Let's start this post off with a speech given by Bernanke regarding aggressive monetary policy aka quantitative easing, almost ten years ago. I think Ben told us what he really thinks of quantitative easing in this environment. It's bat shit. But we're going to play the game anyway.First, as you know, Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies (for evidence see, for example, Posen, 1998). Fortunately, the U.S. economy does not share these problems, at least not to anything like the same degree, suggesting that anti-deflationary monetary and fiscal policies would be more potent here than they have been in Japan.
Without looking, I believe the last time we really talked about Treasuries in any detail was when Julian Robertson remarked that federal government borrowing costs were going to explode higher and we then remarked that his premise was wrong but we expected borrowing costs to rise as countries around the world could no longer afford to buy U.S. debt. At the time, I'm sure that seemed hilarious as globalization was in full swing. But the cracks are indeed starting to mount. We're not there yet but eventually there won't be enough money in the world for every government and company to continue to float endless debt. Additionally, if you believe governments are going to inflate their way out of this, you might reconsider. As we have said before, governments are not going to inflate away $300 trillion of global debt. That would be preposterous. It's also preposterous to think that governments are going to just sit back and watch their economies collapse under deflation either. Governments may wipe out debt but they won't print their way out of it. At least the United States won't.
Many people have cited historical evidence from the Great Depression to support a thesis that bond rates could remain low for decades. This shows a clear misunderstanding of why we had a Great Depression and how this environment is substantially different. Contrary to mainstream opinion, the Great Depression was not the result of a debt bubble. We did have a debt bubble leading into 1929 but everyone confuses correlation with causation. These are generally held beliefs that are inaccurate. What really caused the Great Depression is much more esoteric and not well understood by almost anyone. In other words, as usual the mainstream view is wrong.
Additionally, in the Great Depression the United States was the world's source of productive capital. We could fund our deficits internally practically forever. Not that this dynamic would guarantee a strong economy, because it didn't. In today's beggar thy neighbor neoliberal view of economics, one perpetuated by crooks and idiots, the United States is the world's greatest consumer of capital. In other words, we have given away our self-sufficiency and instead rely on outside sources to produce much of what we need (at slave labor rates
) and to fund our government - a completely asinine and unnecessary dynamic created by corrupt political idiots from both parties. And as those funding sources dry up due to the demise of globalization, something we have said will happen for years, the United States is left with a funding problem unless it adopts a new economic and-or monetary model. As we have said before, this is not a repeat of the Great Depression for the United States. The dynamics are much different. It's something much more fun. In other words, using the Great Depression to divine future U.S. bond rates shows a clear lack of even basic economic knowledge of today or then.
Of course, there are many sound ways to ameliorate that crisis or even outright resolve it. We haven't explicitly provided our roadmap of these solutions yet, but there are a multitude of solutions to this environment. And as substantial and rapid a turnaround our solutions would have, I am sure if we opened up an idea factory to society, (ie, the democratic process of public discourse
) our solutions would either be refined or even better ones would be nominated. If you have been with me since the start of this blog, it's quite easy to put the pieces together of what needs to happen. It's just how to develop sound economic and monetary policy to support it. We'll get there some day. Frankly, I would have already posted a concise step-by-step roadmap if I knew it was just inquisitive people reading this blog. But, in fact, I know a lot of Wall Streeters and bloggers read what we write and plagiarizing is a most favorite tactic of both. So, we are going to let them continue to stick their foot even deeper in their mouth before we get to a very specific roadmap and action plan to put the economy back on track. Because most of them are going to be eating a lot of misinformation, ideology, inaccurate economic beliefs, misunderstanding about monetary policy and lies they have been feeding people. Since I find nothing more annoying than ideology, I'm going to enjoy that moment.
Some weeks before Tuesday's Fed policy meeting, one of the Federal Reserve Presidents, James Bullard, came out with a research paper (very loosely termed) that wasn't really covered in any detail in the mainstream media.
But I can assure you that Wall Street was listening. In fact, I suspect Wall Street helped craft the paper through feedback to the Federal Reserve given its incestuous relationship with its primary regulator. ie, Wall Street helps pick the Fed Presidents, sits on the board of the New York Fed and really self-regulates itself through participation with the Fed. The Fed's relationship with the banks is much like the conflict of interest at the FAA (but worse
) who has a mandate of providing flight safety while at the same time having a mandate to increase the profitability of airlines. For God's sake, I don't want to get going on the FAA or no one may ever fly again. Air travel is a mess and safety is horrendous courtesy of the FAA. Every federal corporate oversight agency seems to have become a corrupt cesspool of bribery perpetuated by corporate personhood and a willing and morally-bankrupt political machine in Washington.
