Oct 31

Solutions for Everything, Answers to Nothing

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Could one day’s Financial Times be the best £2.50 humanity ever spends…?
 

WEDNESDAY we picked up an issue of the Financial Times, writes Bill Bonner in his Diary of a Rogue Economist – the so-called pink paper due to its distinctive color.
 
We wondered how many wrongheaded, stupid, counterproductive, delusional ideas one edition can have.
 
We were trying to understand how come the entire financial world (with the exception of Germany) seems to be singing from the same off-key, atonal and bizarre hymnbook. All want to cure a debt crisis with more debt.
 
The FT is part of the problem. It is the choirmaster to the economic elite, singing confidently and loudly the bogus chants that now guide public policy.
 
Look on practically any financial desk in any time zone anywhere in the world, and you are likely to find a copy. Walk over to the ministry of finance…or to an investment bank…or to a think tank – there’s the salmon-pink newspaper.
 
Yes, you might also find a copy of the Wall Street Journal or the local financial rag, but it is the FT that has become the true paper of record for the economic world.
 
Too bad…because it has more bad economic ideas per square inch than a Hillary Clinton speech. It is on the pages of the FT that Larry Summers is allowed to hold forth, with no warning of any sort to alert gullible readers. In the latest of his epistles, he put forth the preposterous claim that more government borrowing to pay for infrastructure would have a 6% return.
 
He says it would be a “free lunch” because it would not only put people to work and stimulate the economy, but also the return on investment, in terms of GDP growth, would make the project pay for itself…and yield a profit.
 
Yo, Larry, Earth calling…Have you ever been to New Jersey?
 
It is hard enough for a private investor, with his own money at stake, to get a 6% return. Imagine when bureaucrats are spending someone else’s money…when decisions must pass through multiple levels of committees and commissions made up of people with no business or investment experience – with no interest in controlling costs or making a profit…and no idea what they are doing.
 
Imagine, too, that these people are political appointees with strong, and usually hidden, connections to contractors and unions.
 
What kind of return do you think you would really get? We don’t know, but we’d put a minus sign in front of it.
 
But the fantasy of borrowing for “public investment” soaks the FT.
 
It is part of a mythology based on the crackpot Keynesian idea that when growth rates slow you need to stimulate “demand”.
 
How do you stimulate demand?
 
You try to get people to take on more debt – even though the slowdown was caused by too much debt.
 
On page 9 of Wednesday’s FT its chief economics commentator, Martin Wolf (a man who should be roped off with red-and-white tape, like a toxic spill), gives us the standard line on how to increase Europe’s growth rate:
“The question […] is how to achieve higher demand growth in the Euro zone and creditor countries. [T]he Euro zone lacks a credible strategy for reigniting demand [aka debt].”
It is not enough for people to decide when they want to buy something and when they have the money to pay for it. Governments…and their august advisers on the FT editorial page…need a “strategy”.
 
On its front page, the FT reports – with no sign of guffaw or irony – that the US is developing a “digital divide”.
 
Apparently, people in poor areas are less able to pay $19.99 a month for broadband Internet than people in rich areas. So the poor are less able to go online and check out the restaurant reviews or enjoy the free pornography.
 
This undermines President Obama’s campaign pledge of giving every American “affordable access to robust broadband.”
 
The FT hardly needed to mention it. But it believes the US should make a larger investment in broadband infrastructure – paid for with more debt, of course!
 
Maybe it’s in a part of the Constitution that we haven’t read: the right to broadband. Maybe it’s something they stuck in to replace the rights they took out – such as habeas corpus or privacy. 
 
We don’t know. We only bring it up because it shows how dopey the pink paper – and modern economics – can be.
 
Quantity can be measured. Quality cannot. Broadband subscriptions can be counted. The effect of access to the internet on poor families is unknown.
 
Would they be better off if they had another distraction in the house? Would they be happier? Would they be healthier? Would they be purer of heart or more settled in spirit?
 
Nobody knows. But a serious paper would at least ask.
 
It might also ask whether more “demand” or more GDP really makes people better off. It might consider how you can get real demand by handing out printing-press money. And it might pause to wonder why Zimbabwe is not now the richest country on earth.
 
But the FT does none of that.
 
Over on page 24, columnist John Plender calls corporations on the carpet for having too much money. You’d think corporations could do with their money whatever they damned well pleased.
 
