Blogger Ben’s Basically Full Of It

Submitted by David Stockman – The Contra Corner Blog

Ben Bernanke’s skin is as thin, apparently, as is his comprehension of honest economics. The emphasis is on the “honest” part because he is a fount of the kind of Keynesian drivel that passes for economics in the financially deformed world that the Bernank did so much to bring about.

Just recall that he first joined the Fed way back on 2002 after an academic career of scribbling historically superficial and blatantly misleading monographs about the 1930s. These were essentially zeroxed from Milton Friedman’s monumental error about the cause of the Great Depression. In a word, Friedman and Bernanke pilloried the Fed for not going on a bond buying spree during 1930-1932 and thereby stopping the shrinkage of money and credit.

In fact, excess reserves in the banking system soared by 12X during those four years, interest rates were at rock bottom and the US economy was saturated with idle cash. So there was no financial stringency——not the remotest aspect of a great monetary policy error.

Instead, what actually happened was that the US banking system was massively insolvent after a 12-year credit boom fueled by the Fed’s printing presses. This first great credit bubble arose initially from the Fed’s maneuvers to fund the massive war production surge of 1915-1919 and then from its fostering of a vast domestic and international credit bubble during the Roaring Twenties.

Alas, none of the Fed governors during the 1930-1932 credit contraction had graced the lecture halls of Princeton. But to nearly a man they knew you can’t push on a string, and that a healthy economy requires that busted loans and soured speculations must be purged from the financial system in order for sustainable growth to resume.

Bernanke has never had a clue about this truth. As I showed in The Great Deformation, what he got wrong about the early 1930’s—– he replicated in spades after the September 2008 financial crisis:

Upon becoming chairman of the Fed, Bernanke then foisted the Fisher-Thomas-Friedman deflation theory upon the nation’s economy in a panicked response to the Wall Street meltdown of September 2008. Yet monetary deflation was no more the cause of the 2008 crisis than it had been the cause of the Great Depression.

The monetary populists of the 1920s and 1930s, including Professor Fisher, had “cause and effect” backward. The sharp reduction after 1929 in the money supply was an inexorable consequence of the liquidation of bad debt, not an avoidable cause of the depression. The measured money supply (M1) even in those times consisted mostly of bank deposit money rather than hand-to-hand currency. And checking account money had declined sharply as an arithmetic consequence of the collapse of what had previously been a fifteen-year buildup of bad loans and speculative credit. During 1929–1933 commercial bank loans outstanding declined from $36 billion to $16 billion. Not surprisingly, as customer loan balances fell sharply, so did checking accounts or what can be termed “bank deposit money” as opposed to currency in circulation. The latter actually grew by $1.1 billion during the four years after 1929, to about $5.5 billion.

By contrast, it was the loan-driven checking account portion of M1 which dried up, declining from $25 billion to $17 billion over the same period. And the reason was no mystery: the way banks create demand deposits is to first issue loan credits to their customers. Indeed, in the modern world money supply follows credit, and rarely do central bankers inordinately restrict the growth of the latter.

In truth, loan balances and checking account money rose to inordinate heights during the financial bubble preceding the 1929 crash and unavoidably declined thereafter. This had nothing to do with causing the depression. The real reason the American economy was stalled in the early 1930s is that it had lost its foreign customers.

The reduction of M1 owing to the liquidation of bad credit, by contrast, was a sign of returning financial health. Indeed, the major component of bank credit shrinkage had been the virtual evaporation of the $9 billion of margin loans against stock prices that had reached lunatic levels before the crash. In blaming the Fed for the Great Depression, therefore, Professors Friedman and Bernanke implicitly held that the Fed should have underwritten the margin-loan-based speculative mania of 1926–1929 in order to keep M1 from shrinking!

That’s the essence of the matter. Bernanke thought the 2008 crisis was a replay of the fictional world of his so-called Great Depression scholarship. Given half the chance by the clueless White House pols—-so-called conservatives who appointed a thorough-going Keynesian to the most powerful economic job in the world——-this time he did underwrite the speculative mania that preceded the crash. So doing, he took the Fed balance sheet into the netherworld of monetary crankdom.

Starting To Redefine Stimulus

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Austerity has become a loaded concept, not the least of which has been tied to the very growing desire of issuers of past policies to delink them with our current situation. Primary among those is Ben Bernanke who has taken to blogging as a sort of obvious attempt at rehabilitation. Last week, I think, he really came out the worst having taken on directly a Wall Street Journal editorial openly questioning his legacy – and responding to it with what was clearly desperation (the unemployment rate was the “best” he could use in his defense).

