This weekend’s shocking admittal that the Fed is hoping QE will keep asset prices “higher than they otherwise would be” did not surprise David Rosenberg one bit.  In this morning’s note he said:

Brian Sack, a senior official at the New York Fed, had this to say about the powers of quantitative easing in a speech he just delivered:

“Some observers have argued that balance sheet changes, even if they influence longer-term interest rates, will not affect the economy because the transmission mechanism is broken. This point is overstated in my view. It is true that certain aspects of the transmission mechanism are clogged because of the credit constraints facing some households and businesses, and it is true that monetary policy cannot directly target those parties that are the most constrained. Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by  keeping asset prices higher than they otherwise would be. It seems highly unlikely that the economy is completely insensitive to borrowing costs and wealth, or to other changes in broad financial conditions.  ”

I just love that one comment to the effect that QE “adds to household wealth by keeping asset prices higher than they otherwise would be.”  When will these guys ever learn that maybe, just maybe, these Fed policies aimed at targeting asset prices at levels above their intrinsic values is probably not in the best interests of the nation?  As our friend Marc Faber likes to say, the “Bernanke put” is cut from the same cloth as the fabled “Greenspan put” — only the strike price is different.

Imagine running a policy aimed at getting people to spend money based on an artificial level of asset values — what an admission.  Then again, this is what the Fed has been all about since the LTCM bailout of 1998.  We’re still not convinced after reading this sermon that this next “pull-another-rabbit-out-of-the-hat” experiment is going to end with very much success.  There is something to be said about paying for our mistakes and to have the Fed try to rekindle an asset-based economy that has only ended up in generating a series of burst bubbles over the last 12 years, not to mention encourage a lifestyle of living beyond our means, is irresponsible at best, dangerous at worst.

I am honestly still trying to grasp the fact that the Fed has admitted to trying to run what is really nothing more than a ponzi scheme….That is our great American growth strategy.   Unbelievable.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. shocked and i’m not.. agree it’s a tad shocking to sack’s open admission, however bernanke wrote about this in 1999 when he openly criticized japan in a paper for not devaluing their currency when that was the clear solution. I just don’t understand why equities think creating the ‘bad inflation’ is such a good thing. also BOJ devaluing JPY is a bit different than FED devaluing USD ‘the global reserve currency’

  2. I far more depressed than shocked. I have a significant amount of savings earning nothing. The rug can be pulled from under this ponzi scheme at any moment (especially as momentum investors in this land of impatience is the norm).. The once great bastion of american competitiveness, the rule of law in contracts and property, looks to be in no better shape.

    The worst part comes from the feeling of hopelessness to do a damn thing about it.

  3. You’re telling me. I feel like I have been running a real-time criticism of Bernanke’s actions over the last two years and have been largely proven correct. Yet, everyone has this undying faith in him. Not that they should trust me, but the evidence speaks for itself. Bernanke has failed. He failed to foresee this, he failed to help Main Street and he continues to fail to see what the problem is.

    If he’s just out for the banks then it’s time for him to admit as much and explain to Congress why the Federal Reserve system is flawed. That’s what an honest and decent man would do.

  4. If you want to merge Fed into treasury and have government take over printing press, you are not going to help savers like Dan and me. You know that so stop pretending otherwise.

    It is fortunate few people buying your theory. But I am far less sure when next crisis hits. Hey, by the way, Soviet Union went bankrupt despite they had full control of their own currency.

  5. I will bet you anything the Fed starts buying equities at some point…

    And honestly, Alchuter is at least right on something…if all Fed policy is designed to jam assets higher it’d be a cheaper by buying a few bill spoos and not a trill in debt

    Can they legally do that like the BOJ is doing?

  6. This truly is insane. When you hear all the policy stuff day in and out, you kind of get numb to this stuff.

    So when its blunt like this – its amazing.

    The Policy of the most advanced economy in the world, is to buy up paper with paper to get people to feel rich,


    Thats the f*^cking play?

    Holy Shit. Pray for us.

  7. Also, some interesting comments today from Goldman’s Jan Hatzius regarding William Dudley’s speech (emphasis is mine):

    These are legitimate concerns, but they do not mean QE2 will not have an effect. As President Dudley pointed out, those who are able to borrow will do so at lower rates, freeing up some of the income now being spent on debt service. Perhaps more importantly, QE2 works on other elements of financial conditions, including equity prices and the exchange rate. To the extent these moves bolster consumer confidence, reducing the drive to boost saving, and make US goods more competitive in world markets, QE2 can work through channels other than credit.

    Q: What options besides renewed asset purchases does the Fed have?

    The main alternatives are to modify its communication with the markets and to tinker with its inflation objectives. Recent speeches by Fed officials have offered some ideas for consideration on both fronts. On communication, he suggested that the FOMC could be more explicit in saying how it planned to respond to shortfalls in meeting its objectives for inflation and unemployment. On tinkering with its inflation objectives (this is our term—decidedly not his!), he suggested that the Fed could, in essence, target the price level over the medium term. Thus, if inflation continued to fall short, then the FOMC would explicitly try to offset that with higher inflation later.

    My question, with the Fed and its backers being more explicit about what they are attempting to accomplish, is there any chance enough people wake up to the fact that this will not solve any of our structural economic problems to stop it?

