The Fed Is Pimping For Incumbents

The Fed’s Review Of The Banking System

The banking system got high marks from the Federal Reserve on the recent stress tests. Markets responded in Pavlovian fashion. So, what else is new?

A better question is why the favorable Fed report was considered a surprise? Matters are bad in the financial system, but they are unable to say so without jeopardizing matters more than they are. Did anyone expect the Fed to issue a negative report saying that everything done over the last three plus years had no effect or made matters worse?

The stock market took off like a jack rabbit with the Dow rising over 200 points. Rick Ackerman, in How High Can The Fed Pile Manure?, commented on this reaction:

… many on the Street, and even a contributor or two in the Rick’s Picks forum, were seeing cloudless skies at least till the election. “Money is going to be pouring into the stock market at the expense of other investments,” noted one forum regular, Gary L. “I now see the possibility of a 20 percent rise in the stock market year over year,” he continued. “If external factors don’t derail this trend, we are in a perfect sunny day lasting perhaps another nine months. This will make Obama’s chances of winning re-election an odds on favorite.”  We’re not so sure ourselves, especially since the real economy that most Americans encounter in their day-to-day lives is wholly different from the sunny illusion being spun with increasing brazenness by The Powers That Be.

Zombie banks — Citicorp, Bank of America, Wells Fargo, etc. — were the big gainers.

The stock market reaction was a remarkable demonstration of how much people want to believe that the economic crisis is being solved. Investors apparently have reached their saturation point, where they are willing to believe anything positive, even when the belief is contradictory to what they witness every day. Despite unprecedented government intervention, there has been no meaningful economic improvement. This conclusion is especially evident when comparing this economic cycle with others. This one lasted longer and has shown almost no response to enormous stimulus.

The Problem With The Economy

The US financial system is irrevocably insolvent. The government has taken on more debt and made more promises than can be kept. This economic crisis should have occurred in 2001 or even earlier. The government kept postponing the crisis with easier credit and more stimulus. These “fixes” over the last three decades literally papered over the problems and prevented the economy from making the necessary corrections to distorted prices and mis-allocated capital. All government did was postpone the day of reckoning, while ensuring the pain would be greater.

The imbalances in the economy are now so large that growth and the standard of living will continue below normal, perhaps even reverse. The house of cards has been kept standing, but is no longer functional in a meaningful economic sense.  Conditions are no better outside the US. Europe is disintegrating. Japan is drowning in debt. Western democracies are insolvent, having over-committed to welfare state models that are unsustainable. A domino-like collapse will topple all welfare states at some point.

The New “Economic Policy”

The government, via the Federal Reserve, produced a temporary rise in market optimism. Nothing other than that has changed, but that is politically all that matters in an election year. The sheeple will be more compliant and less ornery if they see their wealth increase. The political class wants to stay in office, regardless of what longer-term damage they inflict. IRAs, 401ks, savings and other individual accounts will eventually be battered but that is considered nothing but collateral damage by the political class.

Illusion is all the politicians have left. There is no economic magic bullet that can prevent an eventual depression. So incumbents are focused on the only thing that can get them re-elected, and not coincidentally the thing they do best, — deceit and deception. Theirs is a cruel strategy, one designed to make you believe that things are improving.

The effort includes “fudged” statistics, blatant lies and money pumping to drive markets upward. Remedying economic problems is no longer being pursued. The political class wants to hold things together at least through this election. Mr. Ackerman, for one, is impressed by the effort to mislead:

As bearish as we are on the big picture, we can only marvel at the scripted perfection of recent, ostensibly bullish, economic “news.”

