Master of the Universe

GUALFIN, Argentina – According to several headlines, the U.S. stock market rose on Tuesday “ahead of Fed.” The Dow was up 229 points – or 1.4% – for the session.

And so, we return to poor Janet Yellen. Tomorrow, much of the world turns its lonely eyes to the Fed and its chieftain. The Fed has as much as promised to make the blind see and the lame walk. It claims that it – and it alone – is capable of improving the U.S. economy and, by extension, the world economy.

People will earn more money. They will live better. And they will have less to fear from financial calamities, such as those that happened before the Fed was set up in 1913.

In the popular mind – if there is such a thing – it is further believed that the Fed “won’t allow” a major bear market, because “it would be bad for the economy.” The Fed rules the entire universe of commerce, finance, and investment.


yellen-fed-580Never has a move in administered rates by a few basis points exercised people as much as this time around. Thousands of pages must have been filled with exhortations by assorted armchair planners as to “what the Fed should do” over the past few weeks. The usual suspects were pleading for more easy money.

Photo credit: Pete Marovich / Bloomberg


DJIAOver the past two days the DJIA has actually broken out of its triangle to the upside – normally a short term positive signal, but it remains to be seen how the market reacts to the FOMC decision – via STockCharts, click to enlarge.


Janet Yellen rules the Fed. But who rules Janet Yellen? Yes, the weight of extravagant claims and preposterous promises now falls on one woman: Janet Louise Yellen of Brooklyn, New York.

During working hours, she holds her head up and talks the mumbo jumbo of a normal, confused economist. But late at night, after tossing and turning in bed, her thoughts must focus more clearly. In moments of pure, enlightened terror, she must see the impossible position she has been put in.

“How am I supposed to know at what price credit should change hands? Of course, it is impossible,” she must think.

“Markets, not bureaucrats, set prices. Try to do it any other way and you always end up with a mess.

“And yet, here I am. I have a responsibility. I am head of the world’s largest banking cartel. I am charged – by law – to do four things.

“At least this is what the Fed’s website tells me…

“One, conduct the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.

“Two, supervise and regulate banks and other important financial institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers.

“Three, maintain the stability of the financial system and contain systemic risk that may arise in financial markets.

“Four, provide certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and play a major role in operating and overseeing the nation’s payments systems.


Fed-rate-decision-668x501And this is how it’s done in practice …

Cartoon by Danziger


ZIRP for Zip?

“I shouldn’t ask questions. I should just do the job.

“Full employment? Yes… I think we’re on the right track.

“Stable prices? Where did that come from? I didn’t know that was in there. No question – we nailed that one. Prices are more stable than we wanted.

“But we were aiming for 2% inflation. Well, how do you like that, we hit that target without even trying?

“But if the economy is as healthy as I say it is, it isn’t going to be bothered by a quarter-point rate hike. And if it isn’t as healthy… and the rate hike throws it into a tizzy… then all those seven long years of ZIRP did zip for the economy and rates may as well be raised anyway, no?” (Janet smiles; she is pleased with her turn of phrase.)

“Wait… maybe the employment picture isn’t as good as I’ve been told. There’s that former assistant of mine, Andy Levin, shooting off his mouth at Bloomberg.

“He says the U.S. is probably about two years away from achieving full employment… and that millions of Americans working part time would take full-time employment if they could get it. And many others out of the labor market might be induced back in if they felt they had a chance at a job.

“And there are all these clowns on TV explaining why I should or why I shouldn’t raise rates… or why I will or why I won’t.


hawkishLeaving the birds guessing.

Cartoon by B. Rich


“One tells me the unemployment rate is not as good as it sounds. Another says China is headed for a serious depression. Another worries that world trade is slowing.

“One says speed up. Another says slow down. They think I’ve got some kind of machine here where all I have to do is to stomp on the accelerator and the economy will race ahead. But if I had that, I would’ve pushed the pedal to the metal a long time ago. It doesn’t work that way…


The Biggest Mess in History

“And… oh no… maybe the whole idea is wrong…

“Maybe I didn’t read the job description closely enough. I mean, maybe you don’t get stability, full employment, safety, and so forth by pulling on these levers and turning these knobs.

“Maybe being a central banker is not like being a car mechanic. Maybe it’s more like being a judge.

“Judges don’t have to come up with new tools, like quantitative easing. They’re not supposed to use unconventional methods. They’re not expected to improve the world, for Pete’s sake.

“Judges are just supposed to apply the law and come to the same judgment tomorrow that they made yesterday. The key feature of a judge’s role is a lack of innovation. You murder someone… the judge throws the book at you. Easy-peasy.


judge jobThe moment the book lands

Illustration by Dale Messick


“Murder is murder every day of the year… Saturdays and Sundays included. It doesn’t matter what the unemployment rate is.”

“Judge’s don’t have the world watching… anticipating their next move; their next move is supposed to be just like their last move. And they don’t have to care what happens after they render judgment. Their job is simply to render the correct judgment… every time… just like the last time.”

“I bet judges sleep better at night.”

“Maybe that’s the way central banking is supposed to work, too. It’s not for me to worry about the jokers who have gambled on low rates. What do I care if their stocks go down?”

