The present world economic and political order – A madhouse where the Arsonists are Running the Fire Brigade‏

I have written a lot about the present economic and political disorder (including foreign policy), where the common people are the ones paying the price for the gigantic folly by the political class, old media, central and investment banks, hedge funds etc.; who are pushing risk, leverage and debt to ridiculous and dangerous extremes.

This absurd Alice in Wonderland economic and political farce has been going on now for some time. And the Rabbit Hole is getting deeper and deeper because of the actions, and inactions, of the people mentioned above.

When you start analyzing these figures you get utterly horrified of the totals of the open derivatives positions in the US and European markets.

Just as an example: the four big investment banks in USA (Goldman Sachs, JP Morgan Chase, Citibank and Bank Of America) ONLY “covers” 2,27 % of the Total Exposure with ALL their Assets!

To sum up – TOTAL EXPOSURE TO DERIVATES for ONLY these four banks:

207, 375, 086, 000, 000 TRILLION DOLLARS!!!!!!!!!!!

TOTAL ASSETS for these four banks:  4,720,464,000,000 TRILLION DOLLARS

And remember: these figures are now over one year old. Today’s figures are worse.

If you do the math for example for Goldman Sachs, it has a total exposure to derivatives contracts that is more than 364 times greater than their total assets!

To put these GIGANTIC sums into perspective let’s compare with the GDP from USA and all of EU from 2011.

There a lot of different way to calculate GDP and the figures for each year. Add to that exchange fluctuations, conversion rates etc. So the figures below come from the same source (IMF) to make the comparison easier.  And it is their conversion.

GDP USA 2011 – 15,094,025 billion US dollars

GDP EU 2011 –  17,610,826 billion US dollars

Total GDP for EU and USA 2011: 32,704,851 billion US dollars.

Let’s compare these 32,704,851 billion US dollars with TOTAL EXPOSURE TO DERIVATES for  these four above mentioned banks:

207, 375, 086, 000, 000 TRILLION DOLLARS!!!!!!!!!!!


32,704,851 billion US dollars in COMBINED GDP of EU and USA

Anyone see any problem???”

See among others my posts:

After Cyprus there can be NO Trust Anymore

The economic mess and structural problems in EU and US – Part 1

The economic mess and structural problems in EU and USA – Part 2

Why the Euro is doomed – the German households net wealth in not EVEN HALF of that compared to Italians

Citizens! Forgive us for not arresting those truly responsible for this crisis: bankers and politicians

This is why the Euro is doomed

EU a stupid empire on purpose

EU – an unaccountable mess created by an undemocratic treaty – Now also a crony Bankocracy

The scam that is called EU and the Euro is behind the present crisis

Below are some observations from people with very long experience in the investment and economical field. So rather than me writing again I give you these people’s views.

First from John Mauldin in his newsletter from November 30th (you have to be a subscriber). John Mauldin is a renowned long time financial expert who has written extensively and in depth about the world markets and economic situation. He has his own investment companies; he is an advisor to hedge funds, he an author of several books etc.

(Note: Most of the bold are mine and all underlining is mine. And the charts are mine)

Arsonists Running the Fire Brigade

”I led off by forming an analogy to my Thanksgiving Day experience:

I rather think the stock market is acting like we did at dinner. When the alarms go off, we note that we have heard them several times over the past few months, and there has never been a real fire. Sure, we had a credit crisis in August, but the Fed came to the rescue. Yes, the subprime market is nonexistent. And the housing market is in free-fall. But the economy is weathering the various crises quite well. Wasn’t GDP at an almost inexplicably high 4.9% last quarter, when we were in the middle of the credit crisis? And Abu Dhabi injects $7.5 billion in capital into Citigroup, setting the market’s mind at ease. All is well. So party on like it’s 1999.

However, I think when we look out the window from the lofty market heights, we see a few fire trucks starting to gather, and those sirens are telling us that more are on the way. There is smoke coming from the building. Attention must be paid.

I was wrong when I took the (decidedly contrarian) position that we were in for a mild recession. It turned out to be much worse than even I thought it would be, though I had the direction right. Sadly, it usually turns out that I have been overly optimistic.

This year we again brought my now-96-year-old mother to my new, not-quite-finished high-rise apartment to share Thanksgiving with 60 people; only this time we had to contract with a private ambulance, as she is, sadly, bedridden, although mentally still with us. And I couldn’t help pondering, do we now have an economy and a market that must be totally taken care of by an ever-watchful central bank, which can no longer move on its own?


