Just In - No Taper!

[don]

Jesse's essay seemed more appropriate for this sacred moment by Ben than his actual announcement . . .

What Is a 'Credibility Trap'

A credibility trap is when the lies and the corruption become so widespread and embedded in a system that they become self-sustaining to the point of moral bankruptcy.

It is when almost half of all Congressmen remain in the Capitol after leaving office so that they can make many millions per year peddling influence and crafting loopholes for corporations who are offering huge sums to gain advantage through manipulating the tax and regulatory laws, or eliminating them altogether.

It is when politicians leave office voluntarily once they have gained enough name recognition and contacts so they can cash in.

It is when a ruling class forms, and becomes insulated from their constituents. It begins to act for itself, paying lip service to their oaths and obligations, with no consequence or shame.

It is when the government by example breeds lawlessness.

It is when officials from the Executive Branch move back and forth through a revolving door from corporate institutions in order to make the big payday for their public 'service.'

It is when the truth is led down a blind alley of greed and strangled by expediency. It is when lying and cheating is acceptable, even laudatory, if you are good at it. And goodness is measured in money.

It is when corporations openly pay large bonuses to their executives who win an influential job in government in order to further the corporation's influence and interests.

It is when there is more moral hazard in not taking the money, than there is in taking it, and even getting caught at it, as long as you have served your masters well. If you do not take the money, you are a risk, you are not reliable. You may have a conscience, and you do not have the additional layer of loyalty that comes from complicity. Morality is bad for business. And good people are contemptible.

It is when the only tragedy is not to be in the one percent.

If you wish to see a fine example of this type of systemic corruption, watch the movie Serpico, or a good expose of a banana republic or organized crime, or read the book This Town by Mark Leibovich.

Groupthink rationalizes it, and the fear of ostracism and missing the big payday keeps everyone in line. And once you are part of this type of system, it owns you, whether you are a politician, a journalist, an economist, or a parasitic enabler. If you are in business, not to join in is a competitive disadvantage. Bad behaviour drives out the good, and banality unleashing the darkest parts of human nature is in the ascendant.

A credibility trap is when both parties pledges themselves to the powerful, monied interests, thereby putting the business of business ahead of the business of the people. The society becomes out of balance, and cannot bring itself to right because its leaders have lost their way, and corrupt all who come near them.

It always ends, often from external forces, and too often badly. But while the money is still flowing the band plays on.

"A credibility trap is a condition wherein the financial, political and informational functions of a society have been compromised by corruption and fraud, so that the leadership cannot effectively reform, or even honestly address, the problems of that system without impairing and implicating, at least incidentally, a broad swath of the power structure, including themselves.

The status quo tolerates the corruption and the fraud because they have profited at least indirectly from it, and would like to continue to do so. Even the impulse to reform within the power structure is susceptible to various forms of soft blackmail and coercion by the system that maintains and rewards.

And so a failed policy and its support system become self-sustaining, long after it is seen by objective observers to have failed. In its failure it is counterproductive, and an impediment to recovery in the real economy. Admitting failure is not an option for the thought leaders who receive their power from that system.

The continuity of the structural hierarchy must therefore be maintained at all costs, even to the point of becoming a painfully obvious, organized hypocrisy.

http://jessescrossroadscafe.blogspot.com/

[Mega]

Re: Just In - No Taper!

Yep, all day i thought they would try to without doing it, but in the end they had to put their hands up!
Gold & Silver have left the building!
Lets hope they keep going!

As Jim Rickards said yesterday "....the FED needs inflation".

So, what next?
Mike

[Mega]

Re: Just In - No Taper!

Jeremy Warner
No taper: the Fed loses its nerve


By Jeremy Warner Economics Last updated: September 18th, 2013

Ha! The US Federal Reserve has lost its nerve and left the punch bowl at the party table. The markets were genuinely, and pleasantly, surprised by this apparent act of largesse, even though nobody was expecting anymore than a marginal taper in the first place. The S & P 500 surged to a new record, and there was a collective sigh of relief. The printing press will be kept going after all. QE may have lost much of its ability to stimulate genuine growth, but it sure does seem to put a rocket under asset prices.

Actually, this should not have come as much of a surprise as it seems to. Markets tend to front run events, so even talk of a taper had caused market interest rates to rise quite significantly, and quite probably by more than the Fed had anticipated. By merely raising the subject, the Fed had therefore brought about a not insubstantial tightening of monetary conditions.