Let's make one incontrovertible point on here as it pertains to Federal Reserve actions and Washington economic policy. They are both making all of this shit up as they go along. Period. (Hence my loosely termed remark re Bullard's research paper.
) What the Fed is doing is mostly a lot of subjective bat shit fueled by Wall Street and Washington's desire to save themselves. No policy has any real foundations of fixing the economy. None. Neither are working on behalf of We the People. There is almost no body of evidence or proven research steeped in the scientific method which supports anything the Federal Reserve or the political idiots are doing.
That includes Bullard's dullard paper of what the Fed should do next. Bullard's paper makes a mockery of the scientific method and uses garbage-in, garbage-out math to accomplish it. But the pictures are pretty.
We have outsourced our economic future to a group of unelected and unaccountable bureaucrats at the Federal Reserve. And because they are running from crisis to crisis without an overall published roadmap or sound scientific strategy which, by the way would also have an effect of opening them up to peer review and scrutiny of how corrupt they are, they are flipping coins to determine our future. Of course, we blathered about this when they first started flipping coins as this crisis unfolded as we begged for a reasoned and documented monetary policy plan instead of pell-mell squirting money into every orifice like a Hollywood colonics clinic.
We have now gained full societal exposure on how absolutely ludicrous the economics community and the Federal Reserve truly are. In other words, now we know why our economy is a mess. Incompetent Wall Street bribes our politicians, supported by equally incompetent economic bat shit ideas by the Federal Reserve as they then testify before Congress in support of Wall Street bribes. A virtuous circle of the political whorehouse develops as bought-and-paid-for politicians do the economic will of financial morons.
The fact that the Federal Reserve is flipping coins means there is great potential for unintended consequences. Flying by the seat of your pants in a complex system with millions of moving parts, usually means shit happens. That's why good engineering and science begs for a repeatable, vetted, documented plan or rigorous and repeatable scientific methods. Would you run a nuclear power plant by the seat of your pants? Well that's what the Federal Reserve and Washington politicians are doing but it's not just a nuclear power plant, it's a $14 trillion U.S. economy and our livelihood. Most of these unintended outcomes aren't what its enablers would expect or wish because they didn't apply the scientific method's de rigueur
or vet their plan. Secrecy is a wonderful thing. At least if you are a communist or a moron. It seems the Federal Reserve has embraced the best of both. They are communist morons - they rule in secrecy using bat shit ideas.
I'm not going to go to write a long dissertation on the mechanics of Bullard's conclusion that we need a new round of quantitative easing (QE) or what QE actually is. We did that early last year as the Fed ramped up its first efforts. You can look through the old posts or Google it if you are still uncertain as to what QE is or does. But briefly, a central bank and private member banks trade bonds and cash back and forth to expand or contract the availability of credit and, therefore, hopefully, money creation in the economy. Nothing new. That has happened since the day the Federal Reserve came into existence. QE is actually this act on steroids. It's an attempt to stuff member banks with massive sums of money to stop a crisis, encourage confidence and encourage lending and money creation. The theory is that banking crises and deflation are caused by a lack of confidence or a lack of money in the economy. The first point is inaccurate but the latter is basically true. In other words, contrary to the endless pablum puke from Federal Reserve officials and the President, the last thing forty million people on food stamps need is a phucking lesson on confidence. (Excuse the French but I've waited almost six years to use that word and this is a most appropriate time.
) That said, the reasons why Bernanke and Bullard believe there isn't enough money in the economy are ludicrous. And it's not the fact that we have a lack of money in the economy. It's a lack of a specific type of money in the economy. As we have said many times, this crisis is not one of confidence or because we are overloaded with debt. This crisis has morphed into a debt crisis because corruption in Washington and the Federal Reserve's complicity has allowed it. The primary cause of this crisis is not monetary and, therefore, cannot be fixed by the Federal Reserve with monetary policy. Again, something we have said repeatedly.
On Tuesday the Federal Reserve publicly stated its intent to buy Treasuries and corporate bonds as Bullard's paper remarked. They are doing this for a few basic reasons. Secondarily, the Fed may be seeking to impact refinancing of debt at lower rates. But there are two primary reasons that I really don't see anyone talking about. One, the Fed wants to drive down rates on Treasuries and corporate bonds so that banks won't just sit on the carry trade to rebuild their balance sheets. ie, The Fed would like to see banks do more than line up for the risk free return of borrowing free money from the Fed and buying Treasuries for a guaranteed 3-4% return. The Fed wants them to lend into the economy and is trying to incent them to do so be reducing the interest rate return of parking money in Treasuries as their primary form of profit. So the Fed's intent is to increase the money in circulation by increased lending, which will in theory kick start economic activity. But the Fed buying Treasuries and corporates from banks also has an added benefit that I think everyone has completely missed. It is the most critical point of this post and the most critical change in policy since this crisis started. Buying Treasuries and corporates starts the process of clearing bank balance sheets to buy more Treasuries and corporates. This policy has not been announced on a large scale yet but I think it will in due time. I suspect increased Fed Treasury purchases, possibly very substantial purchases, will be announced in the future if the economy does not turn around, which it won't. ie, Buying government bonds artificially changes the market's supply and demand characteristics and allows greater supply of government bonds to be absorbed by banks. This will allow the U.S. government to run deficits while removing some of the uncertainty as to whether foreign countries will be able to absorb Treasuries as globalization implodes. In other words, it allows the U.S. government to self-fund itself in the event that waning global demand for Treasuries develops.