But not in the central planning dreams of the FT. Corporations should use their resources in ways that the newspaper’s economists deem appropriate. And since the world suffers from a lack of demand, “corporate cash hoarding must end in order to drive recovery.”
 
But corporations aren’t the only ones at fault. Plender spares no one – except the economists most responsible for the crisis and slowdown.
“At root,” he says of Japan’s slump (which could apply almost anywhere these days), the problem “results from underconsumption.”
Aha! Consumers are not doing their part either.
 
Summers, Wolf, Plender and the “pink paper” have a solution for everything. Unfortunately, it’s always the same solution and it always doesn’t work.
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Oct 14

New Fed Boss Yellen: No Change

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Next year’s appointment of Janet Yellen to the US Fed won’t change anything…
 

The NEWS that Janet Yellen was nominated to become the next chairman of the Board of Governors of the Federal Reserve System was greeted with joy by financial markets and the financial press, writes former Texas Congressman Dr.Ron Paul.
 
Wall Street saw Yellen’s nomination as a harbinger of continued easy money. Contrast this with the hand-wringing that took place when Larry Summers’ name was still in the running. Pundits worried that Summers would be too cautious, too hawkish on inflation, or too close to big banks.
 
The reality is that there wouldn’t have been a dime’s worth of difference between Yellen’s and Summers’ monetary policy. No matter who is at the top, the conduct of monetary policy will be largely unchanged: large-scale money printing to bail out big banks. There may be some fiddling around the edges, but any monetary policy changes will be in style only, not in substance.
 
Yellen, like Bernanke, Summers, and everyone else within the Fed’s orbit, believes in Keynesian economics. To economists of Yellen’s persuasion, the solution to recession is to stimulate spending by creating more money. Wall Street need not worry about tapering of the Fed’s massive program of quantitative easing under Yellen’s reign. If anything, the Fed’s trillion Dollars of yearly money creation may even increase.
 
What is obvious to most people not captured by the system is that the Fed’s loose monetary policy was the root cause of the current financial crisis. Just like the Great Depression, the stagflation of the 1970s, and every other recession of the past century, the current crisis resulted from the creation of money and credit by the Federal Reserve, which led to unsustainable economic booms.
 
Rather than allowing the malinvestments and bad debts caused by its money creation to liquidate, the Fed continually tries to prop them up. It pumps more and more money into the system, piling debt on top of debt on top of debt. Yellen will continue along those lines, and she might even end up being Ben Bernanke on steroids.
 
To Yellen, the booms and bust of the business cycle are random, unforeseen events that take place just because. The possibility that the Fed itself could be responsible for the booms and busts of the business cycle would never enter her head. Nor would such thoughts cross the minds of the hundreds of economists employed by the Fed. They will continue to think the same way they have for decades, interpreting economic data and market performance through the same distorted Keynesian lens, and advocating for the same flawed policies over and over.
 
As a result, the American people will continue to suffer decreases in the purchasing power of the Dollar and a diminished standard of living. The phony recovery we find ourselves in is only due to the Fed’s easy money policies. But the Fed cannot continue to purchase trillions of Dollars of assets forever. Quantitative easing must end sometime, and at that point the economy will face the prospect of rising interest rates, mountains of bad debt and malinvested resources, and a Federal Reserve which holds several trillion Dollars of worthless bonds.
 
The future of the US economy with Chairman Yellen at the helm is grim indeed, which provides all the more reason to end our system of central economic planning by getting rid of the Federal Reserve entirely. Ripping off the bandage may hurt some in the short run, but in the long term everyone will be better off. Anyway, most of this pain will be borne by the politicians, big banks, and other special interests who profit from the current system. Ending this current system of crony capitalism and moving to sound money and free markets is the only way to return to economic prosperity and a vibrant middle class.
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Sep 26

Bye to Larry, Hello to Janet Yellen

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So Wall Street and finance’s choice for Fed chair has gone. But here comes Janet Yellen…
 

SO LONG Larry Summers! writes Dennis Miller in his Miller’s Money for Casey Research.
 
In this game of eeny meeny miny moe, it appears that Obama’s index finger will ultimately land on Janet Yellen to replace Bernanke as chairman of the Federal Reserve. Summers was Wall Street’s choice, but he withdrew from consideration, citing potential obstacles in the Senate confirmation process. While I greeted that update favorably, Yellen isn’t high on my list either.
 
