FedUpUSA

Ben Bernanke spews forth once again:

The global economy is now well into its second year of recovery from the deep recession triggered by the most devastating financial crisis since the Great Depression. In the most intense phase of the crisis, as a financial conflagration threatened to engulf the global economy, policymakers in both advanced and emerging market economies found themselves confronting common challenges. Amid this shared sense of urgency, national policy responses were forceful, timely, and mutually reinforcing. This policy collaboration was essential in averting a much deeper global economic contraction and providing a foundation for renewed stability and growth. 

Note what’s missing: Any sort of contriteness or taking of responsibility for creating the crisis.

Yes, creating. 

The Fed caused this mess – directly and indirectly.  By allowing firms like Citibank to make loans they knew were defective and sell them the system was “levered up” with amazing amounts of debt that radically exceeded the output of the economy. 

This is an unlawful act as it violates The Fed’s mandate to manage credit aggregates. 

It is also willful blindness in support of those who committed common-law frauds by the regulatory agency that is allegedly supposed to be watching the largest financial institutions and blowing the whistle on said frauds as a safeguard of systemic stability.

In recent months, however, that sense of common purpose has waned. Tensions among nations over economic policies have emerged and intensified, potentially threatening our ability to find global solutions to global problems. One source of these tensions has been the bifurcated nature of the global economic recovery: Some economies have fully recouped their losses while others have lagged behind. But at a deeper level, the tensions arise from the lack of an agreed-upon framework to ensure that national policies take appropriate account of interdependencies across countries and the interests of the international system as a whole. Accordingly, the essential challenge for policymakers around the world is to work together to achieve a mutually beneficial outcome–namely, a robust global economic expansion that is balanced, sustainable, and less prone to crises. 

Again: We have not taken the adjustment necessary to bring the system back into balance.

The problem is found here:

Debt roughly doubled in the system while GDP advanced 40%, both during the 2000-2007 time frame.  This is unsustainable.  It was created by pumping Real Estate as a means of fomenting and promulgating lies throughout the economy making claims of so-called “growth” which was in fact a bunch of Real Estate-related people passing properties off between one another and calling this “growth”, while in point of fact tends of thousands of factories (where things really are produced) went over to China and are not coming back.

The Fed was responsible for allowing these intentional lies to be promulgated and maintained and still is.

The Two-Speed Global Recovery
International policy cooperation is especially difficult now because of the two-speed nature of the global recovery.

No.  International Policy cooperation is “especially difficult” because there has been no recognition of insolvency by those firms that are, in fact, insolvent.  We instead played games with monetary and fiscal stimulus to attempt to keep the economy running at a level that originally was amped-up by mainlining amphetamines.

Liquidity does not solve a solvency problem.  Bankrupt is bankrupt. 

These institutions are STILL INSOLVENT.

Indeed, for some emerging market economies, the crisis appears to have left little lasting imprint on growth. Notably, since the beginning of 2005, real output has risen more than 70 percent in China and about 55 percent in India.

Bah.  China is passing around empty apartments doing the same damn thing over here that we were doing and it is going to end the same way.  There is going to be an enormous bust over there in the near future and when it happens the curtain will be drawn back to show that there’s a little Wizard Of Oz crap going on over there as well – and in fact the guy yanking the levers isn’t some great Wizard but rather is a tiny little midget with a megaphone.

In the United States, the recession officially ended in mid-2009, and–as shown in figure 3–real GDP growth was reasonably strong in the fourth quarter of 2009 and the first quarter of this year. However, much of that growth appears to have stemmed from transitory factors, including inventory adjustments and fiscal stimulus.

Fiscal stimulus is not actually additive to GDP – it is merely pulling forward demand just as it is in your personal life.  The Chartalists argue that such can “never” lead to people going bankrupt in point of fact.  They’re technically right and ethically bankrupt as a devaluation of the currency simply spreads the payment stream across people without their consent and ultimately destroys those in the lower-echelons of the earning class (and those who are dependent on others.)  If maintained for too long it destroys the currency and government as the debasement reaches the point where one starts printing the interest due in an ever-tightening death-spiral. 

