FedUpUSA

Not might folks, will.

“And you need not go further than one of our stores on midnight at the end of the month. And it’s real interesting to watch, about 11 p.m., customers start to come in and shop, fill their grocery basket with basic items, baby formula, milk, bread, eggs,and continue to shop and mill about the store until midnight, when electronic — government electronic benefits cards get activated and then the checkout starts and occurs. And our sales for those first few hours on the first of the month are substantially and significantly higher.

“And if you really think about it, the only reason somebody gets out in the middle of the night and buys baby formula is that they need it, and they’ve been waiting for it. Otherwise, we are open 24 hours — come at 5 a.m., come at 7 a.m., come at 10 a.m. But if you are there at midnight, you are there for a reason.”

This is why it can’t work folks.

In a credit-driven monetary system, you can only get “inflation” (in the truest sense, where it flows through to wages and prices, thereby debasing – that is, helping – people pay down indebtedness) if there is credit expansion.

But when the limit of credit expansion is reached (which is known – when “QE” by whatever name is initiated, you’ve reached that point, as you are then artificially trying to create credit expansion that you are unable to stimulate otherwise) further machinations of this sort do nothing other than bankrupt the population.

That is, there is no flow-through to wages.  Price for essentials go up (energy, food, diapers, etc) but earnings capacity in real after-tax dollars decreases instead of increasing as occurs in a true inflationary environment.

You’ve all seen this.  The 2qt Ice Cream tub is now 1.5qts.  Price inflation.  But your paycheck hasn’t gone up 25% to compensate.

The upper middle class and above is “unhurt” by this.  Oh sure, they feel the pinch too, but in the broader sense it doesn’t do much damage to them, in that they still have surplus.  So long as you have surplus, you’re “ok” in the general sense (you might not like it, but you at least can put gas in the car and food in your kid’s mouth!)

The working person, and especially the lower-middle class and below, are decimated by these sorts of policies.

Because capital formation is destroyed by ZIRP, these people have no job opportunities.  Without capital formation there are no new businesses formed to create jobs.  Without that employment there is no income to spend.  The price-cram inflation that manufacturers try to hide with quantity games and similar doesn’t matter, as your baby still poops the same number of diapers, so if you get six less in a package, you need to buy more packages.  The price-per is what matters, not the price on the wrapper, and your income goes down.

We can’t stabilize the labor market until we shut off the ZIRP tap.  We cannot export our wage deflation to China, because it winds up reflecting here and destroys the capability for Americans to earn a decent wage.  At the same time despite claims of “zero inflation” food, energy and other essentials continue to skyrocket in price.

If you doubt this problem is real go to a WalMart in any major city on the last day of the month around 11:00 in the evening. Hang around for an hour.  Notice who’s in there and who goes for the checkstand when the clock ticks over.

These folks know better than anyone, due to their superior IT technology and ability to track sales down to the UPC, along with time of the sale and who’s buying, exactly what’s going on.  When they tell you people are so broke they can’t afford a package of diapers until the “magic card” with “government cheese” turns back on at 12:01, you better listen.  They’re not BSing you.

I’ve written on this for three years, and have pointed out that debasing the dollar will not help – it will in fact destroy the middle class and below instead.  We got a short reprieve from the dollar debasement occasioned by the equity collapse in 2008 and early 09, but now we’re in the phase where instead of engendering support for the stock market a dollar decline will crash valuations instead.

Competitive devaluation cannot work, as we do not control the world.  When we do it the rest of the world will respond by doing the same thing.  All we do is tighten the vise – actual help for the population is not in the offing from these policies.  “Begger Thy Neighbor” – exactly what we are attempting to do now - was a big part of why The Depression lasted 10 years, and it is also a big part of why it ended in a World War.

Nothing has changed folks.  I said in 2007 that the only way out of this was to pull liquidity and force the bankrupt to take their medicine, whether we wanted to do it or not.  It doesn’t matter if the rich and powerful banksters “think” this is a bad idea, mathematically it is not possible to inflate out of this, nor to stabilize the economy with ZIRP and QE.  All we’ve done is enable the federal government to temporarily paper over the insolvency of half the population (and all of the major banks) by borrowing and spending 12% of GDP, building in even more damage that now has to be corrected and ensuring that even more pain must be suffered.

