The Fed Desecrates The U.S. Constitution
Politics / US Federal Reserve Bank Apr 04, 2014 - 06:34 PM GMTBy: Raul_I_Meijer
An amusing discussion is firing up ever more about what the ECB should do in the face of a – perceived or not – deflation threat. Many voices are clamoring for immediate action, claiming Mario Draghi et al may well already be too late, or even use words like “the spectacular idiocy of EMU policy”, as Ambrose Evans Pritchard does, who’s been on the topic for a very long time. IMF’s Christine Lagarde is a little less impolite and says: “More monetary easing, including through unconventional measures, is needed in the euro area.” Draghi yesterday showed an unexpected sense of humor when he responded to Lagarde: “The IMF has been very generous in its suggestions on what we should do.”
The vast majority of the “pro-action” favors the ECB engaging in US-style QE and seems to be predicated on the assumption the US QE has been a great success. But is it? The US jobs report that was just released proved to be another disappointment. Between population growth and the millions of people hovering in the grey area of looking but not looking, of having given up but someday might come back, any jobs growth number that comes in under 200,000 barely adds any jobs at all. And that is despite more trillions of dollars in QE stimulus than just about anyone is capable of calculating anymore.
One could argue a good case that QE US-style has far more zombie qualities than anyone should feel comfortable with. And that’s just a start. QE has boosted banks’ reserves with the Fed, making them look healthier than they really are, and inflated asset markets like stocks, real estate and land to fresh record levels even as so many more millions of Americans are out of work, working low-paying jobs or simply up to and over their necks in debt. And now, after 5-odd years of such raving success for the banking system but blatant failure for the American population, Europe should imitate this?
I’m not so sure that Draghi wouldn’t have gone the QE route if he could. But perhaps he can’t. Perhaps the issue at hand is that he has to contend with 28 different constitutions in the European Union. Whereas the Fed only has to flaunt one. As per former Reagan government official and fund manager David Stockman, who concludes an article this week whose title I shortened for our Daily Links to “The Fed’s Fiscal Circle Jerk” but which was originally called Yellen’s Dog Is Eating Homework Congress Didn’t Even Assign: Reflections On The Greatest Mission Creep Ever , says:
The Fed has seized power and is not about to let go – common sense be damned, and the constitution, too.
Stockman takes zero prisoners in explaining why in his view the Fed’s policies, QE and all, are as illegal as can be. Europeans would do well to take note, lest Draghi and/or the Brussels made men find a legal loophole around existing legal constraints to stimulus and monetary easing.
America is being run by an unelected gang of essentially self-perpetuating PhDs. The notion of an economics coup d’état is not so far-fetched. After all, the Eccles Building controls the levers of the nation’s fiscal policy; is the pied piper of the entire financial system; intentionally inflates financial bubbles which powerfully impact the distribution of wealth and income; and is the master builder of the nation’s towering edifice of $59 trillion in credit market debt that flattens growth, jobs and incomes on Main Street.
… the Fed’s QE policy amounts to a giant fiscal fraud. Even if it sticks to the taper, the Fed’s balance sheet will have expanded by 5X – from $900 billion to $4.5 trillion—in 70 months. Yet it has no intention whatsoever of unwinding this stupendous emission of fiat credit. Indeed, selling-down its massive piles of treasuries and MBS would ignite the mother of all melt-downs in the fixed income markets, which have gorged on over-valued paper that was priced by the Fed’s huge, artificial bid in the debt markets.
In other words: say goodbye to your pension. The Fed has taken it by incentivizing funds to buy zombified assets that will one day, we don’t know when but we do know why, implode.
So if this $4.5 trillion balance sheet is permanent, then the Fed’s post-crisis money printing spree amounts to a massive monetization of the public debt. To be sure, all of this was done in the name of rubbery abstractions like “accommodating” recovery, supporting the “labor market” and “stimulating” consumption and investment spending, but the real world effect was quite different and far more tangible: It allowed Washington to treat the financing cost of our $17.5 trillion national debt as a free good. In a world in which even the official inflation rate (CPI) has averaged 2.4% during the last 14-years, there is no other way to describe a policy that actually drove the 5-year Treasury note yield to a low of 75 bps, and pulled the weighted average cost of the total Federal debt down to about 2.5%—which is to say, zero, nichts, nada or nothing in real terms.
