The Underlying Conceit of the Federal Reserve

Is the US stock market finally rolling over? Has the magic spell of QE finally been broken? Maybe. Our ‘Crash Alert’ flag, tattered and torn, still flies – just in case.

Money talks. BS walks.

Walking through the Fed for the last few years has been a lot of BS about ‘transparency’ and ‘forward guidance’.

We’ve even seen articles in the press claiming the policy of ‘forward guidance’ was worthy of a Nobel Prize…and how it represents a new breakthrough in central banking theory and practice.

Supposedly, all the Fed had to do was tell the market what it intended to do. That should be enough. Then investors and business could react to the ‘guidance’ as though it had been delivered to them by Moses on stone tablets.

The US Federal Reserve, in its omniscience, would know precisely what interest rates the US economy would need, not only now, but even six months ahead!

In other words, the the Fed expected us to believe it could know two unknowable things at once – our economic future and the interest rate needed by investors, borrowers and lenders to improve that economic future.

Ben Bernanke first mentioned that the Fed might start to taper its bond buying later this year back in May. Children went back to school. Fall arrived. The leaves started to turn color. Then last week the Fed announced that it had decided that the US economy is not ready for tapering after all.

What? The Federal Reserve didn’t know what shape the US economy would be in after all?

So what was all that stuff about forward guidance? Turns out, it wasn’t guidance at all. It was folderol. The old bumble, stumble, waffle and cheat.

If these guys have PhDs in economics, it makes us wonder. Either PhDs are given out like business cards. Or all economics is claptrap. Maybe both!

Having guided the market towards tapering, what did they think? Either the market had taken them seriously…and had already made its peace with slowing QE. Or the market did not take the Fed seriously…and was waiting to see what it would really do.

Either way, the Fed still had the same problem in front of it. It had to do something. Either taper or not taper. And it had no clue what to do.

As it turned out, the Fed decided not to taper. This made a nonsense of its operating doctrine, undermined its credibility and left investors with the impression – correct! – that the Fed was just making it up as it went along.

What a marvelous time to be alive…to read the newspapers…and to watch slapstick economics at work. All those PhDs. All those theories. All that data. All those formulae. And all of it complete garbage.

The underlying conceit of the Federal Reserve is that it can make the economy better. No theory has ever proposed making this a plausible proposition on any level.

Economists don’t know what a ‘better’ economy is. Is a better economy one that is spending…or saving?

Is it one in which people are all working…or in which they are enjoying their leisure?

Is it better for prices to be stable…or falling?

How much debt should people have?

They don’t know.

Hey, check out these headlines compiled yesterday by colleague Justice Litle:

• Millionaire optimism hits 9 1/2-year high America’s Toilet Turnaround: Manufacturing in the U.S. Rises
• Household Net Worth Up on Rising Stocks, Home Prices – Real Time Economics
• Home Prices Rising at Fastest Pace Since Start of Bubble – Real Time Economics
• Sales of New U.S. Homes Rose in August Following July Plunge

Sounds pretty good? Who knows?

Are more expensive houses a good thing?

Is it ‘better’ for the US to make its own toilets?

And millionaires? On the evidence, the last time they were this optimistic was at the beginning of the most disappointing decade since the Great Depression.

The feds pretend they know it all. Anyone can read their public comments and realize they are just humming and faking it.

Here’s the inconvenient truth: The Feds don’t know how to make an economy better. But they know how to make it better for themselves. And that is an economy that is delusional and largely dysfunctional.

Why so?

It’s all about money, power and status. Wealth that matters is relative, not absolute. People don’t necessarily want more; but they definitely want more than their friends and neighbors.

The feds get wealth, power and status by taking them, not by earning them. And it is easier to take them from delusional people who believe they are making headway too.

But the masses shouldn’t really make progress…because that would make them wealthier and less dependent.

The feds prefer a population that is poor, dependent, ignorant and docile. (That alone explains most of what people see as ‘failed’ government programs. They’re not failures at all from the feds’ perspective.)

QE doesn’t work? Ha! You’ve missed the point…

It’s a great success. You’ve just got to be delusional to believe in it.

Because you get poorer the longer it goes on. And you become more dependent as more and more of the economy’s resources come under the feds’ control.

Taper? Not if the Federal Reserve can avoid it!


Bill Bonner
for The Daily Reckoning Australia

Join Markets and Money on Google+

From the Archives…

How Long Can the Government Charade Continue?
20-09-2013 – Vern Gowdie

The End of Australia’s Boom Economy
19-09-2013 – Satyajit Das

Super… Who’s Going to Buy Your Shares When You Retire?
18-09-2013 – Nick Hubble

Australian Banks in the Firing Line
17-09-2013 – Nick Hubble

Yellen at Stocks to go Up
16-09-2013 – Nick Hubble

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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