IRA popped up this morning with an article that makes some of the points I’ve been harping on for a year or so now….

Even as bank securities holdings are rising in aggregate, loan portfolios and assets overall are shrinking at an accelerating pace – evidence, we believe, that deflation remains the chief threat to the global economy. As we said two weeks ago, when the Fed embraces a zero rate policy, what they are telling investors is that bonds and other rate-sensitive financial assets have no value. We’ve been talking about the shrinking bank balance sheet for more than 18 months and thankfully this key statistic is starting to get broad attention.

Right.

The problem with this premise is that not only does it destroy the asset base (think savings accounts, CDs, etc) that banks require to have a healthy lending environment, it also drives funds in two corrosive and destructive directions:

1. It encourages carry trades which are inherently destructive because the capital lent leaves the nation where it was borrowed.  That is, it is put to work somewhere else, instead of in the borrowed currency.

2. It forces people out the risk curve and while at the same time it destroys bank capital bases it exposes the capital that wants a low-risk (or “risk free”) home into risk assets where it can be destroyed.

When you look at credit quality of these “assets” (especially MBS) you see a truly frightening picture.  The Fed’s intentional overpayment has masked an enormous valuation:coupon disconnect; the internal credit quality in these things continue to go to hell, yet the coupon has been stable rather than rising to reflect this deterioration.  That shouldn’t happen in a rational market, but there is nothing rational about The Fed’s interference.

Now consider the lowly retail investor who is in a money market fund with his “must not lose” money.  He is earning zero, and many of these funds are at present absorbing fees.  This is causing them to run at a net loss, as any attempt to post a negative interest rate to investors will result in an instantaneous run on the fund.  Yet ZIRP makes it effectively impossible for these funds to return a positive yield.

Remember, without these funds there is no lending base and thus no credit growth.  The perverse impact of ZIRP is that it destroys bank capital bases, as over time people will simply not sit for a zero yield – effectively or otherwise.

As I have noted for the last three years (and which IRA also notes in their paper) the only solution to a debt-overhang economic dislocation is to force the excessive and unpayable debt to default.  These defaults bankrupt the institutions and borrowers that were imprudent, but in doing so they also clear the market.  This also forces yields to rise to reasonable levels, restoring a yield curve that reflects duration and inflation risk, yet allows the capital base of the sound banks to be rebuilt, as they are able to attract deposits, especially time deposits, with reasonable yields on these instruments.

In other words, it attracts capital to the financial institutions – not debased currency or credit.

Only loaned (and thus borrowed) capital promotes economic growth.

The Fed’s puerile thought process is that “all yield is the same”, ”all borrowing cost is the same”, and “all credit source is the same.”  This is a chimera.  The Fed is incapable of producing capital, even by printing.  It can produce credit and it can debase existing money, diluting all existing currency, but it cannot create capital.

Capital is created only by real production in the economy.  No other action creates it.  Yet the loan of capital is what gives rise to the granting of credit without debasement of all existing currency.

The Fed is powerless to do this, but it can destroy the conditions necessary for capital to be lent.

ZIRP does exactly that by ruining the incentives necessary for those with actual capital to be induced to lend that capital.

The Fed should have learned this from Japan, but refused to look at the evidence under their nose.  Instead, Bernanke has continued down a ruinous ivory-tower path born out of his own fertile imagination in relationship to how markets and incentives actually work, conflating the concepts of “money”, “credit” and “capital.”

Addressing this problem and correcting it requires admission that both Paulson and Bernanke, along with Summers and Geithner, were wrong.

In the world of Washington DC where “I screwed the pooch” are four words you will never hear a politician utter, such a sea change will require that either President Obama grow a pair of balls or that he be shackled by a massive shift in power in Washington DC – and those who come in to do so actually understand the difference.

Odds on that event were unavailable at presstime.