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Charles Hugh-Smith And Sen. Richard Shelby: Keynesian Policy Is To Punish Capital Accumulation And Reward Leveraged Debt Expansion, We’re Headed Down The Road That Europe’s Already On!

January 2nd, 2013

Global economy: Central bankers gone wild

Let’s start with the US Federal Reserve, which did something that it’s never done before: It tied its actions to actual, concrete numbers in the economy.

The Fed said it would keep stimulating the weak US economy until the nation’s unemployment rate fell to 6.5 percent (it’s now at 7.7 percent). It will also keep interest rates historically low as long as inflation in the US remains under 2.5 percent.

That may not sound radical, but it is.

That’s because it’s the first time the US central bank has used such explicit targets.

Why the switch?

The Fed hopes it will be a more transparent way to let markets know its plans. “We think it’s a better form of communication,” Federal Reserve Chairman Ben Bernanke said.

But more importantly, the use of explicit “guideposts” signals that the Fed is far more concerned about the weak employment situation in America than it is with its primary worry of keeping inflation under control.

The move is part of an evolution in central bank thinking that’s been pushed, in particular, by the president of the Federal Reserve Bank of Chicago, Charles Evans.

Here’s how Evans described his thinking, way back in 2011:

“Imagine that inflation was running at 5 percent against our inflation objective of 2 percent. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn’t any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.”

So it’s burn, baby, burn until the job market improves.

 

 

Charles Hugh-Smith: The Dangerous Blindspots of Clueless Keynesians

Here is a partial list of Keynesian blindspots:
1. The Keynesian Model no longer works; it is counter-productive and destructive.
2. Markets that have been managed by the Central State/Central Banks are broken and no longer function in pricing risk and assets.
3. Keynesians are incapable of recognizing opportunity cost: the money they borrow and squander on sinkholes is no longer available for productive uses.
4. Keynesians are blind to the difference between an investment that yields a positive return and a sinkhole that sucks scarce capital away from productive uses.
5. Keynesians are incapable of recognizing institutionalized moral hazard is the inevitable consequence of flooding the financial sector with cheap, easy money.
6. Keynesians are blind to the fact that cheap, easy money at near-zero rates destroys the premium on real capital (saved cash), fatally distorting the economy and finance.
7. The Keynesians are blind to the eventual consequences of higher interest rates on rapidly rising sovereign debt. What’s left of the private market for bonds eventually recognizes that Central Planning has pushed the risk of default or currency depreciation much higher. That will push interest rates higher, unless the central Bank buys essentially all newly issued Treasury debt.
…
Long, risky trade voyages were hedged with the equivalent of options and limited stock companies that distributed risk for a price. Leverage was limited by the transparency and appetite for risk.
Compare that with Bernanke’s Keynesian policies, all of which severely punish savers (i.e. the accumulation of capital) and reward leverage and debt. By lowering interest rates to zero, Bernanke has imposed the opposite of the World War II experience of forced savings–he has made cash into trash and pushed everyone into risk assets.
By making credit dirt-cheap and backstopping financial-sector losses (i.e. institutionalizing moral hazard), Bernanke has destroyed the market’s ability to discipline malinvestment and openly price risk and assets.
World War II launched a boom precisely because private capital accumulation/savings were enforced; when the war ended, there was a vast pool of capital available for investment and consumption.
Keynesian policy is to punish capital accumulation and reward leveraged debt expansion. Rather than enforce the market’s discipline and transparent pricing of risk, debt and assets, Keynesians have explicitly set out to re-inflate destructive, massively unproductive credit bubbles.
This is why the Central Planning Keynesian policies has failed so completely, and why they will continue to fail. The Keynesians are not engaged in capitalism, they are engaged in the destruction of capital, productive investment and the open pricing of risk, debt and assets. The markets are not allowed to price risk, capital and assets, so the economy is crippled. The Keynesian model is a Cargo Cult, mired in a distant, romanticized past where Central Planning, intervention and manipulation were solutions rather than the root of the economy’s fatal disease.

Obama Deal Adds $3.97 Trillion to Deficit Over 10 Years; Only 5 Republicans Voted Against; White-Flag Surrender

…For all the p#$%^&* and moaning over the fiscal cliff, there was never much of a “cliff” in the first place. Worse yet, every delay made matters increasing irresponsible in terms of addressing the deficit.

