Tag Archives: quantitative easing

Paul Krugman was a False Prophet

Some claim that President Obama sacrificed restoring the economy to get Obamacare through Congress. Others claim that he didn’t sacrifice anything, that he really did not know what to do, and that Obamacare was simply a diversion. Neither have defined this time as it will eventually appear in the history books.

It wasn’t that he didn’t know what to do. It was the he believed so much the theory perpetrated by liberal economists like Paul Krugman that it was the Republicans who got it wrong in the Great Depression. They held back FDR from going BIG and from the ensuing undisputed greatness he would have achieved. The President believed these heathen prophets when they told him to spend trillions and then to hold tight and watch the miracle happen.

A diversion, perhaps….this magical incantation needed time to stew. Give the people bread in the Coliseum. They will be happy with the spectacle, You will be revered in History as the first President to have provided universal coverage, and in the mean time, these sorcerers of classical Keynesian economics will have the time to do what their earlier brethren were kept from accomplishing in history, prove Keynes RIGHT! A pithy seduction indeed….

It just so happens that their concoction was wrong. No stimulus, not even one several trillions large that would indebt America’s grandchildren and their grandchildren, could spend America’s way out of our credit collapse. It was a counterfeit messiah.

The President fervently thought his advisors had it right and that all that was needed was time. We see it all the time on American Idol and X Factor, these singers that come on stage believing to their depths that they can sing. And when the judges simply say no, these would be idols’ faces sink into the shock of disbelief.

QE1 was the initial song. QE2 was the singer begging to have a second shot at glory because he just knows he can do better. Now we have QE3. Its purpose is not to continue the classical effort. No that false dream is long over. Its sole goal now is to hold course until America fights its own way out of our depression in spite of our now $16 trillion-dollar debt. Its purpose is to take over the bread-feeding role and to appease the American public that all is ok through this election cycle. Its job is to somehow hold the West together until another crisis hopefully shocks us out of our stagnation.

So, not surprisingly, the President was caught off guard during the first debate by the weight of this reality. No matter….by round two, both actors were in fighting form and the hopes of America were restored. On to the election…

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Filed under American Governance, American Politics, Economic Crisis, U.S. Monetary Policy

Ben Bernanke Conducts an Economics Demonstration

Standing behind a lectern in front of a distinguished group of economists, Bernanke explains his maneuvers. He pulls out a good sized, clear glass vase and sets it atop the lectern, explaining, “This vase represents America’s monetary system. It seems empty but it is not. In fact it is full to the brim with air molecules. These molecules represent the Fed’s every day monetary function, creating money out of thin air and placing it in circulation. How much more monetary function do you think we could put into this vase?”

An economist raised his hand and said, “None I suppose. It seems the vase is pretty full of air right now.”

“Ah,” exclaimed Bernanke as he pulled out a bag of river stones. “But what if these river stones represented stimulus?” He neatly placed stones one atop the other till they filled the vase. “You see, we can fill this economy to the brim with stimulus and it does not overheat to create hyperinflation. But now that stimulus did not create the desired economic effects, is the vase full?”

A colleague raised his hand and stated, “It appears to be full but about to start emptying because the Chinese are beginning have stopped buying our short term debt.”

Bernanke determinedly remarked, “Yes but with unrest stirred up by an Arab Spring, a bit of European unruliness, and a horrific tsunami, we have a mixture for reserve currency absorption.” He then pulls out a jar of small round pebbles. “These pebbles represent Quantitative Easing.” With that, he pours the pebbles into the vase and begins to gently shake the vase letting the pebbles penetrate the crevices of the larger river stones until all have filled the empty spaces. “With quantitative easing, we are able to fill the longer tranches of debt, pushing out the treasury maturities beyond a year. Now does it look like our vase is full?”

“Seems so,” states a dissenting Fed board member. “The markets are now beginning to wane and more countries are beginning to question their holdings of U.S. dollars.”

“True!” exclaims Bernanke as he pulls out a pitcher of little steel BBs. “But what I have here is QE2.” With that, he pours the contents over the vase and gently shakes the BBs into the crevices between small pebbles and larger river stones, until the entire pitcher of BBs finds their way into the vase. “As you can see, I am able to push more and more of our nation’s debt into the out year treasuries, all the while propping up the markets, and yet we have no hyperinflation. Is the vase full now?”