I am becoming increasingly exercised that the new direction of the US Federal Reserve, which is shaping up as ”extended forward rate guidance” of a zero-interest-rate policy (ZIRP) through 2017, is going to have significant unintended consequences. My London partner, Niels Jensen, reminded me in his November client letter that,

In his masterpiece The General Theory of Employment, Interest and Money, John Maynard Keynes referred to what he called the ”euthanasia of the rentier”. Keynes argued that interest rates should be lowered to the point where it secures full employment (through an increase in investments). At the same time he recognized that such a policy would probably destroy the livelihoods of those who lived off of their investment income, hence the expression. Published in 1936, little did he know that his book referred to the implications of a policy which, three quarters of a century later, would be on everybody’s lips. Welcome to QE.

It is this neo-Keynesian fetish that low interest rates can somehow spur consumer spending and increase employment and should thus be promoted even at the expense of savers and retirees that is at the heart of today’s central banking policies. The counterproductive fact that savers and retirees have less to spend and therefore less propensity to consume seems to be lost in the equation. It is financial repression of the most serious variety, done in the name of the greater good; and it is hurting those who played by the rules, working and saving all their lives, only to see the goal posts moved as the game nears its end.

Central banks around the world have engineered multiple bubbles over the last few decades, only to protest innocence and ask for further regulatory authority and more freedom to perform untested operations on our economic body without benefit of anesthesia. Their justifications are theoretical in nature, derived from limited-variable models that are supposed to somehow predict the behavior of a massively variable economy. The fact that their models have been stunningly wrong for decades seems to not diminish the vigor with which central bankers attempt to micromanage the economy.


The destruction of future returns of pension funds is evident and will require massive restructuring by both beneficiaries and taxpayers. People who have made retirement plans based on past return assumptions will not be happy. Does anyone truly understand the implications of making the world’s reserve currency a carry-trade currency for an extended period of time? I can see how this is good for bankers and the financial industry, and any intelligent investor will try to take advantage of it; but dear gods, the distortions in the economic landscape are mind-boggling. We can only hope there will be a net benefit, but we have no true way of knowing, and the track records of those in the driver’s seats are decidedly discouraging.”

”but now let’s jump into Code Red. In this section, we deal with the topic of central banking and its failures and ponder the implications of continuing to give the same people ever more authority and responsibility. This is from Chapter 5, called:

Arsonists Running the Fire Brigade

In the old days, central banks raised or lowered interest rates if they wanted to tighten or loosen monetary policy. In a Code Red world everything is more difficult. Policies like ZIRP, QE, LSAPs, and currency wars are immensely more complicated. Knowing how much money to print and when to undo Code Red policies will require wisdom and foresight. Putting such policies into practice is easy, almost like squeezing toothpaste. But unwinding them will be like putting the toothpaste back in the tube.


Promoting Failure

We’ll admit that we’re having too much fun criticizing central bankers, the Colonel Jessups of the Code Red world. But please don’t just take our word for it when we tell you that they’re clueless. Let’s look at what others have written.

In 2009 Congress created the Financial Crisis Inquiry Commission to uncover the causes and consequences of the financial catastrophe that almost brought down the world financial system. They roundly condemned the Federal Reserve:

We conclude this crisis was avoidable. The crisis was the result of human action and inaction…. The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage lending standards. The Federal Reserve was the one entity empowered to do so and it did not…. We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets.

Not surprisingly, public confidence in the Fed has plummeted.

Italian Ind production

The Federal Reserve performed disastrously before the Great Financial Crisis, but almost all central banks were asleep at the wheel. The record of central banks around the world leading up to the Great Financial Crisis was an unmitigated disaster. All countries that had housing bubbles and large bank failures failed to spot them beforehand. In the case of England, where almost all major banks went bust (some rather spectacularly!) and required either nationalization or fire sales to foreign banks, the Bank of England never saw the crisis coming. Let’s look at what The Economist has to say about central bank failures:

In 1996 the Bank of England pioneered financial-stability reports (FSRs); over the next decade around 50 central banks and the IMF followed suit. But according to research cited by Howard Davies and David Green in ”Banking on the Future: The Fall and Rise of Central Banking,” published last year, in 2006 virtually all the reports, including Britain’s, assessed financial systems as healthy. In the basic function of identifying emerging threats, ”many central banks have been performing poorly,” they wrote.