Parallel to all the great success, in Bernanke’s mind, in labor utilization stands the economic disfavor of his QE’s. He is, at the same time, saying QE worked well and that it did not work well; it made the unemployment rate drop far quicker than anyone thought possible (because it fell for reasons that have nothing to do with improving economic fortune) but also that it didn’t work fully because of “austerity.” When not championing the ill-suited labor indication, Bernanke has taken to highlighting limitations of monetary policy. The zero lower bound is a real bear to overcome, as he tells it, making QE much more difficult of a transition into real progress.

That is, of course, nothing like what he was saying contemporarily, especially in that November 4, 2010, oped introducing QE2, but he has at times spoken out on monetary limitations. It has the effect of covering all bases simultaneously, hedging his bets on QE without appearing plainly doing so. This was a prime topic back in 2013, ironically, during the taper debate when Bernanke was far more likely to assail the unemployment rate because of his very own “forward guidance.”

QE was terrific, he and his supporters said, but if it doesn’t work it’s not my fault:

You can easily imagine a scenario where congress screws up and creates a huge fiscal drag, then Bernanke unleashes QE4 to try to counteract it and he’s partially successful. Then he’s going to take a double hit for “printing money” and presiding over poor economic performance. He’d much much rather that congress handle its business. In fact his first choice would be for congress to not just handle its business, but enact a large short-term stimulus paired with a huge long-term deficit reduction plan thus allowing him to stabilize nominal growth without doing any more asset purchases or novel communications strategies. [emphasis in original]

As it turns out, that first suggestion, “printing money and presiding over poor economic performace”, has come to fruition and thus all the fuss over reputation and repositioning for posterity – to not be the Fed chief that wholly disproved monetarism. Into that mess has been dragged the various reasons for what is now essentially admitted-impotence (oh, the contrasts between now and then, in terms of proclamations) even “secular stagnation.” Bernanke has recently written his disfavor of the theory, but in so doing has found himself united in preferred process with the economist who first proposed it; Larry Summers.

The World of Philip K. Dick is Almost Here

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Holographic Computers and Self-Directing Bullets

Philip K. Dick was long viewed as a mere genre hack, although his fans always knew better of course. He used the medium of science fiction originally because it was the only way for him to make money as an independent author. His non-SF novels and stories (which have been published posthumously) would have been far more difficult to sell. And so he went and packaged his philosophical ideas into science fiction novels, which we can be eternally grateful for.

The man was brimming with ideas of what the future might look like. Hollywood has tried to bring some of them to the big screen in its adaptations of his novels (none of which Dick himself lived to see), such as e.g. the talking ads in “Minority Report”, which recognize every passer-by and address him by name. Modern-day internet advertising has already come close to this vision.

Visionary author Philip K. Dick: “There will come a time when it isn’t ‘They’re spying on me through my phone’ anymore. Eventually, it will be ‘My phone is spying on me’.”

Dick not only described a fantastic future and displayed an uncanny sense of the things that would one day become reality (the “internet of things”? Try the talking doors in UBIK, which ask apartment owners to deposit money before they will open for them!), he often wrote about a dystopian future in which all these fantastic toys would be abused by seemingly nigh omnipotent governments. The takeover of the US by a fascist government in “Radio Free Albemuth” that uses the alleged threat emanating from an entirely fictitious terrorist organization named “Aramchek” to introduce legislation that completely shreds the constitution and suspends the bill of rights is eerily reminiscent of present-day trends as well (although it was meant to satirize Nixon and McCarthy). The “Department of Homeland Security” and the “suspicious activity reporting” program that makes potential snitches out of the entire population are both foreshadowed in the novel.

Many of Dick’s novels deal with religious themes, alternate history and the bending of reality, often based on his personal experiences and his not inconsiderable paranoia. The main point we want to make is that both the technological and political trends which Dick speculated about in his SF novels are coming into ever sharper relief these days. We have recently come across presentations of two technological innovations that are both highly reminiscent of the Dickian world.

One of them is a “holographic computer” developed by Microsoft (apparently MSFT is still able to innovate after all). Here is a fascinating video of the presentation:

Microsoft’s holographic computer allows users to work and design in a virtual 3D space. NASA plans to control rovers with it starting this July.

