The Road to Ruin

Most stories about central banking and central bankers in the mainstream financial press follow a certain pattern. For instance, the idea that these central planning institutions may not only be superfluous but may be downright harmful is considered utterly beyond the pale of debate. The only topics falling within 'allowed' discourse are discussions about various plans (should there more money printing?  More forward guidance? Bla, bla, bla…), while the literal impossibility of central planning is simply ignored.

In the US, the economics profession has been thoroughly bought off by the Fed to boot (for details, see this article), so not a peep of fundamental critique will ever emanate from it, with proponents of the Austrian school representing the lone exception to this rule.

As the age of unanchored pure fiat money has progressed, central bankers, instead of being tarred and feathered and run out of town for the ever greater boom-bust cycles, the growing inequality, and the stagnation of real incomes their policies have produced, have increasingly begun to be hailed as the equivalent of superheroes in the media propagating the statist quo.

Once they were thought of as gray bureaucrats, whose main job it was to 'take away the punch bowl just as the party gets going', as former Fed chairman William McChesney Martin put it. However, once the system had been set on a course of unfettered growth in credit and fiduciary media following Nixon's gold default (the 'temporary' suspension of the dollar's gold convertibility that has become permanent without an announcement to that effect), it soon became impractical and impolitic for them to 'take away the punch bowl'.


Even Paul Volcker, whose job it was to rescue and preserve the fiat money system, implemented a tight policy for only about two years as measured by developments in the true money supply. Once those two years had passed, money supply growth received its biggest year-on-year goosing of the entire post WW2 era – yes, under the 'tough' Mr. Volcker. However, the medicine of high interest rates he had prescribed for a while, did succeed in rooting out malinvested capital and as a result, the economy was on a fairly sound footing at the time. Unfortunately, on account of credit expansion starting to run wild thereafter, this situation didn't last long.




TMS with change ratesUS money TMS-2, with quarterly and annual change rates, showing the brief tightening by the Volcker Fed and the subsequent record annual increase in the money supply, which at one point surged by 45% in a single year, with quarterly annualized change rates peaking at 165%! – click to enlarge.



Since Alan Geenspan's post 1987 crash intervention, the main job of central banks seems to be to spike the punchbowl at every opportunity, which has paved the way for a credit expansion of truly historic proportions. As a result, the fractionally reserved banking system is continually dithering on the edge of an abyss, and ever greater expansions of money and credit have come to be perceived as the only 'solution' to crises. It is testament to the moral and intellectual bankruptcy of the centrally planned fiat money system that this has become its sole perspective.


Although there are differences between various individual central bankers – there is no doubt a vast gulf between e.g. William McChesney Martin and  Ben Bernanke – it needs to be kept in mind that it is the institution as such that is the problem. Economists, regardless of which school they belong to, will almost to a man assert that price fixing is a bad idea, but will fall silent when it is pointed out to them that this is precisely what the Fed is doing. Somehow, money is held to be an exception.

Since most economists in the mainstream are hopeless empiricists, it required the collapse of the Soviet Union to convince a number of them that central planning of the economy really doesn't work. Until shortly prior to the moment when the utter bankruptcy of the communist system was revealed for all to see, a great many Western economists remained convinced it would one day overtake capitalism and were musing not about whether, but how much socialism we should adopt. Many of these worthies continued to infest academe and policy-making circles as though nothing had happened after their deluded worldview had been so unceremoniously shattered. Still, the fact that a socialist command economy cannot work – a fact proven theoretically by Mises in 1920 already – finally was grudgingly accepted by nearly all of them.

And yet, the majority of economists to this day pretends that central banks and their activities are magically exempted from the laws of economics.  And yet,  it is simply not possible for a gaggle of bureaucrats to determine what the 'correct' level of interest rates or the what the 'proper size' of the money supply should be. The belief that such a system works is just as misguided as it was to believe that Soviet central planning was superior to a free market economy. Regardless of the acumen and  intentions of the bureaucrats entrusted with central banking, the result can only be economic distortions and outcomes that are vastly inferior to market-determined ones.