According to published reports, the Bank of England only learned about the bankruptcy of one huge bank after another a few days before the actual public announcement. So much for staying on top of the situation. The regulators were captured by the very institutions they were supposed to regulate, with neither the banks of the regulators understanding the serious nature of the problems they were creating with their actions.


Housing bubbles swelled and burst everywhere: Spain, Ireland, Latvia, Cyprus, and the United Kingdom. Countries that had to recapitalize or nationalize their banks were broadsided by a disaster they did not anticipate, prepare for, or take action to prevent. In the case of Spain, even after the crisis unfolded, the Bank of Spain acted like a pimp for its own banks. It insisted nothing was wrong and proceeded to help its banks sell loads of crap to unsuspecting Spaniards in order to recapitalize the banks. (We apologize for our language, but there is no other word besides crap that properly characterizes selling worthless securities to poor pensioners – well, there are, but they are even less suitable for public consumption).

In fairness, central bankers did save the world after the Lehman Brothers bankruptcy. The money printing that the Federal Reserve oversaw after the failure of Lehman Brothers was entirely appropriate to avoid another Great Depression. But giving them credit for that is like praising an arsonist for putting out the fire he started.

The failure of central banks makes it all the more remarkable that they were given even more responsibility in the wake of crisis. Since 2007 central banks have expanded their remits, either at their own initiative or at governments’ behest. They have exceeded the limits of conventional monetary policy by buying massive amounts of long-dated government bonds, mortgage-backed securities, and other assets. They have also taken on more responsibility for the supervision of banks and the stability of financial systems.


The Banking Act of 1933, more popularly known as the Glass-Steagall Act, forced a separation of commercial and investment banks by preventing commercial banks from underwriting securities. Investment banks were prohibited from taking deposits. Until it was repealed in 1999, the Glass-Steagall Act worked brilliantly, helping to prevent a major financial crisis. It was replaced by the Graham-Leach-Bliley Act, which ended regulations that prevented the merger of banks, stock brokerage companies, and insurance companies. The American public’s interests were thrown to the wolves of Wall Street, and the Fed and the Clinton administration gave the middle finger to financial stability.

After the Great Financial Crisis, Congress could have simply reinstated Glass-Steagall. The act was only 37 pages long, but it had worked incredibly well. Instead, after an orgy of bank lobbying and Congressional kowtowing to the bankers who had brought the world to the brink of a global depression, Congress passed the Dodd-Frank Act. It is over 2,300 pages long; no one is sure what is in it or what it means; and it has added a dizzyingly complex tangle of regulations and bureaucracy to what should have been a simple, straightforward reform of the financial sector. (The act is so long and complicated that it was nicknamed the ”Lawyers’ and Consultants’ Full Employment Act of 2010.”) You will hardly be reassured to learn that the Federal Reserve’s powers were expanded through Dodd-Frank.

Please note that it was the same banks and investment firms that lobbied to repeal Glass-Steagall in 1999 that so aggressively and successfully lobbied for the Dodd-Frank Act. While there are some features contained in the plan that are good, the basic problems still remain. Industry insiders were able to assure that business as usual could continue. And to judge from their profits, it has done so remarkably well.

Figure 5.4 Major financial legislation: number of pages

Financial legislation

The Fed didn’t need more powers. In the years leading up to the Great Financial Crisis, the Fed already had almost all the tools it needed to prevent the subprime debacle. It simply failed to use them. You could call that lapse nonfeasance, dereliction of duty, going AWOL, or anything other than doing their duty. If you don’t believe you are capable of recognizing a bubble in advance, then all the additional regulations in the world won’t make any difference in preventing a bubble. Dodd-Frank merely gave them more regulations not to enforce. It is the mindset that needs changing, not simply the regulations.

According to the Financial Crisis Inquiry Commission, the Federal Reserve failed to use the tools at its disposal to regulate mortgages or bank holding companies or to prevent the abusive lending practices that contributed to the crisis. The central bank didn’t ”recognize the cataclysmic danger posed by the housing bubble to the financial system and refused to take timely action to constrain its growth,” the report said. It also ”failed to meet its statutory obligation to establish and maintain prudent mortgage lending standards and to protect against predatory lending.”