Here is the full presentation of the Hololens

Frankly My Dear, I Don’t Give a Damn

Submitted by Thad Beversdorf, Chief Economist – ABX / Bullion Capital

I find it shocking how often I have people tell me the Constitution is out of date and is no longer relevant or necessary.  Then there are the vast majority of people that think about the Constitution the same way they think about religion; it makes us feel good to believe in it and we’ll even worship it on a HOLIDAY or two   The reality is that those who seem to get very worked up to the point that they are willing to act in defense of the Constitution even against the highest LEVELS of government make up a very small minority of Americans.  This is a real problem.

You see if people gave a damn the government couldn’t get away with negating the Constitution.  But the vast majority of people just don’t give a damn and so the government very easily provides ridiculous and false legal sounding arguments to explain away why they have become a higher law than the Constitution. Now I’ve tried to understand why it is that we Americans are so damn apathetic about everything the government and government officials do.

Let me give a couple examples for which our apathy just boggles my mind.   We know they took us into wars on false pretenses resulting in the wrongful deaths of thousands of American soldiers and hundreds of thousands of innocent civilians and yet we’ve prosecuted no one.  Hell they’ve admitted to hacking into millions of our home webcams and DOWNLOADING videos and pictures of us in our most PRIVATE moments and maintaining those DOWNLOADS on government servers and then sharing these files with foreign governments.

But because today’s American is simply a shell of a citizen none of the criminal atrocities creates even a stir from us.  Sure we all read about these atrocities and we are angered in the moment but it passes rather quickly and we fall BACK into our self induced ignorant bliss.  Only two things can get Americans to formidably rise up.  The first is a very direct and immediate impediment to our comfort.  For example try cutting back on the monthly social welfare CHECKS.  You’ll have riots.   The second way is if the mainstream media relentlessly instructs us to be upset about a particular issue.  Outside of that there is absolutely nothing the new American won’t move past like water off a duck’s back.

What we’re finding out is that, and it sounds slightly over-dramatic but isn’t at all, unless we are wiling to fight and die to win BACK the freedom our forefather’s fought and died to SECURE for us and all future generations we will CONTINUE to feel our chains grow heavier and shorter.  The simple reason is because our government is very much willing to kill to keep its ever encroaching control.  A FREE population is the antithesis to a political class.  And make no mistake the American federal government is the largest and most powerful group of aristocrats the world has known.

This group of traitors (and I mean that in the very technical sense of the word) not only behave ACCORDING to a separate set of laws they have actually gone so far as to legislate a separate set of laws.  This in itself is a direct breach of the very Constitution they swear to defend.  Their intent is clear and that my FRIENDS is treason.  They are directly negating the very basis of the American concept for their own personal self interest and they are doing so by defrauding American citizens into believing their intent is to represent the will of their constituents.  Treason, Treason, Treason!  What else would you call it?

English Spoken Here

Submitted by James Howard Kunstler  –  www.kunstler.com

Of course, the Freddie Gray riots in Baltimore last week prompted the usual cries for “an honest conversation about race,” and countless appeals to fix the “broken” public school system. So, in the spirit of those pleas, I will advance a very plain and straightforward idea: above all, teach young black kids how to speak English correctly.

Nothing is more important than acculturating ghetto kids out of their pidgin patois and into real English with all of its tenses, verb forms, and cases. It’s more important initially than learning arithmetic, history, and science. I would argue that it is hardly possible to learn these other things without first being grounded in real grammatical English.

When these kids grow up, their manner of speech will identify them and their prospects for success at least as much as the color of their skin — and probably more, in my opinion. Their ability to speak English correctly will be the salient feature in how others assess the content of their character

I’m sure by now that the racial justice hand-wringers are squirming over this proposal. All dialects are equally okay in this rainbow society, they might argue. No they’re not. Have you noticed that TV news, business, show biz, education, and politics increasingly employ people whose parents came from India and other parts of Asia. Do they speak in a patois lacking in complex verb forms? Apparently not. Are they succeeding in American life, such as it is? Apparently so.

Notice that the speech issue — how people talk — is never part of the “honest conversation about race” that we are supposed to have. Has anybody noticed that in his public speeches Martin Luther King spoke regular English correctly, if with a Southern inflection? Has anybody noticed how important that was in his role as “a communicator?” Why is this crucial question of language absent from the public conversation about “the intractable problems of race in America?” Is it because both blacks and whites are too fearful, too cowardly, to face this particular problem of how English is spoken?