Of some 8.4 million U.S. jobs lost between the peak of the expansion and the end of 2009, only about 900,000 have been restored thus far. Of course, the jobs gap is presumably even larger if one takes into account the natural increase in the size of the working age population over the past three years. 

The jobs went to China and India and were replaced by Real Estate flippers – millions of “investors” who were running their households and businesses on false – knowingly false – “appreciation” of asset prices.

This in turn was fueled by the ever-growing insolvency of the institutions that were funding this cycle – a cycle that The Fed knew was based on fraud by 2006, and yet it did nothing, as is now known to be true due to Citibank’s former chief underwriter’s admissions.

Of particular concern is the substantial increase in the share of unemployed workers who have been without work for six months or more (the dashed red line in figure 4).

Then you shouldn’t have promoted policies that replaced actual productive output with real-estate flipping.  But you did.  Now, The Fed refuses to even acknowledge the problem say much less take responsibility for it.

The entire FOMC deserves to be rotting in a Federal Prison as conspirators in a massive Racketeering scheme promulgated on the entire world.

Low rates of resource utilization in the United States are creating disinflationary pressures. As shown in figure 5, various measures of underlying inflation have been trending downward and are currently around 1 percent, which is below the rate of 2 percent or a bit less that most Federal Open Market Committee (FOMC) participants judge as being most consistent with the Federal Reserve’s policy objectives in the long run.¹

You had inflation in credit aggregates running at more than 3% over growth for more than two decades.  Now when that threatens to correct you call it “deflation.”

Baloney.  You’re not “deflating” when the original problem was a bubble you created.  That’s reversion to the mean, not “deflation”, yet you are doing everything you can to prevent it.

And you’re failing and will fail as there is simply no more capacity to lard on more debt in developed economies.  The bad debt and insolvencies must be flushed out and resolved!

Although the details of the outlook vary among jurisdictions, most advanced economies still need accommodative policies to continue to lay the groundwork for a strong, durable recovery.

There can be no recovery until the insolvencies are flushed out and recognized.

Period.

There can only be attempts to blow new bubbles to cover up the old ones, which will either fail or worse, create greater instabilities.  The latter will be of sufficient size to threaten the continued existence of The United States government if you “succeed.” 

For this reason your insanity must be stopped.

Let me address the case of the United States specifically. As I described, the U.S. unemployment rate is high and, given the slow pace of economic growth, likely to remain so for some time.

Unemployment is high because productive jobs were sent overseas and replaced with jobs that were predicated on fraud and concealment of insolvency.  These jobs were not real in terms of productive output, any more than the “job” of robbing banks is productive.

Such “jobs” were exposed as of no economic value beginning in 2007.  But the productive jobs that they replaced are still gone.  There is no way to restore the charade, and thus, there is no way to recover to “full employment” other than to make it uneconomic to have all those jobs that went overseas remain there.

This is the fundamental truth about what happened in our productive economy and no amount of arm-waving will change it.

Indeed, although I expect that growth will pick up and unemployment will decline somewhat next year, we cannot rule out the possibility that unemployment might rise further in the near term, creating added risks for the recovery. Inflation has declined noticeably since the business cycle peak, and further disinflation could hinder the recovery. In particular, with shorter-term nominal interest rates close to zero, declines in actual and expected inflation imply both higher realized and expected real interest rates, creating further drags on growth.² In light of the significant risks to the economic recovery, to the health of the labor market, and to price stability, the FOMC decided that additional policy support was warranted. 

You’re trapped you jackass.  Rather than force the insolvent institutions out into the open and removing the bad debt from the system you instead decided to protect the fraudsters from being exposed. 

The problem is that doing this does not resolve the problem and the imbalances remain.  Japan did this and 20 years later they’re still screwed.  Thus it will be with us until we recognize the problem and resolve the insolvent.