The final result, as passed by the Senate, watered-down budget cuts from $600 billion to a mere $12 billion.

Moreover, the extension of the tax cuts will add almost $4 trillion to the deficit over 10 years, according to the CBO analysis of the American Taxpayer Relief Act….

Senator: U.S. becoming Europe

Alabama Sen. Richard Shelby said Wednesday that the United States is “headed down the road that Europe’s already on.”

“We’re always wanting to spend and promise and spend and borrow, but not cut,” the Republican lawmaker said on Fox News’s “Fox & Friends.” “We’ve got to get real about this. We’re headed down the road that Europe’s already on.”



Shelby was one of eight members — who hailed from both sides of the aisle — to oppose the Senate’s fiscal cliff offer earlier this week. He slammed the final deal for not tackling issues like entitlement reform. The agreement extended Bush-era tax cuts for families making under $450,000 a year and warded off sequestration for another two months but did not take serious action on the debt or entitlements….

Senate’s Deal Means Higher Tax on 77% of Households
After fiscal win, Obama warns Congress on debt fight

U.S. Credit Ratings Test Is Yet To Come

(CNNMoney) Credit rating agencies are likely to hold off passing judgment on the U.S. credit rating until they have a clearer picture about the fate of the debt ceiling and longer term plans to reduce borrowing.

The New Year fiscal cliff agreement between the White House and Congress raised taxes on the richest Americans but postponed much of the toughest political wrangling on automatic spending cuts for another two months….

Next Comes The US Downgrade

$16,432,730,050,569

Treasury Direct link

The Daily History of the Debt Results

Historical returns from 12/26/2012 through 12/31/2012

The data for the total public debt outstanding is published each business day. If there is no debt value for the date(s) you requested, the value for the preceding business day will be displayed.

( Debt Held by the Public vs. Intragovernmental Holdings )

 

 

Date Debt Held by the Public Intragovernmental Holdings Total Public Debt Outstanding
12/26/2012 11,543,065,624,834.50 4,794,794,575,800.56 16,337,860,200,635.06
12/27/2012 11,546,343,682,876.98 4,791,899,708,870.10 16,338,243,391,747.08
12/28/2012 11,546,673,477,919.73 4,789,788,074,686.62 16,336,461,552,606.35
12/31/2012 11,581,517,550,395.07 4,851,212,500,174.05 16,432,730,050,569.12

Debt To GDP: 103%

…And with that we can close the books on the first quarter of Fiscal 2013, in which US public debt grew by $366 billion, some $122 billion per month on average.

This number will now remain fixed, and not change for the next two months, or until the debt ceiling is once again riased, most likely by another $2.4 trillion to $18.8 trillion, to much theatrical kicking and screaming, some time in February or March. In the meantime, any new debt issuance will have to be offset dollar for dollar with a reduction in various government retirement funds, Federal asset sales, SLGS issuance suspension, and the various other internal and external liability rearrangement, i.e., the Treasury’s emergency response, the various components of which were listed here.

And for those curious what this means in debt/GDP terms, we apply the roughly 1.5% annualized GDP growth to Q4 GDP to get a debt/GDP number at December 31, 2012 of 103%, and rising very rapidly.

 

Meanwhile….

Obama heads back to Hawaii — at taxpayer cost of $7 million…   

Obama vows more tax hikes: ‘We can’t cut our way to prosperity’  

The American People are the Big Losers In The Cliff Deal

by WashingtonsBlog

Bipartisan Hosing of the American People

The “fiscal cliff” deal will raise taxes for 77% of the American public.

It will add $4 trillion dollars to the deficit over the next 10 years.

It will create a drag on the economy equal to 1% of the grodd domestic product.

It creates uncertainty in the following areas:

A) the debt limit, B) the sequestered amounts, C) cuts in entitlement spending, D)additional taxes and don’t forget E) the President needs another Continuing Resolution (CR) to keep the lights on.

Blackrock’s Larry Fink is correct when he says:

The American People are the Big Losers In The Cliff Deal.

The entire “fiscal cliff” is a ruse to fleece the people.  Once again, the government has pimped us out.




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January 2nd, 2013 |