The most sordid part of the Great Financial Crisis was not the extreme failure by central banks to regulate. The most egregious violation of the public interest came in the form of the massive subsidies and aid the central banks gave to the banking system when the crisis was underway. The great journalist and essayist Walter Bagehot argued in the mid-19th century that during a financial crisis central banks should lend freely but at interest rates high enough to deter borrowers not genuinely in need, and only against good collateral. During the crisis, the Fed and other central banks lent trillions of dollars at zero cost against the shoddiest of collateral. And the Fed went out of its way to provide gifts to Wall Street banks via the back door. For example, when AIG went bust, Timothy Geithner decided that the US taxpayer should pay out credit default swaps to AIG’s counterparties at full price. Goldman Sachs was given a parting gift to $10 billion. Geithner did not even negotiate a haircut. The money went to dozens of banks, many which were not even American. It is no wonder Geithner became well-known as ”Wall Street’s lapdog.”


Our good friend Dylan Grice wrote a fascinating piece on what happens when you have too many rules and too little common sense. In a Dutch town called Drachten, local government decided to take out all traffic lights and signs. They hoped people would pay more attention to the road rather than fixate on rules and regulations. They were right. In Drachten there used to be a road death every three years, but there have been none since traffic light removal started in 1999. There have been a few small collisions, but these are almost to be encouraged. A traffic planner explained, ”We want small accidents in order to prevent serious ones in which people get hurt.” Let’s see what Dylan has to say about the lessons for capital markets:

You might be thinking that traffic lights don’t have anything to do with the markets we all work in. But I think they do. Instead of traffic lights and road signs think rating agencies; think Basel risk weights for Core 1 and Core 2 bank capital; think Solvency 2; or think of the ultimate market regulators of our currencies – the central banks – and the Greenspan/Bernanke ”put” which was once imagined to exist. Haven’t these regulators provided the same illusion of safety to financial market participants as traffic safety tools do for drivers? And hasn’t this illusion of safety been even more lethal?

Wouldn’t it be nice if central bankers thought more like Drachten town planners? But central bankers and parliaments prefer extensive rules to a common-sense approach.

Central Banks and GDP growth

Unlike the planners of Drachten, the Federal Reserve and central banks around the world issue extensive sets of regulation, fail to enforce them, encourage everyone to speed, and then when crashes happen they protect as many banks as possible from the consequences of their own actions.

The Federal Reserve is in desperate need of reform. This doesn’t mean that politicians should be deciding interest rates or that banking supervision should be taken away from central banks. But central bankers should be answerable to the public for how they do their jobs. Accountability has been completely missing throughout the entire crisis. Almost all central banks failed to do even the basics of their job. The regulations they created, especially in Europe, made it possible for banks to take massive risk and make huge profits that ultimately had to be bailed out by taxpayers.

They believe the banks and other institutions they were regulating when they showed the models which they created which demonstrated conclusively there was no risk. Everyone, bankers and regulators, believed we were in a new era, for the old rules of common sense didn’t apply. Central bankers didn’t need more rules or regulations. They failed miserably at even carrying out the simple job they had. The regulatory functions of central banks should be treated like those of any other regulatory agency. It is critical that we hold central bankers accountable for their management of the banking system.


No Apologies, Only Promotions

One of the most disastrous battles of World War I was the British Gallipoli campaign in Turkey in 1915. It was utterly devastating, leaving more than 50,000 British wounded and almost 100,000 dead. Winston Churchill, first lord of the Admiralty, was one of the architects of the campaign. In the wake of the outcome, he resigned his post to become a soldier in the war. Churchill was a humble man who felt he was at fault. He was honorable. But if Churchill had been a central banker, he would never have had to accept responsibility or resign. He would have kept his job and been given even more far-reaching powers and a big pay raise to boot.

For the past few years, central bankers have been living large. The same people who brought us the Great Financial Crisis are now bringing us a world of Code Red policies and financial repression. The arsonists are running the fire brigade.

Where is the central banker who has apologized for contributing to the crisis or for being asleep at the wheel? Given how disastrous their performance has been, it is extraordinary that the same cast of characters is still running the show. Central bankers are lucky that they still have jobs. As far as we are aware, no central banker was fired for incompetence or mismanagement. Many have retired and are now enjoying generous pensions and highly paid consulting careers advising investment funds as to what their former colleagues might do next.


Central bankers have had plenty of time to discuss the financial crisis since 2008, but they have provided only scholarly disquisitions as to what went wrong in the banking crisis, without accepting any responsibility at all. At no time have any central bankers admitted that they might have ignored the warning signs of excessive debt, kept interest rates too low for too long, ignored bubbles in housing markets, failed to regulate banks correctly, or proved themselves even mildly incompetent.

