This is an amusing speech that many have cited as, well, some sort of evidence of "clarity" from Mr. Fisher. Let's de-construct it.
Two weeks ago, I was back in Germany. My interlocutors there, having been serious, determined and persistent in implementing change and who are now sitting rather pretty, turned the question back on me, asking: Is Americas Decline Exaggerated or Inevitable? I thought I would speak to that question today.
For those of you who are impatient, the answer is: It depends. It depends not upon the outcome of the conflicts in North Africa and the Middle East, nor upon the effect of the tsunami and the disruption of nuclear facilities in Japan, nor upon any of the other pressing issues of the moment that are the subject of day-to-day angst assiduously reported by your colleagues in the press.
It depends upon monetary and fiscal policy.
It depends upon whether the United States can get its economic house in order.
It depends, in the end, upon whether the Federal Reserve, as the nations central bank, and the Congress, working with the executive branch in discharging its duty as the nations fiscal authority, will adhere to the maxims of St. Peter and President Coolidgewhether each of these institutions has the will to be serious and discipline itself, and be persistent in pressing on with their respective duties.
That's a nice set of platitudes that attempt to set a table of "well, we did good things, now we must do hard things." Sadly, what's being expressed is utter crap. Shall we continue?
In contemplating future policy of the Federal Reserve, it is important to remember the frightful predicament we faced in the fall of 2008.
We could have an endless discussion of who was responsible for this so-called black swan scenario.
Oh on the contrary. The entirety of fractional reserve banking is only sound if there is no such thing as unbacked credit emission. That is, if you must back each loan with either an asset or one dollar of your own capital, however you raise it. You may raise it by selling stock, by selling bonds, or by retaining earnings (and thus have it internally) but for each unbacked loan there is one dollar of systemic risk - that is, someone who thinks they took no risk but really did (e.g. a depositor.)
This is compounded when you allow people to claim they have "coverage" of risk that doesn't really exist. Examples of this are claiming to have "covered" risk when you buy a credit-default swap from someone without any money.
Since The Fed is the ultimate supervisor of the clearing and exchange system, it is therefore required to guarantee that such tomfoolery does not occur. It did not do so. That was and remains an intentional act.
Regardless of how it came to be, when the Panic of 2008 occurred, the Fed did what central banks are called to do when pandemonium strikes: As the lender of last resort, we stepped into the breach, used the powers given to us by our government to create money and credit, and deployed the considerable array of tools at our disposal to calm and restore the financial markets.
Uh, there's a problem here. "Creating money" is nothing more than diluting the existing stock of money. This, of course, has shown up in various commodities such as gasoline, cotton, corn and similar. When you change the denominator of a fraction what each unit of the numerator is worth changes as well in exact ratable lockstep. It cannot be otherwise.
We now know that the exigent measures we undertook worked. The end result of the Feds efforts was that the credit markets and the lifeblood of liquidity needed to conduct commerce and sustain the economy were restored.
No you didn't.
For 2008, 2009 and 2010 the Federal Government has spent more than 10, more than 11, and nearly 12% of GDP borrowed, not taxed, as a means of fraudulently concealing the contraction that occurred in the private economy.
Note that this concealment has not abated. You thus "prevented" nothing.
In saving the system, for example, it can be argued that we protected imprudent lenders and investors from the consequences of their decisions; we rescued sinners and penalized the virtuous.
You didn't save anything. All this self-adulation is going to come crashing down on your head. The Federal Government, which you enabled, has now embedded a nearly 36% cumulative decline in GDP through these deficits. That's damn bad, and much worse than it would have been had you left it alone to work itself out in the marketplace.
Yet, by taking interest rates to zero and making money cheap and abundant so as to reliquefy the economy, those who invested the most conservativelytucking their savings away in the safest of vehicles, like CDs, money market funds, and Treasury bills and notessaw the income earned on their hard-earned savings dramatically reduced.
Uh huh. And your right to do this derived from...... exactly what Richard?
Personally, I felt the liquidity needed to propel our economy forward was sufficient even before the FOMC opted last November to buy $600 billion in additional Treasuries on top of the committees pledge to replace the runoff of our $1.25 trillion mortgage-backed securities portfolio. I argued as much at the FOMC table.
"I argued against it before I voted for it!"
How many dissenting votes did you cast Mr. Fisher?
There are perceptional risks, for example. Our duty is most distinctly not to monetizeor even be perceived as monetizingthe debt of fiscally imprudent government.
This is why you've done it, of course. Incidentally, that fiscally-imprudent government has issued approximately $4.5 trillion in new debt over the last three years. The Federal Reserve has taken up between QE and QE2 about half of that, directly and indirectly. How else would you describe that other than monetization?
There is the risk that we might breach our duty to hold inflation at bay.
Really? How are you doing with, oh, gasoline?
That's not something people actually have to buy, is it?