Genuflecting Before the New Chief Central Planner

The bizarre adulation of central bankers in the mainstream media has reached fresh heights of absurdity following the nomination of Ms. Yellen to the post of  Fed chairperson. We have e.g. Ambrose Evans-Pritchard gushing “Rejoice: the Yellen Fed will print money forever to create jobs”. Reading through his screed one may be excused for mistaking it for satire at first glance – but he actually means it. We quote:


“The Fed will be looser for longer. The FOMC will continue to print money until the US economy creates enough jobs to reignite wage pressures and inflation, regardless of asset bubbles, or collateral damage along the way. No Fed chief in history has been better qualified.”


(emphasis added)

Yes, there really is not even a pause for breath between the highlighted non-sequitur at the end the end of the above paragraph and the rest. Acting without regard to “asset bubbles and collateral damage along the way” is considered the hallmark of the 'best qualified' Fed chief by AEP.

After acquainting us with her rather boring sounding career as a life-long bureaucrat who has evidently not the foggiest idea what it means to run a business or otherwise be active in the part of the economy that produces the wealth she is about to help squander,  AEP concludes that:


You could hardly find a safer pair of hands.


Whatever that is suppose to mean. Her “lodestar”, we learn, is NAIRU:


When the rate is above NAIRU, she is a dove: when below, she is a hawk.


Apparently the 1970s never happened. This invocation of NAIRU is like a grunt from the grave. We advise readers to take a look at the aptly named paper “The Death of the Phillips Curve” (pdf) by William Niskanen, which begins as follows:


“There is no evidence of a Phillips curve showing a tradeoff between unemployment and inflation. The function for estimating the non-accelerating inflation rate of unemployment (NAIRU) has been incorrectly formulated. Indeed, the unemployment rate is a positive function of the inflation rate with a lag of a year or two.”


(emphasis in original)

And of course, in the face of the US true broad money supply having inflated by 230% since 2000 and almost 82% since 2008, AEP confides his personal conviction that:


The greater danger is still deflation.


In some parallel universe perhaps.

At the end of his article, there is a brief flicker of hope that the man may not have gone completely off the rails just yet when he notes:


We are surely past the point where we can keep using QE to pump up asset prices.”


Right, although one is tempted to ask: who the hell is 'we'?  But anyway, it turns out AEP wants even more crazy interventionism, not less. The man is evidently a statist through and through:


“My view is that emergency stimulus should henceforth be deployed only to inject money directly into the veins of the economy as an adjunct to the US Treasury, by fiscal dominance, as deemed necessary.

That would take an intellectual revolution. Is Janet Yellen game for such incendiary ideas? Perhaps.”


Well, if that's the 'solution', why not go a decisive step further and hop-skip directly to a full-scale command economy? As we have pointed out before, command economies never have unemployment problems – everybody gets to pretend they're working. Frankly, we find  AEP's incessant screeching for more money from thin air and more State rather revolting by now.

Mrs. Yellen's preoccupation with employment is also discussed in this portrait at Bloomberg (we urge readers to watch the video at the beginning of the article showing excerpts from her speeches). 

It inter alia contains this paragraph:


“[…] Yellen may be less worried than some of her fellow FOMC participants about the cost of further expanding the Fed’s $3.75 trillion balance sheet. In a March speech, she listed four potential risks a rising balance sheet might entail: It could impair market functioning, create difficulty in removing stimulus, lead to balance-sheet losses when assets are sold, and pose risks to financial stability, such as inflating asset bubbles or driving investors into high-yield investments of lower credit quality. She dismissed all of them.”


(emphasis added)

Essentially, Mrs. Yellen's outlook appears very similar to that of Narayana “Havenstein” Kocherlakota, which we recently discussed in detail.

The entire approach is putting the cart before the horse. Employment does not magically create economic growth. It is the other way around: economic growth creates employment.

Genuine, sustainable economic growth can however not be achieved by money printing, deficit spending or any other interventionist measures undertaken by the government. All that can be achieved by these 'to hell with the risks' interventions in the economy are temporary sugar highs like the Nasdaq bubble or the housing bubble. They certainly 'feel good', even while capital and wealth are squandered and consumed, but they are invariably followed by profound and ever bigger crises when the errors of these artificial booms are discovered.