With a compliant media ( because President Obama’s future is at stake), there is unusual support of this great deception.
The Politicization of  The Federal Reserve
I am not a defender of central banking. The Federal Reserve was a government scam from its inception, as was every other central bank/fractional reserve banking system/fiat currency.
For much of its existence the US Federal Reserve was reasonably isolated from politics. It was created as a separate agency to protect against political influence which would always lead to easy credit, low interest rates and  inflation. For decades the separation worked. Independence gradually disappeared over the years, especially the most recent two decades. Today, the Fed, despite its putative independence, is as political an agency as there is.
For at least the last three decades, recessions have been prevented or dampened by the Fed. Political pressures eventually turned the Fed into an agent of whichever party was in office. As a result, the political management of the economy has been to attempt to prevent any economic corrections. Errors have not been allowed to naturally purge themselves via the necessary reallocation of capital and labor. Every slowdown has been met with attempts to prevent the economy from engaging in its natural healing process. The result is to have created this great imbalanced mess we know as an economic crisis. Without prior interventions, we would not have today’s crisis. Now we have an economy so riddled with distortions that normal growth cannot be rejuvenated. Nor can the excessive debt levels encouraged be sustained.
As we near economic catastrophe, the Fed has become purely a political tool. In this crisis, its primary role has been to keep the government from going broke. In that role it has been an enabler of the worst kind. Spending continues to increase because politicians believe the Fed will always print money to cover the shortfall.
The Fed’s policy actions are no longer capable of  helping the economy. Matters are well past that point. Its sole purpose is to keep the game going a little longer. In that sense, it is akin to an incumbents’ political action committee (PAC). Its job is to continue to provide providing money to hide the problems and get through the next election.
The Fed is now nothing but the political enabler of last resort. Its job is to extend and pretend through this year’s election. Its role is to provide the illusion that the economy is improving. According to Graham Summers, it has two objectives:
  1. Propping up stocks
  2. Crushing those commodities/ assets that are politically (and economically) dangerous (gasoline, food prices).

This role is beyond the usual despicable efforts of Central Planning which the Fed regularly engages in. This endeavor is a pure fraud, it is an attempt to convince the American public to believe what is not true.  The Federal Government has morphed into a massive confidence scheme and its most effective con man is the Fed.

Regardless of how the Fed attempts to confuse the issues with its usual economic technicalities and foo foo dust, it now has become a massive pimping operation for incumbents. Its purpose is to use whatever baling wire or other make-shift tools it has to hold the economy together until after the election. That is the new mission. Economic improvement is not possible, nor is it even being sought at this point. Longer-term dis-improvement is possible and will result from these short-term efforts,  but so be it. That doesn’t matter when you are trying to preserve power.

Will the Fed and the politicians succeed?  That is difficult to know. If they don’t, it will not be from lack of effort. I am unwilling to bet my portfolio on either side of the issue. Better to stand aside and watch the destruction unfold. The only issue is whether it will unfold before or after the election.
Most government bureaucrats, union leaders and corporate cronies know they are one election away from owning the country. They know the value of winning.
The more important question is whether the honest, productive citizens of the country know the cost of losing. Do they understand that most of what they own is at risk?

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3 Comments

  1. I always thought that the President and his party had a gift handed to it on a silver platter in 2009. All they had to do was apply some short term pain in order to reap long term gains. The stock market was at or near 6000. It probably would have fallen to 4000 if it was allowed to. This was a great oppurtunity to institute sound money, put the federal government on a diet, and reform out byzantine tax laws. It was also a great time to totally reform our energy regulations, the EPA, and other gross regulatory agencies. We now know that the US, if our political class would ever allow it, is poised to become THE number one provider of energy to global markets. The tax revenues from our energy exports represent a means to pay-off our monsterous debt.

    Of course, there some problems that do not have ready solutions. A nation cannot fight demographics. And there are simply not enough young people with high enough incomes to support our huge entitlement state. It should also be noted that even Mexico and South America can not be counted on to provide future human capital. Mexico’s birthrate plunged from 6.1 live births in 1968 to 2.4 births in 2010. It will fall below replacement levels this decade. Ditto for Brazil, which has a birhtrate of only 1.86 in 2010 (it was 6.5 in 1970).

    Progressives of course went on a spending binge that even today knows no bounds (our defecit in Feb alone was $260 billion). ObamaCare by 2014 will do Lord knows what damage, and the Fed has put the US in a position where both hyper-inflation and dangerous deflation are possible.

  2. Historically speaking, we live in very interesting times. We are probably very close to a civilizational shift of a similar magnitude to the Fall Of Rome. The Western World is going to print money and run up debt until they have no choice other than default. Greece was first, soon it will be Portugal and Spain; eventually Japan, the EU and the USA will default. It isn’t clear what will happen after the great powers default on their debt, but it’s not likely to be pretty.

    It took more than 1000 years for civilization to get back to where Rome was. How long will it take this time? Is it possible that everyone could agree to write off all debt and just start over? China would be left with a lot of worthless paper, but we bought a lot of worthless products. Unfortunately, I don’t think this has a fairy-tale ending. The politicians will never agree to going back to the way things used to be; when they worked for the people instead of us working for them…

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