  8. “Unbelievable”

    THAT is truly the best analogy of what is happening. It is amazing the steps we are taking to try to reclaim the standard of living that we were so accustomed to during the “hell of a party” we had on cheap money and easy credit. And so we try cheaper money instead of feeling the pain now that would actually put us on a course to real recovery. We have lost all accountability to our actions and are no longer responsible for our actions. You gambled yet now the government backstops all the losses, you default on your home and the government steps in and you don’t have to pay up. Capitalism?….Unbelievable

  9. What’s alarming is that the Fed is losing all credibility. They have no concept of the psychological damage they are doing. People are beginning to fully understand the Fed’s approach and the fact that it is nothing more than a house of cards.

    I’m not one to overreact, but this is rehashing the Alan Greenspan playbook all over again. At what point does a rational participant come into the room and tell Ben he has been relieved of his duties.

  10. I am wondering how rising stock markets are really going to help this time. Many people own little stock; many borrowed from their 401k for a home buy; more money is fleeing stocks now and going into bonds; what have you.

    At this point how much “pop” will S&P 2000 really have to the regular guy/gal? More trickle down theory?

  11. TPC, you’re correct in saying Bernanke is “[J]ust out for the banks”.

    The Federal Reserve system is run strictly for the benefit of the banks, not the citizens of this country, and because they control the production of money they have the power to control our economy and our politicians.

    That’s why we need monetary reform, like Freedom’s Vision:


    “It’s not WHAT backs our money, it’s WHO controls the QUANTITY!” -Bill Still

  12. It also goes against your claims for weeks that QE is effectively useless. Obviously the fed inner cirxle believe it pumps asset prices up which you have either denied or implicitly slightly agreed with in only the most non linear way.

    You also said gold rallying as an alternate currency is a fable about 1.5 yrs ago and have missed the move.

    You seem to live in an academic workshop rather than a behavorial financial science lab. Which is surprising because you talk about behavorial finance but would rather preach about what should be versus what the masses believe to be. Even if the mob is wrong in the long run. See NASDAQ 1999

  13. I, too, am surprised that they would flat out admit this, even though it was obvious from the get-go, just as the rescue package was clearly designed to rescue the perpetrators from their own ill-fated overreach without accountability. None of this folderol fooled anyone who was awake instead of sleepwalking.

    This is a free market capitalism? Oh right, silly me, now I get it. “Capitalism” means that the game rigged for the capitalists.

  14. The Fed is a scam, a bloody sham. A private bank set up by the bankstas in 1913 to take over the money issuance from the people.

    The Federal Reserve is neither Federal nor does it have any reserves! If you don’t believe me, check out your telephone directory where it is listed in the private sector, next to Federal Express.

    If you want to read further, buy the following books –

    (a) Creature from the Jekyll Island

    (b) Secrets of the Federal Reserve

    All these central banking cronies should be tortured before being hung in public! They are wolves in sheep skin, and their sole purpose is to screw the public

  15. Charlie,

    You seem to think I claim to never have been wrong about anything. I have never met anyone involved in the markets who has not been wrong about an enormous number of things. Have you?

    With regards to gold I have long believed that gold could certainly go higher. Earlier this summer I wrote:

    “Is it irrational for gold prices to move higher in the near-term? Absolutely not. This belief that paper money is flawed is likely to persist. Investors and governments are truly convinced that the USA is the next Greece.”

    Anyone who is a regular readers knows that I have said on multiple occasions that the gold move was irrational and likely to lead to a bubble.


    But yes, I am not a heavy gold investor so if you want to slap me on the wrist for missing the move then that’s fine by me. I don’t buy into what I believe is a fundamentally flawed market (even if I believe that prices could move higher).

    I think we’ve shown that QE is unlikely to be “effective”. If you consider rising stock prices “effective” then go out and buy some stocks that are not supported by their underlying fundamentals. If you call that “economic recovery” then fine. I don’t. The fact that the Fed has herded a few million people into owning equities is meaningless if it’s not supported by underlying fundamentals. If the move in equities persists and actually turns into an economic recovery then I’ll eat crow.

  16. Jan Hatzius worked directly for Bill Dudley at Goldman. Bill was the Chief US economist and Jan was his deputy. They speak regularly. Jan is extremely smart and insightful; he is one of the sharpest and most analytical guys I ever worked with. That said, Jan is NOT a markets guy, nor is Bill Dudley

  17. If Obama knew that Bernanke was merely extending a form of trickle down economics he would be the guy to light some fires under people’s asses. But he has no clue what is going on at the Fed.

  18. Hey Charlie, do you write an awesome website where you put out a few great articles for free every day? Do you make thousands of prognostications and generate an incredible amount of thinking every day for people you’ll never meet?

    What is your purpose here? To try to make the author feel bad about writing awesome free articles every day and teaching millions of people about a really complex world? Are you trying to drive him off? Go jump off a bridge if you can’t appreciate this website.

