Arrogance Waiting for Comeuppance

Bloomberg informs us that there is a “Yellen Message to Europeans Divided on QE: Do Whatever It Takes”. The belief that central bank bureaucrats can “rescue” the economy by printing more money evidently remains as firmly ingrained as ever. As Paul Singer, the head of Elliott Management, remarked on this in a recent letter to investors (note that Mr. Singer has an excellent track record as an investor spanning four decades):


“Central bank manipulation of prices and risk taking has become the norm over the last six years, because it is so hard for investors to see the downside. QE and ZIRP have been ‘free,’ as far as most people are concerned, in terms of stability, asset price and economic growth, and economic recovery. ‘Free’ in this context means devoid of future countervailing negative consequences. Unfortunately, this particular magic bullet is illusory — the negative consequences are only in their early stages of unveiling…

“Central bankers do not understand that it was their tinkering, manipulation, bailouts and false confidence that encouraged and enabled the insanity that led to the fragility and collapse. Partially as a result of that misunderstanding, the developed world has doubled down on the same policies, feeding the central bankers’ supreme self-confidence. Political leaders have been content to stand aside and watch the central bankers do their seemingly magical and magnificent work.

The believers in the wisdom of this central-banker-centric economic world have been crowing and gloating that those (like us) who have raised concerns about the risks posed by the post-crisis, monetary-dominated policy mix (inflation, distortions, growing inequality, lower growth) are just ‘wrong’ and should apologize for a ‘massive error.’ This, shall we say, ‘Krugmanization’ of a substantial portion of the economics profession and punditocracy is in its triumphalist phase, and whether its smug non-stop ‘victory lap’ ultimately represents an embarrassing high-water mark is for subsequent events to reveal.”


(emphasis added)


paul singerPaul Singer of Elliott Management – his warnings will of course be ignored.

(Screenshot by FOCUS Online/Wochit)


Indeed, the very same crowd that was patting itself on the back so much it must have hurt back in 2006-2007 is at it again. At the time it was also widely held that the economic developments following the crash of the Nasdaq bubble “proved” that central bank manipulation of the economy “worked”. All this smugness that is currently on display will turn into embarrassment soon enough, but the lack of humility just six years after these bien pensants almost managed to blow up the entire financial system certainly seems a bit out of place to us.

This is especially so as it is an apodictic certainty that the “doubling down” on the same policies that have failed so spectacularly last time around will eventually bring about an even bigger failure. We know this because the laws of economics have not been magically suspended. Money printing has consequences, and in many respects it is simply too late to head them off.

Readers may recall two charts (see: chart 1 and chart 2) we recently showed, which document – admittedly imperfectly, as is always the case with aggregated economic data – how distorted the US economy has become over the past six years of the printing presses running overtime. Certain inferences are inescapable: even more capital has been malinvested and consumed as a result of central bank manipulation since the last crisis. This cannot tell us anything about the timing of the next crisis, which depends on variables that cannot be foreseen with certainty, but it can tell us something of its likely severity. Among the aforementioned unknowns are future policy decisions and the state of the economy’s pool of real funding. The former are easier to guess at than the latter, but given the sluggishness of the “recovery”, we must assume that the structural condition of the economy is quite weak indeed.


Bureaucrats Undeterred by Failure: Full Steam Ahead, “Whatever it Takes”

Failure has never deterred our vaunted central planners though. As a rule they blame the free market whenever their schemes blow up. We are not sure if they actually believe their own BS, but this propaganda aimed at covering the behinds of a slew of politicians and bureaucrats is certainly hammered home at every opportunity. Many people have fallen for it, as an overview of reader comments on economic topics in the mainstream press often depressingly attests to. However, the legions of those who no longer uncritically accept the official narrative are fortunately growing as well. For now it is still “full steam ahead” though, as far as the planners are concerned. From the Bloomberg article mentioned above:


“Janet Yellen has a message for European central bankers struggling to decide whether more bond purchases are needed to stave off deflation: Do whatever it takes.

“Central banks need to be prepared to employ all available tools, including unconventional policies, to support economic growth and reach their inflation targets,” Federal Reserve Chair Yellen said in the text to be delivered today at a Bank of France event in Paris.

Yellen spoke as European Central Bank officials appeared divided over how far they should go in pursuing bond purchases. ECB President Mario Draghi said he intends to boost the bank’s balance sheet back toward March 2012 levels, or about 1 trillion euros ($1.24 trillion) larger than today. Draghi has faced pushback from some ECB members.

“Given the slow and unsteady nature of the recovery, supportive policy remains necessary,” Yellen said in a reference to the aftermath of the global financial crisis. Earlier today, Bank of France Governor Christian Noyer, a member of the ECB’s Governing Council, said policy makers have relied too heavily on central banks to boost economies struggling with low growth and low inflation. “Central banks have been considered the only game in town,” he said. “We all know central bankers do not act in a vacuum.”

Yellen said that while fiscal policy has a role in stimulating growth, central bankers should be prepared to act if government support falls short.”


(emphasis added)

The entire premise is of course quite misguided. The economy is not a machine, and it doesn’t need to be “stimulated” by the printing press. If that actually worked, it would have already worked when Roman emperor Diocletian tried it in AD 297-301, when John Law tried it in 1720 or when the French Revolutionary Assembly tried it again 70 years later. The reason it didn’t work was not that these people were intellectually inferior to modern-day central economic planners. Anyone reading the debates of the French assembly on whether or not to print more money will come away with the impression that a very erudite debate took place, which the easy money faction won because it had tempting arguments – very much to the chagrin of the French economy, as it turned out. In addition to that, readers will discover that the arguments in favor of inflationary policy were essentially exactly the same as those that are made today. There is nothing new under the sun, and monetary policy has definitely not become “more scientific” – in fact, its “scientism” is quite inappropriate to the field of human action.