Tonight's statement is, I guess, an attempt to undo the damage. From top to bottom, it was extraordinarily dovish, with several references to the headwinds expected from US fiscal tightening and continued weakness in the labour market. The Fed has apparently decided that the risks of choking off the recovery are greater than stoking another asset bubble. The St Augustinian principle remains intact; please make me chaste, but not yet. But if not now, when? There was little guidance on this, other than to reiterate that not until the unemployment rate falls to 6.5 per cent will policymakers consider raising interest rates.

There was perhaps another influence too, which the statement didn't mention. While everyone has been focusing on President Obama's apparent humiliation at the hands of the Russians over Syria, a new standoff has been developing on Capitol Hill over the public finances.

Yes, the wretched fiscal cliff is back. Next year's budget should theoretically be agreed by the end of this month, but there is absolutely no sign of it happening. In the past, there's always been a last minute fudge, together with a cooling off period, but it looks more serious this time. A federal government shutdown might actually happen, sparking a period of economic mayhem. Presumably everyone will eventually come to their senses and open the parachute. Even so, there is scope for considerable damage in the meantime, bringing the still quite fragile economic recovery to a juddering halt.

Monetary tightening on top could well have proved deadly.

So for now, the Fed is holding back, even though it must know that QE has become little more than a confidence trick in so far as the real economy is concerned. It keeps markets happy, and asset prices growing, but it does nothing to address the underlying fault lines in the US and global economies, and indeed in the long term threatens only to make them a great deal worse.

The can has been kicked further down the road, but it's still there, and the longer this failure to face up to reality persists, the more painful the eventual denouement will be.

[Mega]

Re: Just In - No Taper!

Fed recoils from 1937 tightening error as jobs evaporate

The American economy has shed 347,000 jobs over the past two months, roughly comparable with the rate of loss seen during the Great Recession. It is remarkable that the US Federal Reserve should even have been thinking of phasing out life-support in such circumstances.


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It would be a grave error for the Fed to taper bond purchases at all at this juncture Photo: Reuters



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US labour force participation rate (percentage)



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Weakening US money supply













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By Ambrose Evans-Pritchard

9:00PM BST 18 Sep 2013
11 Comments


The Fed's tough talk has already led to a 140 basis point rise in US 10-year Treasury yields, the benchmark price money for US mortgages and for the world (ex-China). It might as well have raised rates six times.

The shock decision on Wednesday night to put off tapering bond purchases is a recognition of what should have been obvious.

Rising mortgage costs and the "tightening of financial conditions" could slow growth, it said. Indeed.

The net loss of jobs over the summer months has been entirely among men, mostly aged 25 to 54 and university educated. The cohort aged over 55 has been growing, so this is not happening because baby boomers are retiring early and happy to grow cantaloupes in Arkansas, or to play golf at Torrey Pines.


The labour "participation rate" dropped to 63.2pc in July, the lowest level since the late 1970s. The rate for men is at an all-time low. The unemployment rate has been falling, but chiefly because so many people are giving up hope and dropping off the rolls.


Some Fed governors seem to want to wash their hands of this, latching on to theories that the problem is "structural": due to evolving technology, or a "skills mismatch", or that catch-all concept "demographics". No doubt this is half true, but such claims were made in the early 1980s when jobs were scarce. The unemployed were decried as "shirkers" by the Chicago Tribune in the 1930s.

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^{US labour force participation rate (percentage)}
Fortunately the hawks did not prevail. It is likely that vice-chair Janet Yellen played a key role, insisting that the jobless rate is nowhere near the "NAIRU" (non-accelerating inflation rate of unemployment) inflexion point, the level at which inflation starts to accelerate, the gauge she tracks as her lodestar.

Labour specialists say chronic lack of demand in the US is the real villain is this jobs slump. "The problem is not that the labour market is under performing; it is that the recovery has been very slow," says Stanford's Edward Lazear. A record 20.2pc of US households are now on food stamps. That is how they survive.
The economic growth rate over the past three quarters has been 0.1pc, 1.1pc and 2.5pc. This is below the Fed's own "stall speed" indicator - 2pc averaged over two quarters.