Perhaps this raises the specter of IQ. I’d like to know how any IQ test can be meaningful when the person taking it can’t speak the language that the test is given in. I’m sure that any ghetto kid drilled in English for two years would show substantial improvement in such a generalized test. But, of course, first the American people of all skin tones would have to admit that this is important.

We don’t want to. We’d rather wring our hands over “structural racism” and other canards. Why? Because Euro American whites have been programmed to “not offend” at all costs; Asian Americans are too busy being successful; and African Americans are too invested in their own excuse-for-failure industry, wringing money from offense-o-phobic whites.

The Collapse of Cash

Submitted by Michael Pento – Pento Portfolio Strategies

Despite all of the central bank manipulations over the past seven years, it is finally becoming clear economies will not be able to achieve escape velocity. The U.S. central bank has the longest track record of treading down the path of monetary manipulations. And has achieved anemic average annual growth of 2.2% since 2010. Therefore, to further demonstrate the failure of money printing to engender economic growth, the dismal Q1 GDP read of just 0.2 % displays the failure of this policy once again. Wall Street Shills have been quick to once again blame snow in the winter for the Q1 miss. However, it is becoming evident that Q2 will not produce any such anticipated rebound.

Markit’s Flash U.S. Services PMI (Purchaser Managers Index) for April indicated that business activity rose at a slower pace than expected. The April reading came in at 54.2, which was below the consensus of 56.2 and below March’s level of 55.3. Adding to the bad news was the Conference Board’s Consumer Confidence Index that hit 95.2 in April. Economists polled by Reuters expected a reading of 102.5. And, the Richmond Fed Manufacturing Index fell into the minus column for the second month in a row at -3 for the start of Q2.

Things don’t look much better across the globe. The Euro zone Purchasing Managers’ Survey disappointed investors with the German PMI index falling to 54.2, from March’s eight-month high of 55.4. France’s PMI also showed a slower expansion than forecast in the services sector and a worse contraction in manufacturing than predicted. Manufacturing PMI in France decreased to 48.4 in April, from 48.8 in March.

Japanese manufacturing activity contracted in April for the first time in almost a year, as domestic orders and output fell. The Markit’s Japan Manufacturing Purchasing Managers Index (PMI) fell to a seasonally adjusted 49.7 in April, from a final 50.3 in March. The index fell below the 50 threshold that separates contraction from expansion for the first time since May of last year.

We are in our seventh year of record-low interest rates and banks have been flooded with reserves. However, the developed world appears to be debt disabled. That is, already saturated in debt, therefore unwilling and unable to service new debt due to a lack of real income growth.

So the problem for central banks and governments is how to get the money supply booming in an environment where consumers want to deleverage and save. Zero percent interest rates (ZIRP) are inflationary and negative real interest rates foment asset bubbles and encourage new debt accumulation. For decades central banks have used their control of the price of money to coerce boom cycles that eventually turn to bust. But for the past six years, their foray into ZIRP land hasn’t provided the boom cycle they were expecting. Sure, they have created massive bubbles in bonds and equities–but the economy has yet to enjoy the promised growth that is supposed to trickle down from creating these bubbles.  They have set the markets up for a bust, yet the economy never enjoyed the boom.

US Economic Output – “Ugly, but Fleeting”?

Submitted by Pater Tenebrarum  –  The Acting Man Blog

On the Uselessness of Aggregate Economic Statistics

We actually hate talking about GDP. It mainly measures consumption and leaves out the bulk of the economy’s production structure – which has led to the completely erroneous, but often repeated notion that “the consumer represents 70% of economic activity”. In reality, consumption represents somewhere between 35% and 40% of all economic activity. The manufacturing sector is actually not the “smallest sector of the economy”. It is stillthe by far largest sector in terms of total output.

Moreover, “GDP growth” is really not informative with respect to whether or not the activity measured is profitable and therefore indicating that wealth is created. Given that government consumption is a major component of GDP, there is obviously a lot of wasteful spending that is counted as “growth”.

