Wednesday, April 2, 2014

Has Yellen Folded Already?

Almost under the radar, Fed Head Janet Yellen declared on Monday that the economy is too soft and the Fed was going to need to keep the monetary stimulus going "for some time".  In a prepared speech given in Chicago on Monday, she said the "extraordinary measures" will be kept up for the foreseeable future. 
While policy makers have slowed the pace of their monthly asset purchases over the past three gatherings to $55 billion from $85 billion, Yellen said the central bank’s commitment is strong to helping sustain progress in the job market.

“Recent steps by the Fed to reduce the rate of new securities purchases are not a lessening of this commitment, only a judgment that recent progress in the labour market means our aid for the recovery need not grow as quickly,” she said. “Earlier this month, the Fed reiterated its overall commitment to maintain extraordinary support for the recovery for some time to come.”
Stocks - of course - were up after the pep talk, with the S&P 500 Index rising 0.8% to 1,872.72 at 10 a.m. in New York. The yield on the 10-year Treasury note was up three basis points, or 0.03 percentage point, to 2.75%.  Unless you're very new here, you know that I've been saying the growth in the stock market is all artificial, coming only from federal reserve stimulus funds.  Compared to even a flawed commodity standard like gold today, the stock market is down considerably since 2000. 

But the interesting thing that's being reported (Bill Bonner) is that Yellen has admitted to colleagues that she's a disciple of Soviet economist Yuri Pavlovovich.  Who?  Yuri Pavlovovich was a young man and otherwise unknown economist when the Bolshevik Revolution shook Russia.  Young, but not stupid, Pavlovovich was shrewd enough to figure out which way the wind was blowing and set about ingratiating himself to "Uncle Joe" Stalin.  Once in the Kremlin, he studied how to improve the results of the Federal Reserve's Soviet central planning. 
The central concept of Pavlovovich’s pensĂ©es was that people do as they are told to do. Few people are original thinkers. Few are willing to defy authority.

The job of the ruler, he figured, was therefore merely to direct human action in a way that was salutary. People, he reasoned, could be enticed, lured and ordered to do many different things. The challenge for the elite in charge of the economic system was to find the course of action most beneficial to citizens… and to themselves.

“Policy should direct people where they ought to go,” was one of his famous dicta.   Give them a bottle of vodka or seven years in a gulag. That will help make up their minds,” was another.
Unfortunately for Pavlovovich, Stalin appeared to have decided that he didn't really need this economist's opinions and had him assigned to the German front in the winter of 1941.  There, incoming Panzer troops were even less fond of his ideas than Stalin and he met his untimely demise.

The similarity to Janet Yellen's own views, as well as those of every central banker we can think of, is obvious.  The whole of Quantitative Easing to Infinity has been to give us that choice of the vodka or the gulag.  In the central bankers' minds, it doesn't matter that the average borrower has more debt than they can live with, it just matters that they need you to keep borrowing.  Get drunk and borrow!   It's better than a deflationary death spiral! 
As the Fed tries desperately to raise inflation (and are succeeding) the central bankers live in morbid fear that if we consumers don't see prices rising badly enough, we'll save our money and not take on as much debt.  To you and me, seeing prices going down would make us feel better; less like the "typical, middle-class American" in this Steve Breen cartoon.  But to central bankers, you and I being able to successfully save for retirement or life in general is the death knell of their control.  Savers simply must be destroyed.  Omelet; eggs; you know.  You're the egg. 


  1. It is a lot like the titanic. It all started with high hopes, laughter, good times and some bad but we are all in the same boat. At some point TSHTF or the ship hits the iceberg and suddenly everyone is paying attention but as time passes and the powers that be keep telling you to be calm and put on your life jacket, the band plays and the rich and famous get on the life boats along with the women and children. I think the rest of this will indeed play out much like the titanic, some will make it pretty much unscathed, many will not, many will suffer and some will pay the ultimate price. We will have an economic crash, some would say we did have an economic crash but it is being disguised by massive borrowing and massive printing of money. The crash will not just be a peaceful depression with mother government helping the poor and indigent. This is going to be worldwide. Governments will collapse, wars will be started, countries will be invaded. We will be too busy to protect Taiwan or Australia, too busy to protect oil fields and natural resources on the other side of the world. We will be very lucky to simply not get pulled into a war ourselves. This is a game changer, this isn't the 30's when half of our population lived on a farm or were related to someone who lived on a farm. Today 98% of our population live in an urban environment and know nothing about finding food unless it is in a supermarket or restaurant. You remember in the movie Titanic how the engineer the Captain and most of the crew knew what was going to happen but many did not. That's where we are today. I would bet good money that most of our top leaders and politicians have an exit plan. Perhaps a home in Ireland or some other friendly country. Perhaps a small ranch in Montana miles from the road. This is it, this is the big one. Don't be like the people in steerage on the Titanic. Take charge, take responsibility for your life and your future. This is going to be a scary ride, a roller coaster ride without a safety bar.

  2. No one has ever sufficiently explained to me why a deflationary period would be an economic death sentence.

    All I've ever gotten out of those types of explanations is that, "the wrong people would be losing money!"

  3. AM - the reason I've always heard for why deflation is worse is that banks have contracts denoted in dollars, like a mortgage to pay back 420 payments (35 years) of $X, and in deflationary periods, people have fewer dollars. If you have a pile of freshly printed dollars, each one worth 10% of the ones the loan was written for, that's less of a problem for them. They get the required number of dollars in payment during inflation, but fewer dollars during deflation.

    Seems to me neither is good. You wouldn't want to buy a truck full of goods for $10,000 but have it worth $8000 when you get to your destination. But they wouldn't want to sell it to you for $8000 if it was worth $10,000 a couple of days later!

    So "the wrong people losing money" is the banks.