“Definitely.” Remarks a marketeer as he reacts to Bernanke’s remarks that there will be no QE3 by pulling out of the market, sending it south. Sensing a potential slide into deflation, Bernanke reaches down under the lectern and pulls out a pitcher of sugary white fine Florida sand and begins to pour it over the vase, shaking the sand into the tiny crevices left in the vase, then waves his hand over the vase telling the market that interest rates will hover at zero for the next two years. “You see, I have more tricks up my sleeves. I call this Operation Twist. By this concurrent Fed and Treasury action, I can shove more and more of America’s debt way out into the treasury curve without hyperinflation.”

“But no one else is buying the debt and you are talking about creating even more debt by buying into the European’s crisis. Won’t this finally create hyperinflation?” shout the prime metal buyers as they watch the market tank and their metal prices dropping.

“Aha,” exclaims Bernanke gleefully as he pulls out his last pitcher containing crystal clear water which he promptly pours over vase and it seeps into the last known air pockets within the confines. “You see by packing the out years full of debt, I have effectively made more room in the early periods for a bit more room to conduct QE3. Call it by any name you want but the Fed will solidify Europe’s crisis and shore up America’s failing economy as long as I have space in the vase and the dollar does not hyper-inflate. To do otherwise would be to subject the banks to deflation and collapse.”

(Soooo…Europe may breathe a sigh as the can kicks further down the road, the markets may have a mini rally, the metals may trail off for a bit as other short term hedges seem a better bet, and then what? Your vase really does seem to be full now Dr. Bernanke.)

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America’s Future Building Block #5 – Radically Revise America’s Debt and Equity Policies

Strange how what might once have seemed a drastic measure, such as quantitative easing that by all accounts was historic in its reach, can appear tame when compared to the revolutionary measures that will be soon be contemplated if we are unable to reverse America’s fortune. Strange how what will be proposed next in this post might also seem revolutionary, except when compared to the much more drastic measures that will be proposed by others if what is recommended here is not implemented and America continues to accelerate its downward drift.

What has become increasingly clear is that Americans will not consume our way out of our most severe business contraction since the Great Depression. If we are to reverse course, we must produce our way out of our demise. Our GDP must increase, and in so doing, our increased production must provide all Americans the ability to work for each other and for the world on behalf of our country’s future.

What is also clear is that our attempt to centrally increase production through quantitative easing failed to spark a resurgence of economic growth. Our next great attempt must not be allowed to repeat replenishment of the world’s bank’s balance sheets or to repeat grand government sponsored projects that take too long to trickle down to the rest of the economy and that lack the traction to jump start our economy. If the ill fated quantitative easing experiment could not reverse our contagion, our next attempt must instead be distributed throughout the economy to kindle millions of micro-investment opportunities that will nurture sustainable growth.

To distributively spur GDP growth, America must provide a broad swath of domestic equity and debt capacity that can be invested by millions of Americans in countless avenues of productive capacity. By creating the monetary environment that allows our nation’s pent up innovations to take root, we can put all Americans to work on the highest and best domestic priorities for growing our economy. Yet our current government policies are producing just the opposite effect. During this global recession, while allowing the Federal Reserve to ferociously pursue Keynesian limits, we have supported policies that both diverted and consumed domestic equity while at the same time destroying domestic debt capacity. These policies must now be dramatically reversed.

Our equity policies must be reversed. Rather than encouraging growth of equity to keep pace with our country’s productive growth needs, we have pursued policies that chase equity away to other countries by increasing the cost of doing business in America through regulatory, structural, and labor costs. Of the equity that is left, we have pursued policies to capture much through estate taxes, capital gains taxes and corporate profit taxes to pay for our grotesquely bloating government budgets. Without growth capital, we cannot grow.

