in the Fed’s ability) but that QE was too narrowly focused on treasuries and MBS (quality collateral).I am thinking very volatile oil prices might be the result, with a danger of a complete loss of control by the FED.

    1. from Mexico

      Brick said:

      The biggest danger might be that the FED will be very timid, let an asset bubble rip…

      Will be?

      1. jake chase

        Otherwise intelligent people seem to have no idea of the Fed’s mission, which is exclusively to save the magabanks, their creditors, and their looting executives from the consequences of reckless but profitable (to them) behavior. Seen from this perspective, every Fed action makes consistent sense. It will keep buying worthless bonds as long as the megabanks have any available for sale. It will continue to redefine inflation and unemployment out of existence, as a key participant in the propaganda apparatus. Its victims will continue being small savers. I do not expect to see positive interest rates in what remains of my lifetime. All this chatter about the end of QE is a smokescreen and nothing more. Bernanke and Greenspan have always been nothing but PR men and stooges.

        1. skippy

          “It will keep buying worthless bonds as long as the megabanks have any available for sale” – jake

          Haygood has a small effigy of you and I cannot speak of the things being done to it, but, it looks like he got his training down in Argentina… some where in the past.

        2. from Mexico

          Since the early 1980s, not only the Fed, but the entire US financial regulatory aparatus have dedicated themselves to the blowing a set of serial bubbles, each bubble bigger than the last, and each successive bubble designed to cover up the wreckage caused by the bursting of the bubble that preceded it.

          There is this mythology propagated that only loose Fed policy — low interest rates and inflated money supply — can blow bubbles. This is a lie. One of the first big bubbles to get blown, which provoked the S&L crisis of 1989 — was blown under very tight monetary conditions. What allowed the bubble to be blown despite extremely tight monetary policy was the abrogation of regulatory policy, as is explained here:

          There are many other examples of this, as this study reveals:

          In each of these episodes, a loosening of credit
          constraints allowed households to increase their debt.
          This increase in credit availability was associated with
          financial innovation and liberalization and declining
          lending standards. A wave of household optimism
          about future income and wealth prospects also played
          a role and, together with the greater credit availability,
          helped stoke the housing and stock market booms.

          What always amazes me is how the FDIC and IMF have all these extremely bright people around who put all these impecable empirical studies together, only to be ignored by the Bernakes and Greenspans of the world. Besides inflicting untold suffering upon humankind, this must be very frustrating for the people who conduct these studies.

          1. from Mexico

            Bottom line, in your list of “PR men and stooges,” don’t leave out Volcker. He was the one, after all, who fired the first volley in the war on the little people who have to work for a living.

        3. Jim Haygood

          ‘Otherwise intelligent people seem to have no idea of the Fed’s mission, which is exclusively to save the magabanks …’

          Probably you meant to type maggot banks. ;-)

      1. Can't Help It

        I saw a Fed ad for a new ingenieur (who says you can’t learn anything from a movie). The new guy is expected to be able to do some new magic related to helicopters.

        1. dolleymadison

          I didn’t know there was such a thing as “illegal” when it came to the Fed and their Bank Masters…

    1. NotTimothyGeithner

      Bernanke’s problem is low interest rates will kill life insurance companies. Besides the long term implications of wealth inequality which isn’t among Bernanke’s concerns, life insurance companies are huge and less risk adverse than banks. One failing will be a disaster in real terms and political terms.

      1. Don Levit

        Unless state laws have changed, insurers are limited to how much “risk” they can take. I believe the maximum amount, at least many years ago, was 10% exposure of its investments to the stock market.
        I still have a few whole life policies on my kids.
        They are showing illustrations of future dividends remaining level till age 100.
        They have remained level for the last 10 years.
        Can you imagine?
        An insurer showing future dividends as level, raher than as increasing?
        Don Levit

        1. Chris Engel

          You should punch in the face whomever sold you permanent life insurance policies _on your children_!

          As someone who worked in the business, let me tell you that those are just dogshit products that lead to big rips (commission) for the financial planner (advisor, whatever/whoever) and a low value for the client.

          This goes for everyone — never buy permanent/whole/universal life insurance, it’s a scam. Buy term, invest the difference. And FFS — dont buy life insurance on your kids!

  3. 4D

    I absolutely agree they are in a tight corner, but the markets don’t think they are. Most investors think there is a long passage still behind the Fed.

    I’ve seen plenty of comments in the past two days saying QE will never end, but clearly Fed officials are trying to prime markets (point 1 above) just to come to terms with the fact it must end in the not too distant future.

    The Fed is running into some real physical market constraints. I believe Jeff Snider at Alhambra Capital has been doing the best work I’ve seen on detailing the problems of QE and the shortage of collateral in repo markets. This has put a cap on shadow financing.

    As Zerhohedge noted today the Fed owns 30 percent of 10 year equivalents, and along with other CB’s there is big chunk of collateral now longer available for rehypothecation.

    Anyone not wearing big bull glasses can see that there is little growth traction in the US, or most of the world, outside of speculative components, which means policy is failing while bubbles are blowing.

    1. Richard Kline

      Ben and Timmie’s fixation on preventing securitized assets from reaching a market clearing price was an act of economic madness. The assets were rotten; the price should have declined. That would have mangled many Very Affluent People, and so had to be prevented by any scheme necessary. The notion, of course, was that while the Fed forcibly held up asset prices eventually the economy would grow so that the clearing price for those assets became close enough to the phoney price that the Fed could leap clear from its support role with little or no volatility in asset price and allocation resulting. Because, y’know, ‘growth is natural’ and must occur ‘so long as credit is available.’ [Yes, the academic lunks behind all this really think they are scientists and have the models which prove so.]

      Here we are in the real world, and of course Ben and Timmie’s Best of All Possible Gated Communities has _not_ eventuated. Faked assets ~ no effective growth. Free money in a no-growth scenario has gone entirely into speculation, as opposed to primarily in more ‘normal’ times. Because both assets and markets are severely structurally distorted at present, it is not possilbe for the Fed to both end it’s support and there to be no resulting volatility. Will the economy eventually grow under the faked prices to float them clear ‘naturally’ and buffer market distortions in the aftermath if the Fed holds up the fakery for _another_ five and a half years? (The present policy has been in force that long already even as the mechanics of intervention have been changed.) No. What I find interesting, in a sickening sort of way, is the pervasiveness of the market function distortions which have resulted from the Fed’s actions to this point. In essence, all markets are correlated with the Fed’s QE behavior. The massive correlation is perhaps the most comically disastrous ‘unintended consequences.’ Not unanticipated consequences, though, as this potential was decried before, during, and presently as the Fed has faked the flows of the financial system. Massively correlated systems don’t change state smoothly.

