Dude, Where's My Deflation? Yes the Fed Has Lowered Rates and Grown Money Supply But...

My email box pretty much exploded today as the metals rally and divergence from stocks woke up the audience. And the action in my own accounts tended to be diverting, and not unhappily so. Sorry if I have been slow in getting back to you all, and in answering your questions.

Let's take a look at the monetary scorecard and a few ancillary measures to see how Ben and His Merry Pranksters are doing.

While GDP remains very sluggish, growing at less than 2 percent rates, the money supply growth is pegged around 10 percent in M2, with the broadest short term measure MZM hanging in just below that.

CPI remains elevated, and some say and probably correctly understated, with CPI Urban running at 5 percent year over year, which is rather high given all the fundamental metrics of the economy.

Most surprisingly the 10 Year Bond continues to hit new lows as people pile into all Treasuries across the curve.

As you may recall, the purpose of Operation Twist, or QE2ish, is to LOWER the yields of the long end of the curve. And especially with the winds of global financial crisis at their backs, the Fed has certainly done this if one bothers to look at the Ten Year Note Yield chart below, with a big hand from the little lady (Merkel).

Yes rates tend to go up a bit during the Fed operations, as the wiseguys front run and game the Fed's purchases, but they always come down sharply soon afterwards. These are just a few of the many ways that the Fed is quietly passing enormous sums of money to their member banks.

At some point interest rates may have to start increasing again, as the Fed will have to deal with inflation. But it won't be by using QE, quite the contrary. To raise rates the Fed must reverse QE, and gently drain from the system as the economy begins to create its own sustainable growth. That has not happened yet, as is clear from various measures like the Velocity of Money.

So, is the Fed 'successful?' In its purely monetary objectives yes, but not at the end of the day, because the primary measure of their success, besides keeping the markets liquid, is to stimulate the real economy.

Benny is in trouble here. With GDP growing at near recession real rates, and even the long end of the curve priced at NEGATIVE real interest rates depending on how one measures inflation, he is caught in a liquidity trap.

A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels.

The problem is not interest rates, but a more anomalous situation such as war, in this case a class war and a currency war. Demand will not pick up until the median wage rises faster relative to overall economic growth, and global trade becomes equitable and orderly. And of course, when the money flow is not being continually hijacked and taxed by an outsized and predatory financial system that does not allocate so much as confiscate wealth through fees, frauds, and the mispricing of risk.

Contrary to election year rhetoric, the growth of government spending has been flat under Obama. The deficits have ballooned because the revenues (taxes etc) collected by the government have been shrinking due to economic contraction, the Bush tax cuts, etc.

Bernake can only do so much with his monetary hat on. The Fed and Treasury need to get behind financial reform, and restructuring the American economy to stimulate the median wages and jobs, and stop promoting activity that is little more than wealth transferal from the bottom 95 percent to the top.

That is not likely to happen before the end of the year.

I am not a 'fan' of Bernanke, even when he was first appointed to George W. Bush's Council of Economic Advisors in 2002. I thought Obama made a tactical error in reappointing him in 2010, probably to keep from roiling the markets. Besides, Obama himself is more a moderate Republican, in the manner of Herbert Hoover, than a real progressive like Roosevelt, and he is certainly no hard core Keynesian or socialist, no more so than Richard Nixon.

I am concerned that the continuing deadlock in Washington, fostered to a large extent by a Republican policy bloc that refuses to compromise, will prompt Bernanke to pull something even more 'unconventional' from his bag of tricks. That might not be pretty.

Do I really need to say it again?

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained growth and recovery.

Joe Stiglitz On the Price of Widening Inequality - The Tsar Nicholas II Syndrome

"Is there a greater tragedy imaginable than that, in our endeavour consciously to shape our future in accordance with high ideals, we should in fact unwittingly produce the very opposite of what we have been striving for?"

