I would add a “c,” a third point for you to bear in mind: You had all better use to the good this unusual period in economic history of proactively accommodative monetary policy by the Federal Reserve and other major central banks. The FOMC has made money the cheapest and most widely available of any time in American history. Interest rates dipped to their lowest level in 237 years; bond and stock markets rallied to historic highs in both nominal and real terms; bankers and investors are flush with liquidity; for anybody who is creditworthy, money is über-abundant. This will not last forever. One would be foolish not to exploit it now.
But here's what Fisher doesn't mention, but damn well ougth to have been talking about: Your "exploiting" of it means that someone else will have their income diminished for the duration of the exploitation you gain.
This is the 900lb Gorilla in the china shop that nobody is modeling, but they damn well ought to. It's why Japan has run this crap for two decades and it has done exactly nothing of benefit.
Note what Fisher has considered "healthy":
To be sure, the job creators in our economy—private companies—have used this period of accommodative monetary policy to clean up the liability side of their balance sheets and fine-tune their bottom lines by buying shares and increasing dividends. They have also continued achieving productivity enhancement and relentless reduction in SG&A (selling, general and administrative expenses).
Buying back shares and paying dividends with borrowed money is "cleaning up the liability side" of the balance sheet? Where did you get the crack you are smoking behind the lectern Richard?
What is holding them back is not the cost or the availability of credit and finance. What is holding them (ed: companies) back is fiscal and regulatory policy that is, at best, uncertain, and at worst, counterproductive.
Well, yes. Obamacare anyone? I mean, c'mon -- now the IRS wants to call volunteer fire departments "employers" for the purpose of the employer mandate? That's not "uncertain", it's deliberately destructive.
The real issue facing the American economy is, I'm convinced, almost-entirely related to the health care "industry" that has latched onto the government as a means of compulsion to further its extraction of economic output -- a process that had hit the wall and threatened to turn southbound and detonate in their face. The problem at its core is that exponential growth is always like this; two interrelated exponential functions will always run away from one another if one has a larger value than the other.
This is the core point that I laid forward in Leverage, and I remain as astonished more than two years after its publication as I have been for the previous couple of decades that this mathematical fact is willfully and intentionally ignored on a serial, notorious and outrageous basis virtually everywhere in the monetary and fiscal policy arena.
It really is as simple as this graph demonstrates:
You can't avoid this outcome any time you have that relationship in place. That is, as long as you have growth of some sub-component of the economy at a rate that exceeds the actual economic output growth the bad outcome depicted in that red line will happen -- every single time. It will happen because it mathematically must happen.
The FOMC has helped enable a sharp turn in the housing market and roaring stock and bond markets. I would argue that the former benefited the middle-income quartiles, while the latter has primarily benefited the rich and the quick.
Who owns the interest-producing assets that have been harmed? As a banker Fisher certainly understands that everything is a balance sheet, and that for everyone who "benefited" someone got screwed in exactly equal amount. The problem is that the "screwee" impact is deferred and not instantly-apparent for the simple reason that most interest-income portfolios are laddered and thus the impact comes on slowly as the ladder reprices over a period of years.
But this means that the screwing, once it happens, doesn't go away when policy changes -- it only fades out over an equivalent period of years! This is what got Japan stuck in a morass that they have been unable to exit from, and it is what threatens us now.
By intentionally ignoring the other side of the balance sheet and either poo-pooing the impact on same or denying its existence outright the Japanese dug themselves a hole they have been unable to extricate themselves from, as they "believed" that the costs in question were less than the benefits.
But this can never be true just as one cannot book an asset without a balancing liability. The only way to "cheat" is for the liability to be booked somewhere that is a near-infinite sink. This is why you can only prosper, in the end, by mining, growing or manufacturing something -- the other side of the balance sheet is either that which you dug out of the ground (a very large sink), the energy from the sun (ditto) or human effort (chargeable against your body and mind, a very-slowly-depleting resource over your lifetime.)
Efficient capital formation happens in an environment where labor can save its surplus economic output as a store of value unmolested by the capital side of the economy. That means no inflation -- not "low and secure" inflation, but zero structural monetary inflation and thus productivity accrues to labor in the form of mild and persistent increases in purchasing power -- that is, a mild and persistent deflation.
Because this is how economic balance, where capital and labor both have incentives to improve productivity and invest wisely, share in the fruits of same. It is how you address income inequality. It is how labor finds its reward and thus is incentivized to produce more. It is how capital formation is funded not by making a forward promise that is inherently dishonest since nobody can predict the certainty of outcome in a new venture, but with previously-produced economic surplus which is a known quantity as it has already been earned. It makes "investing" in worthless ventures stupid rather than providing incentives to create ponzi schemes and scams, because the alternative to investing -- saving -- is a slow-growing purchasing power in the sum saved rather than destruction of said power if those funds are not immediately spent.
I give Richard Fisher credit for being one of the few who will sound the alarm at the stupidity of the Fed's policy, even if his whistle is as flaccid as the intellectual vapidity found in FOMC as a whole.
