The flirty, flirty guys with their flirty, flirty eyes (and those flirty, flirty girls with their flirty, flirty curls . . . )
PAPER MOON
Johnny Black, 1915
--two years after
Congress founded
the Fed
in 1913
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I really dislike the seeming complexity of this chart. If you can't stand it, just 'feel' the overall impact and read on below.
The impression you should have is: things worked very well for quite a while (five years), and then they stopped working well. How much 'not well'? Well, the S&P dropped 42% from its peak in October of last year to its lowest point (so far) this year.
For five years, the World's premier inflation hedges, gold and oil, were signalling exploding inflation ahead ... until they flipped into their upside-down high dive that signals deflation coming.
Both were driven by global financial affluence. Oil had behind it the additional fillip of runaway economic growth in China married to above average growth in the rest of the world. On top of that was an excess of money supply which permitted speculative bid-up of the prices of houses in the U.S. and elsewhere in the world. Whose fault was that?
Who controls the money?--that's your answer. If you said, "The banks," you answered wrong. The Government does.
When at last, in early to mid 2007, cracks started to appear in the U.S. debt structure due to over-extended ratios of debit to equity among investment banks and others--kapoof--collapse.
And it is still going on, and will continue until all assets around the globe are carried at their true market value or the rule of 'mark to the market' is abrogated with respect to institutions that hold mortgages or other very long-term instruments.
In my view--having studied similar matters attentively during my salad days--the now Crown Prince of the Fed and the Minister Plenipotentiary of the Treasury, abetted by the Congress and the Chief Executive of the Nation, are applying exactly the wrong 'solutions'.
They are: 1) not killing the mark-to-the-market rule as it applies to long-term investments, e.g., mortgages; 2) not letting the housing market clear itself of excess housing; instead, 3) flooding the world with new money (in the vain hopes that the world will use it to buy new stuff or old stuff which has been sticky selling, like cars and houses and meals-out for the family).
In every economy through history there has always been money. It has always been a visible measure of well being or misery. But it is tricky to interpret and to apply by those who control it. For example, one of the most powerful tools put into play by the Fed to date to stem the rolling disaster was to flood the market with money, thinking that if they did, banks would lend it and people would spend it.
That's not happening because of volitional problems. The public has no confidence or capacity to borrow it. The banks have little or no confidence to lend it. Thus it sits, a growing, inert pool of hyperfuel waiting for ignition. All the while, overclouding the Fed's money cafeteria are the still giant thunderheads of over-expanded standard debt in addition to the incalculable magnitude of derivatives debt coming due.
How big is the Fed pool? Totally without precedent.