      Ergo the Fed can’t lay down its weapons of mass distortion. I’m not of the view that the Fed will withdraw it’s support unilaterally and let the whole faked schemata implode, which would the be the probable result. Like it or not, and evidently its major minds do not, the Fed will keep pretending until the market distortions themselves implode the rig-up. Another bubble’s fated end is the likely modality, though who knows really. There is no historical comparable for the present conundrum: yes, we have an instance of economic folly which is a new stupid thing under the sun. What won’t be new is the dust of the bust at the end of it all: that will taste exactly the same as in prior econo-financial catastrophes of self-infliction.

      1. from Mexico

        I still believe the story is incomplete without taking into account the trillions upon trillions of dollars the US has spent in the last decade trying to establish full spectrum dominance.

        Just like the costs of the Viet Nam war didn’t come back to bite us in the ass until the 1970s, the bill for our military adventures since 2003 still hasn’t come due. And of course the possibility of world domination is more remote now than it ever was.

        1. Jim Haygood

          A central bank with currency-issuance authority, such as the Federal Reserve, essentially is permanent war finance.

          Unfortunately, the global empire it finances is rendering ever more negative returns.

          Keeping throwing good money after bad, and pretty soon you’re f*cking poor.

        2. Richard Kline

          The distinction for me, from, is that the two issues are policy-separate. That is, the plan for hegemonic hypertrophy is pushed entirely separately from the plan for take-over-the-public-financal structure. And each are pushed by separate constituencies amongst the oligarchy for that matter, there’s very little over lap. The Murdochs do both—but they aren’t even American!

          Most of the financial oligarchy are just in if for themselves as far as I map it. They don’t really give a rat’s ass about bragging rights relative to the heathen Chinee in Darkest Africa, or whose tokhus gets kissed in Salvador. The financial oligarchy _doesn’t make it’s money in that kind of empire_, if you follow me. The financial oligarchy is interested in looting _American_ insurance companies, and gouging commodities futures contracts _no matter WHO_ extracts or ends up with the stuff. The financial oligarchy is interested in financially ‘fracking’ Japanese health care delivery to extract rents for no value added, free money for the privilege of totally unnecessary intermediation in service delivery and costly recipient dumping. The financial oligarchy doesn’t do borders except for tax avoidance and jurisdictional arbitrage. The financial oligarchy has a post-national mindset. The guys dropping bombs are sooo 20th century, they don’t get it that they’re yesterday’s men.

          As to who will pay for all that expenditure on drawing imperialistic lines in the shifting sands, the money spent there is small beer compared to the sums put in motion for the financial oligarchy. No need to worry about who’s loading that oil tanker for whom when one can game the system and extract a fat rent without ever leaving ones jewel-studded keyboard in a gated community far, far away. What the financial oligarchy has figured out, and rightly, is that the public financial infrastructure of large sovereign states is the source of real vast wealth. Why go to the trouble of invading a Third World cesspool when ones crony at the Fed or Treasury can, with a few keystorkes and five minutes of bloviation before the camera but tens of billions into the pockets of the a handful or oligarchs to virtually no effort? Sovereign fiscs, and their debt and tax authorities are the real source of wealth in modern, developed countries, and that has been true for a millennia. The blackest criminals cluster round those domestic, onshore, Fountains of Mammon, and conspire to engorge their flows. Successfully, in the 21st century case of America.

          1. Roland

            Actually the financialized empire does need a lot of brute force. The US elite enjoys a nice flow of real goods and services coming from abroad, all of which can be paid for by figments of Ben Bernanke’s imagination.

            That’s a very nice deal for the US elite, but in order for that deal to continue, a strong physical coercive potential must be maintained, and occasionally demonstrated.

            Luckily for the US elite, global force projection has never been so cheap and easy. Recent technical developments (e.g. the return of militarily useful personal body armour) have been highly favourable for the imperialist. Imperial forces have suffered insignificant casualties. Pretty much the only people who get killed, maimed or rendered homeless are the foreigners warred upon.

            Better still, compradore elites in China and Saudi Arabia, for their own various purposes, have been willing to finance, at close to zero interest, the entire financial cost of all wars waged by the US elite post-2000.

            Even 16th century Spaniards couldn’t do empire so cheaply and so easily.

            So why should the American elites ever stop? Bubble after bubble, war after war, who on Earth is ever going to make them stop? Remember these people think that greed and fear are the only moral poles–and they don’t fear much.

            Now I’m not saying the imperialists are covering themselves in glory. Like for the Romans in the Late Republic, the wars all seem to be indecisive fiascos while they’re happening. Compare US performance in the Middle East to the various Roman wars against Jugurtha or Mithridates.

            But think: the naked corruption and incompetence displayed by the Romans during their long wars in Numidia did not in the least indicate a decline of Roman imperial power, the apex of which was reached more than a century afterwards.

            Does the empire immiserate most of the people even in the imperial core? Of course it does, but that doesn’t matter, since empires are run for the benefit of their rulers, not their subjects. A Roman senator didn’t care if the small farmers of Latium were ruined by the flow of cheap slaves and cheap grain coming to Italy from around the empire. As far as the Roman senator was concerned, the populus of Rome could either join the Legions, or go on the dole, so why should they complain? Ingrates!

            This process might go on for a very great deal longer than many of its critics think. It is up to critics to point to a likely external positive check upon the power of the US elite and its globalist franchisee elites. Who’s gonna make them stop? We already know that there is no effective internal check on the power of these elites–this ruling class has successfully escaped the gravitational pull of the political and legal restraints historically placed upon it.

          2. Colas92

            Interesting challege Richard Kline: who will stop the oligarchy?

            1- Nations with nuclear weapons are one possibility … reckless, delerious overreach is always a possibility that brings down the oligarchy (and the rest of us along with them) .. Putin has been drawing lines in the sand (with the Chinese) in Syria and Iran… pushing back against ABM systems as well. Obama seems quite cautious at this point… perhaps for good reason… of course nuclear war will tend to wipe out life on earth, so there’s small comfort for the rest of us

            2- It’s likely a deteriuorating, unstable financial order will blow itself apart… The recent Fred Mishkin paper outlining scenarios in which the Fed could be bankrupted, in need of a bailout from Treasury, is a potential path to be contemplated. Any set of circumstances that forces interest rates to rise can wipe out the Fed… Not a lot is needed.

            3- In any case, keeping the bubble assets afloat starves the real economy forcing contraction and stasis, which reduces tax receipts, which means that the 69 million Americans living on food stamps/ or disability checks, along with 25-30 millions unemployed or underemployed will have to be “cut loose” … in other words a Final Solution budget.