Not only were central bankers not fired, many were promoted instead and given pay raises. Timothy Geithner, who headed the Federal Reserve Bank of New York, not only failed to regulate a host of banks that needed massive government bailouts but was an active apologist for Wall Street banks. For his efforts he was promoted to Secretary of the Treasury under President Obama. In Europe, Spanish central bankers stand out as perhaps the most incompetent ever, having overseen dozens of banks that created the biggest housing bubble in European history and having failed to recognize problems not only before but after they happened. Bankers like Jose Viñals, Jose Caruana, and others were given plum jobs at the IMF and the ECB after being asleep at the wheel in Spain.

Japan debt

Granting extra powers to central banks without a change in the philosophy behind their management is like encouraging an irresponsible teenager. Imagine your teenage son borrowed the family car and crashed it, and instead of punishing him you bought him a new Ferrari to test drive. Conventional monetary policies are like a sturdy old family station wagon, but Code Red policies are like a modified Ferrari 288 GTO capable of hitting 275 miles per hour. Given how spectacularly central banks failed during the Great Financial Crisis, it blows the mind that they’ve been handed the keys to a faster set of wheels.

One last thought. You might get from reading this that we are against rules and regulations. Far from it. We just like very simple, workable rules. Reinstate Glass-Steagall. Limit the ability of banks to create leverage, and require even more capital as they get larger. Banks that are systemically too big to fail are too big, period. Take away the incentive to grow beyond what is prudent for the deposit insurance scheme of a nation to maintain. Allowing bankers to take the profits and then hand taxpayers the losses in a crisis is not good policy, even if it is bolstered by 1,000 pages of regulations written by lawyers and bank lobbyists who then proceed to ”massage” them in order to do what they want to anyway.

But, alas, such hopes may remain dreams deferred until there is yet another crisis and taxpayers are asked to absorb even greater losses (but we can always hope!). So, in the meantime, as prudent investors and managers, we must be aware of the realities we face. The saying in Africa is that it is not the lion you can see that is the danger, instead it is the one hidden in the grass that leaps out at you as you try to escape the one you see. Later we will talk about a few strategies that can help you handle the risks that crouch hidden in the grass.”


Second this presentation from Grant Williams, investment and financial expert from Singapore, with 28 years of experience of world markets, to get another angle of the same problem. He is now a portfolio and strategy advisor for a hedge fund in Singapore.

“Grant Williams ”pulls no punches” in this all-encompassing presentation as the ”Things That Make You Go Hmmm” author reflects on what is behind us and looks ahead at the ugly reality that we will face when ”the impurities of QE are finally flushed from the system.” Central bankers of today have ”changed everything” he chides, ”in ways that will ultimately end in disaster.” Following extraordinarily easy monetary policies across all of the world’s central banks, Williams explains why ”we are now near the popping point of the 3rd major bubble of the last 15 years,” each bigger than the last. The only way Janet Yellen avoids being at the helm when this ship goes down is to blow an even bigger bubble than Bernanke’s government bond experiment, ”which is highly unlikely.” From how QE works, why many don’t ”feel” wealthy anymore, to the fact that ”the geniuses that gave this thing life, don’t have the guts to kill it,” Williams warns, ominously, ”the bills have come due on the blissful latest 30 years.”


Returning to a world with which we are familiar is going to require either some real magic on the parts of Draghi, Kuroda, Carney, and soon to be Yellen; or some kind of tornado that sweeps away everything in its path and allows the world to build again from more solid foundations.


Wizened In Oz: ASFA 2013 Presentation. Perth, November 2013

Third, just to remind us that it is the normal, hardworking people that are following the rules that are getting screwed, just take a look at this graph from USA below:

This is why all these welfare systems are going to crash taking the societies with them.


US welfare cliff

“While what little remains of America’s middle class is happy and eager to put in its 9-to-5 each-and-every day, an increasing number of Americans – those record 91.5 million who are no longer part of the labor force – are perfectly happy to benefit from the ever more generous hand outs of the welfare state. Prepare yourself before listening to this… calling on her self-admitted Obamaphone, Texas welfare recipient Lucy, 32, explains why ”taxpayers are the fools”…

”…To all you workers out there preaching morality about those of us who live on welfare… can you really blame us? I get to sit around all day, visit my friends, smoke weed.. and we are still gonna get paid, on time every month…”

She intends to stay on welfare her entire life, if possible, just like her parents (and expects her kids to do the same). As we vociferously concluded previously, the tragedy of America’s welfare state is that work is punished.”

