Tales from the FOMC Underground
Tales from the FOMC Underground by MN Gordon – Acting-Man
A Great Big Dud
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. [PT] – click to enlarge.
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] – click to enlarge.
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.