            At some point soon a military dictatorship will be necessary to manage the killing fields … we are well on the way towards a full blown military police state lockdown… Such governance is increasingly unstable and prone to collapse or a reckless plunge into nuclear war.

    2. Moneta

      ZIRP and market manipulations lead to a drop in confidence.

      This means an increasing number of people looking for a free lunch and paper gains and less people willing to work.

      Anyone expecting the economy to rebound in a productive manner is completely deluded and out of touch.

      Printing and capacity destruction will lead to inflation. And when I say inflation what I mean is a drop in living standards.

      1. Richard Kline

        Agreed. But that’s a feature, not a bug to the financial oligarchy. Ohh, the lackeys at the Fed delude themselves that there is a greater good, but the guys giving them the wink-wink, nudge-nudge are quite happy to take a larger share from a smaller pie while a cowed public sits by and begs for crumbs where once they had a share. The financial oligarchy only cares about _their own_ position, which is actually stronger in a weakened and more polarized country. The Kochs understand this well: big money wins bigger in tough times so long as the state props them up while letting the populace take the hit.

    3. financial matters

      I think this is the wall that the QE and ZIRP are running into and related to breaking the buck in money market funds.. “”the problems of QE and the shortage of collateral in repo markets”” (4D)

      And it could be quite a cascade effect.. “”In essence, all markets are correlated with the Fed’s QE behavior. The massive correlation is perhaps the most comically disastrous ‘unintended consequences.’ Massively correlated systems don’t change state smoothly. Like it or not, and evidently its major minds do not, the Fed will keep pretending until the market distortions themselves implode the rig-up.”” (RK above)

  4. Walter Map

    None of this has anything to do with the Real Economy. Nothing the Fed has done benefits the Real Economy. All the Fed has done is throw trillions at the Financial Economy, aka the Fake Economy, parasitizing the Real Economy on which the Fake Economy is supposed to depend – and ultimately does depend.

    The Fed’s proper course should have been to let rapacious financiers take their losses and bail out the Real Economy instead. The big banks should have been nationalized and broken up. For sure, that would have resulted in pain on Main Street, but that way that pain would eventually have ended as the economy recovered. The Fed’s approach ensures there will be no eventual recovery in the Real Economy because the supporting the Fake Economy requires it to cannibalize the Real Economy indefinitely. All the Fed has done is kick the can down the road and delay the inevitable reckoning, and at a very high price, because now that reckoning will be that much worse.

    Not that the Fed was ever going to follow a proper course. It’s mission is supposed to be to control inflation and to control unemployment, but that has never been anything but a lie. It’s real mission is to guarantee the rich get richer, at any cost to the Real Economy, using all the smoke and mirrors available to it.

    Bernanke out by August, QE ends, rates up: Crash

    It’s going to be ugly.

    1. wunsacon

      >> None of this has anything to do with the Real Economy.

      Yes, it does. All-the-reserves-you-want and back-to-mark-to-myth means banks didn’t have to sell off housing inventory to raise reserves themselves. Cheap money means banks and hedge funds can bid up all kinds of assets and commodities. Cheap money means businesses didn’t have to continue cutting labor costs. To me personally, it means my savings translates into 15%-down on a house versus 50%-down and makes my payments extend far beyond what I’m comfortable with regarding my employment prospects.

      1. Ben Johannson

        The Fed is the monopoly issuer of reserves. Banks don’t raise it for themselves through sales.

          1. Ben Johannson

            Banks raise capital for themselves, which they use to offset losses and maintain solvency. Reserves are issued by government for purchasing government securities, obtaining cash for things like ATM’s and clearing payments between banks.

          2. wunsacon

            Lots of “reserves”, Ben:


            Can some of the content of one account ever be transferred to another account? If so, then free money from the Fed in one account is fungible with asset sales to raise “capital” or “reserves” or whatever other name people give it.

            It’s money.

  5. profoundlogic

    You aren’t missing anything. The Fed is indeed buying it’s own propaganda. This will undoubtedly be entertaining (if not depressing) to watch. Their epic hubris is demonstrated by their claims of any recovery at all. This giant money-laundering operation (common folks; Let’s call it what it is) has done squat for the real economy. That was never the real intention.
    The Fed exists to keep bankers and Federal Reserve officials gainfully employed. Beyond that, it’s pretty much useless. These guys oversaw one of the biggest bubbles in history blowing up in their faces, yet they were completely clueless to the havoc which was about to be unleashed. Their solution to the problem once the damage was done….Print as much money as it takes to recycle all of that fraudulent (defaulted) debt and throw the tab at the American taxpayers. After all, most of them are still too busy watching their favorite ball game or reality TV show to realize they’ve just been robbed of most of their hard-earned savings.

    Ignorance is bliss…until ignorance comes knocking on your door with your pink slip.

    1. Susan the other

      There must be a name for it. What do you call a phenomenon of mass disillusionment whereby people everywhere just quit playing economic ball and demand disappears? I think we’re lookin at it. Disillusionment with capitalism and all of its unresolved problems; disgust with unequal distribution of both goods and money; panic over the climate and overpopulation. We here on NC can’t be the only ones who have become deeply cynical. So any “consumer optimism” will be superficial and tenuous at best and people will remain skeptical for decades – until somebody discovers collateral they can believe in,

      1. Richard Kline

        What do you call it? Insurrection. Revolution would be better, but there’s neither organization nor mindset for that. One gets insurrection and quietist religious fabulation. We’re not there yet, in either respect . . . .

  6. ignim Brites

    The FED has painted the nation into corner. Very unlikely either the FED or the nation survives.

    1. OpenThePodBayDoorHAL

      Private crdit was what blew up in 2007/8, when debtors could not handle any more debt. This time around it’s central bank debt, and they have no such limit. They can keep issuing and issuing…which I guess means the crisis will be a currency crisis?

  7. Robert Asher

    Disinflation? In the world I live in during the last 10 years the real value of my income, whose nominal value has increased 2.6% a year, has declined by 10%. This according to the BLS online inflation calculator (not the one used for Social Security of course). Why? OIL prices, which also have a huge impact on food prices. (My own inflation index uses the price of a 20 ounce (volume) container of cottage cheese.) The fees charged by plumbers and electricians have increased. My local property taxes have increased by 33%. So if peopole on fixed incomes facing these forces are not consuming as much as they used to, is it any wonder consumer demand is not strong?