The meaning of “massive monetization of the public debt” is essentially that the public debt is being transferred to the public. In what Stockman labels a “fiscal circle jerk”. As has been clear since at least the Civil War, the Treasury could have cleared its debt “directly”, without a central bank acting as a middle man. But that would not have allowed for baking secret debt, which is many times higher than federal debt (think derivatives) to be included in the laundry.
… part of this fiscal scam is even more egregious than the Fed’s own acknowledgement that it’s artificially suppressing the treasury coupons. What the Fed is also doing is issuing second-hand “greenbacks”— those notorious non-interest bearing IOU’s that financed the Civil War. Since the crisis the Fed has returned $400 billion of “profits”, including $80 billion each in the last two years, to the US treasury, thereby off-setting upwards of 25% of the interest cost on the Federal debt.
… how is it that the Fed is more profitable than the wholesale, retail, entertainment, food service and hospitality industries of America combined? Self-evidently, its the magic of printing press money: The Fed buys treasuries and MBS with a coupon; pays for them by issuing new liabilities without a coupon; collects the spread which gets recorded as a “profit”; and then returns this ‘profit” to Uncle Sam at year-end. Had the Treasury Department dusted off Lincoln’s playbook, instead, it could have simply issued “greenbacks”, and dispensed with the round trip. In less polite company it might be called a fiscal circle jerk.
A great question that desperately needs to be answered: ” … how is it that the Fed is more profitable than the wholesale, retail, entertainment, food service and hospitality industries of America combined?” Answer it and you know what QE is: a scheme to let the government get ever deeper into debt “for free”, while at the same time propping up too big to fail bankrupt Wall Street zombies. And who do you think ends up paying?
Don’t be surprised if it all turns out to be an elaborate plan to pull the plug at a handpicked moment designed to unload all losses on the greater fools (re-)entering stock markets and housing in ever greater numbers. It’s a good idea to try and stay away from conspiracy theories, but just look at what’s happening here. Huge piles of debt are added to already historically large amounts of it, and all America has to show for it are weak jobs reports like the one issues today. Shouldn’t that make you wonder?
Based on its historic rate of expansion the Fed’s balance sheet would be about $1 trillion today. So during the past 70 months, the monetary politburo has issued about $3.5 trillion worth of Abe Lincoln’s “greenbacks”. But here’s the thing: Even as Lincoln took many matters in his own hands like suspending habeas corpus, closing newspapers and imprisoning dissenters, he did bother to get an act of Congress to print his paper money. And as much as the beltway bandits of today’s Washington have enjoyed the quasi-free financing of $9 trillion in new public debt since the crisis – even they would have never passed something called the “Greenback Authorization Act of 2009″.
At some point it might be appropriate to ask what exactly Congress is doing while this plays out. Stockman claims that it would have never passed a repeat of Lincoln’s plan, but doesn’t that mean that it should act, or have acted, now the Fed does just that through other means, and at much higher cost the people?
Then consider the orgy of debt issuance in the business sector. During the last year, every single record from the 2007 blow-off top has been exceeded. This encompasses $1.1 trillion of investment grade corporate debt, including a staggering $49 billion issue by Verizon to fund what was essentially an LBO of its own subsidiary. Next in line is about $600 billion in leveraged loans – more than 60% of which have been “cov-lite” style spit and prayer loans. And then there are $400 billion of new junk bonds proper, along with the return of that bell-ringer for speculative tops called leveraged recaps, wherein the LBO barons freight down their debt mules with even more debt in order to pay themselves a dividend.
In all, business sector debt stood at about $11 trillion on the eve of the 2008 crisis, and has now vaulted upward to $13.5 trillion. Yet nearly the entire gain has gone into the preferred financial engineering games of bubble finance—namely, LBOs, cash M&A deals and stock buybacks. Indeed, in the latter case the big corporates are now borrowing hand-over-fist to fund buybacks at nearly a $1 trillion annual rate. Compare that to investment in productive plant and equipment where real outlays are still running $100 billion or 8% below its late 2007 level.