The Federal Reserve’s policy target for the federal funds rate has been near zero since December 2008, so another means of providing monetary accommodation has been necessary since that time. Accordingly, the FOMC purchased Treasury and agency-backed securities on a large scale from December 2008 through March 2010, a policy that appears to have been quite successful in helping to stabilize the economy and support the recovery during that period.

Baloney.  All you did was blow another asset bubble – in stocks in government bonds.

Following up on this earlier success, the Committee announced this month that it would purchase additional Treasury securities. In taking that action, the Committee seeks to support the economic recovery, promote a faster pace of job creation, and reduce the risk of a further decline in inflation that would prove damaging to the recovery.

You failed Bernanke.  Now you’re doubling down on a failed policy.

In particular, securities purchases by the central bank affect the economy primarily by lowering interest rates on securities of longer maturities, just as conventional monetary policy, by affecting the expected path of short-term rates, also influences longer-term rates.

Oh yeah, they’ve gone down a lot.

Oh wait – rates have gone up since you started buying?  How’s that Ben? 

Oh, that happened during QE1 too.  Funny how you don’t talk about your abject failure to do what you claimed you were attempting the last time.

Lower longer-term rates in turn lead to more accommodative financial conditions, which support household and business spending. As I noted, the evidence suggests that asset purchases can be an effective tool; indeed, financial conditions eased notably in anticipation of the Federal Reserve’s policy announcement.

Yeah, people front-ran the policy and figured they could sell at overheated prices to you.  Oops.  They thought that the last time too, and got cornholed.  Now it’s happening again and rates are going up instead of down.

Incidentally, in my view, the use of the term “quantitative easing” to refer to the Federal Reserve’s policies is inappropriate.

That’s like saying that calling Bud Dwyer’s actions “suicide” was inappropriate.  Instead, “cranial disruption” would be more accurate.

(People put up with this crap?)

Importantly, the Committee remains unwaveringly committed to price stability and does not seek inflation above the level of 2 percent or a bit less that most FOMC participants see as consistent with the Federal Reserve’s mandate.

Stable = Unchanging, level, the same, identical.

The lies continue.

Where are the cops – specifically, where is Congress and why are they unwilling to impose on you a pair of manacles – either in terms of policy or literally in the form of leg irons and shackles – for your willful and intentional abuse of the mandate you operate under – an abuse that dates back to 1913?

In that regard, it bears emphasizing that the Federal Reserve has worked hard to ensure that it will not have any problems exiting from this program at the appropriate time.

Ensure eh?  And you know this because….. oh wait.  You don’t.  You’ve never done this before.  So “ensure” is yet another lie.

Fully aware of the important role that the dollar plays in the international monetary and financial system, the Committee believes that the best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States.

What a load of crap.  First-semester economics teaches one that all other things being equal if there are more of something in the economy the price of each is lower.  Therefore, printing money inherently debases the currency and causes its relative value to fall. 

Your claims are yet another blatant lie.

In sum, on its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for many years. As a society, we should find that outcome unacceptable.

Actually, we should find the conditions that led to this to be criminal misconduct, and we should imprison everyone involved in it.  That includes you, personally, the other members of the FOMC, all of the officers and directors of the major financial institutions that blew this bubble and everyone involved in the rating agencies and others who willfully and intentionally turned their head to avoid recognizing insolvency and unsound practices including Geithner and Paulson along with the entire NY Fed.

Monetary policy is working in support of both economic recovery and price stability, but there are limits to what can be achieved by the central bank alone. The Federal Reserve is nonpartisan and does not make recommendations regarding specific tax and spending programs. However, in general terms, a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve.

Pulling forward demand does not solve anything. 

Production must be returned to the United States from where it now resides so as to balance the production of goods and services with their consumption.