    1. ambrit

      Mr. Asher;
      My perspective is that of an aging plumber in the American Deep South. Prices charged for plumbing and electrical work are rising, but not the wages paid to the actual plumbers and electricians. The phenomenon known as “rent extraction” is at work here, as it is everywhere else in our economy today. Many of the most prominent plumbing repair services, the ones with the ads in the yellow pages and the eye catching graphic logos on the trucks, have been, or are from the start, syndicated to investors. These capitalists writ small get their cut first. (In a criminal case that would be described as ‘skimming.’) While not a new thing, this rent extraction is done at arms length. While an owner operator is doing rent extraction, there is an immediacy to the relationships that mitigates the worst of the abuses. Not so with a system where hired managers do the bidding of off site owners. In the factory system, unions arose to deal with the workers side of this issue. Small and mid-sized trades shops have been de-unionized now, slowly but surely, over the past forty years or so. So, next time you grumble about that repair bill, remember, you are doing gods work. Someone has to pay for the absentee owners kids private academy fees.
      Please excuse me but, I can’t resist a quote from Frank Herbert: “The s—- must flow.”

  8. Moneta

    Theory of Pseudo-Capitalism in developed world:

    Government subsidizes business so business can grow. Government debt grows as economy grows until it reaches a debt ceiling.

    When this happens it is then time to find an emerging market with little governement debt and cheap labor to lever up and transfer its production there to cut costs and keep the debt-to-gdp ratio manageable.

    This goes on for a while, as long as consumers can lever up and the emerging country keeps its debt-to-gdp ratio at an acceptable level. If the emerging market government is a dictatorship that is a plus because that means the population will not be getting higher wages or consuming much energy which will give even more to the developed market.

    However, once the emerging market’s debt ratio gets too high, the developed country must look for an exit or try to squeeze the emerging market. That’s where the IMF comes in.

    Pseudo-capitalism in practice:

    US reaches its limit at end of 60s. Starts exporting production to lower costs and keep debt off US government books and onto other emerging governments’ books.

    Fast forward to 2008-2013, US debt is reaching a limit for consumers and government. The US needs to devalue this debt without losing its power to import… OIL. Therefore, it has to be very careful with its QE so as not to anger the countries with the US $ reserves and so as not to choke off trade.

    So the Fed stays Dovish while the US drills its old wells to get production back up and keep oil prices down just in time to massively deflate its debt.

    Of course, they know this oil production will not be sustainable, but it should give them just enough time to be able to do their helicopter money manoeuvre and place the world back into the same order of the last 4 decades for another 3 or 4.

    Interestingly, most of the people in the developed world are clueless about finance and wish for global democracy and world peace.

  9. petridish

    There is much well-reasoned and careful analysis in the comments above. But they all seem to proceed from the same basic assumption: the FED (and all other global central banks) actually WANT to restore the global economy to its former “capitalist” function.

    Perhaps a better analysis would proceed from asking the question, “What steps would a central banker take to transform global capitalism into global feudalism?”

    1. Moneta

      IMO, restoring the global economy will lead to global feodalism… countries gutted one after the other.

    2. washunate


      I think it’s the strategic question of whether the Democratic party can be reclaimed, or whether it will implode as more aware leftists exit the scam.

      Perhaps because I’m not an insider caught up in the details, the actions of the Fed have seemed imminently reasonable to me – from the perspective of a system of political economy that desires concentration of wealth and power. Why would the Fed ever stop backstopping the criminals? That’s what the DC Democrats want.

    3. Lambert Strether

      Well, they’d have to put an end to wage labor. They’d also need kings. Do you have a scenario for that? The transformation would need to be on a worldwide scale.

          1. ambrit

            Dear Lambert;
            Fair as far as it goes. However, Demmings reconstruction of the Japanese economy after WW2 would go a fair way towards a feudalistic state of affairs, no?

          2. Doug Terpstra

            The term “neo-feudalism” by Charles Hugh Smith and others fits our plight. History rhymes and if you squint a little and picture Dimon and Blankfein with funny hats and dress capes, they could certainly pass for feudal warlords, collecting tribute from serfs. As for a king, with the right headdress Obama makes a classic black Pharaoh, even if that predates Euro-feudalism by more than a millennium.

      1. Colas92

        Politically speaking we already live in feudal oligarchy which chooses our kings and princes for us. Economically, we have become vassals or even property of corporate overlords who live on extracted rents… in short, a modern version of feudal relations.

    4. Ben Johannson

      The problem I have with that interpretation is that Bernanke has repeatedly admonished Congress for not utilizing fiscal policy to solve the labor market problem. The Fed is essentially a one-trick pony, fiddling with interest rates in the hope something sticks, knowing it probably won’t, knowing it has to at least try due to political pressure.

      Recall before the 2012 elections how Obama’s media boosters were flooding the internet with articles about how the economy is all the Fed’s fault for not doing way totally more, so as to insulate the President from any responsibility.

  10. Susan the other

    A graceful exit for the Fed? About as graceful as the finger pointing in Congress. Bernanke is a very interesting man. He goes before Congress and explains to them exactly what they have to do to fix everything. Congress has the temerity to blame Bernanke for “printing money” foolishly. Bernanke points out that any long term recovery depends on fiscal policy which creates the necessary demand for the Fed to stop supporting a bankrupt economy. Blah blah blah. It never changes. Bernanke explains that the Fed is merely the agent of Treasury and that Congress gives the Fed its dual mandate of stable prices and full employment. Which two goals, in a capitalist system, are diametricallly opposed goals and everybody with a brain cell knows it. Bernanke actually suggested that Congress reconsider the mandate and simply have the Fed control prices while Congress passes fiscal legislation to maintain full employment. At which point every senator and rep on the panel then got that blank-eyed expression of denial.

    1. Chauncey Gardiner

      Thank you, Susan. Fiscal solutions have to date been of very limited scope. Austerity-Sequester needs to be sent to the same place in which all failed ideas repose.

    2. Ed S.


      Absolutely right. Chairman Bernanke is probably the ONLY individual in power who has actually fulfilled his duty (to backstop the banking system). Don’t like what he’s doing? Change the role of the Fed.

      Congress, the Executive branch (both Bush’s and Obama’s), the regulatory apparatus have done virtually NOTHING to revive the economy. Bernanke doesn’t control fiscal policy, regulation, justice, etc. And while he may have made questionable policy decisions, it seems to me that as a student of GD #1 he did everything that he could to prevent GD #2.

      Bernanke is too convenient a scapegoat for our macroeconomic ills; I wonder how much he is a convenient distraction.