Friedrich Hayek

I don't know if I would call that a great tragedy, or a greater irony. It most likely depends on the spirit with which one undertakes that endeavour to shape the future, rather than the words that express the ideals. Words turn into mere slogans, and people are often fooled, but God will not be mocked.

I like to think of the tendency of people to destroy themselves through excess as the 'Tsar Nicholas II Syndrome,' the drive to continue to hold and expand your grasp on unsustainable wealth and power for its own sake, even as it leads you and your family to a cruel death in a cellar, but with jewels sewn into the children's clothes. Winning.

It is the very basis of tragedy. Those traits and circumstances that make a person successful, and raise them to great heights, when taken to an excess that causes them to lose the sight of true value and balance, hamartia, becomes the very instrument of their own destruction.

I think Joe Stiglitz is attempting to put this in economic terms, to show the impracticality of the continuing deterioration of the American social fabric through public and tax policies with their roots in the 1980s.

Simon Johnson has recently written something similar from a slightly different perspective: Jamie Dimon and the Fall of Nations.

This long developing imbalance and erosion of equitable economic justice has led to a chasm of wealth and power, a distortion of the political system, and dangerously unstable social conditions in the developed world more usually seen in the Third World.

And this is a recipe for disaster.  But even so, the monied interests may again make the offer that they think cannot be refused: 'Do as we say, or everything burns.'

I don't think the arguments of Stiglitz and Johnson will be successful in their appeal to reason, but I hope for it. At least the effort is being made in the States. When I watch the televised news I see people utterly possessed by insatiable greed and madness, who will say and do anything to get what they want.  The current crop of political leaders throughout the Western world is a freak show. Europe and the UK may be a lost cause already, ready to heave themselves into the abyss with a spasm of despair.

One cannot reason someone back to rationality when they have been taken to a mad place through an excess of unrestrained desires.

And madness breeds madness, and will serve none but itself.

Vanity Fair
The One Percent's Problem
By Joseph Stiglitz

Let’s start by laying down the baseline premise: inequality in America has been widening for dec­ades. We’re all aware of the fact.

Yes, there are some on the right who deny this reality, but serious analysts across the political spectrum take it for granted. I won’t run through all the evidence here, except to say that the gap between the 1 percent and the 99 percent is vast when looked at in terms of annual income, and even vaster when looked at in terms of wealth—that is, in terms of accumulated capital and other assets.

Consider the Walton family: the six heirs to the Walmart empire possess a combined wealth of some $90 billion, which is equivalent to the wealth of the entire bottom 30 percent of U.S. society. (Many at the bottom have zero or negative net worth, especially after the housing debacle.) Warren Buffett put the matter correctly when he said, “There’s been class warfare going on for the last 20 years and my class has won.”

So, no: there’s little debate over the basic fact of widening inequality. The debate is over its meaning. From the right, you sometimes hear the argument made that inequality is basically a good thing: as the rich increasingly benefit, so does everyone else. This argument is false: while the rich have been growing richer, most Americans (and not just those at the bottom) have been unable to maintain their standard of living, let alone to keep pace. A typical full-time male worker receives the same income today he did a third of a century ago.

From the left, meanwhile, the widening inequality often elicits an appeal for simple justice: why should so few have so much when so many have so little? It’s not hard to see why, in a market-driven age where justice itself is a commodity to be bought and sold, some would dismiss that argument as the stuff of pious sentiment.

Put sentiment aside. There are good reasons why plutocrats should care about inequality anyway—even if they’re thinking only about themselves. The rich do not exist in a vacuum. They need a functioning society around them to sustain their position. Widely unequal societies do not function efficiently and their economies are neither stable nor sustainable. The evidence from history and from around the modern world is unequivocal: there comes a point when inequality spirals into economic dysfunction for the whole society, and when it does, even the rich pay a steep price.

Let me run through a few reasons why...

Read the rest here.