We have come across yet another exercise in Yellen adulation at Bloomberg, written by Mr. Justin Wolfers, an economist whom we haven't heard about before, but who is evidently not averse to interventionism and probably thought the nomination offered a good opportunity to suck up to power a bit (maybe he writes out of a genuine conviction that loose monetary policy 'works', but one should never lose sight of the fact that the Fed liberally showers grants on its favored apologists in the economics profession). Mr. Wolfers' article is entitled “Why I'm Very Happy About Janet Yellen”. The only thing one is left wondering about at the end of his paean is why he hasn't yet proposed her to be considered for sainthood.

At one point he remarks that:


“The unemployed should rejoice that they have a powerful advocate willing to battle the hard-money types willing to consign them to the economic scrap heap.”


There is an excellent commentary on Mr. Wolfers' article at the Daily Bell, where the above sentence has inspired the following imagery:


One can actually imagine a French romantic painting along these lines: Indigent and ragged US citizens stretch out their arms, pleading as the authorities clatter by on big, armored horses, their gilded capes flapping in the breeze.


Whether Mr. Wolfers realizes it or not, had the 'hard money advocates' been listened to when it mattered (there were plenty of opportunities throughout history), we would not be in the mess we are in. Never mind that such hard money advocates are rare as hen's teeth in both academe and the corridors of power nowadays, so the 'danger' of them getting a hearing is vanishingly small anyway.

At one point Mr. Wolfers even asserts that now that Ms. Yellen is Fed chief, he is “reassured that the future of my daughter is in good hands”. This strikes us as a slightly premature conclusion, to put it mildly.

By the way, we don't doubt that Mrs. Yellen is sincere and actually believes what she professes to believe – in other words, she is seriously deluded. By all accounts, she seems to be a nice person though. So we have a nice and 'humble' person leading an institution that is clearly a danger to civilization. What a relief! Meanwhile, all the gushing praise for her academic work on labor markets seems a tad exaggerated to us. She and her husband wrote a 'famous paper' that basically concludes that workers tend to be happier when they get paid more rather than less. Well, duh.

Apparently she has yet to hear about Henry Ford, who decided to raise the pay of his workers because he figured it would make them more productive. Almost needless to say, we think such studies are a complete waste of time. In an unhampered market economy there would be no involuntary unemployment and the remuneration of workers would reflect their productivity. Entrepreneurs are not stupid with regard to the feedback loops involved (as Mr. Ford showed), and labor is a scarce resource employers must compete for. In a free unhampered market economy there would really be nothing to write papers about in this context  – all that needed to be said on the topic has been said long ago already.  Of course Mrs. Yellen clearly does not believe in the power of an unhampered market economy to provide employment for all who want to be employed. From the Bloomberg portrait:


“Yellen, 67, voices confidence in the ability of monetary policy to stabilize output and boost employment when capitalism fails, a view she shaped under the late Nobel laureate James Tobin at Yale University in New Haven, Connecticut, where she obtained her Ph.D.”


Color us unsurprised that she studied under a Keynesian economist who had the dubious distinction of having a tax named after him (a tax misguided EU governments now want to introduce in spite of its well-documented history of wreaking untold harm).

The fact that the swill about capitalism 'failing' and the alleged need to deploy the helping hand of the printing press to 'correct' such 'failures' are part of her core beliefs is in the end all one really needs to know.



Chart by: Michael Pollaro




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7 Responses to “St. Yellen’s Ascension to the Throne”

  • mc:

    From the article (quote Yellen):
    ” If the current, elevated rate of unemployment is largely cyclical, then the straightforward solution is to take action to raise aggregate demand. If unemployment is instead substantially structural, some worry that attempts to raise aggregate demand will have little effect on unemployment and serve only to stoke inflation.

    I see the evidence as consistent with the view that the increase in unemployment since the onset of the Great Recession has been largely cyclical and not structural.”

    Labor force participation rate plunging for 5 straight years, and still thinking it might be cyclical? Interest rates are flat line for half a decade with unprecedented interventions, is that a normal cyclical response? No points for the “raise aggregate demand” canard, but even by the Keynes handbook this is not a normal recession.

