Reap the Wind…
Reap the Wind…
Inter-generational wealth larceny and other Fed voodoo… Stagflation anyone?
By J.M. Hamilton
Is your head spinning yet? The financial news is coming in so fast and furious that it’s almost the perfect storm of economic sensory overload, but, unfortunately, this storm appears to be winding up. Bankers are working weekends and, perhaps, holidays to save the Euro, and justify QE2. As mentioned in a prior blog, one knows it’s serious when bankers meet on weekends, and the on-going financial crisis appears to be a never ending case in point. One thing is for sure, the trend of banks being bailed out, at the expense of the proletariat (that would be about 99% of us), continues unabated. The policy mistakes that were made in Japan in the 90’s are still the rage in Europe and America.
Heh, at least the bankers are happy. Everybody else… pound sand!
The Politicization of the Fed
The recent exchange between Republicans and Dems was pretty interesting. Some Republicans are calling for the Feds mandate to be clipped to just insuring the stability of the dollar, that is to say:
Dear Chairmen Bernanke, please stop this nonsense about looking out for the unemployed, we have wealth to protect.
In other words, one in five Americans out there will just have to find their own cake and pudding. And the Treasury’s response was we can’t politicize the Fed… QE2 is a righteous policy, and a wonderful thing to behold. Unfortunately for Americans, corporate interests, and the world, the Fed was politicized long ago and the last time we had somebody in the chair with the cojones (please excuse the vulgarity) to chart an independent course was June 2, 1987.
This picture is worth more than a thousand words.
That’s right, after Volker, essentially, saved the Reagan presidency, and helped us forget all those zany WIN buttons from the seventies, the administraton threw their savior overboard in favor of someone who was a little suppler.
Intended and Unintended Consequences
Enter the new chairmen, presently known as Mr. Greenspan, formally known as the maestro, and very easy money. The result: a Fed more willing to acquiesce to the political desires and needs of the Executive branch, who appoints the Fed chairmen (after all, what’s a President to do with this messy thing called “democracy,” and the Senate and the House?); and liberal Fed policies that played no small role in the bubble that blew up the world economy, and in particular the Western economies, in 2008. Entre Chairmen Bernanke, and to borrow a verse from the Who: “here’s to the new boss… same as the old boss!” Yes, indeed, it appears that the easy money policies, that helped create our economic Hiroshima, are here to stay.
And the stated aim of QE2? Per Mr. Dudley, Chairmen of the Federal Reserve Bank of NY, we get the following:
“We have no goal in terms of pushing the dollar up or down,” Mr. Dudley said. “Our goal is to ease financial conditions and to stimulate a stronger economic expansion and more rapid employment growth.”
Okay. But as we all know the Fed is a body of extremely bright men and women… surely, there are other explicit, and tacit, goals and objectives at play here, besides "stronger economic expansion" is quite vague. Let’s examine some of the repercussions of easy money, or QE2:
$$$ Well we know from Shadow Government Statistics that M3 is still contracting, and the dollar multiplier is also exceptionally low… that is, there is a below normal money velocity in the economy. Gee, that couldn’t be because banks and corporations are hoarding cash, and in the case of the former, due to highly impaired balance sheets? The Fed knows, fully, that the banks are not suffering from liquidity issues, but impaired assets and earnings on their balance sheet and income statements, respectively. All QE2 does is buy the banks more time to clean up their financials. QE2 does little to address the true crisis, which is the finding a floor in the housing market, and restoring jobs to Americans.
$$$ The Fed, as does the Executive Branch/Treasury, very much has a vested interest in seeing the policies of the last two years (i.e. the Bank Bailouts and the continuation of Too Big to Fail) succeed. By any economic measurement and in terms of mitigating human suffering, it would appear that TARP, and the myriad other Treasury and Fed policies since 2008, are a colossal failure. Rather than admit failure, the Fed continues to throw good money after bad, and give the banks yet another round bailouts, via QE2. (By the way, if the 50 state attorney generals don’t succeed, in what Bush/Paulson should have done when this crisis first erupted -- i.e. SHUT DOWN THE BANKS -- then, perhaps, the investor class, who purchased all those toxic debt securitization products from the banking industry, will.)
$$$ The government also owns, or has partial ownership, in several prominent corporations. By holding interest rates low, it forces American people and corporations to look at riskier means to earn a reasonable rate of return – think stock market. One very wise economist on Tom Keene’s Bloomberg radio program, called this “inter-generational wealth transfer, or larceny;” in brief, the Fed is giving the depositors, and saving class in this country, nothing, so that the banks can have depositor money for free to further prop up impaired bank financial statements and create greater margins on earnings for same. So what’s grandma to do (?)… What with flash trading and sharks on the Street, and asset bubbles galore, well she can just take her 2% at BOA and party hearty!
$$$ There’s also a geo-political angle in all this, too… which reminds me of God Father III, where the Vatican’s banker, in that movie, stated: “Finance is a gun… politics is knowing when to pull the trigger.” And it appears that Bernanke and Co., have pulled the trigger on the Pacific Rim, and in particular, a currency manipulator named China. Here, the Fed is attempting to combat the Yuan’s peg to the dollar, which makes China’s goods and services more affordable, at the expense of American goods, services and labor; but the Fed’s policies also has the impact of destabilizing the Renmenbi, since China’s printing presses have to work overtime printing Yuan to purchase the flood of U.S. dollars, in order to make the currency peg hold. Add to this the flood of U.S. dollars entering the Pacific Rim, in the form of investments, and you have a bunch of communists leaders suffering night sweats and inflation fears.
I never said QE2 was all bad.
$$$ And, the future unintended consequence from QE2 ???: Well that would be stagflation… a scenario, whereby interest rates and inflation are high, and unemployment is also high, and you are not high. In fact, many of us will be feeling quite low. Remember the misery index? There will be no inflation as a result of QE2, QE3 and QE4, in the immediate future, because there is high unemployment and weak demand; but inflation is around the corner because as the Fed sprays the world with paper, commodity prices rise in the face of a devalued currency, and because our friends the bond vigilantes, presently kicking serious butt in the E.U., will soon happen upon future Treasury auctions. And you think the gloom and malaise shrouding the country right now is tough… just wait. Time to duct tape your wrists, boys and girls.
Right now, the Fed enjoys a unique position in history of controlling the world’s fiat currency, and watching its primary currency competitor, the Euro, dissolve into thin air. The dollar is the only game in town, and will remain the defacto haven of wealth for the immediate future. Unless the E.U. unites, politically and fiscally, instead of merely monetarily, it is extremely doubtful that Germany and France are going to want to bailout the rest of Europe for their profligate ways, and perpetuate sovereign moral hazard. Hence, we all may very well be witnessing the death rattle of the Euro…. This allows the Fed to continue lobbing trillions of dollars in liquidity around the world, and here in the U.S., without threat of immediate repercussions. The Renmenbi has its own inflationary problems, and is not quite ready for prime time (courtesy of the Fed and global investments); plus China does not appear ready to take on the currency mechanizations of Wall Street, hedge funds, private equity, and the flash trading crowd.
If America’s political class, both Democrats and Republicans, could get their act together and govern in a united fashion, instead of endless internecine political warfare, then maybe the Fed wouldn’t have to attempt to address fiscal, monetary and foreign policy issues, simultaneously. The Fed is ill equipped to do so, and does not enjoy the mandate of the American people. But what’s a President to do?
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