The economy has weathered the most draconian fiscal tightening (2.5pc of GDP this year) since the end of the Korean War remarkably well, helped by shale gas, but it is not yet at "escape velocity". The fiscal squeeze goes on.
The International Monetary Fund has advised Washington to go easy, citing an "output gap" of 4.6pc of GDP. The Dallas Fed's measure of core inflation was 1.2pc in July. Growth of the M1 money supply is the slowest in two years, while growth of broad M3 has slowed to the point where it could turn negative without QE. The alleged inflation threat is a fiction of febrile imaginations.

It would be a grave error for the Fed to taper bond purchases at all at this juncture, given the risks for Brazil, India, Turkey, South Africa, Indonesia, Ukraine and others already facing a turn in the credit cycle, and given the danger of another eurozone debt spasm, as happened at the end of QE1 and the end of QE2.

The Bernanke Fed has twice misjudged the global effects of premature tightening already, each time precipitating a credit and stock market crash within weeks, and each time forcing the Fed to capitulate. Third time lucky?

^{Weakening US money supply}
One suspects that some hawks want to end QE for reasons that have nothing to do with jobs or inflation. A paper by former Fed governor Frederic Mishkin, "Crunch Time", warns that the Fed will struggle to extract itself from QE if it delays until 2014. It may drown from losses on its $3.6 trillion of bond holdings as yields rise.

Above all, their real motive seems to be fear that QE is stoking another asset bubble, and that the risk of this game now outweighs the rewards. This is a legitimate worry. As the Telegraph reported earlier this week, the Bank for International Settlement's former guru William White says the global debt structure is more dangerous than ever.

“This looks like to me like 2007 all over again, but even worse. All the previous imbalances are still there. Total public and private debt levels are 30pc higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets,” he said.

Lest we forget, it was Mr White who saw the debacle of 2008-2009 coming with crystal clarity. The latest dash for subordinated debt, "leveraged loans" (I kid you not), "cove-lite" lending, "CoCos", and so on, are all too like those infamous "CDOs" and "CLOs" last time.

The question is whether the public welfare is best served by popping the bubble and allowing Austro-liquidation to purge the toxins, or whether this would be ruinously destructive. Many readers think it is past time to dynamite this edifice. I have much sympathy with this view. Yet in the end, I prefer magic.

The root of our global crisis is the $10 trillion reserve accumulation by the emerging powers, massive over-investment in China, and extreme levels of inequality within the West as the "Gini Coefficient" goes off the charts. The combined effect is to create excess capital, and lack of consumption, pushing the global savings rate to a record 25pc. This chronic disorder keeps blocking economic recovery. It is embedded in the structure of globalisation.

Be that as it may, if QE as conducted is causing asset bubbles, then we should deploy central bank stimulus more creatively, should it prove necessary. We know how to do it. The methods were pioneered by Takahashi Korekiyo, who pulled Japan out of the Great Depression early in the 1930s. His brilliant feat is now the model for what Japan is (covertly) doing again under Abenomics.

Takahashi turned the Bank of Japan into an arm of the treasury - "fiscal dominance" - and ordered it to finance the budget deficit. You can deploy QE in any way you want. It could be used to build houses, injecting the money into the veins of the economy, instead of the veins of hedge funds. There is no reason why it cannot be administered by an independent Fed or Bank of England, choosing the calibration level as they see fit.

Lord Turner, the former chief of the Financial Services Authority, is tentatively pushing this idea, asking what is to stop the Bank of England writing off its Gilt portfolio, financing "prior" deficits. This could be done with a flick of a switch, reducing Britain's sovereign debt to a manageable 67pc of GDP at a stroke. The US could do much the same.
Pedants will scream. The central bank priesthood will talk of Hellfire and damnation. But if you can conjure away this debt without inflation, the objections fall away. For the sake of decorum, the Gilts could be converted into zero-coupon bonds with no expiry date. The certificates could be burned one Sunday, during a World Cup Final.

Such unorthodox action might even be desirable in strict monetary policy terms, making it easier to restore interest rates to normal levels earlier in the recovery cycle, to the benefit of savers. It is a victimless crime, or no crime at all.
Or if we want to be really radical, we can dust off the 1936 Chicago Plan, lately revived by the IMF's Jaromir Benes and Micheal Kumhof. They argue for a return to the pre-Stuart system, before the English Free Coinage Act of 1666. This would strip banks of their power to create money out of thin air, returning to state-created money.