As quantitied, and explained by Alexander, ”the single mom is better off earnings gross income of $29,000 with $57,327 in net income & benefits than to earn gross income of $69,000 with net income and benefits of $57,045.

“We realize that this is a painful topic in a country in which the issue of welfare benefits, and cutting (or not) the spending side of the fiscal cliff, have become the two most sensitive social topics. Alas, none of that changes the matrix of incentives for most Americans who find themselves in a comparable situation: either being on the left side of minimum US wage, and relying on benefits, or move to the right side at far greater personal investment of work, and energy, and… have the same disposable income at the end of the day.”

WELFARE ABUSE: 32 years old Austin, TX welfare recipient says (October 30)

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  1. sophiaalbertina Says:

    John Mauldin interview

    As a complement to this post, here is the recent interview with John Mauldin by Steve Forbes with the apt title: How Central Bankers Will Ruin The Global Economy

    You can watch the interview here:

    Transcript of the interview:

    John Mauldin: How Central Bankers Will Ruin The Global Economy

    John Mauldin, investor and co-author of the new book Code Red, recently sat down with me to discuss monetary policy, a still-lagging economy, and how he might operate the Federal Reserve if he were in Ben Bernanke’s or Janet Yellen’s shoes.

    Steve Forbes: John, good to have you back again.

    John Mauldin: Steve, it is always fun to be with you.

    Forbes: You’ve got a new book out, called Code Red.

    Mauldin: Yes.

    Forbes: Hot off the press.

    Mauldin: Yeah, show it up twice now. There we go.

    Forbes: Code Red, Jack Nicholson, A Few Good Men. Explain first the title.

    Mauldin: Well, in that movie Jack Nicholson famously felt that he had to protect America. He was in charge. And so he issued his famous ”code red,” and his line was, ”You need me on that wall.” So at the beginning of the book I paraphrased his speech as if it were Ben Bernanke talking or now Janet Yellen:
    ”You need me on that committee. You want me on that central bank. Yes, you work for savers and creditors, but I’m responsible for whole economies. I have greater things to worry about.”

    So in 2008 the central banks of the world had to issue a code red.
    It’s like, a patient is brought by ambulance to the hospital, and instead of operating you put him on morphine. Or it’s like asking the arsonist to put out the fire. Part of the reason we had this very crisis was because of central bank policies and government regulations and the interweaving of large investment banks and politicians and central bankers.
    I don’t want to get into conspiracy theories; I think it’s just people’s self-interest.

    Forbes: How about a stupidity theory?

    Mauldin: Some of it was stupid, but some of it was just greed. Nonetheless, we had a crisis. The banking system froze up. We went to the edge of the abyss. We looked over and it was a long way down. And I believe central banks appropriately provided liquidity. That was their function, and I would argue that almost the sole true function of a central bank is to be there when the stuff hits the fan.

    Forbes: To be what Bagehot called the lender of last resort.

    Mauldin: Yes, the lender of last resort. That being said, they never took the patient off morphine. At your and my age, we’ve had the unpleasant experience of caring for friends who are in the hospital. And in today’s world, my mother has a hip operation, and they have her up and walking the next day.
    They just opened up her hip, put a new hip in. One of my good friends, the same thing – the next day he’s up and walking. Forget this morphine stuff. Forget lying around in a hospital bed like we used to have to do. Well, the central banks are still operating with 1900s medicine, so they just kept the patient on morphine.

    And now the patient is addicted. The problem is, when you want to end that addiction, whether it’s alcohol or drugs or quantitative easing, withdrawal is not going to be pretty. But the Fed’s hope is that somehow or other, ”We can get the economy going. We can create animal spirits,” and that people won’t notice when they start withdrawing a trillion dollars a year of monetary easing out of the global system.

    And when they even hinted that they might reduce the amount of the increase, the market just went crazy. And the next week, all the Federal Reserve governor types went, ”Oh, no, no, no. That’s not what we meant! We mean something different. And it’s going to be all about the data.”

    Everything’s data-dependent. It’s like, weren’t we data-dependent already? Central bankers and economists serve the function of shamans and evangelists. They’re there not to gaze at sheep entrails; they look at data and try to tell us what the future is going to be.