  11. washunate

    Yves, do people talk to you quietly about what really might happen? Everything seems so fake and stage-managed at this juncture that I just assume I’m watching a play – but even knowing that, without inside access to the director, you still are just guessing at the course of the production, and that is assuming no interesting unplanned stage managing fiascos throw everything awry. If things really do get to the point of being boxed into a corner, we are talking about massive dislocation with essentially unpredictable consequences, and there is basically no liberal thinking on that subject publicly. Public Democratic commentary is a combination of trust Obama and collapse is impossible.


    I would offer a little different perspective on the following near the end of the piece: “The one reason this might not be as terrible as it sounds is that with labor markets slack, it’s harder to generate real economy inflation than you think.”

    I would be eager to hear more about why this perspective of inflation seems so pervasive. Sure, price increases can be driven by wage increases. But where does it follow that they must be driven by wage increases? The reason that wage stagnation has been at the heart of our economic troubles for decades now is precisely because public policy has stagnated wages at the same time that it has dramatically increased prices.

    The 4Hs, if you will, of a basic middle class standard of living are not driven by the labor market. They are driven by public policy: housing, healthcare, higher education, and healthy food. If median wages explained the prices of those items, their prices would fall drastically. The list of specific government policies that restrict wages while inflating prices is enormous because we are reaching the mathematical limits of exponential growth. It requires ever more direct and blatant government force to keep the prices elevated.

    That’s just how the math works: sociopathic predation = worker productivity – wages. As productivity approaches wages, the amount left for theft approaches zero. As productivity approaches predation, you have increasing levels of price inflation, indentured servitude, and ultimately slavery (which, in mathematical terms, is essentially a way of saying that price levels have risen to infinity).

    Or to put it in practical terms, I strongly recommend to anyone thinking price inflation isn’t a problem trying to live for a year on the medain wage in one of our nation’s cities. I’ll even exclude the major ones – don’t even try Manhattan or San Francisco. Pick one of those low cost flyover cities like Minneapolis or Cincinnati or Oklahoma City or Denver or Kansas City or Nashville.

    1. Moneta

      Talking about deflation or inflation is a red herring. What’s coming is a drop in living standards.

      1. washunate

        Agreed, that’s what I mean. I care about actual living standards in the real world. I don’t care about monetary theory or academic disputes.

        I go into detail because sometimes people dismiss short comments because you don’t ‘understand’ the way money works, (you know, it’s all so different and complicated in our modern world), but the point is as simple as you make it.

        One tweak to your statement is that what is coming is a drop in living standards to people who have been mostly insulated from the carnage in our economy. More marginalized and voiceless members of our society have been targeted for some time, with prison perhaps being the zero-boundary equivalent from monetary policy – and protection from prosecution its neat and tidy polar opposite for the elite.

        1. Calgacus

          Washunate: In part, replying here to your last reply, rather than burying it in an old thread

          I said “printing trillions – and no inflation FROM IT to speak of” Not that there was no inflation now. Just that your suggestions would cause real harm right now. For zero anti-inflation benefit.
          The point is that whatever the level of inflation and prices is now – spending any amount seriously proposed will not affect it. Not Spending, “Wise Spending” just causes depressions.

          Until someone can answer why politicians will spend additional dollars wisely, it is nonsensical to make blanket claims that additional dollars will improve the situation. We’re not in some uniquely time-constrained liquidity emergency where we have to throw gobs of money at a problem right now.

          Well, then everything I say, that MMT says, that Keynes said is nonsensical.
          Wise Spending is unimportant now. Any US spending better than on bombing US cities, say, would be good overall.

          “We”, millions ARE in a time constrained liquidity emergency. Such statements just prove that you aren’t. That the wolf is not at your door. Wise Spending = poverty and unemployment and misery for millions. Billions if you count the effect outside the USA. You think you are on the side of the poor. My first comment on you here was to praise your ideas. You mean well. But such ideas, overall, are on the side of the rich. Wise Spending = Austerity & Misery. There’s a lot of Keynes you should read.

          Real economics, which everyone used to understand, until around 1970, does look “nonsensical” to victims of post-70s, neoliberal brainwashing. But everybody used to understand MMT somewhat. When Warren Mosler explained his stuff to one congressman – the congressman replied: Yeah, that’s how I learnt it in college in the 60s.

          We’re in a long drawn out transfer of wealth. You don’t understand how the transfer works. Waiting for Wise Spending abets, enforces the transfer.

          What matters is allocation of resources, not the number of dollars spent.
          Absolutely wrong. “Allocation of resources” BS is a major problem. If you don’t spend the dollars, Wise Spending = destruction of resources, poverty and misery. Yes, of course better if spent “more wisely”. But the least wise thing, the worst misallocation and waste is to not spend enough, RIGHT NOW.

          Yes, prisons can “stimulate”. They are a rotten way of “stimulating”. If spending is bad enough, it can be bad overall. But it’s got to be really, really bad. Right now, “neutral”, useless spending – say building pyramids to attain full employment – would be a Great Idea. Much, much, much better than making millions live in misery, waiting for Wise Spending pie in the sky. .

          Agreed, that’s what I mean. I care about actual living standards in the real world. I don’t care about monetary theory or academic disputes.

          Not caring about “monetary theory or academic disputes” is not caring “about actual living standards in the real world”. It really matters whether economic, or engineering, or medical theories are correct or not. The lives of millions depend on correctness of academic theories. Just like they depend on academic disputes and theories about how to build bridges and dams and how to concoct medicines. “Wise Spending”, rather than Imperfect Spending Right Now in an imperfect world, is “lets make a perfect dam, with no wasted concrete, while people drown and starve” “lets make a perfect vaccine that cures All diseases, not just one”. Wise Spending is Nuts.

          1. washunate

            Thanks for continuing the discussion. We can definitely disagree, and it’s good to articulate that clearly. You claim that bad spending is better than no spending, I claim that’s nonsensical. I would further observe that wealth concentration itself is the problem, and marginal federal spending as implemented by the current President is going to entrench it, not reverse it. Finally, I would observe that we have been trying spending for a decade, adding something like $10 trillion in federal debt, the vast majority of it going to the very criminal elites in war and finance destroying our country. How much more does it take? Another $10 trillion? $20 trillion? $50 trillion?

            Or to say it differently, the Constitution, not GDP maximization, is the foundation of this country. If ignoring the bill of rights creates jobs, then we sacrifice those jobs until those amendments are repealed.

            (More sarcastically, I would retort that you clearly have no idea what it’s like to be hunted by the national security state or hounded by the student debtors prison or profiled by local police or denied access to medication that costs pennies to produce because of some border agent saying you can’t import those drugs into the US or using public transportation to get groceries because you can’t afford a car or imprisoned for smoking a recreational drug safer than alcohol or living in an apartment with a stove that’s not even flat because the nice house down the street is owned by the bank and they won’t sell it at a market clearing price because the government is backstopping their activities. And my personal favorite when encountering this opinion, sticking hands down people’s pants at airports.)