Before Summers stepped aside, the authors of an article on Yahoo Finance asserted why Wall Street preferred Summers even though we shouldn’t:
“Obama leans toward Summers not on the merits but because the Wall Street bankers want him. Summers is one of the boys, and the bankers know that Summers will do their bidding, at the expense of everybody else.”
The authors added that Summers advocated for financial deregulation and shot down legislation capping bankers’ bonuses – including bonuses for the AIG unit that helped trigger the banking mess. They went on to root for Yellen, citing her exemplary academic record and history with the Federal Reserve.
“Yellen correctly foresaw the risks of the 2008 financial meltdown, while Summers famously missed it. She, not Summers, has hands-on experience running the Fed.”
Summers is out of the mix now, but the “logic” behind this article made my blood boil. Just because one candidate is lousy does not mean the other is any better.
 
Here is Yellen’s highlight reel according to Jim Kuhnhenn at the Associated Press:
“Yellen has advocated tough regulations since her time at the San Francisco Fed. She is credited for issuing early warnings that the housing bubble and unregulated financial practices threatened the economy…As the Fed’s vice chairwoman she has called for additional financial system safeguards.”
Hmm…here’s another way to look at Yellen’s record: since joining the Federal Reserve’s Board of Governors in October 2010 and becoming a permanent voting member of the Federal Open Market Committee (FOMC), she has never cast a dissenting vote against the monetary action recommended by Chairman Bernanke.
 
If the near collapse of the banking system was caused by deregulation and AIG’s toxic loans – which she spoke out against – how competent a leader is Ms. Yellen? Did anyone heed her early warnings? No; and her inability to push her peers toward preventative measures is an indictment of an ineffective executive. In the business world, saying “I told you so” could get you fired. However, like so many things government, activity is mistaken for accomplishment. An effective executive makes sure he or she is heard and gets the job done.
 
What about Yellen’s leadership since the crisis? Last month Sheraz Mian broke down the 2Q earnings reports of the S&P 500 companies in ZacksEarning Trends:
“Yes, the total earnings tally reached a new quarterly record in Q2 and the rest of the aggregate metrics like growth rates and beat ratios look respectable enough. But all of that was solely due to one sector only: Finance.
 
“Excluding Finance, total earnings for the remainder of S&P 500 companies that have reported would be down -2.9% from the year-earlier period. [But] earnings growth was particularly strong at the large national and regional banks, with total earnings at the Major Banks industry, which includes 15 banks like J.P. Morgan and Bank of America.”
It looks like too big to fail banks are certainly succeeding. So, Yellen’s hands-on experience running the Fed has accomplished full employment in the financial sector. Perhaps that’s supposed to trickle down to the rest of us.
 
The Federal Reserve publishes a booklet titled, The Federal Reserve System, Purposes and Functions. It says that the Federal Reserve’s duties fall into four general areas:
  1. Conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates;
  2. Supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers;
  3. Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets; and
  4. Providing financial services to depository institutions, the US government, and foreign official institutions, including playing a major role in operating the nation’s payments system.
If any public company failed at its mission so miserably, the stockholders would throw out the entire management team. It is time for accountability.
 
What’s our bottom line? While the Federal Reserve holds down interest rates and floods the banking system with money, it’s destroying the retirement dreams of several generations. The Employee Benefit Research Organization reports that 25-27% of baby boomers and Generation Xers who would have had adequate retirement income – under return assumptions based on historical averages – will run out of money if today’s low interest rates are permanent.
 
In short, we can’t sit around and hope for trickle-down crumbs from the financial sector. It all reminds me of AT&T’s “reach out and touch someone” campaign from the ’80s. Well, AT&T got too big for its britches and wanted to soften its image. The Justice Department broke it up shortly thereafter. Seems the monopoly was touching our wallets a bit too much.
 
How much more proof do we need? We are fed up with the Federal Reserve bailing out banks at the expense of everybody else. Seniors and savers have been sacrificed for the benefit of the banking system, and the Federal Reserve orchestrated it all.
 
We can’t afford any more of Janet Yellen’s so-called leadership. How about nominating someone who can keep her hands to herself and out of our wallets?
 
Whether Janet Yellen becomes the next Bernanke or not, it’s important to understand the impact that political decisions have on the financial futures of all investors. I’m definitely keeping track and will have a lot to say, I’m sure, as we get nearer to moving her in. Get all of my commentary on this and other items of interest to you by subscribing to our free weekly publication, Miller’s Money Weekly. You’ll be glad you did.
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