  19. Obama wouldn’t do anything even if he understood all of this. He has proven that he’s in it for the bankers also.

  20. To understand what the fed is doing one simply needs to read the book “The Big Short” …steve eisman is absolutely correct.. the system is not about equal opportunities. its about squeezing the poor and weak.. it has been that way since the dawn of civilizaion…

  21. The point is the FED banks are completely out of ideas.
    They are down to their last play. Roubini was incorrect as they have more ammo.
    Next we try hyperinflation as a prelude to a withdrawal of the USD and some sort of currency reform.

    This will be a commodity backed issuance with gold as one of the commodities in the basket.

    The numbers just do not work out especially for a giant economy like the USD denominated area.

    What kind of adjusted growth figures would be required to handle 1-200 Trillion USD in unfunded liabilities?

    We see that the limits of real growth might be about 3%.

    So the choice is repudiate the USD or cut government spending to a level the real economy can support.

  22. TPC

    Why are you “shocked” by this?

    They will inflate, they will literally give money away if need be.

  23. TPC

    Have we “inflationistas” as you call us at least scored a point in the debate?

    Governments are not constrained, they can do what they want.

  24. Inflation has averaged 3.5% since 1945 (according to the CPI). How can you claim that we are now experiencing some nasty inflation when we are not even above the historical average?

  25. People do care – but far too few know about this. It’s not their fault. it’s not because they are stupid or don’t care. It’s that they don’t follow this stuff the way we do. They are too busy making ends meet, taking care of their kids, etc. I reject the stereotype of the consumer-obsessed, fat, lazy, stupid American as an excuse. Sure, there are lots of those too. But there are many millions of intelligent citizens who simply don’t know what is going on. But thanks to the internet and certain media, at least some of the truth is getting out to the public.

    When I explain a bit of these things to average, intelligent people it just doesn’t penetrate. It’s not that they don’t care, it’s that some just don’t understand or don’t see it, while the people who do “get it” feel/are powerless.

    Keep spreading the word. That’s one thing we CAN do.

  26. I would tend to agree. I’ll concede the point when CPI starts coming in at 3.5%+ for a few quarters. Until then, we’re in a disinflationary environment with a higher risk of deflation than hyperinflation.

  27. And this is not me being stubborn. This is me looking at the facts and nothing but the facts. You simply cannot deny that inflation is well below the historical average.

  28. Mr. Prag Cap,

    QE does not lead to inflation. QE IS inflation!!!!!!!!!!!

    When will you understand this simple concept?

    Inflation is an increase in the quantity of money and debt. Price increases are consequences of inflation.

    Repeat after me, inflation is an increase in the quantity of money and debt.

    QE is the issuance of new money – pure inflation 101.

    The consequence of inflation (prices increases) are not showing up in official measures such as the CPI because the government manipulates these numbers. According to their own admission, they make hedonistic adjustments to CPI, to make the sheeple feel good.

    So, PLEASE do yourself and others a favour and stop going on and on about deflation. We DO NOT deflation, we have very high inflation (money creation) all over the world

  29. PS,

    With all due respect – you are 100% wrong. When the central bank initiates a policy of QE they increase the monetary base and simply swap assets with the private sector. It does not increase private sector net financial assets. It does not add debt. It does not add money to the system.

    You’re making the same mistake that the hyperinflationists often make – that the monetary base is real money. It is most certainly not. It’s difficult for people to grasp where this money is coming from. In reality it is coming from nowhere. I think it’s best to think of the Fed’s balance sheet as a void.

    Hoisington summed my thinking up beautifully in a recent paper:

    “The monetary base, bank reserves plus
    currency, does not fulfill these functions and hence
    does not constitute money. To paraphrase Friedman
    and Schwartz, the base, which is also known as highpowered
    money (currency in the hands of the public
    and assets of banks held in the form of vault cash
    or deposits at Federal Reserve Banks) cannot meet
    these criteria. The nonbank public – nonfinancial
    corporations, state and local governments and
    households – cannot use deposits at the Federal
    Reserve Bank to effectuate transactions. Moreover,
    currency is not sufficiently broad to be considered a
    temporary abode of purchasing power. For Friedman,
    high-powered money can be properly regarded as
    assets of some individuals and liabilities of none.
    So, let us be clear on this subject. In 2008, when the
    fed purchased all manner of securities, to the tune of
    about $1.2 trillion, the fed was not “printing money”.
    Bank deposits at the fed exploded to the upside, the
    monetary base rose from $800 billion to $2.1 trillion,
    yet no money was “printed”. Deposits did not rise,
    loans were not made, income was not lifted, and
    output did not surge. The fed could further “quantative
    ease” and purchase another $1 trillion in securities
    and lift the monetary base by a similar amount yet
    money would still not be “printed”.

    So you can see, there has been no change in the net financial assets of the private sector. Ben is trying to talk the market up and he is succeeding so far. But he can’t talk the real economy up and that is why this program is destined to fail just like it did in Japan.

  30. I hope this ruins Brian Sacks career. These scum bags have sold out their country. This is downright shameful.

  31. I humbly disagree. I say it is their fault because they aren’t paying attention and the reason they aren’t paying attention is they don’t care.

    I believe it was Winston Churchill who said “People get the Democracy they deserve.”

