Dow up 75 points yesterday. Gold up $26 an ounce.
Stock investors are still acting as though Janet Yellen will be good for the economy… or at least good for stock prices.
Gold investors must think so too.
But will she be?
Yellen has no business or investment experience. Her entire career has been spent in academia and in public policy institutions. She has never started a business or had a job in the private sector.
Does she have any idea how an economy functions? Not on the evidence…
In 2005, she described the developing housing bubble as a “good-sized bump in the road.” Was she worried about it? Apparently not. “The economy ought to be able to absorb the shock,” she claimed.
But how would she know?
And when, two years later, the economy hit the “bump” it turned out she didn’t know anything. The economy wasn’t able to absorb the shock at all. Instead, the wheels flew off… and the economy went into a ditch.
And now, it’s late October and Yellen will soon be running the biggest, most powerful banking cartel the world has ever seen. Good luck to us all!
The Really Big Picture
The days are crisping up in Maryland. Here in Florida, it’s still summer.
We’ve come back to Florida to give a speech about writing. What can we say about it? Only that writing is easy; it’s thinking that’s hard.
We sat in the airport terminal in Baltimore. One man was reading a novel. Another was watching TV. Another sat down beside us and began playing a game on his iPhone. A woman was reading Woman’s Day magazine. Others talked on their phones.
Are we the only ones here who are thinking about the Fed’s interest rate policy? We’re clearly the dumbbell in this group. Most people have better things to do.
But now we’re going to go back to thinking about how the Fed and the dollar fit into the general scheme of things – the really big picture, looking back 10,000 years and beyond.
The critical change came around 5,000 years ago. Little by little, man became “civilized.” We use the word cautiously. It is like a hand-grenade without a pin. It could blow up on us at any moment.
What is civilization, anyway? Is it a good thing? A bad thing? Who’s really civilized, and who’s not? No matter what you say, you are bound to offend someone with deep prejudices on the subject…
But what the heck? Damn the torpedoes… full speed ahead!
A Civilized Dawn
Civilization is different from barbarism. Most anthropologists, archeologists and philosophers focus on the wrong things – art, culture and technology, for example. They miss the key differences – money, matrimony and the mandates that people follow.
People did not suddenly awake to a civilized dawn. Instead, the progress from barbarism to civilization came in fits and starts, with much backing up and many detours.
Don’t bother to tell us the Germans were supposed to be civilized… yet they exterminated more than a million at Auschwitz… or that Americans are supposed to be civilized, but are sending drones to kill people they’ve never met. Even the most civilized peoples do uncivilized things. And most peoples, no matter how civilized they have become, still maintain some archaic, barbaric habits and institutions.
As civilization became more complex, the rules grew simpler. Typically, people became monogamous, monotheist and monetarist.
You can see this progress in the Bible. The Old Testament is full of war… and many rules for how people are to get along with one another. In the New Testament, Jesus proposes only one rule, which leaves little place for making war: Do unto others as you would have them do unto you.
In pre-civilized days a man might have as many wives and concubines as he could manage. Civilized, modern men typically have only one. (And that is more than enough for many men.)
In pre-civilized days, commercial transactions were difficult and complex – usually involving a credit-based system which left obligations stretching forward into the future, often unresolved over many generations. Civilized man developed modern money – typically gold – which made it much easier to settle up and move on.
But the most profound difference was that barbaric people used force and violence to get what they wanted; civilized transactions are based on mutual consent and cooperation.
But wait. Where does that leave the dollar and the Fed?
Does the Fed allow willing buyers and sellers to set interest rates as they choose? Or does it force the issue… pushing interest rates around as though they were travelers in the airport security line?
Does the Fed permit investors to discover asset prices without interference? Or does it try to fix prices, claiming that it knows better than the rest of the world put together?
We know that the economy of the Soviet Union, driven by brute force, was a disaster. How do you think the economy of the US – heavily persuaded by the padded force of the Yellen-led Fed – will fare?
Is today’s Fed a modern, civilized institution? Or an archaic throw-back to the past?
And what about the dollar itself? Is it a form of modern money… or a barbarous relic, depending on the police power of the state to give it value?
More to come…
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
At Bonner & Partners we believe there is an epic bubble brewing.
It’s a bubble in faith in central bankers’ ability to successfully manipulate markets and economies for the better. And it stretches from the US to Europe, Japan, China and beyond.
Like all bubbles, it will some day burst and cause serious damage to the unprepared.
On Monday, I told you how the Fed had failed to produce any kind of measurable “wealth effect” through QE.
But central bank incompetence goes far beyond that.
The Fed, for instance, also consistently gets its calls on the economy wrong – a disturbing reality, given that it claims it can perfectly calibrate inflation and unemployment levels (the stated aim of QE).
Again, former chief US economist for British bank HSBC, and former senior economist at the Dallas Fed, Lacy Hunt has the details. From a recent article by Hunt at Casey Research:
During the current expansion, the Fed’s forecasts for real GDP and inflation have been consistently above the actual numbers. Late last year, the midpoint of the Fed’s central tendency forecast projected an increase in real GDP of 2.7% for 2013 – the way it looks now, this estimate could miss the mark by nearly 50%.
The reason for this over-optimism, suggests Hunt, is faulty thinking. The Fed actually believes its own BS about the “wealth effect” – the idea that when people see paper gains in their stock market portfolios they rush out and spend. (Critics of the “wealth effect” theory point out that investors who’ve already seen two epic crashes in the last decade or so are more cautious than that.)
Faulty thinking + faulty forecasts = Fed fail.