    Now, as we discuss in several chapters of the new book, Fed economists are particularly bad at predicting the future. It’s worse than if you and I just flipped a coin. Okay? It’s almost statistically impossible to be as bad as central bankers are at predicting the future. And yet we’re supposed to trust them when their data tells them and they tell us, ”Well, we need to apply this amount of quantitative easing and create this amount of money at this interest rate level. And somehow or other it’s gonna magically transform into these economic numbers out here in the future, even though for decades we’ve been predicting this stuff, and we haven’t been right yet.”

    So it doesn’t end well. We have 12 men and women sitting in a room thinking they can manipulate an economy with data they don’t truly understand and that they can’t actually measure with tools they’re making up as they go along. Is that passionate enough, Steve? I get wound up, but their actions have consequences.

    Forbes: So you talk about central bankers going wild.

    Mauldin: Yes.

    Forbes: How do they avoid blame? Powerful agency, unchecked, make their own money.

    Mauldin: I think at the end of the day they’re going to, what I call, lose the narrative. They’re gonna lose their ability to be the guy behind the curtain making the magic happen.

    Forbes: Now, that leads into a quick, interesting subject. Why are so many people intimidated by monetary policy? Capitol Hill, for all the stupidity there, people do master, many of them, complex subjects. What’s the inhibition about monetary policy?

    Mauldin: Steve, it’s magic. Okay? Economists would like to think that…
    Forbes: So maybe David Copperfield should be Fed?

    Mauldin: David Copperfield might do as good a job. Economists like to think that we can create models full of equations; we have physics envy. But economics is art as much as it is science. It is not something that is to the level yet – maybe in the future, with new systems and new theories – but we are not yet able to truly model an economy and to understand what the inputs are.

    Forbes: Can’t model one person, for cryin’ out loud.

    Mauldin: Well, I have trouble modeling my seven kids. Just like you – we were talking about your daughters. Life is amazingly complex. And when we try to manage the ups and downs by not allowing the system to correct in minor ways, then we build up the potential for a very large correction.

    Forbes: Sort of like suppressing forest fires?

    Mauldin: Like suppressing forest fires. It’s a great analogy. In fact, we use it in our book. The consequence is that we’re now at a trillion dollars’ of quantitative easing a year. The Fed balance sheet is at $4 trillion. One of my questions to Janet Yellen – we were talking about this earlier – if I was on the Senate committee, I’d ask, ”What’s the theoretical limit? Is there a theoretical limit to the Federal Reserve balance sheet?”

    Now, you and I and most right-thinking human beings and economists would say, ”Well, yes, there has to be a theoretical limit.” Well, what is that theoretical limit? And if the answer is, ”It’s data dependent,” then let’s look at the data. We both knew that’s exactly what the Fed’s answer was gonna be.

    It’s data dependent” is a non-answer. That’s saying, ”We won’t know what the theoretical limit is until we’ve passed it.” Well, are we going to have to get into a situation that looks like the ’70s again? And today we get away with printing of money that we couldn’t have gotten away with in the ’70s, because the velocity of money is slowing down.

    Forbes: Well, that leads to an amazing question. How could the Fed have created the balance sheet that it has? If anyone had looked at that five years ago, they’d have said it would be Weimar German Republic hyperinflation.

    Mauldin: Which many people did.

    Forbes: Why didn’t it happen?

    Mauldin: It is all about the velocity of money. That money hasn’t moved out; it’s still in reserves.

    Forbes: Why has that happened?

    Mauldin: Well, that’s a good question, and I would like you to find a paper anywhere that explains Fisher’s concept of the velocity of money that he gave us back in the ’30s. Here’s what we know about it. It rises and it falls over long periods of time. And the velocity of money started turning down well before this last crisis, from a very high level. And now it’s falling. And it will continue to fall until some moment in time at which it begins to rise again.

    And when it begins to rise, if we’ve got a $5 trillion, $6 trillion balance sheet and things get bad, we get a recession. ‘Cause God knows we have not figured out how to tame the business cycle. I don’t care what they think they can do with targeting nominal GDP. Then what does the Fed do? Do they give us $2 trillion in an era of a rising velocity of money? Do they have to find Volcker and bring him back?

    This just doesn’t end well at some point. And now, people wanna go, ”Well, when? Can I ride it out? When do I need to get out?” I don’t know. And they don’t know, either. This is not Tom Landry sitting on the sidelines of a Dallas Cowboys game – for those of us of a certain era, remember the man with the fedora? He had a plan. If it was third and 27 and they were down a touchdown, he had a play for that. He had everything planned out. The Federal Reserve doesn’t have that. They’re making it up as they go along. And it’s frustrating for investors because we don’t know the outcome, nor do we know what they’re going to do. We’re guessing.