    We’re a nation of stupid and apathetic people, so we get a government that takes advantage of us because we only care about American Idol, various “Reality” shows (those alone should tell you how messed up we are as a society) and other mind numbing TV programs. Here are some amazing stats:

    * 33% of high school graduates never read another book for the rest of their lives.
    * 42% of college graduates never read another book after college.
    * 80% of U.S. families did not buy or read a book last year.
    * 70% of U.S. adults have not been in a bookstore in the last five years.
    * 57% of new books are not read to completion.
    * There are over 17,000 radio stations and over 2,000 TV stations in America today.
    * Each day in the U.S., people spend on average 4.7 hours watching TV, 3 hours listening to the radio and 14 minutes reading magazines.
    * The projected average number of hours an individual (12 and older) will spend watching television this year is 1,750.
    * In a 65-year life, the average person will have spent 9 years glued to the tube.
    * Number of 30-second TV commercials seen in a year by an average child – 20,000
    * Number of videos rented daily in the U.S. – 6 million
    * Number of public library items checked out daily – 3 million
    * Percentage of Americans who can name The Three Stooges – 59%
    * Percentage who can name at least three justices of the U.S. Supreme Court – 17%


    So, we have only ourselves to blame!

  32. Ruins? If they pull off S&P 1500 on QE2 thru 4, Sacks will be in line for Fed head or Treasury secretary in 5-10 years. You guys don’t get it. This is American ponzi, delude the masses and reward the bankers. Anyone who can pull it off is promoted.

    You think they care about a cabal of internet bloggers and message board posters? The masses have no idea what is going on in America. As long as the stock market is up “something good must be happening”.

  33. TPC,

    One question on QEII – is there a possibility that it can be a success through some form of virtuous circle, wherein asset prices (primarily stocks) are goosed higher and this increases business and consumer confidence, which then filters through to improved spending and employment?

  34. Mr. Prag Cap,

    What are you talking about? Your understanding is 100% wrong; allow me to explain:

    In QE1, the Fed created new money and then used this money to “buy” or transfer toxic assets from the banks. I am sure you will agree with this.

    Then, the banks got hold of this newly created money and they turned around and loaned this money to the federal government by buying Treasuries. I am sure you will also agree with this.

    So, in one stroke, the Fed created new money, took on the toxic assets from the banks and loaned this money to the government in a ‘stealth’ fashion.

    In any event, new money was created in QE1 and this is inflation – pure and simple. Inflation is defined as the increase in the quantity of money and debt.

    If the Fed had not created trillions of new dollars and it had not bought the toxic assets from the banks, then we would have had deflation. BUT this has not happened. New money was created and injected into the system via the government, using the banks as the conduit or link. This is inflation.

    Money velocity etc are Keynesian jargon and frankly, I don’t care about this nonsense.

    Inflation is an increase of the quantity of money and this is what has transpired.

  35. Yes, there has been no change in the net financial assets of the private sector, but the public sector’s debt has gone through the roof and this is inflation.

  36. spoiled leads to intellectual decline.

    and judging from the parents on my street, its not getting better.

  37. how anyone cannot see the only way to protect your assets in this environment is gold. its not for buying bread when you are in your bunker(not happening at all).

    deflation for now and immediate future….inflation or stagflation 2-6 years down the road.

    cullen is the only one i know of that would have a chance at sticking-that-747-landing-in-my-driveway FED pullback down the road and, HA, i don’t exactly look for ben to recommend him for the job.

  38. Just read the following in an FT article…there is growing speculation apparently that the Fed is going to follow the BoJ into buying stocks…


    Many traders have become convinced that the BoJ move increases the chances of more quantitative easing from the US Federal Reserve – with some even speculating that the Fed may follow the BoJ’s lead and look at purchasing equity assets in the form of exchange traded funds.

  39. If the sheeple don’t know what’s going on, then having the stock market go up might make them feel a little better, in a remote sort of way. But if they are already up to their necks in debt, they may not be able to act on their feelings by buying more stuff. So it might finally create feelings of frustration, envy, and resentment, instead of confidence.

    But goosing the stock market won’t bring down unemployment. It’s all about jobs and final demand. People won’t start to feel really good until they have jobs, everyone they know has a job, the foreclosures on their street are sold, the empty storefronts are filled, and the bounce back kids have moved out.

    The sheeple will eventually figure out that Ben has failed. Ben has sown the wind, and he shall reap the whirlwind.

  40. QE2. It feels like our car has 200,000 miles on it… tires are bald, brakes are bad, cylinder compression is low, and we’re burning oil. So we take it to our #1 mechanic, and he recommends a super charger.

  41. Obama doesn’t care. He is smart and knows this Ponzi game ends with disaster. After disaster, he can “Fundamentally Change America”. That is his stated goal. Now what do you think ths fundamental change will look like…

  42. I went to a dinner party recently. A broad range of mid-range investors and entrepreneurs represented. Probably $100-200 million in financial assets. 100% of the people at the table were enraged by the system and embarrassed by how much money they’d made in the last year, thanks to the ponzi. We are in a self-absorbed “turning.” Nobody cares about anyone else. Nobody cares that future generations are doomed. Nobody cares about politicians. I have never heard such cynicism all my life. The peak of this turning, in my view, was Tepper’s comments: buy stocks because the money printing will continue. Do you know how ridiculous this will sound in a few years?