            I apologize for not being well versed enough in Keynes or MMT to refute this in detail, because this sounds extremely dangerous. I mean, when Keynes was around, US currency was backed by gold, right? Is there any authoritarian or wasteful policy you wouldn’t support in the name of spending more money; any constraint at all? Obviously we can’t resolve this in a few comments, but I do think this is one of the primary longer term thoughts I have been thinking about. I don’t think hyperinflation will happen to the dollar, but your argument, taken to its logical conclusion, supports no other outcome that I can see. I appreciate you standing by your proposition, because I have encountered other people who back off when taking this all the way, either downplaying support for corporate welfare, or claiming that spending wouldn’t really be infinite, there would be some magical brake along the way – wealth will trickle down before the dollar becomes worthless. Ha!

            Anyway, have a happy Memorial Day weekend. Perhaps you can invite me over for a celebratory dinner when we invade Iran or on the 10 year anniversary of ignoring the FBI’s Congressional testimony on the epidemic of fraud :)

            I do concede in all seriousness that your position is winning. There seem to be very few (of the non-crazy-prepper variety) worried about too much spending, militarization, and general decline of Constitutional governance and non-rightwing fiscal responsibility. In DC, both the GOP and the Dems love their spending.

            Also, Yves, this is what rocks about your site. The internet is fantastic for the spread of ideas when the host is excellent.

          2. MRW

            I completely agree with you, Calgacus.

            washunate, you conflate what the federal government spending can do for the economy (money creation and jobs) with credit creation by the banks, and what it has done because people don’t understand the difference. They are two separate universes. That additional “$10 trillion in federal debt” you cite is not something that has to be paid back. The federal government may create “debt” but when the federal government does it, and it alone, it’s creating real money. Besides, it’s sitting in pension funds and the 1%’s bank accounts; it’s not sitting in the treasury’s general account. The credit creation universe figured out how to get it because 99% of this country doesn’t know how the monetary system works so they didn’t know how to stop the bastards.

            Calgacus is absolutely right. The federal government has GOT to start spending into the real economy, the industrial economy, to give people jobs, rebuild the infrastructure, and pay for real scientific research, communication broadband upgrades and the like. When the federal government does these things, it is interest-free money for everyone, capitalism for all. It is money spent for public purpose, and for the government provisioning itself.

            The federal government/central bank can pay for all these things without requiring you to put your house up as collateral, sign over your bank account, pledge stocks and bonds, garnishee your wages, or make you pay a % of the cost. But banks can, and therein lies the difference that Calgacus is writing about; we have financial capitalism for the few destroying the many. We have allowed the banks to privatize what should and can be free if done by the federal government. Costs rise. The poor are hit hardest. (Look at the state of student loans. If the government will make the banks whole with student loans–promised in 2005–why are the banks involved to begin with? Give the money to the kids.) Banks aren’t loaning to businesses, they are loaning with great abandon to other financial institutions (loans create deposits which the Fed covers) and the profits spiral among themselves.

            I am unaware of your previous conversations with Calgacus, but you ought to take what he’s saying to heart. [I’m getting the evil eye here to get of the computer.] Read Michael Hudson.

          3. washunate

            “The federal government has GOT to start spending into the real economy, the industrial economy, to give people jobs, rebuild the infrastructure, and pay for real scientific research, communication broadband upgrades and the like.”

            Agreed (although, philosophically, I would strongly nuance the position about jobs – the point is to create wealth, not employment. Leisure time is a good thing, not a bad thing).

            But there are two problems:

            1. What does that have to do with what the federal government has actually been doing?

            2. How do you justify ignoring the oppression of people suffering from government policies? Is there no policy you wouldn’t support in the name of spending more money?

            If you really are willing to support the most unconstitutional and racist policies, then we fundamentally disagree. If you are not willing to support such policies, then we agree that what matters is how money is spent.

            As to Michael Hudson, are you talking about this guy:

            “The Obama Administration’s Wall Street managers have kept the debt overhead in place – toxic mortgage debt, junk bonds, and most seriously, the novel web of collateralized debt obligations (CDO), credit default swaps (almost monopolized by A.I.G.) and kindred financial derivatives of a basically mathematical character that have developed in the 1990s and early 2000s.

            These computerized casino cross-bets among the world’s leading financial institutions are the largest problem.”

            “Mr. Obama ran as the “candidate of change” from the Bush Administration’s war in Iraq and Afghanistan, its deregulatory excesses and giveaways to the pharmaceuticals industry and other monopolies and their Wall Street backers. Today it is clear that his promises for change were no more than campaign rhetoric. There even has been continuity of Bush Administration officials committed to promoting financial policies to keep the debts in place, enabling banks to “earn their way out of debt” at the expense of consumers and businesses. Read $13 trillion in government bailouts and subsidy.

            History is being written to depict the policy of saving the bankers rather than the economy as having been necessary – as if there were no alternative, that the vast giveaways to Wall Street were simply “pragmatic.” Financial beneficiaries claim that matters would be even worse today without these giveaways. It is as if we not only need the banks, we need to save them (and their stockholders) from losses, enabling them to pay and retain their immensely rich talent at the top with even bigger salaries, bonuses and stock options.

            It is all junk economics – well-subsidized illogic, quite popular among fundraisers.”


    2. Yves Smith Post author

      You really do need rising labor costs to have meaningful inflation. If you break down the costs of PRODUCTS, you’ll find that labor (factory labor, factory supervision, managerial overheads, marketing, the labor component of supplies purchased) are over 50% of total costs. And the US is now a service economy, so economy-wide the labor component of total costs is even greater.

      That does NOT mean that individuals don’t feel the pinch of even comparatively low inflation. This is the conundrum. If central banks succeed in generating commodities inflation (or financial speculation achieves that effect) people with no wage increases will be squeezed by rises in their food and fuel costs.

      1. washunate

        I follow the point about labor costs. (I’m comfortable taking that line of thinking further – in aggregate, all monetary costs are labor costs; one firm’s cost of raw materials is another firm’s cost of labor.) I agree we won’t have a hyperinflationary collapse precisely because that would require wide-spread demand collapse of dollars which just isn’t going to happen (because the whole point of wealth concentration is to skim those extra dollars from the public – that would require a level of stupidity among the elite that I do not think they possess).

        I just don’t know why debt expansion/contraction cannot perform the same function as wage expansion/contraction in impacting prices?

