Tales from the FOMC Underground
Many of today’s economic troubles are due to a fantastic guess. That the wealth effect of inflated asset prices would stimulate demand in the economy.
The premise, as we understand it, was that as stock portfolios bubbled up investors would feel better about their lot in life. Some of them would feel so doggone good they’d go out and buy 72-inch flat screen televisions and brand-new electric cars with computerized dashboards on credit.
The Wilshire 5000 total market index vs. federal debt and real GDP (indexed, 1990=100) – mainly there is an ever wider gap between asset prices and the underlying economic output, and although federal debt has grown by leaps and bounds in the Bush-Obama era, it can’t hold a candle to asset price inflation either. If asset prices were an indication of how an economy is doing, we would have arrived in Utopia by now. Unfortunately that is not the case, as asset prices primarily reflect monetary inflation. Just consider the extreme example of Venezuela’s IBC General Index, which went from 40,000 to 120,000 points, while the economy contracted by 21% in real terms (officially, that is. If one were to apply private sector estimates of inflation, it would look a lot worse). It is certainly true that economic aggregates are benefiting from bubble conditions to some extent, but that is essentially phantom prosperity. If you burn all your furniture, your home will be warm – that this might be problematic only becomes glaringly obvious once all the furniture is gone, because then it will not only be cold, but there will be nothing left to sit on either. When the red line on this chart reverts to the mean (or the “other extreme”), there will be a lot of gnashing of teeth, as many of the mistakes made during the bubble era will be unmasked.
Before you know it, gross domestic product would go up – along with wages – and unemployment would go down. A self-sustaining economic boom would follow.
This fantastic guess, however, has proven to be a critical error in judgment. Asset prices bubbled up, flat screen televisions and new cars were bought in record numbers, and the unemployment rate – according to the government’s statistics – went down.
On the flip side, real GDP growth only marginally lurched upward, never eclipsing 3 percent during a calendar year, and the great big economic boom that was supposed to save the economy from itself turned out to be a great big dud.
At the same time, the general aura of the Federal Reserve Chair, once held up on high by Bob Woodward, has slipped into irreparable decline. No public relations exploit or press briefing can correct the damage. No policy adjustment or balance sheet modification can return the Fed to its former glory.
Quite frankly, the state of disrepute of present Fed Chair Janet Yellen appears to be that of a larcener, near comparable to a United States Congressman. The transition from maestro to scoundrel in just over a decade has been a sight to behold. ZIRP, QE, operation twist… you name it. There’s been one absurdity after another.
Consider how much attention is paid to central bankers and their policies these days, as exemplified by how many cartoons about them are drawn about them. In times past no-one thought much about central banks, they were considered boring. That has certainly changed after the introduction of the pure fiat money system in the early 70s and the massive bubbles and busts their policies have triggered in the wake of this event. [PT].
Sanitized for Public Consumption
No doubt, the Fed has brought their shame upon themselves. They’ve made their bed. But they don’t want to lay in it.
Earlier this week the June FOMC meeting minutes were released. According to the minutes, some FOMC members acknowledged that “equity prices were high when judged against standard valuation measures.” Some are even “concerned that subdued market volatility, coupled with a low equity premium, could lead to a buildup of risks to financial stability.”
Unfortunately, the minutes are prepared and provided for public consumption in a cleanly sanitized summary form. Names are not tied to individual discussion points. Moreover, name calling and vulgarities are omitted from the official record.
Perhaps, good manners and erudite etiquette have been preserved in the hallowed halls of an FOMC meeting. However, this is highly unlikely. Because over the last decade or so, in nearly all social dealings, both professional and public, good old-fashioned human decency has devolved to barroom decorum.
We hope they haven’t removed the laugh track… (this is from an article we posted in 2014) [PT].
Thus we’ve taken it upon ourselves to round out a brief excerpt of the FOMC discussion, adding back the warts to better demonstrate the meeting’s dialogue. What follows, in the best interest of reader edification, is a fictitious adaptation of true events that occurred at the June 14 FOMC meeting. Enjoy!
The most recent laugh track chart we could find is from 2011 – and it is telling as well. The mood turned very somber in November of that year. We will have to hunt for a more recent update. Presumably the laugh track continues to mimic the trend in the stock market.
Tales from the FOMC Underground
“What should we do?” began Yellen. “A decade of easy monetary policies has turned financial markets into a Las Vegas casino while the economy’s lazed around like my smelly house cats. What the heck was Bernanke thinking?”
“Hell, Janet,” remarked New York Fed President William Dudley. “He wasn’t thinking. He soiled his pantaloons and then he soiled them again.”
“So now we must clean up his stinky pile while he promotes his revisionist courage to act shtick. The reality is we must orchestrate a take-down of financial markets, and we must do it by year’s end.”
“Well, gawd damn Bill!” barked St. Louis Fed President James Bullard. “With the exception of Neel, the $700 billion dollar bailout boy, don’t you think we all know that?”
“Hey, now!” interjected Minneapolis Fed President Neel Kashkari. “Don’t blame me. I was just carrying out Hank Paulson’s will, right Bill? Saving our boys’ bacon back at Goldman so they could continue doing god’s work.”
“Besides Fish, it was you all who lined up behind Bernanke and tickled the poodle with his crazy QE experiment while I was busy chopping wood at Donner Pass and getting my fanny spanked in the California Governor’s race by retread Jerry Moonbeam Brown, of all people.”
“Fair enough,” continued Bullard. “The point is, taking down the stock market will cause an extreme upset to the economy’s applecart. The mobs will come after us with torches and pitchforks.”
“You see, the real trick is to do the dirty deed then disappear behind a fog of confusion. That’s what Greenspan would do. How can we pull that off?”
The maestro is still up to his old tricks
After a moment of silent contemplation, and a licked finger held up to the cool political winds drafting across the country…
“Eureka! We can pin it on President Donald J. Trump!” exclaimed Chicago Fed President Charles Evans. “Could our good fortune be any better? Not since Herbert C. Hoover has there been a more perfect scapegoat for an economic depression of the Fed’s making.”
“Hear, hear!” approved Yellen.
“Damn the economy,” they bellowed in harmony… minus Kashkari. “This one’s on Trump!”
Blaming ye olde Trump asteroid should be easy, since he has made the grievous mistake of taking credit for the run-up in the stock market on Twitter. Now he “owns” the bubble he previously denounced – at the very least he has become its co-owner. [PT]
“Bill, one last thing,” closed Yellen. “After the meeting, remember to give the public that shake n’ bake you dreamed up about crashing unemployment. We have to give off an air of being data dependent.”
“That misdirection should twist them up until NFL football starts. Shortly after that, our work will be done…”
“…and by the New Year, Congress and Joe public will be begging us to rescue the economy from the Fed’s… I mean… Trump’s disastrous economic program.”
[Ed. note: in the original version of this article Richard Fisher was used in the section about the fictional meeting. We replaced him with James Bullard, as Fisher has retired from the Fed. Besides, we always thought Fisher was one of the more thoughtful Fed presidents; inter alia he was one of the handful of FOMC members who regularly dissented from Ben Bernanke’s mad-cap money printing schemes]
Charts by St. Louis Fed, Bianco Research, Bloomberg
Chart and image captions by PT
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