  43. TPC, It would be nice if you are right but I think Obama suffers from a bad case of delusional narcissism that is unfortunately all too common among politicians. He truly thinks that he has the answers for this country but only needs more time. As such, he will do whatever he thinks will help him get reelected. This is a perfect example of the utilitarian theory gone wrong: instead of doing what is right now he does not in the hope of making a greater impact down the road. Unfortunately decisions based on the short-term are rewarded in our political media complex when it is a long-term focus we really need.

  44. Well, I’m Canadian. I have a much less cynical view of Americans (and people) than you do.

    While it doesn’t surprise me to see what your opinions are – since they are so common on the Internet – I thinks it’s far too easy to generalize and criticize others as you have. Like I said, many might be like you say – but many are not. This notion that people get the govt they deserve, while understandable, reminds me of preacher sermons. “The public must be bad. They are sinners. If only they’d be more like me.”. Far too simplistic – and self-righteous – way to look at things, imo.

    Sure, there are many ignorant, stupid, lazy, people. When has there ever not been? Those peopel are a lost cause. Agreed. However, I believe there are more aware, informed, and intelligent people than ever before (thanks to technology). There are many intelligent, caring people who just aren’t tuned in the way some of us are. It is not their fault. My friends and family certainly care about these issues. But they do not have the background nor the focus. They know something is wrong – but they aren’t sure what and they don’t know how to fix it.

    And what, if anything, have you wonderful, enlightened people done to change the current situation? You think you’re so much better than others? You’re not. Feels good to judge others as inferior, but what have YOU done to change things? Has it been effective?

    We do not always gets what we deserve. Sometimes we do, sometimes we don’t. Seems like you guys like blaming the victim instead of the perps. If anything, it’s human nature (power corrupts, greed, hubris, etc) of those in power that has gotten us here.

  45. Edna:

    I always find myself engaged by your comments. Chances are, we’d never meet in the real world, either from lack of proximity or differences in social circles, but it’s nice to hear your views.

    I think I read somewhere in these pages and commments that we have wasted the opportunity a Great Depression could have brought to America.

    I’m no advocate for unnecessary pain, but America badly needs a checkup from the neck up, and a rethinking of our values and priorities.

    It’s not just the poor that need to reassess their values, it is all of us. And the reassessment needs to include creating an America that is more inclusive and unified in it’s shared beliefs.

    I only pray it is not an all out war that creates those shared values.

  46. That’s their thinking – but it won’t work this time.
    Ramping up the stock market will make the public angrier and not increase their wealth to a significant extent. It’ll mainly make the wealthy wealthier.

    The people (who many of you have such a cynical view toward) *DO* know that the emperor has no clothes. Well, enough of them, that the ponzi is meeting serious resistance. The word continues to spread. That’s why sites like this are so important.

    Madness: The entire financial world looking to a room full of men and the decisions they make. Wow. Talk about moral hazard.

  47. Greetings, Please excuse my naiveté, but when the Federal Reserve purchases TOXIC (as in BAD, POISIONOUS, NOT GOOD) assets just what is the medium of exchange and why would they demonstrate an interest in buying something that is patently poisonous and otherwise unmarketable?

  48. I honestly don’t see what is so shocking about this.

    If we begin with the premise that this is largely a balance sheet recession, there are a few basic ways to fix a broken balance sheet:

    1. Cancel debt (reduce the liabilities on the right hand side of the balance sheet, thus increasing net worth)

    2. Asset inflation (increase the value of the assets, thus increasing net worth)

    3. Generate higher income (add cash to the balance sheet, thus increasing net worth)

    4. Print money (add cash to the balance sheet, thus increasing net worth)

    5. Some combination of the above

    If you believe that private debt levels are excessive, then the most obvious answer would be to prioritize the first option — debt cancellation.

    But the Fed can’t do that. Of the choices on that list, the Fed is limited to the fourth one directly, and the second one indirectly.

    Let’s not blame the Fed for policies that it can’t control. This is largely a legislative failure, as the Congress will not engage in the level of stimulus and debt cancellation that would result in a faster fix, while the president is too busy trying to play the moderate in order to display any real leadership.

    Bernanke is working with what little he has. Had he not acted as he did, we would have surely had a depression. QE created a floor, but it cannot create strong growth in situations that are as serious as this.

    The Fed has no other option but to pursue asset inflation policies. If Congress had acted decisively, then it wouldn’t be necessary to the degree that it has been, but given the circumstances, the Fed really has no choice unless it chooses to let the economy fail.

  49. I guess. It would have to be some sort of “animal spirits” recovery. The truth is the fundamentals are just too poor to overcome with some wealth effect. He’d have to start a new bubble in stocks. Which would end badly and get us back to square one.

  50. You’re double counting the public sector’s balance sheet. The Fed’s balance sheet is not at disposal for the private sector to use to spend. Sorry, but Milton Friedman was wrong. Inflation is not always and everywhere a monetary phenomenon.

    The last few years prove this 100%.

  51. “Can they legally do that like the BOJ is doing?”

    No, but I don’t view that as a significant barrier.

  52. They’re buying treasuries currently. They bought all the toxic stuff last year with the following thinking: we can hang onto this stuff until it matures and we can shore up the bank balance sheets at the same time. Win win.

