Jawbone Failure: Lacker

You have to admire the audacity of these clowns:

"To my mind, a natural place to start is asset sales," he told reporters after a speech in Charlotte, North Carolina, playing down fears of market disruptions. "We have to move over time to channeling resources away from the housing market. It doesn't seem advisable to me to build a recovery based on housing."

What Lacker is talking about is the huge portfolio of MBS - mortgage-backed securities - that The Fed has "bought" as part of its "quantitative easing" program.

The problem with this statement is that it is a bald lie.

Literally everything that government and The Fed have done has been predicated on not "building a recovery based on housing" but on attempts to re-inflate the housing bubble!  Holding prices high - intentionally - by forcing long-term interest rates for mortgages down is destructive and evil. 

Creating the housing bubble - which we now know was not just Greenspan's legacy but in fact was largely Bernanke's fault in that he was one of the individuals at The Fed in the early 2000s that advocated for the ultra-low rate and ultra-high liquidity environment that caused it - was the underlying evil in our economic mess.

Yet to believe that this was some sort of accident is incredibly naive.  Certainly where all the "funny money" went might have been an accident, but the creation of a bubble as The Fed's solution to the bursting of the last bubble they created was no accident at all - it was a policy.

My best guess is that the hawkish lies coming out of Lacker and a few others are a reaction to the fact that the market is increasing voting "no confidence" on both The Fed and America's currency - the dollar.

And let's not kid ourselves - all The Fed has to sell is the dollar.  Should the dollar collapse The Fed will have literally nothing, and this presumes that the Federal Reserve itself (along with the government) is not sacked.

There is a clear climate of panic in this regard.  Gold's parabolic rise is not about "inflation" - Gold has never been a decent inflation hedge; indeed, it has historically underperformed actual inflation, dramatically so, to the point that those who have tried to use it (or silver) as a means of avoiding monetary debasement through inflation have wound up holding a bag of air.

No, Gold is a geopolitical instability and monetary collapse hedge.

And in that regard what Gold's price is telling you is clear:

Now those who are buying Gold in a panic - believing that the dollar will become literally worthless - may be right or they may be wrong, but they are scared, and with good cause.  Last year our government had a deficit .vs. income of about forty percent - that is, government spent about $1.6 trillion more than it made ($3.6 trillion spent, $2 trillion - roughly - taken in via taxes.)

Geithner is on TV this morning talking about how we must get deficits down to "about 3%."  But he is, I presume, talking about GDP, not the government's size.  But even by that measure he's talking about reducing the deficit to $400ish billion.

Bluntly: how?

Look, the CBO says that's a load of bull.  They're predicting another $9 trillion in deficits racked up over the next ten years, and that's probably low - the CBO almost always is, because they can't account for legislation (and its spending) not-yet-dreamed of.

Geithner is trying to take a victory lap but in fact his claim of asset price recovery is an outright lie.  The dollar has deflated by more than 20% in value .vs. Euros, as just one example.  While the S&P 500 and DOW are up by a hell of a lot off the bottom in March when you look at the price of houses, for example, you've lost another 20% of the value of your house when looked at in terms of Euros!

The stock market's rise is EASILY explained - it is the dollar that is sinking, not the market that is rising.  But the danger here is that this element of pumping asset prices is now breaking down - that is, the dollar's continued deterioration is now only holding stock prices steady and is no longer having the sort of strong response in stock price appreciation.

The Fed and Treasury, to be blunt, is losing control of the game.  Geithner's claim this morning that as "fear has receded money has come out of Treasuries and Dollars" is amusing.

The problem with Geithner's claim is that this sort of move in the dollar, which has caused governments such as China and Saudi Arabia to take huge (hundreds of billions of dollars) in losses on dollar depreciation, is inherently destructive.  Oil producing nations will respond to this by tightening the spigot handle enough to make themselves whole over time.  But for the utter collapse in oil demand we'd be looking at $200/barrel oil and $6/gallon gasoline right now.  That day, if our economy truly recovers along with demand for oil, will immediately assert itself.

So what does Geithner and The Fed intend to do here?  They are in a box - the ultimate problem is 20+ years of excessive credit creation - an irresponsible set of policies that in fact violate their mandate under Federal Law.

I'd love to find a way to spin this in a bullish fashion, but I can't.  The only way out for the government is to force the bad debt into the open and default it.  If they don't - whether via huge tax increases or removal of the subsidies, direct and indirect, on financial institutions, then ultimately The United States Government will go bankrupt.

In 2006 The St. Louis Fed's Laurence Kotlikoff argued that The United States is functionally bankrupt - here and now.  He was right, of course, and the interesting part of his solution to the problem was adoption of The Fair Tax. 

I have long advocated for this, since it is the only means I've heard elucidated that addresses the structural problems with governing funding.

In any event there has been no recognition by the government that the last 20 years of credit growth is unsustainable and in fact is why we're in this mess.  Worse, they seem to think they can drink themselves (and we can drink ourselves as consumers) sober.

Nonsense.