Our debt capacity policies must be reversed. Rather than aggressively pursuing policies to stem the damage from our real estate bubble, we instead are allowing our real estate equity bubble to slowly deflate, increasing the nation’s housing debt overhang approximately 10 trillion dollars. We are further pursuing policies to clear this overhang through aggressive foreclosures and bankruptcies of millions of Americans that destroys debt capacity in two ways. First, much of the debt that is not purged through bankruptcy is just transferred from housing debt to liens on the debtors’ future earnings. Secondly, the credit ratings of the debtors are damaged, shrinking their ability to assume new debt. Without new debt capacity to both absorb the old debt capacity lost and to add to new equity, America cannot increase its GDP and jobs.

Either through historical ignorance, or worse through a deliberate effort to give elite constituents opportunities to protect their piece of a dwindling pie at the expense of the entire nation, we have reconstituted bank equities while doing little to gird their underlying loans, to expand our nation’s credit, or to reverse this business cycle’s monetary implosion.

The beneficiaries of these failing policies include our bloated government that delays inevitable and urgently needed right sizing, and banks that continue to feign fairy tale housing equities on their books so that they can continue to extract interest payments while appearing by most accounts to maintain a modicum of solvency. The losers thus far from our failed government direction have been the rest of the U.S. economy, all savers, all job seekers, and the America’s future.

If we are to repair America’s capitalist system without having to eventually resort to revolutionary measures, we must immediately reverse our monetary policies with what might seem revolutionary measures today, if not for the much worse measures that will inevitably come as a result of our continued inaction. We must stop attempting to pay for excessive government budgets with current and future growth equity. Instead, we must continue the path of slashing government expenditures. We cannot have our GDP growth equity cake and eat it to fund deficits.

Once we smartly choose to conserve our growth equity, we must take the much harder step of changing our policies to incentivize equity owners to keep their equity in America rather than allowing it to be invested offshore, or the heroic steps we took to save our GDP will be for naught as the saved equity simply slips away through direct foreign investments to the East. In addition, if we are able to convince equity owners that America is a good investment, we must also create available debt capacity alongside that equity, because investments in GDP growth require both equity and debt.

Our nation’s existing debt is already maxed out. 80 percent of this debt was created by a series of orchestrated bubbles intended to extract capital for Asia’s expansion. Our country was left strapped with overwhelming debt and was unable to move forward as Asia, now flush with our capital, ran past our stalled economy. We must stop this bubble debt from placing a stranglehold on our nation’s future.

Without a realistic method to isolate and appropriately deal with the debt created during our spectacular real estate bubble, we cannot move forward. Thus, I make what now seems a revolutionary suggestion, but only so because we have not yet degenerated into requiring an even more revolutionary measure. We must isolate the existing bubble-created, under collateralized debt and have our government force the debt holders to convert it to equity, thereby co-opting those who extracted the debt to share in the risk of making America once again successful.

As an example of debt conversions, our government will insist that banks remove the overextended portion of housing loans from their books and replace them with partial bank equity ownership of those same homes. Once we remove these artificially elevated debt obligations from the mass of Americans, we must accelerate repair of their credit ratings that were damaged solely due to our nation’s business cycle debacles so that all Americans may appropriately support our country’s future economic productivity.

While seemingly radical, my solutions will support the equity and debt consolidation that must be infused back into our country’s future. A simple review of our Western capitalist system will clarify why my conclusions are on point and why we must aggressively reverse course. Let’s remind ourselves of the monetary linkages of the Western capitalist system. First, investors provide both equity and debt needed to grow businesses to meet the needs of the market. More risk adverse debt providers require periodic repayment of principle and interest before equity providers share in the business profits. Because some industries’ profits swing more widely from the peaks to the troughs of the business cycle, debt providers require the business owners in these industries to obtain a greater amount of equity to survive the cycle while continuing to make principle and interest payments.

During the initial rise of the business cycle, as demands for goods and services increase, the return on a business’s equity increases making the business a more attractive investment, attracting further equity to build supply capacity to meet increasing demand. Banks, typical suppliers of debt capital, assess a business’s future profit potential given its additional equity, and agree to increase its debt through new loans that combine with the equity to build additional business capacity.

Toward the end of the cycle, as supply grows to exceed demand, revenues reduce. The reduced revenue must first cover the interest on the newly acquired debt before providing a return on equity. Decreased return on existing equity decreases demand for new equity. For those companies that added too much debt in ratio to new equity, they risk defaulting on their loans at the trough of the cycle. Thus business cycles enforce maximum debt to equity ratios.