  • No6:

    This is setting itself up for a catastrophic collapse of the currency at some point. I cannot see these idiots abandoning the direction taken since 2008. They will fiddle the stats as long as possible and intervene in ever more markets but eventually the dollar will be trashed.

    Strangely there is a belief out there that the world reserve currency cannot hyper inflate. (Mike Shedlock who is eminently sensible is of this belief). I think this meme is wrong.

    • mc:

      Reading Mish Shedlock in detail, his reasoning is very sound. Most Central Banks of the world hold the dollar as the primary asset against their own currency. A large number of those CBs run the policy of export subsidy exchange rates that slowly accumulate large amounts of USD as foreign reserve indefinitely. Print the local fiat at a rate greater than the Fed and buy dollars. This becomes a large reservation demand that operates separately from that of the US economy and politics.
      This creates a situation where the only way hyperinflation of the dollar can occur is the political event of repudiating the dollar as a backing of the local fiat currency. So many countries use the dollar as reserve, and nearly all have an enormous trade relationship with the US. Exports to the US play a powerful political role in these nations as well, and dollar hyperinflation ends trade with the US for the short term.
      It becomes a no-win situation for CBs that would love to sell dollars and hide elsewhere. These are irredeemable Fed liabilities that are on the asset side of their balance sheet. A bid for dollars will always exist as long as CBs can expand their balance sheet by printing local fiat and buying dollars. In past local hyperinflations, people exchanged for the dollar as a stable store. That status with people and CBs, until reversed, is unique among currencies and provides the buffer to prevent hyperinflation. It has to cease being the reserve currency first, because that makes it, by construction, the supposedly invariant store of value.

  • Mark Humphrey:

    Thanks for this and many other excellent articles.

    Now that Yellen’s appointment looms large, it makes me wonder if we’ll see another stock market ramp into the clouds. No one knows how this will play out, except the ending will be unhappy.

    If stocks bound way higher, we might see long term interest rates climb also. So, for instance, if Yellen pumps at a faster rate due to flagging indicators, the new money would flow into revenues. Expanding revenues would outpace historical costs, so the average rate of (nominal) profit would incrrease. Higher nominal profit returns would tend lift company borrowing and interest rates.

    So stocks and interest rates might go up together, which could sow trouble for the economy and, after a heady rise, stocks. Through all this confusion, gold could finally resume its bull market, about the time stocks peak and start falling. I’m guessing that the dollar would stay strong through another stock market rise, and then get weak as economic troubles and high interest rates clobber stocks.

    Then gold might resume its bull market.

    But I’m indulging in guesswork.

  • 1984 came 30 years late. They can’t get rid of the IRS zeroes!! Think of the highly productive bureaucrats that would eliminate, not to mention the accountants and lawyers with government insured loans.

    I suspect when it costs almost nothing to employ someone to boost earnings another dollar, so as to sell stock at an infinitely higher price, more people will have jobs. Until another bubble breaks. Strange they will either destroy the village to save it, or ensure deflation remains a risk for the rest of our lives.

  • zerobs:

    OMG! Pater is right about that Bloomberg video.

    “Yellen has spent her entire life in academia and government…. But it is the human economy that she cares about so much.”

    Yeah, she cares about the human economy so much that she purposely avoided vocations that required actual customers HER ENTIRE LIFE.

  • zerobs:

    My view is that emergency stimulus should henceforth be deployed only to inject money directly into the veins of the economy as an adjunct to the US Treasury

    It’s as if US Treasury Notes were never used as currency before.

    One could certainly inject this stimulus directly into the economy by eliminating the income tax (thus removing the need for the IRS to even exist) and merely print all the money the government ever needs. But since that has seen tried hundreds of times in human history only to end in utter disaster every single time, we need highly intelligent people like Yellen and AEP to come up with an extremely convoluted-but-half-baked way to accomplish the exact same thing.

    It’s like Rube Goldberg’s inventions being taken seriously. Yellen et al would like to stimulate the economy so much that we’d have to label Moe Howard a terrorist for only having Three Stooges when Four Stooges would increase GDP by 25%.

    (Rube Goldberg wrote the first Three Stooges movie, back when it was a 4-man team.)

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