  53. The problem is, Bernanke does not even admit that more fiscal stimulus could help. In fact, he is now an austerian based on his recent comments. He really thinks he controls the whole machine with monetary policy. It’s absurd.

    And sorry, boosting home values and equity prices only works for so long. It is not a real fix. It is a temporary fix. Have we not learned anything from the housing bubble? The fundamentals must match the price rise.

  54. As we increase total credit to nominal GDP, the financial system becomes more and more unstable. Financial deepening is a great positive for stability and growth to a point; that point, empirically, appears to be around 170% credit to GDP. We are around 350% and rising rapidly still.

    Also, as the real economy tries to respond to artificial demand, we get more and more overcapacity, and generally in the wrong areas (c.f. housing). These were both widely cited as problems a year ago, but we’ve forgotten about them entirely now.

    More financial assets, no matter what they are, stacked on top of nominal GDP, is going to be immensely destabilizing. I strongly oppose the Fed’s actions principally for that reason.

  55. When Bernanke appeared before Congress in July, he called for more stimulus spending:

    Testifying before the House Financial Services Committee, Bernanke did urge lawmakers to come up with a credible plan to reduce the government’s record-high budget deficits in the long run. But he said they shouldn’t move now to slash spending or boost taxes, or undertake some combination of both.

    “I believe we should maintain our stimulus in the short term,” Bernanke said as he spoke about the economy’s challenges for the second straight day on Capitol Hill.


    Bernanke can’t make Congress do anything. Congressmen have enormous egos, and don’t want to be told what to do, or lectured, or otherwise instructed by those who work for other agencies.

    Bernanke’s trying to play the diplomat, while playing the role of the independent who he is supposed to play.
    If Congress doesn’t want to listen, there isn’t a damn thing that he can do about it.

    If Congress and the president are going to refuse to manage the fiscal side, then monetary policy and the Fed are all we’ve got left. The problem is with the absence of fiscal policy, not the monetary policy.

  56. TPC,

    An idea for a future post would be exploring the QE effects on currencies. The U.S. experience with QE has shown a significant negative impact on our currency even though technically it probably should not, were as Japan has had the opposite effect. It would be interesting to get others input on why the US currency response has been so strong to QE?

  57. Just this past weekend he said we need to reduce the deficit sooner rather than later. He’s either bipolar or very very confused.

  58. I had hoped to find references to the facts mentioned. None were provided in the link, but the lively discussion of Farenheit 451 was interesting.

    It largely bemoans the lack of critical thinking, however I would counter that with the increase in critical thinking, as evidenced by people who read and write on sites such as these.

    A pet peeve of mine is people spouting “facts”, without sources or explanations. They might be facts, and they might be selective facts, and they might be intentional lies, mistakenly repeated.

    Still, it WAS a good link.

  59. Hey, I done a lot more than most people to “change things”. I’ve written over a thousand letters to politicians, this is no exaggeration. I’ve gone to rallies, donated money and volunteered to affect change for the benefit of Main St. not Wall St. And I vote in every election whereas less than 50% of our population votes.

    I really believe if millions of people would’ve marched on DC to stop the banking bailouts it wouldn’t of happened, but the majority do not care enough to get their lazy a** off the couch to do anything about it. Because of this apathy we find ourselves in this predicament.

    The bankers and politicians, are getting away with their crimes because the American people allowed them too, one could even say we’ve aided and abetted them or are an unindicted co-conspirator.

    svg you said “There are many intelligent, caring people who just aren’t tuned in the way some of us are. It is not their fault.”

    This is a big problem with our society, very few people are willing to take responsibility for their actions or in-actions, so they’re always blaming someone else, including our government, for their failures or short comings.

    I’d really like to know if it’s not the citizen’s fault for not paying attention to what our government is doing, then whose fault is it?

  60. “I am honestly still trying to grasp the fact that the Fed has admitted to trying to run what is really nothing more than a ponzi scheme….That is our great American growth strategy. Unbelievable.”

    The thing that most are not seeing is that these people are indoctrinated into a world view that precludes them from seeing it as a ponzi scheme or a confidence game. From their perspective, those of us who do see it that way are simply lacking faith (and we are the problem, not them). From their perspective, if the naysayers would all just find the faith to believe that everything will be okay, then everything will be okay. They are “doing God’s work,” creating the perception that the “worthy” (their view of they and their cronies) have wealth and power, in order to make that become reality, but the reality their indoctrination will not let them see is that they are manipulating and defrauding people who have actually earned their own wealth and power of those things which they desire but haven’t actually earned for themselves.

    The deeper problem of our world today is that their world view is all wrong because perception is NOT reality (nor does it become reality). Changing people’s perceptions cannot change reality; it can only, for a time, obscure reality for the benefit of those creating the false perception and the detriment of those deceived by it. Reality always, eventually, reasserts itself (though, as the last century shows, it can be a very long time). At its very root, their world view is based upon manipulation and fraud but they are incapable of seeing that because they are indoctrinated into a false belief that they are “doing God’s work” for the sake of the “worthy”, “changing reality” by altering people’s perceptions of it.