We know from anecdotal soundings that American businesses, like businesses in other countries, are doing their utmost to offset with higher prices the surging costs of inputs such as fuel, other commodities and materials, and components, parts and processes sourced from abroad. My gut tells me that this will result in some unpleasant general price inflation numbers in the next few reporting periods, even though the trimmed-mean inflation rate we calculate at the Federal Reserve Bank of Dallasbased on the price movements of 178 personal consumption expenditure itemswhile rising, has over the past six months run at a sedate rate of 1.2 percent.
That's because the CPI has a demonstrably fraudulent component called "owners equivalent rent", and then on top of that rental prices directly. Both respond by showing lower costs when interest rates are inappropriately low. This, despite the fact that such inflated valuations (thereby allowing that distortion) inevitably comes back to earth.
Had the actual price of homes been in the CPI instead, during the bubble years you would have seen huge increases in the CPI. That in turn would have led to great alarm among the population and pressure for you to cut that crap out at The Fed.
The scam inherent in these "adjustments" to what is supposed to be an actual price index is intentional.
Now, we at the Fed are nearing a tipping point. Just as we pressed on in doing our duty through extraordinary, exigent measures, we must now discipline ourselves to just as persistently normalize our operations in a timely way.
I'll believe it when I see it.
As for the fiscal side of the equation, you know the story. I have been harping on this for years. I spoke of the dangers of what in polite parlance might be called the fiscal incontinence of Congress when I addressed the Commonwealth Club of California in May of 2008.
Ah, this much is true. However, these complaints are akin to a heroin pusher complaining that his "customer", the addict, is mainlining too much junk. Of course that "customer" is only able to do so as a direct consequence of the supply. Without supply, there is no ability to satisfy demand, irrespective of how much screaming the addict does.
Past Congresses have made promises they cannot keep. Now, the new Congress is embarking on a corrective course.
No they're not. That's a commonly-repeated lie. To correct course you must show a means to run a primary surplus such that debt is paid down. That would require more than $1,700 billion in budget cuts, increased taxes, or some combination of the two.
This will be a titanic struggle. Our Congress must find a way to align spending with income through taxation that (a) does not cut off the incipient economic recovery, (b) provides a credible path toward bringing their accountsincluding the unfunded liabilities of Medicare and Social Securityto solvency and (c) respects the fact that in a globalized, cyber-ized world, those with the ability to create jobs may create them in places that offer more compelling fiscal and regulatory environments.
You have just described an impossible event.
Specifically, (a) cannot happen along with (b) and (c). (a) cannot happen because the so-called "recovery" was false. Refer to the above graph again: There has been no recovery in the actual economy. It has been faked through the borrowing of huge sums of money that are then spent by the government.
Cessation of that practice (which addressing (b) will cause) will result in the recognition of all of this false "growth" and "economic activity" disappearing. It cannot be otherwise since a dollar that is not spent is in fact not spent! A dollar that is taxed is one that is removed from the private economy in order to spend via the public one. Therefore, this balance must inherently result in the contraction of GDP by the amount of the deficit, irrespective of whether the change takes place via raising taxes or cutting spending.
There is no avoidance of the mathematical facts Mr. Fisher, and you're smart enough to know this.
There cannot be robust direct investment in the United States without confidence in the nations ability to reverse its budgetary death spiral, especially the inexorable accumulation of national debt and unfunded liabilities of Medicare and Social Security. The need to break the back of that spiral is as dire now as was the need for Paul Volcker to break the back of inflation in the 1980s.
That act will result in the recognition of the economic contraction that has thus far been fraudulently avoided. It cannot be otherwise.
Getting our fiscal house in order will not be an easy task. But there are worse alternatives. Resorting to protectionism or capital controls or sustained negative real interest rates or inflation, in lieu of real fiscal reform, would be pyrrhic solutions. Corrupting the independence of the Fed would surely lead the nation to the same fate that befell Weimar Germany and Perons Argentina when their central banks took to monetizing debt. The nation cannot, must not, and, in my view, will not go down those sordid paths. Indeed, I sense we have turned the corner and are on the road to fiscal redemption, however bumpy it might be.
I believe that it is a lie.
The Federal Reserve and the government are incapable, Mr. Fisher, of actually performing what you're talking about in this missive. It is mathematically impossible and therefore will not happen.
The choice before the nation is one of acceptance of the fiscal profligacy by both government and individual and the backing off of such profligacy. This will inherently reduce consumption and therefore GDP on a ratable basis. The fraud put forward by those who claim to have "avoided" a Depression will become evident, as GDP contracts to actual productive output - that is, as demand falls in line with production (rather than continued borrowing.)
Unfortunately the previous three years (and the beginning of this fourth year) have constituted yet more damage that now must be absorbed. This absorption will not be without cost and pain. Indeed, that pain will be severe. But it is the very policies of the government and Federal Reserve that have compounded the harm - first in 2000-2003, and now from 2007-2011.
Will we stop the idiocy and accept reality? I'm not convinced.
I do agree with Mr. Fisher on one point: If we don't stop now, it won't matter if we stop at all.
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