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The Economist's Sell Signal

Stock-Markets / Inflation Nov 30, 2013 - 12:29 PM GMT

By: Fred_Sheehan

Stock-Markets

The disintegration of central banking shifted to overdrive in November. The Senate Banking Committee's listless accreditation of Janet Yellen as next Fed chairman was not a surprise, but it was notable that vigorous critics of Chairman Bernanke, such as Senator Bob Corker, dozed through the hearing. When the bubble of all bubbles bursts, and the Senate and Congressional oversight committees fulminate at central bankers, it will be those politicians who should sit in the dock. They could have acted. Instead, the Senate is whisking Bernanke-Squared to the throne, as quickly and quietly as possible.


Yellen is very much the academic economist: in complete control of what cannot be known (macroeconomic silliness), setting world policy on such, and with no knowledge of the specific. She explained before the Committee, that stock prices are O.K. ("I don't see at this point, in major sectors of asset prices, misalignments.") She is not concerned about "bubble-like conditions, since "price-to-equity ratios" are benign. As distant observers of the stock market know, it is the "price-to-earnings ratio" she was supposed to memorize before the hearing.

The (Always) Brilliant Larry Summers, another macroeconomist who has never had an original thought in his life, blurted before the IMF on November 8, 2013, that conventional macroeconomic thinking leaves us in a very serious problem. It is not startling; though it would have been surprising at some point in the past, for this master cylinder of central planning, after admitting his generation of economists has failed, to not then offer his apologies and announce his permanent departure to Tierra del Fuego.

Instead, Summers continued: "The underlying problem may be there forever," which, in the world of Summers, Bernanke, Yellen, means the period until they are run out of town and sentenced to a prison cell, with their mouths taped, while Alan Greenspan sits on the other side of the iron bars, lamenting the decline of economists' prescriptions since his departure.

Summers (before the IMF) offered advice that is now conventional among conventional macroeconomists. He advises the bureaucratic class to impose a negative 2% or 3% interest rate on the 99% of Americans competing in the Hunger Games.

It seems like yesterday when convention held that savers earned interest, and, no inflation (of prices) was the goal. This was the balance between savers being paid to lend their money, and borrowers paid interest to use the money. The rate paid was the meeting of minds among lenders and borrowers, a free forum of expression to which, someday, we shall return.

For now, American university professors control markets. The route to the apathetic acceptance of redistribution and confiscation from the public has been laid by a careful and gradual brain washing.

The Economist was neither careful nor gradual with a front-cover story in its November 9, 2013, issue: "The Perils of Falling Inflation." The lead story warns: "The biggest problem facing the rich world's central banks today is that inflation is too low." (This "rich world" foolishness will not be addressed here.)

It is too low, for reasons not stated in the Economist. Inflation is too low, remember, for the "rich world's central banks," (not for us), because a financial economy needs larger quantities of money, credit, and accounting tomfoolery to prevent its collapse. The rich world's economy not only needs more finance, it demands an expanding base of finance, growing at an exponential rate, to remain whole. In 2000 and 2007, it was merely a slowing in the growth rate of credit creation that was followed by the plunge.

The various gimmicks are long in the tooth, so: "We need lower credit standards, a weaker banking system, and credit needs to be extended to the bankrupt to prevent liquidation of the Bank of England."

The Economist did not say that, though the statement is part-and-parcel to perfidious Albion's calls for the British people to spend and borrow themselves into penury. In the past three months, Bank of England Governor Mark Carney announced banks could cut their cash reserves "to support economic growth;" banks could now submit "any identifiable collateral" and it would be welcomed at the Bank of England; and the economic "recovery" is, quoting Carney, "still reliant on rising home prices and consumer demand." The result: interest-only mortgages: "borrowers, expecting to make the majority of the return from rising property prices" (Andy Lees, The Macro Strategy Partnership News Daily, November 19, 2013) is all that's left between the former Bank of Canada governor and a one-way ticket back to Banff. This is a desperate strategy by Carney.

Back to what the Economist did say; it was a whopper: "central banks' inflation target [is] 2%" and this has been "the cornerstone of central banking for decades." This is an attempt to erase history. Obliterating the past has been essential to the rise of Bernanke and Yellen. Their "2% inflation target victory" was described in the following links, written at the beginning of 2012, at the time the Fed asserted this new cornerstone of central banking: (see "Presidential Rivals: Drop the.....this was on January 12, 2012", "A Quartet of Fed Chairmen.... This was on January 20, 2012" and "Transparency has Landed..." January 29, 2012").

A year earlier, in December 2010, the Federal Reserve was handcuffed, since "an inflation target" of anything other than zero percent was still an absurd notion, other than among professors who had gone in for central planning. Bill King, in the December 14, 2010, "King Report" compared the past two communiqués by the Fed after their November 3, 2010, and the December 13, 2010, FOMC meetings. The December 13, 2010, communiqué claimed "measures of underlying inflation have tended downwards." This assertion was (in Bill King's words) to "deflect political and public outrage at QE 2.0." King went on: "If the Fed had to acknowledge there is inflation, their world is destroyed. QE would have to be scuttled." (The Fed and Bernanke go on about inflation "expectations" and try to ignore inflation but they are still faced with a public of 300 million that cares what it is paying today.)

The consumer price index (CPI-U) rose 0.1% in November 2010; it had increased 1.1% over the past 12 months. The Fed nearly had to drop its money-printing, road-to-ruin because inflation was so high. "The cornerstone of central banking" was established over the next twelve months, culminating in the universally accepted practice of central banks' non-stop, money-printing and inflation of credit, stocks, corporate profits, buybacks, mergers, PIK bonds, rehypothecated collateral, and speculators' fortunes. Particularly piquant have been the booming auction-house, luxury-goods, and casino stocks.

The Economist's article was unbalanced, sloppy, and abandoned by the starting team: much like the world's markets. A suggestion for current asset allocation: where would you want your money today if you knew interest rates will rise by 4.0% tomorrow?

By Frederick Sheehan

See his blog at www.aucontrarian.com

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Frederick Sheehan Archive

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