  61. Roger,

    Great point on “facts” without references. I did a quick google and found quite a few other sites mentioning those same numbers, but none had references to surveys coming up with those numbers. So you’re right, it all could be lies, but if I had to guess I’d say its closer to reality than not.

    I concur that the internet has allowed people to become more critical thinkers, but the problem is the majority use it in mind numbing ways.

  62. “I’d really like to know if it’s not the citizen’s fault for not paying attention to what our government is doing, then whose fault is it?”

    Good question. My answer: human nature. i.e. It is all of us.

    I think we agree more than it appears. We’re on the same side. I’m very impressed that you wrote those letters, etc. That’s more than I did, that’s for sure. I just think that it’s unproductive talking about blame and looking down on our fellow citizens. There are many reasons that things are the way they are, and why more people don’t get involved. Again, human nature.

    Yes, if millions marched on DC and/or got involved, things would be different. I’m still shocked that there wasn’t violence on Wall St. throughout this time. I would never have believed that Americans would be so docile given the magnitude of what has transpired (and continues). I’m just not convinced it’s because they’re stupid, lazy, or spoiled. I’m not stupid, lazy, or spoiled – yet I avoid rallies like the plague.

    Sites like this are encouraging. The more people talk about it, the better. That’s where the internet is such a great thing, instead of being spoonfed the MSM’s narrow/conformist views (disinformation). Slowly but surely, things ARE changing.

    What I take issue with is the extreme cynicism. What’s the point? It doesn’t help. It’s unproductive. Nobody ever accused me of being an optimist (lol), but I refuse to buy into the “nobody cares”, “sheeple” (I find that term revolting), “lazy, fat, ignorant American” camps. Actually, I find those beliefs in and of themselves to be intellectually lazy.

    Nice talking with you. ;)

  63. I agree with this completely…. on another note I know the inflation/deflation debate is a hot one at TPC and I have left responses many times… anyway I finally decided to put a cohesive piece together on the matter… even though we are in chapter 1 of the story… maybe chapter 2:


    …ps I wish rosie were right more often.. he definitely called the 2008 crash but I have listened too closely and been too bearish for the past year … and left money on the table…

  64. How does it matter if the private sector spends or the public sector spends?

    Newly printed money has reached the economy; via the government spending where commercial banks acted as the conduit to carry out the stealth inflation.

    Don’t you get it?

    Who cares which party spends the new money!?

    If Obama’s team spends newly printed money, that newly printed cash does enter the private sector because the government does business with the private sector and then, the money stock gets diluted. This is known as inflation 101.

    If you can’t understand this simple concept, then it is really a shame.

    Ok, I challenge you and all the other deflationistas –

    Go and sell all your assets and put everything you own in US$ time deposits for the next decade.

    If you can do this, you will be eating your own deflationista cake, otherwise, it is all pseudo craptalk and BS.

  65. This has been the policy for 15 to 25 years. It has always been to punish the savers with artificially low interest rates and to dellude the masses into believing they are wealthy because their homes and stock investments keep going up. We are in the throws of a huge depression right now. There are no jobs because we do not manufacture much any more. When you don’t manufacture what you consume, where are jobs going to come from? We can’t all be bankers, clerks, waiters, and lawyers. We live in dangerous times now as the clock is running out on our government’s scheme.

  66. I take exception to your comment that’s “It is all of us.”

    Myself and a few others have been fighting the good fight. Whereas people like you quietly voice your frustration in a forum like this, if at all, but don’t go to rallies or make yourself be heard to our leaders. So it’s most of us, not all of us, that are not only allowing ourselves to be looted, but don’t even know or care.

    I also disagree with you about blaming citizens for their actions or in-actions. People need to be held personally responsible. Too many people are looking for a free ride having someone else do their heavy lifting and blaming others when things go wrong.

    So, I’m sorry if it hurts your feelings when I call these people out, but I’m disgusted that the American people have allowed themselves to be looted and have done nothing about it.

    And if it’s “human nature” then we’re doomed as a society as we’ll allow the thieving bankers and politicians to continue their crimes unpunished.

    America needs to wake up!

  67. Every newly printed dollar which is spent (either by the private sector or the government) in the economy is inflationary. Inflation is the increase in the quantity of dollars in circulation. The Fed has created over $1 trillion, the government has been spending this money and you say there is no inflation!?

    Have you heard the saying –

    “To a man with a hammer, the whole world looks like a nail!”

    This applies beautifully to all deflationistas, you twist every data as proof of deflation. Even though the symptoms of inflation (surging commodity and stock markets) are everywhere, deflationistas still believe deflation is prevalent.

  68. Well, that was the entire idea behind ObamaCare. Totally destroy the existing system so that momemtum toward a socialized British/Canadian system becomes unstoppable. Which is precisely why the Congressional Democrats had no need to read the bill before passing it. The details are irrelevant. And they were spot on – it is working faster than anticipated.

  69. As someone with foreign experience pointed out recently on these pages, hyperinflation is never equal across all asset classes. Those things that are true necessities (food and fuel) will inflate without limit. Assets like bonds and stocks will crash, at least in real value. Physical gold will be worth much much more than its paper equivalent, since paper assets are easier to expropriate.