(This is what we said would happen in our Julian Robertson post years ago and I think the Federal Reserve sees this coming and is attempting to ameliorate this anticipated dynamic.
) This is a huge change
in policy that has the potential to keep the lid on Treasury rates for some extended period of time if, and I repeat if, the program is expanded. Maybe a lot longer than anyone could imagine. We shall see how it develops over time.
As we have said, the Fed has been in perpetual quantitative easing for thirty years. Last year's unintended consequences was a corrupt Wall Street paying itself record bonuses with taxpayer money and an upward price in commodities and stocks as Wall Street resumed playing Russian Roulette with our money. That shot prices higher which hurt underprivileged Americans. (We don't have any inflation regardless of what you read. Period. This concept of inflation and deflation happening at the same time as some remark is completely batty. Higher commodity and end user prices are driven by Wall Street speculation in commodities markets not an overabundance of money chasing limited goods. We have been writing this for years and many are still talking about it. My God. Quit it.)
Some of the outcomes, unexpected or otherwise, of additional QE are likely to be, one, the Fed has finally forced grandma into a homeless shelter as her savings returns are now zero. First it was interest on savings accounts. Now it is high quality bonds with almost no return. Now grandma is going to experience bankruptcy courtesy of the Fed's policies or she's going to start trading commodities. That is, if she already hasn't. Two, Wall Street is a corrupt monopoly that lives off of the insider information and front-running of Federal Reserve policy. So, over the last few weeks as this policy was likely leaked to the financial community, corporates and Treasuries are dominating the new high lists on the NYSE. In other words, both Wall Street and the investor class are now plowing into bonds at an unprecedented clip because, being they are socialists, they live off of the Federal Reserve's dole and want to be invested in what they believe Uncle Ben will guarantee. Three, QE 2.0 means the dollar could rally further; something the Fed clearly does not want as it attempts to steer the dollar lower in a neoliberal race to the bottom of the barrel. Four, or ten or whatever number this is, as the carry trade of taking free money from the Fed or the Bank of Japan or anyone else and buying Treasuries for a risk-free return of 3-4% deteriorates with the Fed standing on the bond market's chest. This and other fundamental factors means banking profits could start to implode rather rapidly. For the sake of profits, Wall Street really needs the government to issue more and more debt given the Fed is standing on bonds and fundamentals continue to deteriorate.
It's almost a surety banking profits have already peaked or will this quarter which is why after a year long reprieve, we are now back to heckling the safety of the banking system again. Another unintended consequence is the possibility that it could hasten the collapse of equities as future monies continue to flow into bonds and equity demand continues to wane......... But the most important fact associated with this new quantitative easing is that it could allow government and major corporations to continue to spend willy nilly by providing greater demand for bonds. (Politicians haven't announced stimulus 2.0 to go with QE 2.0 for obvious political reasons. I'm sure they'd rather wait till after the November elections to start spending other people's money like the pigs they are.
Without radical monetary, banking and economic transformation, the money supply will eventually implode when all of this easing ends. So it can't end. In other words, the economy is so broken that without more and more erotica or stimulus, it cannot sustain itself. Yet more and more stimulus requires higher and higher burdens on taxpayers so it's a self-defeating strategy of dullards like Bullard. That means any of these easing tools should only be used in a transitory period to a new economic, banking and monetary model. ie, These tools should only be used to keep the system afloat while we rebuild our economy and our monetary system with proven and better methods. That is not happening because Washington is a massive cesspool of corruption. All of this likely leaves the Fed with the eventuality of using the proverbial nuclear bomb. (See below.)