But where I will not give him credit is found in the fact that he is well-aware of the fact that everything that The Fed does in regard to manipulating interest rates, irrespective of how, creates both a "winner" in the lowering of an interest payment and a "loser" who receives one dollar less for each dollar that is not paid by the winner in same.
It is the willful and intentional refusal to bring forward that fact into the public discussion that is the worst and largest mark of malfeasance both in the FOMC and the endless parade of jackasses that we see in the mainstream media.
Jesus, how long did this take?
Chief among the data points to be noted is that net interest expense, which is the money paid to depositors at banks, continues to fall. While all banks earned about $118 billion in interest income last quarter, they paid just $13 billion to depositors, a graphic example of the “financial repression” used by the Fed to subsidize the US banking industry. Via QE, the Fed is subsidizing all banks to the tune of over $100 billion per quarter in artificially depressed interest cost and income to depositors of all stripes.
Yeah and that’s coming out of someone’s hide – yours.
That’s $400 billion a year, or roughly $1,200 per person in the United States a year.
For every person.
Man, woman, child, rich, poor, destitute.
That’s your electric bill in many parts of the country, and your car insurance (or more) in most.
The real galling part of this “disclosure” and that Chris is talking about it now is that most were not talking about it at all when this program began. I’m one of the few who has been.
The reason it is so obscene and should lead you to string up everyone in the economic and media businesses that have not been hamming on this is that it is literal first-semester accounting.
As I’ve repeatedly noted everything is a balance sheet.
When you lower the interest payment that someone has to fork up the lender gets less by the exact same amount. That lender is your insurance company, your grandmother on fixed income, your pension fund, Social Security and Medicare trust funds and more. It is the cash return on short-term paper in corporations, income they would otherwise use to hire people.
In short this “policy” has done nothing but try to time-shift demand into today from tomorrow while at the same time destroying interest income cash flow. Yet it is precisely capital formation, from which lending and investment comes, that make possible economic progress. You must accumulate capital to fund new ideas, to try new things, to build new businesses. If you destroy the return on that capital you ultimately destroy the incentive to accumulate it and the economy ultimately tanks as a result.
We are well past the time when Americans of all stripes should have refused to continue to consent to this crap.
When will you draw the line?
Anecdotal reports during the ﬁrst year of the crisis suggested that ﬁnancial ﬁrms whose MBS-based portfolios were souring were desperate to earn substantial revenues elsewhere.?
The “elsewhere” may have been global commodity markets, which boomed during the second half of 2007 and the ﬁrst half of 2008.
The lower interest rates the Fed engineered seemingly encouraged this activity, as ﬁrms borrowed cheaply and attempted to proﬁt in commodities.
So where have they gone now? Uh....... the SPX?
What happened to oil prices later on, and what does this mean when our current bubble pops?
The debate over the wisdom of locking in near-zero rates did not take sufﬁcient account of the experience in Japan, in my view.
The BOJ changed the policy rate to near zero in the 1990s.
Short-term rates remain at zero today in Japan, 15 years later.
Some analysis suggests that the sooner policymakers set the policy rate to zero, the sooner the economy will recover and the sooner interest rates can be returned to normal.
I have seen no evidence that this is true during the last ﬁve years.
Instead, I think the December 2008 FOMC decision unwittingly committed the U.S. to an extremely long period at the zero lower bound similar to the situation in Japan, with unknown consequences for the macroeconomy.
The market is ignoring this speech....... gee, I wonder why.
C'mon folks, think this crap through will you?
When confronted with concerns about people struggling to live off fixed incomes, Yellen agreed that “low interest rates harm savers, it’s absolutely true.” Harming at least some savers, however, may be part of the plan, at least if Yellen agrees with Charles Evans, the president of the Federal Reserve Bank of Chicago. He has argued that the threat of wealth confiscation by negative interest rates is necessary to restore spending and “risk-taking” back to “normal levels.”
So what does "bringing down interest rates" really do?
Well, it makes it easier for those who are rich, or who have really good and secure jobs, to borrow more money. It makes it easier for corporations to borrow more money too, including borrowing to buy back stock.
But think about it folks -- someone has to buy the debt, eventually, that is issued.
So let's say that I borrow $100,000 against my house at a "super-duper" interest rate, or I go borrow $50,000 to buy a really nice new car. That loan will eventually get either sold or securitized or somethinged to someone.
And then the problem comes.
See, that person who buys the paper gets a much lower return than they would otherwise. It's not just "savers" who get hurt, you see, because all savers are a subset of the larger group known as lenders.
So we have simply pulled forward demand that is created with these ultra-low rates, at the price of tomorrow's spending, because the person who buys the paper gets less interest for the next five, eight, ten or thirty years and they can't spend what they never receive.
And that's just the direct damage. The indirect damage is monetary; by debasing the currency when you perform QE you are faking actual economic output since GDP is of course reported in nominal terms and "deflated" by the CPI instead of the true value -- credit expansion.