        Or to say it differently, why have prices risen so much over the past couple of decades? The Social Security Administration’s reported median compensation has only increased from about $15K to $27K from 1991-2011. In the same time period, the Federal Reserve reports household and nonprofit credit market debt rising from about $4 trillion to $13 trillion and all sectors credit market debt rising from about $14 trillion to $54 trillion. The Energy Information Administration says gas went up from about $1.10 to $3.50. Wikipedia says the cost of an FA/18 Hornet was about $30 – $50 million, while the F-35 JSF is around $200 million (and growing). The official cash-based accounting metric has US federal debt rising from about $3 trillion to $14 trillion.

        In other words, wages less than doubled, while private debt and gas prices more than tripled, federal debt quadrupled, and next generation fighter jet projects are passing quintupling. Let’s say we avoid catastrophe and have another couple decades like the last two. That’s not going to be pretty for the bottom 80% or so of our society, whether we call it inflation or not.

      2. Roland

        Well, I look at the fate of many post-secondary students in recent years.

        The students’ earning power did not rise. Their parents’ earning power, by and large, did not rise.

        Nevertheless, there has been a great inflation in post-secondary education costs.

        What filled the gap? Easy credit, leading to long-term debt.

        Consumer price inflation, in recent times, has not been sustained by rising wages. It has been sustained by an explosion of consumer debt, made possible by loose monetary policy.

      3. Colas92

        Were rising labor costs the cause of Weimar Hyperinflation? Hardly.

        As for accurate calculations, consumer price inflation vastly outruns wage growth…

        “The CPI on the Alternate Data Series tab here reflects the CPI as if it were calculated using the methodologies in place in 1980. In general terms, methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.”

  12. JGordon

    I’m really curious here, but what does Yves et al think a good monetary policy would be? I have been under the impression that you all are in favor of money printing in any and all circumstances, and the more the better. Are there some ways of printing money that are better than others then, or some instances where printing money might not be a good idea period? Maybe for example where the amount of newly printed money brought into existence requires economic growth that can never and will never be achieved?

    “Limits to Growth” got it right in the 70s. You might want to think about what kind of an economic paradigm we need when industrial economic growth is impossible.

    1. steelhead23

      I’ll reply as et al. It is my view that outright purchase of MBS is outside of the Fed’s charter and has virtually no instant effect on the U.S. economy, but presents loads of risks. I am in no way qualified to educate anyone about finance, but I think it is important to differentiate expansive fiscal policy from loose monetary policy. An expansive fiscal policy would be supported by most Keynesians as it would have real effects in the economy. Loose monetary policy could help grow the economy as well, if consumers had move disposable income or confidence in the future to accept higher credit risks. But, the Fed has gone nuts. Buying junk at par so the banks could breathe. So, Keynesians would mostly support higher deficit spending but I think I am not alone in believing that due to private ownership of the Fed itself, and its belief in TBTF, the Fed is well past its sell-by date, is distorting markets and placing risks on the future that are not in the public interest. Hence, I happen to believe that the Fed’s role should be reduced to providing a liquidity clearing-house (the overnight windows and such), while the emission of money should be a government function, perhaps along the lines of MMT. I too would like Yves’ take.

      1. Moneta

        I wonder how many defined benefit pension plans would have collapsed had there been no bailouts and no QE.

    2. Lambert Strether

      “I have been under the impression that you all are in favor of money printing in any and all circumstances, and the more the better.” Have you considered reading the comments in order check your impressions?

    3. Yves Smith Post author

      Your comment is a real straw man.

      1. We’ve said repeatedly that too much stimulus will create inflation when the economy is growing nicely and unemployment is low.

      2. We’ve said repeatedly that we need more fiscal stimulus, that the Fed’s machinations goose financial asset prices and don’t do much for the real economy and hurt savers.

      3. We’ve run numerous posts by MMT types (who say repeatedly that too much “printing” is a bad idea when the economy is slack) to show that they government does not need to issue bonds to finance deficits (as in we don’t have to worry about China or Japan jerking our chain).

      1. JGordon

        You say it’s a straw man, but it’s something I’ve really been trying to grapple with when reading everything you post. Like, I’m really not sure what your point is or what you’re trying to achieve since the various things you seem to be aiming for are, from my point of view, contradictory and mutually exclusive. That’s why I just decided to ask outright.

        Alright, I will take your response at face value there and think about it. However, I’d like you to consider that with the Fed buying up such a large amount of Treasury issuance in order to fund government spending that there is no practical difference between monetary and fiscal policy anymore. I sort of assumed that anyone would think of that as a given and just proceeded with my thoughts without realizing that it wasn’t so readily obvious. Sorry!

        1. Ben Johannson

          That’s why you’re confused. The Fed isn’t buying Treasurys to fund government spending because it doesn’t have to. The bond market is a vast corporate welfare program and its beneficiaries come running for every Treasury auction with hat in hand. The Fed is buying so many Treasurys because that’s how QE works. The central bank can’t just throw reserves onto banks’ balance sheets, it has to swap assets if it wants them to have excessive quantities of reserves. The central bank is also forbidden from taking possession of riaky assets, so it has to swap reserves for high quality assets, which means acquiring Treasurys.

    4. F. Beard

      Are there some ways of printing money that are better than others then … ? JGordon

      The banks create new, temporary money (“credit”) as debt but not the interest required in aggregate to service that debt except as more debt.

      OTOH, budget deficits by the monetary sovereign require no borrowing, much less borrowing at interest.

      The former enslaves, the latter frees.

      Now which one do you think is better?

      1. Don Levit

        In olden times, Jews would lend to Jews without interest.
        But, you can be damn sure they received back their principal.
        You seem to suggest debt with no payback of principal or interest?
        Is this some type of new debt that was just developed, by you?
        Don Levit

        1. F. Beard

          No. Deficit spending ALLOWS the banks to be paid back since bank lending does not create the interest required in aggregate except as more debt.

          And the Hebrews of old lent EXISTING money; they did not lend money into existence as the banks now do and thereby drive the population into debt.

        2. Ben Johannson

          What Beard said. When banks create money the supply expands with the loan and contracts as the loan is paid back. When government creates money there is no principle to be returned, so it’s a net increase in financial assets.

  13. steelhead23

    When the Fed does decide to reduce its MBS purchases, as Yves said, they would likely telegraph that to the big banks. I suspect that if the market tanks badly as a result, they’ll say something like “just kidding” a continue buying – at least for a day or two – then back to the program. In that way it could measure the likely effect of its actions. But, you know, there is a lot of nervousness in the markets and trying to play investor confidence like a cello may prove as… difficult as learning to play the cello. As it currently stands, I think the markets are playing the Fed. DOW 20,000 anyone?