Taken together, American industries have historically required a ratio of 1 unit of equity per 1.5 units of debt. With a total American business values of about 52 trillion dollars and real estate values of 38 trillion dollars, the corresponding fully balanced equity levels approximate 36 trillion corresponding to a sustainable business cycle debt of 52 trillion dollars. However, U.S. debt now exceeds 57 trillion, suggesting we are over-indebted already by 5 trillion. And this ratio does not yet account for the approximate 10 trillion in debt overhang not yet addressed by our shrinking housing bubble. With a combined 15 trillion dollar debt imbalance and an economy in the trough of the business cycle, America’s economy is stalled, requiring either an increase in equity, a reduction of debt, or as I propose, a radical movement of both.

And yet, my suggestions are not so radical when juxtaposed against what will be proposed by much more radical proponents than I when our economy nosedives from its current anemic plateau. So let us consider not taxing existing equity away to pay for government debts, not incentivizing existing and new equity to seek offshore investments, isolating existing debt and converting it to equity, distributively dispersing available equity and debt capacity, and accelerating repair of our citizens’ credit ratings that were caught in the cross fire of our bubble debacles.

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Keynesian Economics will not Put the Pit Bull Teeth Back into America’s Bite

A business philosophy shared with me long ago suggests that one should never enter an enclosed back yard with a vicious pit bull unless you intend to kill it. If you are going to jump over the fence and face the neck ripper, go over it wielding a bat and swing it wildly, smashing the pit bull until it lays lifeless in its own pool of blood. Otherwise it will rip you to shreds.

If China had re-entered the world stage in 1979 claiming it was going to assert a strategy to overtake America and Europe, gut their real GDP engines, indebting their people to transfer historic levels of real GDP infrastructure to China, and most importantly (because the West’s elite drive political policy and military actions), entering a final pit bull smashing phase (this phase has not yet occurred) that leaves the West’s elite scrambling to protect their wealth from an epic class struggle of debt defaults, wealth redistribution, and financial collapse, the pit bull elite of EurAmerica would have financially ripped the neck of this immense country of wonderful people before they had a chance to implement such an ingenious strategy.

So if one believes like I do that China has proven the masterful central planner above all on Earth, it would be illogical for China to have entered into EurAmerica’s backyard too early. China’s GDP was much too weak to implement any semblance of a world hegemonic strategy that could directly confront the West. She would need to suckle on the teat of her Western nursemaid until strong enough to leave the nest and assert her own world power.

Now that China is strong enough, now that she has enough world hegemonic relationships in place, now that her nursemaid has entered menopause, China’s strategy will increasingly become apparent. Yet she still has no need to enter the backyard with EurAmerica’s pit bull even if she no longer fears its ferocity. China realizes there is no benefit to directly confront EurAmerica yet for the pit bull is old, in foul health and it has lost its teeth to cause any real damage to China’s continuing rise to world hegemony.

Certainly, if one believes that China lucked into such a meteoric rise as the leading economic force in the world, then attributing any intelligence of design to her strategy for doing so would seem conspriratory at best. Yet the results speak for themselves. FDI in China is unprecedented in any other point in the world’s history. It is the greatest gold rush, the most inflated bubble, has caused the deepest competitor indebtedness, and was the least bloody international coupe in history.

I do not disparage China for having the world class skill, patience and confidence to assist EurAmerican businessmen and politicians to shake down their citizens. China offered access of cheap drugs to a culture that had already chosen the addictive personality of consumerism. EurAmerica did not have to accept them but now that we did, we will have to suffer the withdrawal symptoms of our cultural weakness as we now attempt to rehabilitate ourselves.

In the midst of our economic turmoil, there are those that continue to espouse Keynesian principles to spur America out of our economic malaise. Our political leadership wishes to take QE to an even greater level of spending as a potential jobs solution. Keynesian principles suggest that in an absence of consumer demand, government can create artificial demand that will then spur additional consumer demand, increasing money velocity that can reverse the direction of collapsing money supply and right the course of capitalism.

