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Fisher Outs Bubbles Ben: QE Was A Massive Intended Gift To The 1%

Dallas Fed President Richard Fisher has been a thoughtful dissenter all along on the lunacy of QE and the Fed’s massive bond buying spree. But now he has left nothing to the imagination, admitting that Bernanke’s objective all along was to aggressively levitate the price of financial assets and thereby confer massive windfall gains on the wealthy who own most of them. And all this was done in pursuit of some whacked-out, latter-day Keynesian version of “trickle down” economics, which, according to Bubbles Ben, was for the good of the average American—even if they didn’t appreciate it, comprehend it, demand it, or vote for it.

And that’s the heart of the problem. The average American does not need a monetary politburo comprised of 19 more or less self-selected dictators to decide what’s best for them economically. Once upon a time we had a far better decision mechanism called the free market and a wonderful financial market governor called the price of money and debt, aka market-based interest rates.  Under that regime, savers got an honest reward for deferring current consumption and spending; borrowers faced the true economic cost of debt to finance their projects; speculators faced the risk of sudden, sharp changes in the cost of carry when markets got frothy; and investors discovered in the market a valid “cap rate” against which to figure the return on their investments.

At the end of the day, markets cleared. When society’s pool of economic savings out of current income, as opposed to fiat credit created by the central bank, was insufficient to meet demand for borrowed funds, interest rates rose to induce more savings. At the same time, when investment booms and demand for borrowed funds by speculators got too frisky, interest rates peaked—and even soared into high double digits in the Wall Street call money market, which was the epicenter of capitalist speculation—and thereby rationed available savings and rolled back excess demands for borrowed funds.

Stated differently, the free market of millions of savers, borrowers, investors, intermediaries and speculators was balanced out and stabilized by the mechanism of prices. It thereby had a built-in correction against booms and bubbles—and one that showed no mercy to those who got in over their ski’s when periodic liquidations of financial excesses were rung out of the markets.

The essence of honest free markets for debt, money, equity and everything else that is traded is that there are no bailouts, no moral hazards, no central bank “puts” and safety nets under the stock market, and therefore no unearned windfalls to gamblers and speculators. By contrast, the Greenspan-Bernanke-Yellen style of Keynesian central banking is all about dishonest markets where all prices in the money, debt and related securities markets are rigged, pegged, manipulated and medicated by 12 fallible people—nowadays mostly academic PhDs— who rotate thru the FOMC.

But these monetary central planners operate from a core doctrine that is now obsolete, and which was always a dangerous trick on society based on “stimulating” credit-based expansion of GDP today by means of a one-time leveraging-up of household, business and government balance sheets. Needless to say, this Keynesian debt conjurors trick worked for a long-time because when the old-time financial orthodoxy of President Eisenhower and Fed Chairman William McChesney Martin succumbed to the so-called New Economics in the mid-1960′s, American balance sheets were still relatively clean after the great debt liquidations of the 1930s and, as I have demonstrated in “The Great Deformation”, during World War II, as well.

So from approximately 1970 thru the present a great orgy of consuming the borrowing capacity of America’s balance sheets ran riot, and presently Greenspan proclaimed himself the Maestro and Bernanke the Savior. But the numbers put the lie to that. During the century before 1970, the ratio of total credit market debt—household, business, financial and government—- to national income was steady at about 1.5X.  And with the exception of the early 1930s crash of the denominator (national income or GDP), the nation’s ‘leverage ratio” oscillated in a narrow band around that central tendency during periods of booms and bust, war and peace, and mostly during the times of growing prosperity in between. Call it the golden constant and it worked.

As late as 1981, the GDP was $3 trillion and credit market debt about $5 trillion–still reflecting the golden constant of national leverage. Then we had what can only be described as a rolling national LBO under which every sector of the economy totally used up it borrowing capacity and in the process finally ran up against the hard stop of “peak debt”.

Specifically, the “bubble blind” PhD’s who ran the Fed could not see that by 2007 the US economy was consuming $7 of new credit for each dollar of added GDP. In fact, scour the fabled transcripts of the FOMC meetings and there is hardly an acknowledgement that credit market debt that year expanded by $4.5 trillion and that money GDP grew by the niggardly sum of $700 billion.  Did this ship of fools not understand the laws of compound arithmetic? Or that at 2007s rate of up-take, credit market debt outstanding would grow from $50 trillion to the absurd level of $500 trillion within only a few decades!

More importantly, did they not understand that the Keynesian game of borrowing extra GDP today at the expense of deflationary debt burdens tomorrow was nearing its limit?  Self-evidently, they did not. Washington’s so-called rescue of the US economy after the financial crisis consisted of nothing more than a central bank enabled drawdown of the last available balance sheet—that of Uncle Sam. So here we are today with credit market debt of $59 trillion on $17 trillion of money GDP, meaning that our rolling national LBO has reached its end game.  At a national leverage ratio of 3.5X the US economy lumbers under two extra turns of debt relative to the stable, sustainable and healthy 1.5X ratio that prevailed before the Keynesian conjurer’s trick became national policy.

Read the rest of the post at David Stockman’s Contra Corner. View original post.

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