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A Tour de Force of Sophistry: Janet Yellen Needs to Resign

Posted on Wednesday, September 21, 2016 No comments

Wednesday, September 21, 2016

The statement from the Federal Reserve released this afternoon is a tour de force of sophistry, trying to explain exactly how doing the same thing over and over again is not insane.  Here is a blow by blow commentary:
Although the unemployment rate is little changed in recent months, job gains have been solid, on average.
Which jobs? The phantom 'jobs' derived statistically by the use of an out-of-date business birth/death ratio?  Do they mean the the service sector jobs which are being taken disproportionately by those 55 and older, for whom retirement has been exposed as a cruel joke?  If Ms. Yellen actually thinks the jobs report is 'solid', she should resign.
Household spending has been growing strongly but business fixed investment has remained soft.
Why bother with "fixed investment" when you have a much more certain return buying back your company's own stock? (Not to mention that nice executive bonus which is tied to the stock price!)  The data on corporate debt is available to anyone willing to look.  Corporations are further into debt than before the last crisis, and the bulk of those funds have gone to stock buybacks.  If Ms. Yellen cannot recognize this mathematically obvious reason for the 'softness' in fixed investment, she should resign.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.
Apply a stable calculation methodology to employment data from 1977 (when the 'maximum employment' mandate was added) until today, and it will become painfully obvious that the Federal Reserve has failed at this part of its mandate.  But this is more the fault of Congress than the Fed, for the Fed has never had the necessary tools.  They still don't, and they never will.  Full employment is a function of fiscal policy that prevents government from unduly competing with the private sector for capital.  If Ms. Yellen does not have the backbone to slam this ball back into Congress' court - where it belongs - she should resign.
The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace. 
Exactly why do they believe this?  After eight years of such monetary policy, we have not yet seen any 'moderate' expansion.  Why will a ninth year be any different?  If Ms. Yellen cannot explain to us why we should keep doing the same thing over and over again, expecting a different result, she should resign.
Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.
Has it occurred to the Fed that they have cause and effect reversed?  Energy prices are low because there is a massive glut of supply and decreasing demand.  Why do they believe the effects of declining energy prices are 'transitory'?  The only way they rise is if the economy places greater demand on current supplies.  Exactly how does the Fed see that happening in a ZIRP and potentially NIRP environment where stock buybacks and derivatives speculation compete with productive uses of captial (which requires energy)?  Oh, wait, we've never been in a ZIRP/NIRP environment, so they can't possibly predict what will happen.  If Ms. Yellen does not appreciate how much about the current situation she cannot possibly know, she should resign.
The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.
Where do I start? After eight years of "wait[ing] for further evidence" we have every right to ask why they 'judge' that a ninth year will make a difference.  And if Ms. Yellen cannot explain that, she should resign.

And what does 'for the time being' mean?  With corporate debt, especially junk bonds (high yield) - which are just the corporate version of the sub-prime mortgage - higher now than before the last crisis, exactly when does she think will be 'a good time' to cut off the ability of over indebted corporations to to serially refinance their bonds?  Rising rates will force what are basically zombie companies into bankruptcy - and the longer they wait, the more of them will go down in flames all at once.  If Ms. Yellen cannot explain why some undefined time in the future will be 'better' than today for this reckoning, she should resign.

'For the time being'?  With the stock market propped up by corporate debt-funded stock buybacks, exactly when do they think will be 'a good time' to raise rates and cut off this support for stock prices?  With real estate all but back at pre-crisis inflated levels, and rising rates precluding refinancing of mortgages, exactly when does she think will be 'a good time' to raise these rates?  If Ms. Yellen cannot explain, she should resign.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.
How?  In 5,000 years of monetary history we have never had debt instruments yielding less than 0%.  Yet today, almost 1/3 of bonds outstanding - worldwide - are yielding negative rates.  Exactly what models are they using to inform their 'expected economic conditions'?  In the absence of any historical examples of the current monetary environment, exactly how have they validated those models?  If Ms. Yellen cannot explain, she should resign.
This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Again, what models inform 'indicators of inflation pressures and inflation expectations'?  How are those models validated?  And what the hell does "readings on financial and international developments" mean?  Is Ms. Yellen now admitting that the Fed is effectively the world's Central Bank?  Is she now admitting that the stock market is now the only 'data' that really matters?  Since they cannot have validated models without having historical patterns to validate against, it would seem there is nothing into which to plug their 'data' - so they end up with nothing but stock market indices.  If Ms. Yellen cannot explain why this is not the case, she should resign.
In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
What a complete crock of sophistry.  Monitor 'expected progress'?  Absent validated models, how?  They "expect that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate."  Why do they expect this?  They have expected this for eight years now.  Why do they expect a ninth will change anything?  The economic outlook will be 'informed by incoming data'?  With which they will do exactly what?  Plug the data into exactly which models?  Which have been validated in the absence of historical patterns exactly how?
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Oh my... They are going to maintain a massive balance sheet - preventing all of that capital from obtaining to actually productive uses - "until normalization of the level of the federal funds rate is well under way."  Which will be when again?  Sometime in the ninth year, after eight years of doing the same thing over and over again and expecting a different result?  And they expect to see that day when normalizing interest rates is 'well under way'?  Why do they expect to see that day, seeing as they have no validated models into which to plug their data so as to inform those expectations.