By the way, let's make something very clear. None of this involves printing money. I have written on here for over five years that the Fed is not printing money. The Fed has expanded its balance sheet to take on the toxic trash of a corrupt Wall Street but this has not led to money creation in the economy. The American economy is choking on its own vomit as it becomes sicker and sicker for the lack of much needed money. The Fed has effectively printed nothing. The vast majority of comments in the blogosphere, in the financial community and in the mainstream media are really mildly to completely erroneous when they write about monetary policy. And even if banks were to encourage lending, we wrote many times on here well before this crisis developed that there was no demand for capital in the American economy. A lonely and only position that we were talking about. And that clearly is not because of its high debt load. Something that literally no one understands for some bizarre reason. Actually because most economists and financial commenteurs don't know what they are talking about. Neither does the Fed. The Fed is trying to push a string up hill.
When the Federal Reserve places more money in private banks through some effort of easing, you need to understand what the banks are going to do to anticipate the outcomes. A private banking system is not going to do what's in the best interests of the economy or democracy but what's in the best interests of private banks. Last year the banks took all of our free money and speculated in the financial markets and paid themselves criminal wages rather than release it into the economy. The Fed is now trying to more precisely target that money for more productive use. But let's be clear, all of the Fed's actions are first and foremost meant to save the banks because there is a deluded view of Federal Reserve bureaucrats that if the banks are healthy the economy is healthy. The actuality is that if the economy is healthy, banks are healthy. Those statements aren't even close to intersecting and that is why quantitative easing has and will continue to fail.
So where are we going to end up with all of this? The ultimate unintended consequence? I believe it is probable the Federal Reserve is seeding its own demise and with it, the demise of Wall Street. There is a reasonable probability the Fed will be forced, through currently unforeseen circumstances, to eventually deploy the nuclear bomb. Whether they yet realize it is irrelevant. I think it is highly probable that the Fed is ultimately going to be forced to monetize or print away substantial debts in an effort at taming a strong dollar and reducing our enormous government debt burden. This will be their downfall for engaging in morally-bankrupt QE and taking the burden of a corrupt banking system onto their balance sheet. In other words, The Fed will be forced to wipe away its balance sheet after being directed by Washington politicians in a great act of carnival sword swallowing. Either the Congress will give the Fed the authority to forgive debts on its balance sheet or the Treasury will issue some amount of bonds, (trillions of dollars worth) the Fed will buy the bonds and deposit newly minted cash in the Treasury so Timmy Geithner can write a check to pay off some enormous portion of our financial burdens. At that point the debt simply disappears forever. This would be printing money. Not what we see today. And by the way, printing money is what we have said the Fed should do numerous times since this crisis began two years ago to ameliorate the situation. Although I can tell you there are many substantially more productive ways to do so to benefit We the People. This won't fix the economy but it will ameliorate the mess we are in. And it is marginally comparable to what the government did in the 1930s when it devalued the dollar against gold. Devaluing against gold has no relevance in today's world because the dollar is not tied to gold as it was then.
Obviously for the Fed to expose this ability will mean the world is going to be a very unpleasant place with no other options. That won't be the end of the world but it would be the end of foreigners buying our debt as their Treasury investments get crucified in the currency markets. But then, foreign buyers of U.S. debt are generally bankrupt anyway. They just don't know it yet. So who really cares what happens to foreign investors? Or at least that is how politicians think.
Ultimately, when the American people see that the government can perform magic at the drop of a hat, they are going to start wondering why we are paying private bankers $800 billion a year in interest for government loans that can be made to go away in the blink of an eye instead of giving cover to the Wall Street thugs like Kneal KashandCarry who advocate kicking grandma to the curb by killing Social Security to support the massively fraudulent banking system's profits instead. And I think it's this dynamic that is plausibly going to cause substantial monetary and banking reform when such lies are exposed. What I'm telling you is there is some serious major shit coming down the pike and everything going on in Washington right now is noise made by people good at making noise and doing little else. In other words, your conscience is going to be standing in a field of flowers listening to harps playing as we become enlightened to the status quo's incompetence and how much undue suffering they have been causing us. From that point forward, they'll be talking to the hand when they try to explain themselves. Remember, I have remarked on here that before this crisis has passed, that I think we could very well bring down the beast and kill Wall Street and the corrupt private banking system forever. Obviously metaphorically since we advocate nonviolence in lieu of hate-filled violence of emotional gorillas.
If I believed 2012 was the fulfillment of religious prophecy, I would have little doubt the anti-Christ is Wall Street. This completely anti-democratic cabal has done more to destroy our country, perpetuate racism and a lack of human dignity, endlessly steal our money, destroy our jobs, enslave a society, cause endless suffering and poverty, and reward corruption and cronyism more than any terrorist could ever even imagine accomplishing in a thousand years of attacks. In a democracy, banking should be a public utility primarily chartered with the development of human capital and production. Enlightenment is not a process the status quo is going to enjoy but I sure as hell am. Of course, since this blog is entertainment and imaginative narration, I joke. Ahem.
It's good to be the king. Not much longer though.Link in title