In response to an FT article by Sam Fleming on 20th May 2015, entitled 'Fed minutes show doubt about strength of US recovery'
They will not raise rates - QE4 is more likely.
Central Bankers seem to believe that $10,000 saved from income, and used to invest in a productive future, is the equivalent in function and effect to $10,000 QE issued by the Fed to primary dealer banks in exchange for government debt; $10,000 which is then:
a) Used as gambling chips by the banks and their hedge fund clients - the effect of which is to inflate stock prices
b) Used to buy more debt from governments who lack the ability or the intent to ever repay that debt, except by continuing to issue further debt - the effect of which is to inflate bond prices
c) Parked back at the Fed for a nice little bonus of 0.25%, as a reward for being bailed out 7 years ago
The only thing these two sums of $10,000 have in common is that they are the result of human activity expressed as currency units. One is an expression of personal responsibility and knowledge of how to create wealth in a free market; the other is an expression of governmental irresponsibility and the delusion of a free lunch in a centrally controlled market. They will never have the same effect in the real world, because one is productive, the other is parasitic.
The cult of money printing and the holy grail of ‘optimal control’ is bunkum. The academics that proclaim this nonsense have very little understanding of business, human behaviour or wealth creation, I.E. they don’t ‘get’ the real economy. They are funded and feted by governments, political parties and investment banks who do very well out of the delusions they present as economic science.
Just as savings are not equivalent to QE, an IQ of 170 is not equivalent to being useful...if you are using the wrong models. These guys have got the fundamentals wrong, and thus we are heading towards a massive debt crisis - a crisis enabled by the academic credibility they give to the open mouths in government and the charlatans on Wall Street.
‘Gurus' like Professor Summers and Dr Bernanke use equilibrium models that do not include money, banking or debt - I.E. they do not even come close to describing the real economy. In effect, Professor Krugman has a Nobel prize for his contribution to an extremely clever map of a flat earth. To folks who are busy earning a living, to others who’ve been encouraged to believe a PhD in economics is a sign of wisdom, and especially to the beneficiaries of crony capitalism and socialism for the rich, these people are cast as heroes. To me, they are neither gurus nor heroes - they are academics peddling dangerous bunkum.
The Fed has three choices:
2. Default and financial collapse
3. Restructuring of debt and the monetary system
Number one, ‘inflation’, would require an acceleration of the current policies of QE/NIRP/Financial Repression/Currency devaluation. This is what the Fed, the ECB and the BoJ have been trying to achieve for the past 6 years. Even if they succeed in channeling the monetary inflation to Main Street, history suggests it will spiral out of control. They are scared of deflation but they think inflation is a pussycat - they should talk to Paul Volcker about that.
Number two, ‘default', is what we are rapidly approaching because debt has continued to grow faster than the productive economy’s ability to service it. It may not start in the USA, but a significant default will cause increased volatility in capital flows at a time when bond market liquidity is decreasing. This will trigger a domino effect in derivatives, and will ultimately decimate savers and pension funds already struggling to find 8% yield in a NIRP straitjacket…and it will almost certainly spark another massive dose of QE in response.
Number three, ‘restructuring', first requires policy makers and academics to have the courage to tell the truth about where we are, and the humility to admit that they’ve been following an experiment that has not worked. This is very difficult when you’ve built a 30 year career building models that have led the economy to the edge of a cliff. I don’t think the current crop have got the stomach for it.
Ultimately, restructure we must, and restructure we will, the choice is when we do it, how we do it, and how much pain we create in the process. I believe that the restructuring will be forced upon policy makers by a sovereign debt collapse. When that happens, the central bankers will initially prescribe more QE - I.E. paraffin to put out the fire, more heroin for the junkie. What concerns me is the strong possibility that folks will continue to believe these people know what they are doing, which will prolong the agony.
Personally I think it is only a matter of time before the existing economic paradigm is thoroughly discredited. When the penny drops for the general population (pun intended), I hope the economists who have given credibility to this travesty of central planning show a little humility or preferably go the whole hog and do ‘mea culpa’. I don’t expect they will do either.
I suspect the following is more likely: Professor Krugman will proclaim ‘we didn’t do enough’; Professor Summers will produce a much heralded but Teflon coated analysis that will include no acknowledgement of his culpability in the financialisation of the economy, through his facilitation of the repeal of Glass-Steagall; Dr Bernanke will tell us it was all on-track when he left the Fed; Dr Greenspan, the Godfather of easy money, will point to his recent attempts to wash his hands of these foolish policies; and poor Dr Yellen will take the full fury of a Congress who will suddenly find themselves overcome with concern for ‘Working Americans’…AKA overcome with fear of being kicked off the gravy train...
What Congress are unaware of, is that their ‘gravy’ has long since lost its potency. Mr Congressman is unaware that the $10,000 that JP GoldMorg ‘donates’ to his ‘campaign' every month is effectively counterfeit - I.E. no trace of productivity, the active ingredient in economic ‘gravy', has ever been anywhere near it.