Unfortunately, the differences in the cyclical positions and policy stances of the advanced and emerging market economies have intensified the challenges for policymakers around the globe. Notably, in recent months, some officials in emerging market economies and elsewhere have argued that accommodative monetary policies in the advanced economies, especially the United States, have been producing negative spillover effects on their economies. In particular, they are concerned that advanced economy policies are inducing excessive capital inflows to the emerging market economies, inflows that in turn put unwelcome upward pressure on emerging market currencies and threaten to create asset price bubbles.

That’s because they have.  Rather than resolve the insolvent you’re covering it up.  But money has no master, and it moves to the place where it can earn a higher – and safer – yield.  That’s not here and you can’t make it here other than by resolving the underlying problems.

To a large degree, these capital flows have been driven by perceived return differentials that favor emerging markets, resulting from factors such as stronger expected growth–both in the short term and in the longer run–and higher interest rates, which reflect differences in policy settings as well as other forces. As figures 6 and 7 show, even before the crisis, fast-growing emerging market economies were attractive destinations for cross-border investment. However, beyond these fundamental factors, an important driver of the rapid capital inflows to some emerging markets is incomplete adjustment of exchange rates in those economies, which leads investors to anticipate additional returns arising from expected exchange rate appreciation.

No, to a large degree it is the looting culture and coverup of the fraud and theft that took place that leads people to determine that you will continue to debase the currency rather than deal with the crooks.  This, in turn, leads people to decide that the debasement of the currency and the cheap borrowing it permits is best used to buy things somewhere else.

That’s a carry trade and it is set up by your outrageous coverup of the frauds and scams over the last decade – a policy you are continuing today with the explicit permission and egging on of our President and Congress.

Just as in Japan, it will not stop until you stop the abusive practices that are enabling it.

It is instructive to contrast this situation with what would happen in an international system in which exchange rates were allowed to fully reflect market fundamentals. In the current context, advanced economies would pursue accommodative monetary policies as needed to foster recovery and to guard against unwanted disinflation. At the same time, emerging market economies would tighten their own monetary policies to the degree needed to prevent overheating and inflation. The resulting increase in emerging market interest rates relative to those in the advanced economies would naturally lead to increased capital flows from advanced to emerging economies and, consequently, to currency appreciation in emerging market economies. This currency appreciation would in turn tend to reduce net exports and current account surpluses in the emerging markets, thus helping cool these rapidly growing economies while adding to demand in the advanced economies. Moreover, currency appreciation would help shift a greater proportion of domestic output toward satisfying domestic needs in emerging markets. The net result would be more balanced and sustainable global economic growth.

Not as long as the looting remains unchecked.

You cannot have balance in the world economy until you stop people from hiding their own insolvency and remove debt that is non-productive from the system.  This requires that you deflate that non-productive debt.  Doing so will detonate those firms that are hiding the truth of their insolvency but the key point is that their bankruptcy happened years ago but has been hidden from public view as a means to enable yet more looting – in this case, more than $140 billion of wages and bonuses in the last year alone!

Given these advantages of a system of market-determined exchange rates, why have officials in many emerging markets leaned against appreciation of their currencies toward levels more consistent with market fundamentals? The principal answer is that currency undervaluation on the part of some countries has been part of a long-term export-led strategy for growth and development. This strategy, which allows a country’s producers to operate at a greater scale and to produce a more diverse set of products than domestic demand alone might sustain, has been viewed as promoting economic growth and, more broadly, as making an important contribution to the development of a number of countries. However, increasingly over time, the strategy of currency undervaluation has demonstrated important drawbacks, both for the world system and for the countries using that strategy.

Heh, if we’re going to loot, why should they not do it to us? 

This is the inherent and expected outcome when you permit stealing – more people steal!

Perhaps most important, the ultimate purpose of economic growth is to deliver higher living standards at home; thus, eventually, the benefits of shifting productive resources to satisfying domestic needs must outweigh the development benefits of continued reliance on export-led growth. 

Permanent exponential growth is arithmetically impossible.

Stop lying to people.

That said, in the short term, rebalancing economic growth between the advanced and emerging market economies should remain a common objective, as a two-speed global recovery may not be sustainable.