  14. Doug Terpstra

    Clearly the Criminal Reserve is “all-in” in gambler’s parlance, with a bloated balance sheet about five times its historical norm of toxic (mark-to-myth) assets from its cartel members. It’s been printing money non-stop for five years now for supply-sider gamblers alone, and as a result there are bubbles everywhere, except in jobs (and gold oddly enough). There are now massive bubbles in stocks, bonds, housing, all at once, as well as minor ones in student loans, art, prestige autos, yachts, RVs, etc..

    So now the “Fed” is trapped in its own “Speed” movie, and it can never let off the accelerator, ever, or the bus will explode. Of course the fuel tank will inevitably run dry, but before that happens, unlike the movie heroics, it will leak its moves to its own cartel insiders first to ensure that the savvy money gets out—while leaving the doomed muppets on the bus.

    Charles Hugh Smith asks, “What If Stocks, Bonds and Housing All Go Down Together?”

    Injecting liquidity by creating credit and central bank cash out of thin air is not a helicopter drop of money into the economy–it is a flood of money delivered to the banks and financial elites. The elites at the top of the neofeudal financialization machine already have immense wealth, and so they have no purpose for all the credit gifted to them by the central banks except to speculate with it, chasing yields, carry trades and nascent bubbles (get in early and dump near the top).

    Life is good for the kleptocratic financial Aristocracy: for debt-serfs, not so good.

    1. monday1929

      Good points. Note that the student loan bubble is one of the biggest of all- somewhere around one trillion dollars, and can’t be discharged through bankruptcy.
      The FED balance sheet is also of the deadly parabolic shape, which always concludes the same way.
      The FED does not control interest rates.
      Zirp destroys more than just savers and retirees- it destroys Capital.

      There is trillions in unpayable debt. The question was: “who is going to pay the bankers?”
      We now know the answer.

    2. Moneta

      there are bubbles everywhere, except in jobs.

      No incentive to work. More incentive to look for a free lunch.

  15. AbyNormal

    When They Do The QE Stomp
    By Lee Adler

    Traders on Wall Street,
    Get some quick feet
    When they do the QE stomp.
    Really somethin when the yields start jumpin
    When they do the QE stomp.
    Whoa oh!
    It started in Congress
    With a Bernanke show
    But he gave a wrong answer
    Then the yields did blow.
    They started sellin.
    Oh, what a sight to see!
    The yields are jumpin and the banks are dumpin
    When they do the QE stomp.
    Really somethin when the yields start jumpin
    When they do the QE stomp.
    It gets that panic feel.
    You know you know it’s real.
    You better sell.
    You know it well.
    If you decide to wait.
    Then it will be too late.
    Oh my.
    Oh why oh why.
    If you don’t do it now
    You’ll get hit with a pow
    And your cash will be all gone
    All gone!
    The yields are jumpin and the banks are dumpin
    When they do the QE stomp.
    Really somethin when the yields start jumpin
    When they do the QE stomp.
    Whoa whoa
    Repeat and fade.

  16. Paul Niemi

    The corner the Fed faces is the exit of the Chairman in eight months. Ben Bernanke’s term ends Jan. 31st, 2014. The uppermost question is whether appointment of a successor, presumably Janet Yellen, will have an easy Senate confirmation, or if the confirmation process will be a fiasco. At that point, the U.S. Senate will own the policies of the Fed. Will the Senate be obsequious, or will the nomination be blocked? I would guess QE will continue until then, because there should be no strong inclination to rock the boat in the days leading up to the decision. A clue to what is expected to happen may be observed in Harry Reid’s recent talking up of the “nuclear option” for getting the President’s nominees confirmed. I think that may happen, because given the size of the Fed’s balance sheet, it has quickly acquired power tantamount to being a fourth, co-equal branch of government. It is more power than just to sweep limitless bad assets under the rug. It is power to pick winners and losers in the markets and exercise outsized influence on policy. The Senate will swallow that or not. Either way, I can’t see that it will be easy.

  17. kris

    Dear Yves Smith

    There is no such thing as an independent federal reserve.

    QE is a political decision, not economic decision. Whether it stops or not, it’s up to the White House and John Boehner, not Bernanke.

    Bernanke is the adviser and the executor, but not the decison maker.

    QE will stop as soon as Obama gives the order to and chances are it is going to occur extremely soon.
    My expectation was to happen past March. It’s imminent

      1. kris

        Obama is doing things to satisfy the main donors:

        Obamacare to satisfy Pharma lobby
        QE to satisfy big banks

        Obama is taking money away from big oil and military and giving it to his donors.

        There is a limit, because QE’s goal is supply big banks with money so they do not default on their swap losses. QE has no economic goal

        This has lead to many countries trying to bypass USD by going for currency swaps.
        This is a disaster for USA.

        Hence, everybody now, I’d say including big banks, are pushing for the QE to halt immediately, thus leading to another Lehman, which is no bid deal.

  18. clarence swinney

    The surplus Bush inherited from Clinton was largely due to the Social Security Trust Fund.
    Bush argued it would be better to give the projected surplus to the private sector via tax cuts.
    It was not better. The income of the wealthy grew but workers got stagnant wages. Working class households were hit hardest and Republicans began intense promotions to cut important social programs. Republicans should have known Supply Side did not work. The failed promises about growth and revenue have damaged the health, education and retirement programs that the working Class depends upon. The debt burden came with Supply Side promises. Since 1980, it was increased
    $1900B by Reagan; $1500B by Bush I; $1400 by Clinton; $6100B by Bush II; $5100B by Obama.
    One half of Obama debt add on belong to Bush Tax Cuts, two wars and Part D Medicare.

  19. CapVandal

    I don’t see the Fed as painted into a corner at all. Fiscal tightening in a weak economy has doused inflationary pressures.

    “In particular, the expiration of the payroll tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of the sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy this year.”
    And in the Q&A, Bernanke added:
    “I fully realize the importance of budgetary responsibility, but I would argue that it’s not responsible to focus all of the restraint on the very near term and do nothing about the long term, which is where most of the problem exists.


    I would use the phrase ‘painted into a corner’ if there were really signs that the inflation target is being significantly breached or the economy is overheating.

    I also find it curious to read the various accounts of a shortage of bonds to continue QE. If this were actually true, smaller purchases would have greater impact given a shrinking inventory.

    The ‘end’ of QE is already effectively off the table, replaced by ‘taper’. Of course there is some short term volatility when the Fed opens its mouth. I have no sense that markets have unrealistic expectations priced in for at least the medium term.

    No one is even suggesting the Fed use the break pedal. Applying a little less gas may have much less impact than feared.

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