    Forbes: Now, if you were Janet Yellen, going into the Fed knowing what you know, what would you do?

    Mauldin: If I were Janet Yellen, I’d be talking about data dependency. I would do exactly what she’s going to do, which is to give non-answers so that she can go back and do whatever the heck it is she wants to do.

    Forbes: What would you do? How would you try to get us out of this mess?

    Mauldin: I would become kind of like Volcker was back in the ’80s, when he was burned in effigy. If you remember…

    Forbes: Oh, I remember.

    Mauldin: You remember. He was not popular. There was a reason Reagan didn’t reappoint him. We look back now and we go, ”Oh, Volcker was a great man.” He did what had to be done. He allowed the economy to function on its own. He said, ”We’re not going to allow inflation to be the controlling agent. We’re going to be opportunistically disinflationary over time.”

    But to start that process, he had to take the patient off the morphine. And I would not immediately end quantitative easing because God knows that could be terrible. But I would begin to taper. I would probably, contrary to some of my more aggressive fellow analysts, I would just say, ”Ah, the Fed’s got a $4 trillion balance sheet. Leave it alone.”

    That’s what they did in the ’30s. And eventually nobody notices it. But if you have to start letting it taper off, then you allow it to taper off by simply rolling over sales. And so much of it is mortgages, it’ll reduce anyway. And you allow rates to rise to a somewhat more natural rate. We don’t have enough time here now, but there is this concept of the natural rate of interest. And when you artificially hold interest rates below that natural rate of interest, which we’ve done for four years now, you get in trouble. And now, in the new Fed research and policy papers coming out, they’re talking about giving us forward guidance to 2017.

    We’re talking eight years of artificially low, financially repressed interest rates? That is theft. And what it is is a theft of time. Because we have a generation of people who have played the game by the rules. They’ve saved their money. They’ve done what they were supposed to do. And now we’re saying, ”You’re not going to get enough return unless you move out the risk curve.” But they are precisely at the point in time in their lives when they shouldn’t be taking risks.

    Then Bernanke comes on the stage and says, ”We made the stock market look good. How wonderful is that?” What have we done? We have given bankers and people with assets the opportunity to make enormous amounts of money. 2009 came along, and bankers were on their backs. The world was coming to an end, but who has made out the most since then? Bankers, because we flipped the world to make the world good for them.

    I want a banker to take my deposit and to lend it out. And to pay me money on it. I want him lending it into the community for productive purposes. I don’t want him lending money unnecessarily to hedge funds. I make money, and I invest in a lot of hedge funds, but I don’t want that community bank lending to hedge funds; I want it going into productive purposes.

    The hedge funds can find money somewhere else, thank you. They’re very good at that. What we need is to understand that we have stolen time from people when that was the only thing they had. And when you take it from them, you’re taking away their lifestyle. You’re taking away their ability to enjoy what should have been a golden time.

    Forbes: Now, well, we’ll get to what you recommend in the book. But why are economists so obsessed with growth? The only way they think they can do it is by credit bubbles. They wouldn’t call it that, but that’s in essence what they’re reduced to: create a credit bubble.

    Mauldin: The reigning theoretical economic paradigm is one of, let’s call it neo-Keynesianism. I don’t really think Keynes would be completely on board with it today. And it has a fetish for consumption. They want to drive consumer spending. And the way you drive consumer spending is to make money cheap so that people can buy cars and other stuff at lower prices.

    And in essence, debt is basically future consumption brought forward. Another way to say that is that current spending, current borrowing, is future consumption denied when it’s borrowed for consumption today. Now, debt for productive purposes, debt for me to buy a robot or steel – things I can put labor into to produce a product – that’s productive debt.

    But consumption debt is what leverages what the Keynesian economic guys seem to be wanting to produce. And it does spur income and investment today, just like the housing bubble did. There was no question the housing bubble employed a lot of people. A lot of people made a lot of money, and then a lot of people lost money because then they were on the wrong side of the leverage. It would be more appropriate, I think, to target income. That’s the important part of what an economy should be doing. How can we produce more income? How can we produce more profit? And it doesn’t have to be widgets; it can be services. Facebook is a perfectly fine economic activity. It’s an entrepreneurial service. It allows us to do things that we will all enjoy doing. There are many, many ways. Like restaurants. There’s tons of ways to produce a service or a good that people want. But that’s production, not consumption.”


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