“But wait… if they go down too much… too fast… we could have… hmmm… a situation on our hands. And it could develop into a very big mess… the biggest mess in world history.”

“Oh my… is it morning yet?”



Image via


Image captions by PT


The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.




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5 Responses to “Inside Janet Yellen’s Brain at 4 a.m. (Part II)”

  • therooster:

    I didn’t state anything that was wrong. Somewhat incomplete, perhaps, because I was simply trying to make the point that fiat currency MUST have the legal tender crutch put upon it for the purpose of development and acceptance. How else could a real-time pricing measure be created ? It has to experience practical integration.

    As for gold, it’s just like I said. It’s a market currency and needs no legal tender status. It stands on its own.

    As for gold circulation and gold usage, that’s growing and growing by agreement and consensus, exactly the way that it should on the basis of an organic shift by the market and not a shift by legal decree that comes from the apex of hierarchical power. A shift by decree cannot be done when gold and fiat currencies (and the whole debt market) trade in real-time (floating). The market would have to be able to exercise some great wisdom and understanding that it simply does not yet have, for the sake of avoiding a fiat crash in what I would simply call “a huge rush to judgment”. This is another reason that the elite, regardless of what you think their intentions may be , do not outwardly support gold as a currency, and leave that responsibility to the marketplace. There are “necessary evils” written into “the script”.

  • therooster:

    Nobody is forcing people to use gold as a currency. It’s market currency guided by market law.

    Fiat currency is legal tender by decree, by man’s law, not by market law.

    Gold, within a currency role, needs no such crutch such as a legal tender designation.

    The only way to develop a real-time measure (like the USD) that could be applied to a rare metal like gold is to have it do an “apprenticeship” for the sake of market orientation, by fiat. Only after that stop-gap measure could the dollar assume its more recent role as a real-time measure used in debt-free trades by comparing prices and then making the swap between the two widgets.

    Gold can be one of those popular widgets …. and is becoming so ….. thank God.

    • VB:

      Wrong. The dollar is legal tender by decree – not a currency by decree. The only thing the decree mandates is that the dollar must be accepted as payment for debts and taxes. It doesn’t mandate that it must be a medium of exchange (i.e., a currency). People CHOOSE to use it as a currency because it being legal tender makes this very convenient – but they don’t have to. There were several cases (Argentina, Zimbabwe) when people lost confidence in the local legal tender and stopped using it as a medium of exchange.

      The only way for gold to become a currency (which it currently isn’t) is for people to choose it voluntarily as a medium of exchange because it is better suited for that than what they have been using so far. Currently this is not the case, so people are using dollars as a medium of exchange. For them to start using gold or anything else, they will have to lose confidence in the dollar first. (Or gold – by weight – has to be made legal tender – but this isn’t going to happen.)

  • therooster:

    Did anyone at the FED actually say this ? —> The Fed has as much as promised to make the blind see and the lame walk. It claims that it – and it alone – is capable of improving the U.S. economy and, by extension, the world economy.

    Entertainment , perhaps.

    Dollars are measures ….. measures used for pricing to make comparative trades.

    This is an application of relativity . It does not have to be absolute. A dollar, although used for pricing, does not have to be a settlement tool (currency). The settlement in trading for a debt-free widget can be another debt-free widget. Just compare the prices.

    Now make one for those trading widgets gold or silver. As long as you have relativity with the dollar pricing, in real-time, you can use gold and silver as a settlement currency, in which case, you can start to purge debt.

    The FED’s job was to develop the real-time measure (USD). The markets job is to find better utilization , one that goes beyond its use as a debt based currency.

    Marry it with gold in a real-time application. You end up with real-time store of value, debt-free and total flexibility and scalabilty in its trade liquidity (coverage)

    • VB:

      Nothing “has” to be a currency – not the dollar, not gold, nothing. Currency is simply the most liquid good – the thing that everyone in the group of traders would accept as payment for his or her goods and only because s/he knows that it can be used to pay for other goods from another group member who will also accept it.

      Like it or not, currently the dollar is in this position. Very large groups of people accept it as payment and pay with it, so it is a medium of exchange – i.e., a currency. Gold, on the other hand, is currently not in this position. Nobody sells their goods for gold, so nobody accepts gold as payment for the purpose of paying with it to someone else. It is a matter of confidence.

      Note that this has absolutely nothing to do with whether gold (or even the dollar) is valuable. It is also true that the current state of affairs is not natural. The dollar is used as a currency because it is imposed as the means for paying for debts in a very large and strong economy via government fiat. But while this situation is not natural, it gives it a property that makes it widely acceptable as a currency – and this acceptance IS natural. Similarly, gold has other useful properties (fungibility, divisibility, value-density, etc.) that had made it acceptable as a medium of exchange in the past – and again, that acceptance had been voluntary.

      The point here is that no matter if you like the current state of affairs or not (I do not), you cannot FORCE people what to accept as a currency. And as long as they don’t see any benefit of using gold as a currency, they will not use it, no matter what you say. And currently they see gold’s usefulness only as a store of value and not as a currency.

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