Fed’s Fisher: Half-Truths & Lies


The Fed Is Flaccid


Now that is imagery that I agree with, and it ought to serve as a warning to you:

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.

I’m sure.

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 thistwo 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 virtuallyeverywhere 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.

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