The IMF paper argues that if lenders are forced to put up 100pc reserve backing for deposits, this could - by complex legerdemain - eliminate all public debt in the US, UK, Germany, France and perhaps even Japan.

My point is not to endorse Lord Turner's plan, or the Chicago plan, or any other particular plan, but simply to say that fear of asset bubbles is not a good reason to shut off monetary stimulus prematurely, if the economy still needs it.

Whether the Fed or the US policy establishment is willing to think so far out of the box remains to be seen. At least it has backed away from a repeat of the great 1937 error of premature tightening. There is slightly less risk that it will tip us back into another leg of the Long Slump. We have dodged a bullet.

[DRumsfeld2000]

Re: Just In - No Taper!

From the article:-
''Lord Turner, the former chief of the Financial Services Authority, is tentatively pushing this idea, asking what is to stop the Bank of England writing off its Gilt portfolio, financing "prior" deficits. This could be done with a flick of a switch, reducing Britain's sovereign debt to a manageable 67pc of GDP at a stroke. The US could do much the same.
Pedants will scream. The central bank priesthood will talk of Hellfire and damnation. But if you can conjure away this debt without inflation, the objections fall away. For the sake of decorum, the Gilts could be converted into zero-coupon bonds with no expiry date. The certificates could be burned one Sunday, during a World Cup Final.

Such unorthodox action might even be desirable in strict monetary policy terms, making it easier to restore interest rates to normal levels earlier in the recovery cycle, to the benefit of savers. It is a victimless crime, or no crime at all."

Victimless crime? How can this be done without consequences?

Can someone explain what he is on about?

[Chris]

Re: Just In - No Taper!

Savers are always considered victimless by a government hell bent on inflation. Who else are the owners of these gilts who will no longer be receiving their coupon payments?

Perhaps he is talking about writing off the gilts owned by the Bank of England. In there was no consequence to writing them off then why did they purchase them in the first place?

[Chris Coles]

Re: Just In - No Taper!

Always nice to see the iTulip community pulling together. I just put this up on The Times in London.

Fed casts doubt over US revival by keeping the taps turned on

There are those of us on the outside of this debate, (in my case, I am a member of the Shadow Fed committee of the iTulip community), that have long argued that the unemployment figures being publicly paraded have been manipulated; that the true rate of unemployment is in the order of 19% with youth unemployment in the region of 50%, as high as in some European nations. So the first thing to note is that major trading organisations on Wall Street do not seem to have researched these facts; or are deliberately ignoring them.

Be that as it may, my view is the FED has at last started to come to terms with the true nature of their dilemma; they are caught between a rock and a hard place. Trapped by their previous decision to support a bankrupt financial system; rather than letting true free market forces remove the systematic problem via classic bankruptcy.

Now they know that if they remove QE, market forces will take them right back to the beginning; facing complete collapse. Well may they now hesitate.

http://www.thetimes.co.uk/tto/busine...cle3872969.ece

[jpatter666]

Re: Just In - No Taper!

Always nice to see the iTulip community pulling together. I just put this up on The Times in London.

Fed casts doubt over US revival by keeping the taps turned on

There are those of us on the outside of this debate, (in my case, I am a member of the Shadow Fed committee of the iTulip community), that have long argued that the unemployment figures being publicly paraded have been manipulated; that the true rate of unemployment is in the order of 19% with youth unemployment in the region of 50%, as high as in some European nations. So the first thing to note is that major trading organisations on Wall Street do not seem to have researched these facts; or are deliberately ignoring them.

Be that as it may, my view is the FED has at last started to come to terms with the true nature of their dilemma; they are caught between a rock and a hard place. Trapped by their previous decision to support a bankrupt financial system; rather than letting true free market forces remove the systematic problem via classic bankruptcy.

Now they know that if they remove QE, market forces will take them right back to the beginning; facing complete collapse. Well may they now hesitate.

http://www.thetimes.co.uk/tto/busine...cle3872969.ece

Unfortunately, the Fed has arrived at the "damned if you do, damned if you don't" point.

They choose damned if you do, so at the show trial they can claim they were trying to do *something*. :-P

[Chris Coles]

Re: Just In - No Taper!

Unfortunately, the Fed has arrived at the "damned if you do, damned if you don't" point.