This is why when you first cut rates (no matter how you "ease" conditions) the initial impact in the economy appears to be pretty good. But that's a distortion, because you've simply pulled forward the demand from tomorrow into today, and you wind up paying for it with less income to and thus less spending by the lenders tomorrow.
Want proof that I'm right? You have it right in front of you -- both here in the United States and in Japan. In Japan despite 20 years of this crap there has been no grand recovery. In the US despite four years of this crap the labor participation rate has not moved a millimeter upward since 2009 and GDP "growth" has been less than the QE applied (that is, real economic movement has been negative.)
The asset price appreciations that are built up by this are also temporary and dangerous. The guy who gets the cheap house loan thinks he's a genius, but he's dead wrong.
The guy who wants to buy his house five years from now didn't get the formerly-expected income from that loan when he bought the first homeowner's certificate and thus has less with which to purchase that house with down the road!
The guy who buys the stock where the company is buying it back with borrowed money sees a nice pop. The little old lady who financed that through her holding of a bond fund gets less in interest and guess what -- she doesn't have the money down the road to buy that firm's products, which ultimately results in an earnings miss!
When -- not if -- this catches up with you the entirety of what you did must, mathematically, come back off -- plus the time value that you squandered.
It's arithmetic folks, and if you think about it for about five minutes you would instantly throw rotten tomatoes at anyone who propounds, supports or causes such a policy to be put in place because it cannot, mathematically, work.
Janet Yellen, nominated to be the next chairman of the Federal Reserve, signaled she will carry on the central bank’s unprecedented stimulus until she sees improvement in an economy that’s operating well below potential.
The beatings will continue until morale -- and performance -- improves.
The facts are something different than Yellen's (and Bernanke's) fantasy-land crap.
The facts are that when you destroy the expected positive return from lending that people have no incentive to lend at all, nor to accumulate capital which they can then lend at a profit.
What's worse is that the "initial burst" of activity you get from instituting such a policy fades as soon as people come to believe you're going to keep doing it. And that's a big problem for the economy as a whole because you wind up with exactly what we have now -- asset price bubbles but no material expansion in the economy as a whole.
Unfortunately an asset price bubble without economic expansion behind it is dangerous because it eventually will come off, and everyone in the market knows this. But the punch bowl, being spiked with Everclear, provokes everyone to get drunk out of their minds and screw each other blind on the hors d'oeurves tables.
The biohazard risks from such activity, never mind the puke quotient as the party continues, ought to be obvious. But just like a house party gone bad with 100 teens that smash up the place and***** in every corner there's simply no recognition of the inevitable consequences -- despite the parade of preening jackasses on the TeeVee telling us that all these teens will comport themselves with decorum and simply have a drink or two and then leave the wise man takes the other side of that bet, with leverage.
Unemployment remains too high because we've done exactly nothing to address the structural problems with our economy. Washington DC is addicted to handing out checks to buy votes, which destroys the incentives of people who would otherwise be driven to either find a job or start a small business. The Fed claims that it is not (and will not) monetize the debt but in fact it has, despite Bernanke's claims. Washington DC loves to trumpet how "deficits have come down" but in point of fact that's obfuscation and game-playing, since Treasury was factually at the debt limit from May through September!
By the way, Treasury estimates that it will take in 9% more revenue this fiscal year than last. Oh really? That's very nice, but remember that the economy itself is growing at a rate closer to 2% on a nominal basis (including QE's "injections") and is factually negative when that is subtracted back out.
So Treasury thinks it will extract more than 400% of "growth" in tax revenue than the economy will expand nominally and will obtain more tax revenue into a factually-shrinking economy?
Where do you think that's going to come out of?
I'll tell you where: Your ass.
In addition, either that "estimate" is going to be proved up as wrong (in which case the deficit is going to explode) or you're going to pay it but that means you won't spend those same dollars in the economy as a whole.
That impossible combination, by the way, is how they think they're going to have only a "small" increase in the deficit this incoming fiscal year.
Any hint of actual recession will blow that "estimate" to bits.
Somebody needs to stand up and tell the truth. But any hint of truth-telling by Yellen is likely to lead to people waking up and saying "heh, what's this crap I have in my portfolio that is valued in the tens or hundreds of billions but makes no profit?" A little bitty company woke the tiger in the spring of 2000 and initiated the unwind -- accidentally.
This time the problem is much more-insidious as the "cheap money" policies have allowed firms to report profits that are financed and unsustainable, just as trees do not grow to the sky.
But don't tell that to Yellen -- she's only got four years of this crap under her skirt and despite hard proof that QE has never produced a nominal growth rate exceeding the injected funds as a percentage of the economy (that is, it has never worked) along with Japan's 20 years of experience with the same attempt which has, once again, never actually worked either she's going to sit in the hearing room and tell us that this is, indeed, her path forward.
Someone needs to ask her this question: "What happens when the market concludes, from 20 years of history in Japan and 4 here, that you will never manage to produce a positive net GDP delta from your QE program and people sell off assets from the perfectly-rational response to knowledge that you are destroying the employment base, senior citizens and capital formation of the country?"
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