For the principles to work, demand must be perceived as great enough and sustained enough for creditors to offer consumers new credit. In addition, the consumer’s potential income must be large enough to meet the obligations of the consumer’s past debt plus create additional debt capacity that can provide additional spending to spur the new business cycle. The amount required for Keynesian principles to take hold would be orders of magnitude greater than the politics of our day or the world creditors and credit agencies would allow given the historic consumer debt, housing overhang, and government deficits including national through local caused by an international extraction of equity to the East.

Additionally, this large amount of stimulus spending that is intended to spur on the local economy is diluted by the amounts that redirect to foreign economies. Our government cannot isolate stimulus and thus the amount of spending needed for America’s jumpstart would have to be multiplied for the effects of international leakage. America has long since gutted the tools of domestic Keynesian stimulus by allowing the tansferring of 40,000 factories to China alone.
We do not have the economic manufacturing base that supports money multiplying factor to implement Keynesian principles through governmental central planning in this country. The dollars we spend flow like a sieve into the world economy which also is in desperate need of stimulus. To attempt Keynesian principles in America today therefore would also be attempting to jumpstart the western world on our own.

I favor through my job voucher plan (www.jobvoucherplan.com), a distributive, domestic, Keynesian approach of sorts, one that attempts to direct as much of the catalyst into the domestic economy as possible while putting all able Americans back to work. Yet it combines Keynesian stimulus with a redistribution of current social welfare for that purpose and a redirection of the American economy to a modern mercantilism.

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In the World’s High Stakes Game of Chicken, Bernanke May Have Just Blinked

In Ben Bernanke’s first ever news conference, he stared down reporters with his boldface rejection of a QE3, but my guess is that in this international game of chicken, Bernanke will soon blink. He disclosed that he will not begin a QE3 after QE2 finishes on June 30, and that the Fed funds target rate may buoy from its near zero rate. His reasons for this decision were that his concerns for inflation have overtaken needs to prime the sluggish economy, and that QE2 has been “effective” and “successful”. With Bernanke’s finger on the button of the world’s economy, has he really forsaken quantitative easing?

Pumping a previously unimaginable $1.5 trillion into the economy certainly had to be “effective” on some level but unfortunately, not on the level that would ease anyone’s mind that America, or the world for that matter, has dodged imminent danger. With all of the stimulus and quantitative easing that encouraged it, the U.S. economy crawled ahead 1.8% in the first quarter of 2011, well below the rate of a normal recovery. Meanwhile, unemployment claims are edging higher as a quarter of the U.S. suffers unemployment or underemployment, and the recent moderate gains in housing prices have peaked and are retreating once again.

The recent rise in commodities signaled the expected results of America’s monetary intervention, inflation. America’s consumer’s goods consumption is import driven and those prices are going up. If Bernanke actually holds true to the promise he gave America prior to testing his monetary theories, and pulls dollars from the economy in response to rising prices, America’s economy will turn down a more diligent path of squeezing out its excesses through a hard double dip recession combined with inflation.

The combination of Japan’s recent tragedy and a continued potential for a downturn in the U.S. may lead to a softening in the growth of worldwide demand, thereby reducing the potential for real demand inflation. However, as the unprecedented flood of dollars multiply in the market, we will see the lagging effect of a continuing drop in dollar purchasing power that will more than offset the soft economy to produce inflation. Commodity prices are the leading indicator of future general inflation as the QEs work their way through the economy.

America will then have stagflation similar to that caused by the currency expansion and oil embargo of the ‘70s. Our import consumer goods prices will accelerate higher, while our domestically captive service prices will drift lower leading to reduced wages and higher unemployment, as commodity inflation saps the energy out of our service driven domestic economy.

Bernanke has the choice of funding a QE3 to pay for rising interest rates that are bound to occur as a result of previous government intervention, or of pulling the plug on this bad monetary experiment and potentially having some frustrated economist coin a phrase with his name in it to mean a “really really bad stagflation”. My guess is that rather than be known for the Bernanke Splits, he will blink and a third, perhaps more moderate, round of QE3 will begin to assist inflation even higher.

That’s my take, what’s yours?

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