At what stage do people making out like bandits get to be recognized for what they are, which is bandits? Is that only after the regime that allowed for them to do it gets toppled?
Needless to say, this massive leveraging and stripping mining of cash from the business economy is not the unseen hand of the free market at work. It is the consequence of the Fed’s very visible pegging and rigging of the financial markets. Fast money speculators are subsidized by the Greenspan/Bernanke/Yellen put, which drastically compresses the cost of market risk insurance and artificially fattens the margins on carry trades.
Maybe the cruelest part of this is that as people are glued to their new plasma screens, their homes are robbed empty behind their backs, and they repeat after their flat 2-D gurus that their lives are getting better. It’s the ultimate con-man’s dream: not just taking your dupes for all they have, but convincing them they benefit as you do it. They’ll be happy to let you take some more.
Likewise, also come the $5k Wall Street suits – streaming into America’s busted sub-prime neighborhoods fixing to become single family landlords. Yet without the Fed’s gift of cheap financing, there is not a snowball’s chance that these clueless spread-sheet jockeys would own a single, single-family home— let alone upwards of 500,000 at last count.
In short, the Fed has interposed itself throughout the very warp and woof of the nation’s business economy. It does this in a manner that makes a mockery of our purported mechanism of economic governance—that is to say, the spontaneous actions and decisions by millions of producers, consumers, investors and savers on the free market in response to honest price signals arising from the vineyards of commerce and industry. Instead, in a manner like the “caribou” soccer of 6-years olds, today’s economic actors have no choice except to ceaselessly chase the Fed around the economic fields.
Yeah, this is how US home prices are kept from scraping the gutter and letting millions of home “owners” default. The question is how long do you think it will last? There can’t seriously be anyone who thinks “they can do this forever”. Wouldn’t it make more sense that since “their” interests are 180 degrees different from yours, at some point in time they’ll be coming to take it away from you?
So where did the Fed get this mind-boggling grant of plenary power? Fed Chair Yellen explained it succinctly in a recent speech:
The U.S. economy is still considerably short of the two goals assigned to the Federal Reserve by the Congress of low and stable inflation and maximum sustainable employment.
Yellen was obviously referring to the Humphrey-Hawkins Act of 1977 – one of the most pernicious pieces of legislation ever enacted, and one I am proud to say I voted against as a freshman Congressman. Yet even in those halcyon days of Keynesianism, few in Congress believed that they had mandated the Fed to pursue rigid quantitative targets for inflation and unemployment – let alone precisely a 2% annual gain in the PCE less food and energy or 6.5% on the U-3 measure of unemployment, which didn’t even exist then.
By contrast even the voluble Senator from Minnesota saw the law as essentially an expression of congressional sentiment that it would be swell to have more jobs and less inflation. And most certainly, the Congressional majority that passed the act did not in its wildest imagination foresee that the route to the quantitative inflation and unemployment targets it didn’t mandate would be through the canyons of Wall Street and the made-up monetary doctrine of “wealth effects” as the surest route to their achievement.
Well, that may be true, David, but the Congressional majority are still sitting on their hands as it does indeed happen, like so many of those see nothing hear nothing monkeys. You can argue that they didn’t see it coming, but they can see it now …
So the last 35 years have brought the greatest exercise in mission creep ever undertaken by an agency of the state. That explains why the monetary politburo persists in its absurd quest to force more debt into an economy which is already saturated with $59 trillion of the same. To pretend, as does Yellen and most of the monetary politburo that they must plow ahead printing money at lunatic rates because Congress so mandated it, is the height of mendacity.
The Fed has seized power and is not about to let go – common sense be damned, and the constitution, too.
I hope you’ll let Stockman’s words sink in; that would be helpful when trying to understand why things may look up while they’re sinking fast and furious. And I wonder what Mario Draghi thinks about this. What can he do if he concludes he really can’t monetize the public debt of 28 different countries with 28 different constitutions? Lower interest rates? Yeah, right. There’s only one thing he can do, and he never will: restructure the debt of banks and nations alike. The option must appear to him in sleepless nights sometimes. Maybe a lot lately.
By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)
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