Gold, Silver, and the May Jobs Report

"Through a set of economic policies designed to bail out and subsidize failed and often tainted corporate enterprises, while actively promoting a false sense of confidence to support those policies, the public has become exposed, by those very people entrusted to protect them, to dangerously high levels of hidden counterparty risks.

The cautionary functions of the media, the political class, and the regulatory bodies have been routinely directed, distorted, and even silenced for the benefit of a highly compromised and increasingly self-serving elite. And this corruption has begun feeding on its own momentum, resulting in increasingly blatant examples of deception, distortion, and outright theft.

This is crony capitalism, and its deadly credibility trap."

Jesse

There was a disappointment in the US Jobs Report today, and a shocking (to some) divergence between stocks and the precious metals which are staging a big rally right up now to the intermediate trendline. Although as one can see the premiums are hardly euphoric.

How come?

I looked over the Jobs numbers earlier this morning, and checked the usual suspects. Imaginary additions were 204,000 which are right 'in the groove' for the normal pattern we see for May each year.

If anything the seasonal adjustment was shaded to the downside, meaning that it would have not taken much or been out of the norm to have taken away LESS jobs in the seasonal adjustment, and brought in a report that was in line with expectations.

As an aside you remember how I feel about the histrionics around the highly volatile and revisable monthly changes versus trends.  And additionally while the number of jobs is important, the median numbers and especially the median wage are the thing to watch in addition to the longer term trends.

So why put out a weak number when one could have statistically justified a stronger number?  Besides 'sand-bagging' now with an eye to the second half of the year?

There are an important set of central bank decisions coming up, including the FOMC meeting shortly after the Greek elections at mid month. This weak Jobs number gives Bernanke the cards he needs to play in responding to the evolving crisis.

And you know what that means.

And this is why gold and silver diverged so hard this morning to the upside. They had been artificially pressed down for the May-June contract expirations, and some might say to lessen the impact of their rally when the inevitability of QE became evident. It also gave some of the wiseguys a great opportunity to pick up the means of production, the mining stocks, on the cheap if one is thinking longer term.

Anyone who cannot see manipulation in the precious metals markets is willfully purblind, in every sense of the word.

I am just wondering how the Feds will try and spin it. An extension of Operation Twist? The long end of the curve is approaching the ridiculous along with German and Swiss bonds. More likely there will be a swap line spun bailout of Europe, and more quietly behind the scenes, with the Jobs report for domestic cover. Perhaps the Fed will continue to expand their Balance Sheet, but not so noisily as to jawbone the economy, yet.

As I said the other day, US and Greek bonds are heading in roughly the same direction, just on different trajectories and timelines.

Gentlemen, start your presses. But try not to be too obvious about it.

Simon Johnson: Jamie Dimon and the Failure of the Nation

No matter how you wish to frame it, the Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained growth and recovery.

Baseline Scenario
Jamie Dimon And The Fall Of Nations
By Simon Johnson
May 31, 2012

“Why Nations Fail: The Origins of Power, Prosperity, and Poverty,” by Daron Acemoglu and James Robinson, is a brilliant and sometimes breathtaking survey of country-level governance over history and around the world. Professors Acemoglu and Robinson discern a simple pattern – when elites are held in check, typically by effective legal mechanisms, everyone else in society does much better and sustained economic growth becomes possible. But powerful people – kings, barons, industrialists, bankers – work long and hard to relax the constraints on their actions. And when they succeed, the effects are not just redistribution toward themselves but also an undermining of economic growth and often a tearing at the fabric of society. (I’ve worked with the authors on related issues, but I was not involved in writing the book.)

The historical evidence is overwhelming. Many societies have done well for a while – until powerful people get out of hand. This is an easy pattern to see at a distance and in other cultures. It is typically much harder to recognize when your own society now has an elite less subject to effective constraints and more able to exert power in an abusive fashion. And given the long history of strong institutions in the United States, it appears particularly difficult for some people to acknowledge that we have serious governance issues that need to be addressed...

Read the rest here.