They choose damned if you do, so at the show trial they can claim they were trying to do *something*. :-P

A fair point except that as I see it, they are classicly caught in the headlights and have locked up, unable to move a muscle out of fear. Instead, they make no decision whatever.

[shiny!]

Re: Just In - No Taper!

Unfortunately, the Fed has arrived at the "damned if you do, damned if you don't" point.

They choose damned if you do, so at the show trial they can claim they were trying to do *something*. :-P

A fair point except that as I see it, they are classicly caught in the headlights and have locked up, unable to move a muscle out of fear. Instead, they make no decision whatever.

You both make sense, but what I'm wondering is now that we're at this point, how long until it really seizes up/blows up? Martin Armstrong puts a sovereign debt crisis for the U.S. at Sept. 30, 2015.

[DSpencer]

Re: Just In - No Taper!

You both make sense, but what I'm wondering is now that we're at this point, how long until it really seizes up/blows up? Martin Armstrong puts a sovereign debt crisis for the U.S. at Sept. 30, 2015.

These type of pinpoint predictions remind me of Nostradamus, the Mayans or various religions that are continuously preparing for the end of the world.

[Chris Coles]

Re: Just In - No Taper!

You both make sense, but what I'm wondering is now that we're at this point, how long until it really seizes up/blows up? Martin Armstrong puts a sovereign debt crisis for the U.S. at Sept. 30, 2015.

We may be at that point where the slightest thing will trigger a collapse without a moments notice.

[Chris Coles]

Re: Just In - No Taper!

These type of pinpoint predictions remind me of Nostradamus, the Mayans or various religions that are continuously preparing for the end of the world.

Come on now, the whole idea of the debates here on iTulip has been to work through the thought process of a forecast of collapse made by EJ some years ago. All we can do is continue the debate. There has to be an end point; where we move from a period of disruption into a new period of stability. Surely no one expects that transition to be smooth?

[GRG55]

Re: Just In - No Taper!

Unfortunately, the Fed has arrived at the "damned if you do, damned if you don't" point.

They choose damned if you do, so at the show trial they can claim they were trying to do *something*. :-P

The Fed has been in a "zero degrees of freedom" policy trap for quite some time now...each removal of a prior QE has been followed by the invocation of another, named with a number one larger than the last. The latest round of QE has been dubbed "QE Infinity" by some commentators.

For some months I have been convinced that the Fed would come to its senses and start to taper, and the US economy would be strong enough (albeit, barely) to give it the cover it needed to do so. Others, including EJ, have been equally convinced that the economic indicators would not allow the Fed to act. I think the main reason I have been wrong is too close an association with the petroleum industry, which is the one sector in the US economy that is doing very, very well (other than the generous bonus "God's work" the bankers are doing, of course)...capital flows into upstream oil and gas have been relentless, wages have spiraled upwards, skilled labor is in short supply and the spin off into the economies of States such as Texas and North Dakota, and manufacturing sectors such as steel tubulars and pipe has been dramatic.

Nevertheless the Fed didn't act, and EJ and others who expected the Fed to stay the course have been proved correct.

In his 1954 book "The Great Crash, 1929", author and economist John Kenneth Galbraith wrote:

"Action to break up a boom must always be weighed against the chance that it will cause unemployment at a politically inopportune moment. Booms, it must be noted, are not stopped until after they have started. And after they have started the action will always look, as it did to the frightened men in the Federal Reserve Board in February 1929, as a decision in favor of immediate as against ultimate death. As we have seen, the immediate death not only has the disadvantage of being immediate but of identifying the executioner.

The market will not go on a speculative rampage without some rationalization. But during any future boom some newly rediscovered virtuosity of the free enterprise system will be cited. It will be pointed out that people are justified in paying the present prices - indeed almost any price - to have an equity position in the system. Among the first to accept these rationalizations will be some of those responsible for invoking the controls. They will say firmly that controls are not needed."

Seems we are back to a situation of "frightened men (and women) in the Federal Reserve Board", who do not wish to be seen to be responsible for any of the consequences of their collective actions.

And all the while Wall Street and parts of the Administration and Congress are saying firmly "that controls are not needed"...

[jk]

Re: Just In - No Taper!

You both make sense, but what I'm wondering is now that we're at this point, how long until it really seizes up/blows up? Martin Armstrong puts a sovereign debt crisis for the U.S. at Sept. 30, 2015.

that gives us 2 more years to PARTY!