FRA-A73-R+®publique_Fran+ºaise-400_livres_(1792)_2The first paper currency of the French Revolution: the assignat. After this currency failed, the revolutionary assembly issued a replacement, the “mandat”, which failed even faster. After all this stimulation by intelligent, well-educated men, the French economy was lying in utter ruins.


Ms. Yellen also suffers from the Keynesian delusion that demand must be stimulated, and from the possibly even greater delusion that more regulation can keep the inevitable crises at bay, which follow in the wake of central bank policy-inspired asset bubbles:


““With policy rates at or approaching zero, central banks of necessity turned to unconventional policy tools such as large-scale asset purchases,” she said. “These unconventional tools have, in my opinion, served to support a recovery in domestic demand and, as a consequence, global economic growth.”


Yellen, who succeeded Ben S. Bernanke in February as Fed chair, said the global crisis and slow recovery have underlined the importance for governments of improving their finances in good times so they can spend money stimulating their economies during downturns.

Another lesson, she said, was the importance of a stable financial industry backed by “effective regulation and supervision.” Yellen was optimistic about the economic outlook, saying that “headwinds associated with the financial crisis will wane.”


(emphasis added)

We have already commented extensively on why the notion that things will work out if only the “proper implementation” of Keynesian recipes is pursued is actually nonsensical. Varying deficit spending and surplus generation according to the wave-like movements of the business cycle is unworkable, because it ignores the real problem (see “Keynesian Dogma – Garbage in, Garbage Out” for details).

We won’t deny that money printing always appears to give the economy a “shot in the arm”, as real wealth is diverted into bubble activities. This shows up as “growth” in aggregate economic statistics, but it is really the equivalent of heating one’s house by burning the furniture. There can also be no question that even during artificially stimulated booms, wealth is not only consumed, but a certain, actually quite significant amount of genuine wealth generation continues to take place as well. If the economy were left to its own devices, i.e., if we had an unhampered free market economy without constant government intervention, these genuine wealth creation activities would always be the dominant force in the economy.

And yet, one cannot consume oneself to prosperity. There is never a problem with “demand” as long as there remain unsatisfied human wants. The problem is whether there is a sufficient amount of sensible investment and production to enable people to actually pay for this demand. The scarcity of capital cannot be alleviated by printing money and “stimulating demand”.

If Ms. Yellen actually believes that a temporary improvement in economic statistics is proof that central bank policies work, we may well ask: what did those same statistics “prove” in 2006 and 2007? At the time there was a lot of laughter at Federal Reserve meetings. At the time she and her colleagues were evidently also quite convinced of the success of their interventions.


laughterLaughter at FOMC meetings – as this laugh track shows, everything appeared to be fine to the planners in 2006-2007 – click to enlarge.

Lastly, economic booms and asset bubbles that have formed as a result of central bank intervention eventually always lead to a fork in the road for policymakers: they must either decide to abandon further credit and money supply expansion voluntarily, in which case the crisis comes sooner rather than later, or they continue to print and risk the eventual complete breakdown of the underlying currency system. There is no third possibility.

What can definitely not be done is to avert crises by introducing ever more complex regulations. By mid 2013, the Frank-Dodd Act’s regulations were already running to nearly 14,000 pages, after almost 4,300 public meetings. Reportedly, regulators were “just getting started” at the time. How this increase in complexity is going to ensure “financial stability” in the face of one of the biggest asset bubbles in history is quite beyond us. Ms. Yellen’s certainty on this point in our opinion mainly betrays a dangerous complacency.

Below is an excerpt from an infographic on Dodd-Frank published by Davis Polk (the complete infographic can be seen here) in June 2013:


dodd-frankAs of mid 2013, almost 14,000 pages of regulations had sprung from the Dodd-Frank Act, which represents an estimated 39% of the total that is expected in the end – click to enlarge.


Our assessment of this is the exact opposite of that of Ms. Yellen: this complex body of rules makes financial crises more, rather than less likely. Her own statements already show us why this must be so: the existence of this body of additional regulations makes people complacent and blinds them to the risks that are growing like weeds right under their noses.



The Europeans should best ignore Ms. Yellen’s “whatever it takes” advice, but we know of course that they won’t. While the ECB has been tip-toeing around the German Bundesbank’s opposition to its monetary policy initiatives, the inflationists have so far won out every time. Curiously, that always seems to happen, throughout history – probably because it is regarded as the easy way out. Not even the most glaring examples of failure have ever managed to stop the next crop of intellectuals from becoming convinced that they have found the holy grail of central economic planning and inflationism. Previous failures are simply deemed to have been lacking in scientific rigor, but this time it will surely be done right! We conclude that few things are more dangerous than a bunch of bureaucrats having an epiphany on how to “fix the economy”.


Charts and tables by: Bianco Research, Davis Polk



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2 Responses to “Yellen’s Message to Draghi: Print, Baby, Print!”

  • jimmyjames:

    Previous failures are simply deemed to have been lacking in scientific rigor, but this time it will surely be done right! We conclude that few things are more dangerous than a bunch of bureaucrats having an epiphany on how to “fix the economy”.


    Altogether now ..pump!
    We’ve been here before ..

    The ancients old sentinel stands above on the hill .. as it has for 3000 years and watches it happen all over again ..

  • No6:

    Due to the fact that elections in the US arrive at predictable times and economic planners do have some latitude as to when credit expansion will slow, we can have a stab at timing a future crisis. It seems they like an outgoing president to divert the blame.

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