    Think hyperinflation is impossible? Then check out the data on peak oil. Peak oil exports has already occurred – in 2005. Oil production has essentially been constant over 5 years, with the defecit in crude made up with natural gas liquids. If it wasn’t for the global recession, demand would already have exceeded supply. It may be a few years to a decade away, but big time inflation is coming. You can count on it.

  70. The board is appointed by the President and they do have a .gov internet address. The telephone book means nothing.

    And the Fed is required to pay its excess profits to the US Treasury, which shows its true ownership. Its true nature is a government owned corporation that is in a monopoly partnership with private bankers.

  71. When money is printed, it has to go somewhere, but it does not have to go into general price inflation (the so-called CPI). When interest rates are declining it tends to go into financial assets and bubbles. But if a wage-price spiral gets started it goes into food, fuel, and wage costs.

  72. Bernanke probably wants a slow growth economy to force the consumer to build up savings and deleverage without causing either a deflationary implosion or another speculative bubble. But he is between a rock and a hard place. If he tightens, the economy implodes like a collapsing star, and it may take all of the Fed’s efforts to stop this from happening in any case. If there is overstimulation and the Federal Defecit gets much worse, that could collapse the dollar and set off a wage-price spiral once oil prices start soaring. Bernanke is no fool. He knows that he can print dollars, but he can’t print oil. Surely he can see how well oil prices have held up despite the Great Recession. This is the real, physical constraint on the stimulus side.

  73. Andrew,

    You are correct. Newly printed money can find a home anywhere in the economy, creating bubbles in certain pockets of the economy.

    The CPI is so heavily manipulated that it does not even reflect the true increases in prices! And price increases are only consequences of inflation, which is always monetary.

    Prices are a function of the amount of money in circulation within an economy.

    Money creation (inflation of the money stock) causes prices (CPI) to rise and money contraction (deflation) causes prices (CPI) to fall.

    Simple economics 101.

  74. The average citizen is to busy watch “real housewives”, “jersey shore” and “dancing with the stars,” they don’t have a clue.

  75. The Fed is run according to the goals set by Congress. Congress and the President want to continue even greater spending and borrowing and the Fed’s policy of maintaining asset values is the only policy that will keep us out of a default situation.

    The Fed’s hands are tied as long as Congress refuses to cut spending and reduce our debt. And that will never happen during election season.

  76. “Money creation (inflation of the money stock) causes prices (CPI) to rise and money contraction (deflation) causes prices (CPI) to fall.”

    Simple and wrong, basic confusion of stocks and flows. If you print 20 billion and hand it to the Bill Gates, who just saves it and do not increase his consumption you are not going to generate one inch of inflation.

    There are plenty of places money can go to “idle” so that is not part of the circulation. Look at the monetary aggregates, they have been increasing rapidly over the last century, 10% – 20% yearly. Yet inflation has been much lower.


  78. Good call. My book “R I P FEDERAL RESERVE BANK 1913-2028″ examines the next two decades. Inflation several magnitudes harsher than the 70s erupts toward the end of this decade. I use occult knowledge to predict. Even if you are sceptical, my book is a must read for balanced viewpoint. No one can ever say again they were not warned about what we will face as a nation.

  79. Check out this interesting commentary beginning with an excerpt from Greenspan’s 1966 essay “Gold and Economic Freedom”
    “Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale”
    Read “Who is John Galt” here http://www.gata.org/files/QBAMCO_Who_is_John_Galt.pdf

  80. I caught an interview of former US Treasury Secretary John Snow. The reporter was asking Snow about the anticipated effect of Quantitative Easing II. I suspect that QE I caused the stock market rally during that time, and it looks like QE II is fueling the current rally.

    Here is the meat of the interview:
    Source: http://www.pbs.org/nbr/site/onair/transcripts/former_treasury_secretary_john_snow_101011/

    Washington bureau chief Darren Gersh talked with Snow and began by asking why the Fed is considering this unusual step. JOHN SNOW, FORMER TREASURY SECRETARY: Well, the U.S. economy is way, way under performing. We have slow growth. We have high unemployment, we have output levels that are far short of our potential output levels. And we have just come through the biggest financial catastrophe, cataclysmic event of the last 70 years. So the Fed`s worried about, properly so, about the future path of the U.S. economy and quantitative easing. In simple terms, it`s simply the Fed`s applying more credit to the markets by buying paper of one kind or another.

    DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: And will it work? What specifically does the Fed want to do and will it work?

    SNOW: Well, what the Fed wants to do is to get the economy on a better growth path. The idea behind quantitative easing is you buy paper, government paper that`s now held by financial institutions or individuals. And then they have the money. And then they go out and buy some other financial assets, stocks. And they drive up the value of those other financial assets so we get an increase in the value of financial assets which means an increase in the value of lots of peoples` household wealth. And the idea is if household wealth goes up, then that will be a spur to spending.

    GERSH: But if people are afraid to spend, will giving them more money solve that problem?

    SNOW: If their assets go up in value, if the stocks and bonds they hold go up in value, they will be inclined to feel wealthier and more confident about the world. That`s the theory.

    If you are so inclined, you can see the actual video here. http://www.pbs.org/nbr/info/video.html

    Queue up to about 6:41 into the video: Nightly Business Report for Oct 11, 2010.