“Well, that’s the news from Lake Wobegon, where all the women are strong, all the men are good looking, and all the children are above average.” Waaay above average! (h/t BC)

Image credit: Garrison Keillor

Furthermore, in a bubble era, when credit expansion ex nihilo is running wild, a lot of investment in fixed assets will eventually be discovered to have been malinvestment. Such spending is also added to “growth” while it occurs, but in reality, it is just a waste of scarce capital. Simply put, there isn’t much worth measuring, because the truly important things cannot really be measured anyway. Even so, it makes a lot more sense to occasionally look at the gross output tables per industry rather than GDP.

Now let us think for a moment about Wednesday’s quarterly GDP report. What does it even mean that the economy has allegedly grown by “0.2%”? This strikes us as a completely absurd number. Given that it actually represents quarterly growth annualized, it means that “real growth” last quarter was 0.05%. Really? Someone has measured the economic output of the entire country and found out it grew by 5 basis points? This sounds like a tiny fraction of the margin for error rather than a meaningful number.

Real growth is determined by discounting nominal growth by the so-called “GDP deflator”. This is a magical number if ever there was one. Almost like God, it moves in exceedingly mysterious ways. One reason the deflator (which is currently declining, and hence boosting real GDP) is often so hard to believe for many people, is its partly self-referential nature.

Let’s think about this for a moment: the Fed inflates the money supply, and relative prices in the economy inevitably begin to shift. This means that the prices of some goods will rise faster than those of others, and some prices may even fall slightly. The deflator is calculated by weighing these price changes by actual spending patterns. Sounds sensible, right? It isn’t really. Consider a hypothetical example. A housewife of modest means enters the supermarket with the intention to buy beef. But then she notices that the price of beef has gone up by 50% and decides to buy chicken instead, the price of which has only risen by 10%. She isn’t doing this because she suddenly likes chicken better, she is doing it because a particular effect of monetary inflation has left her with no other choice.

Since more chicken than beef is now bought everywhere by people in a similar situation, the price deflator will give greater weight to the cheaper product and smaller weight to the more expensive one. In the end it is saying: inflation hasn’t impoverished you as much as you think. So the Fed inflates, which affects prices and artificially influences buying patterns, in the process lowering the living standard of everyone who isn’t in society’s top strata of income and wealth. These patterns are then used to claim that prices have actually increased a lot less than everybody thinks. Thereafter, the result of these calculations is used to flatter “real GDP”!

The PCE index, which is the implicit price deflator used to calculate real GDP – click to enlarge.

Brief Reference On Construction

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

One of the last data pieces for Q1 GDP is construction figures, which were just released and added another layer of disappointment. While the latest monthly update was for March, the missed expectations actually play a role in setting Q2. While non-residential spending wasn’t good, trouble remains centered on the residential real estate sector. That would tend to align more closely with the permits and starts version of the housing market rather than the far more volatile home sales figures.

Whatever the case, construction is not encouraging and there is yet scant signs of an energy “effect.”

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

• When What Comes Down Doesn’t Go Up (Economist)
• When Will Apple Stop Screwing the US Economy? (Zatlin)
• America’s Trailer Parks: Residents Are Poor, Owners Are Getting Rich (Guardian)
• China Gets Backed Into A Corner By The ‘Impossible Trinity’ (MarketWatch)
• China’s Long Bull Run (Barron’s)
• Share Trading Frenzy Grows As China’s Economy Slows (SMH)
• China’s Factory Activity Shows Continued Contraction (CNBC)
• 100 Days Of Solitude: Syriza Struggles As Greeks Stare Into The Abyss (Guardian)
• Greece’s Firebrand Finance Minister Deserves to Be Heard (El-Erian)
• Athens Cheers German President’s Stance On WWII Reparations To Greece (RT)
• Merkel Says Germany Can’t Cut Off Nazi Past, Cites Greece (Bloomberg)
• Trading in Greek Government Bonds Slows to a Trickle (WSJ)
• Greek Medical Ass’n: Clinic For The Poor ‘Illegal’, ‘Unfair Competition’ (KPG)
• Bernanke’s Rebuttal (WSJ)
• Schäuble Spied For The Americans And Told Lie After Lie About ClubMed (Slog)
• Saudi Arabia Uses US-Supplied Cluster Bombs In Yemen (Human Rights Watch)
• Who Is Bombing Whom In The Middle East? (Robert Fisk)
• Tax The Rich, Save The Budget $19.5 Billion A Year: Australia Institute (SMH)

Much more here: Debt Rattle May 4 2015 – TheAutomaticEarth.com