Looting only works until the “peasants” (from whom you loot) revolt.

In extreme cases you get what happened in the 1870s where the looters are literally drug out of their offices and hung from lampposts.

But in all cases when the suckers run out of money or patience you get unpleasant results – even if they’re nominally “peaceful” – and frequently they are not.  As the looting continues an ever-increasing proportion of the population becomes dependent on government “cheese” to remain alive.  But as the government debt levels continue to rise instability is transferred from the individual who is looted to the sovereign.  When the sovereign finds itself forced to stop the issuance of new credit at an ever-increasing exponential rate the risk of civil disorder or outright revolt becomes acute, as all that “government cheese” gets cut off abruptly.

Appropriately accommodative policies in the advanced economies help rather hinder this process.

Bull.  The only thing that helps in advanced economies is forcing the looting out of the system – and jailing those who conducted it.

But the rebalancing of growth would also be facilitated if fast-growing countries, especially those with large current account surpluses, would take action to reduce their surpluses, while slow-growing countries, especially those with large current account deficits, take parallel actions to reduce those deficits.

How ‘ya gonna do that?  You cut of the government cheese and you might find that there are lots of decorations on the lampposts in downtown Manhattan – and elsewhere.  That which you and other policy-makers won’t do through due process of law the people might do through less-formal means.

The fact remains that you can only play “vampire” until you have a corpse and the blood is exhausted.  Then you have to stop, and you will – one way or another – simply because your supply of “new blood” is exhausted.

I argue, and have since the onset of this crisis, that the proper way to stop it is through due process of law, with those who are responsible paying the just price for their crimes. 

And make no mistake – they are crimes.  Selling non-mortgage backed securities as if they had mortgages in them is fraud.  Misrepresenting what’s in the securities you sell is fraud.  Overstating appraisals and incomes is fraud.  Concealing the true value of loans on a balance sheet is fraud.  Whether someone makes those frauds “legal” via extortion of regulators does not change the essential character of what happened. 

You can avoid prosecution in the short term but not justice in the long term.

Conclusion
As currently constituted, the international monetary system has a structural flaw: It lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances. This problem is not new. For example, in the somewhat different context of the gold standard in the period prior to the Great Depression, the United States and France ran large current account surpluses, accompanied by large inflows of gold. However, in defiance of the so-called rules of the game of the international gold standard, neither country allowed the higher gold reserves to feed through to their domestic money supplies and price levels, with the result that the real exchange rate in each country remained persistently undervalued. These policies created deflationary pressures in deficit countries that were losing gold, which helped bring on the Great Depression.³

Bah.  The Great Depression was caused by margin collapse. 

This is inherently what does and mathematically must happen when you debase the currency and thus drive up input costs into an economy where the productive job base has been hollowed out and driven overseas. 

There is no solution to this problem that allows the continued protection of those who performed the looting.  We can either resolve this by forcing the insolvent into the open, clawing back their bonuses and pay, seizing their assets and prosecuting where we can, thereby deflating the excess credit and debt, or we will continue to play this game right up until the Federal Government is forced to withdraw the “government cheese” and we have 20% of the population homeless, hungry, jobless – and pissed.

I hope that policymakers in all countries can work together cooperatively to achieve a stronger, more sustainable, and more balanced global economy. 

I hope that policymakers in all countries will recognize that your policies and obfuscation has failed, that you have been consistently wrong since 2005 and 2006 on the path of the economy and housing market, that QE has in fact led to higher, not lower interest rates on the long end of the curve and that currency debasement has now baked into the cake input cost ramps that cannot be recovered through higher final delivered prices, and thus will bring about margin compression.

If these policies are not reversed – either voluntarily by you or by forcing you from office and replacing you with someone who can do 5th grade arithmetic and will stop lying to the public and the Administration then the risk of a full-on collapse of these programs, government funding and what comes with it – all of it ugly and very undesirable – threatens to become realized.