If Ms. Yellen cannot explain this in a way the orindary saver can understand, she should resign immediately.

Just When You Thought You'd Seen It All, Central Banks Begin 'Kiting' their 'Checks'

Posted on Friday, September 2, 2016 No comments

Friday, September 2, 2016

 It's a term from when credit cards were a rarity and 'Web Bill Pay' hadn't even been imagined.

Someone would open a checking account at two or more banks.  They would write a check from their account in Bank A to their account in Bank B.  There the funds would be available to allow other checks written against the account at Bank B to clear.  Once the checks written against Bank B clear, the person writes a check against the account in Bank B to his account in Bank A to allow the original Bank A check to clear.

The actual check would go from the bank at which it was deposited to an 'item processing' facility where the check would be scanned.  The numbers on the bottom of a check are printed with a special ink called MICR (Magnetic Ink Character Recongnition).  On a typical consumer checking account, the first set of numbers at the bottom (the 'ABA number') identify the bank.  The second set is the check number, and the third set is the account number.  After scanning these numbers, along with the amount they are sent to the bank for the settling of the check.

This scheme of using alternate accounts as a 'float' for the other account - basically turning each account into a form of interest-free 'payday loans' - depends on the time interval between when the check is deposited at a branch to when it is scanned at the item processing facility.  That time interval can be expanded by adding accounts at other banks to a circle around which a 'float' is passed from bank to bank.

The term for it is 'Check Kiting'.  The original check from Bank A to establish a 'float' in Bank B is called the 'kite' check.  It is and always has been illegal.

Apparently, though, not for Central Banks.

The underlying motive for check kiting is essentially the need for personal 'liquidity' - a purposefully opaque central banker's term for having money to spend.  For central banks, the desire is to provide 'liquidity' to 'markets' in the hope of increasing 'aggregate demand', therefore provoking inflation - so as to make today's staggering debt loads cheaper to pay.  That last part - making debt cheaper - is probably the hardest part for ordinary people to understand.  But for this post, it is not really that important.  What matters here is that central banks are engaged in a grand 'check kiting' scheme - one which can only end badly.

Let's say Spain's Banco de España buys bonds issued by the Spanish government.  To simplify, Banco de España writes a check to buy these bonds.  But to cover that check, they sell from their 'inventory' of bonds to Germany's Bundesbank, which writes a check.  The Germans now have Spanish bonds in their inventory, so they sell German government bonds to cover their check to Spain. Portugal writes a check to the Bundesbank for these German bonds.  The Portuguese central bank now has German government bonds in their inventory, in addition to their own government's bonds, so they sell some of their sovereign debt to Banco de España to cover their check to the Bundesbank.  Spain writes a check to Portugal's central bank for that debt, and then sells their debt to the Bundesbank to cover the check.  The Bundesbank then writes a check....

And around we go.  The 'kite check' is simply being passed along from central bank to central bank. (Yes, this is where you start banging your head on the desk...)

Remember, if an individual does this, it is all about the need for personal 'liquidity' so they have money to spend on something needed or wanted.  Central banks are kiting their checks in the hope of providing liquidity to their markets - hoping that it will be spent.  Throughout this whole charade, which is clearly not working, our esteemed central bankers remain oblivious to one stupendously simple observation: If you want people to buy products, you might want to try making products people want to buy.  IT WORKS EVERY TIME!

There is a point at which money becomes so cheap that the odds at the Blackjack table of derivatives speculation are actually better than lending to Main Street businesses, which might actually be able to use the capital to improve products and processes, or even to create entirely new markets.  (This is what made Steve Jobs the legend that he is.)  At that same point of cheap money, a publicly traded company can actually return the illusion of greater share value by buying back its own stock, rather than creating a nominally lower - but real - return by upgrading plant and equipment or doing R&D on a new product (otherwise known as capital expenditures, or 'capex', which then require them to actually hire people).

We can call this a Ponzi scheme or a Check Kiting scheme.  Either way, in any other part of our economy other than the Wizard of Oz world of central banking, this would be entirely illegal and would result in people going to jail.  (At least Iceland, of all places, gets this and actually jails bankers for stuff like this.)

The very best advice was actually given by Steve Jobs to the graduates of Stanford University, to whom he spoke at their 2005 commencement:  He said: "Don't be bound by dogma, which is living with the results of other people's thinking."

That advice can be no better applied than to today's central bankers, our esteemed Federal Reserve Chair Janet Yellen most certainly included.
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