ANALYSIS: Why the Fed’s decision confirms to every thinking analyst that economic recovery is a myth

yellengag18915The Fed has talked the talk, but the US economy hasn’t walked the walk

By the time she finally said something yesterday, Janet Yellen’s options were between a pointy rock and a very crinkly hard place. So as expected, she sat on the fence.

After all the flat hours of trading before she spoke, western markets zapped up then down then back to slightly below where they started. It’s fair to say, I think, that the net result was relief rather than belief. Both the Dow and the FTSE fell again. Rising above the spin, there isn’t much confidence out there.

Regular Sloggers will by now know my views on both QE tapering and rate rises: the world is never going to be ready for them, because the world is in a slump: take QE out of the GDP calculation, and that is very obviously the case. It’s in a slump because the key elements in the preferred neoliberal system – globalism, credit, high repurchase rates to retain growth, repression of mass consumer PDI and fractional reserve banking – are all dysfunctional concepts. And muttering away somewhere in the background is a sorcerer called Shadow Banking that could easily destroy the entire global financial construct.

Last July, I asked ‘…is this the end of QE withdrawal, and in fact a long overdue acceptance by the Fed that – without permanent QE – the world’s largest economy is a walking-undead Zombie? The one thing emanating from Yellen that suggested the latter might well be the case was her use of the phrase “continuing loose monetary policy for the foreseeable future”….’

That Slogpost was headlined, ‘Has Janet Yellen put her foot in it?’, and I think that, for some people, she definitely had. ‘The forseeable future’ is not, after all, two months is it? But in fact, within weeks Yellen was regrouping to explain her mis-speaking, saying the signs were looking good and tighter money was on the way. Because, um, if the economy is recovering Janet, well hey – you have to tighten, right?

She was wrong to let herself be pressured by the hawks – because they’re wrong about the economy, and now she’s been forced to backtrack. There’s a thing called Wall Street that wants QE back to keep stock confidence high; and there’s a thing called Congress and the business community that wants signals saying we don’t need QE, because there’s a recovery. Then there’s a thing to the South called South America for whom even this much tightening means death; and there’s a thing to the west called China which has lost confidence in both its economy, property and stock markets because its exports show no evidence at all that Western consumption is increasing thanks to a ‘recovery’.

A somewhat dishevelled and smelly cat is now out of a bag: there is no real recovery – it’s a confection created by bogus signs, dodgy data, and ignoring the devils in the detail. We can now say this with a high level of confidence because the stimulus hasn’t produced any of the responses one would expect.

For example, we’re told that jobs are coming back: that the unemployment rate has fallen to 5.1%. Inflation should by now be rising but it isn’t: inflation is a mere 0.2%, and in August consumer prices fell. When the economy is winding itself back up as the precursor to normality, prices do not fall.

It simply won’t do for neoliberal hacks to say the Fed was “fully justified” in keeping rates at zero yesterday. It kept rates at zero because their neoliberal theories and assertions aren’t adding up.

On Wednesday, Gregg Robb at Marketwatch similarly wrote, ‘…the world has turned a bit upside down. Stocks slumped around the world on signs China’s economy was worsening. The dollar rose sharply against emerging market currencies and commodity prices dropped. The big question is how these factors may impact on growth and inflation in the U.S. and how they are factored into monetary policy.’

This seems to me a quite extraordinary attempt to suggest that things have happened ‘in other places’ and now the US must react. China’s economy weakened and then other markets were knocked on by that because western consumption has slumped. Commodities are cheap because demand for the key ones like timber and copper have fallen….and oil is cheap because the US is trying to punish Russia.

Things aren’t happening like they should because first, much of QE and Zirp has been about protecting banks and generating false confidence; and as a consequence of that, the promised theory of both policies doesn’t turn into reality. We can see this now in euroland, where Draghi has blasted ahead with another QE Big Bang, despite its failure to achieve economic results anywhere after 17 attempts so far across the planet.

In this JP Morgan chart below, we can see odd things at work:

ECBQEchart18915The Bank of England, the Fed Reserve and the ECB have all collected assets worth 20% of GDP. The ECB is about to up this to nearer 35%; and the Bank of Japan is at an insane 60% and rising. Not only do none of the GDP data being used take account of this widespread use of very expensive crutches, as this next chart shows, the results are pretty risible:

08-15GDP18915Spookily enough, both the UK and US are showing nominal growth in the seven years since 2008 at 20%….the exact amount of assets (ie, junk) purchased over that time. But during that same period, wage levels have been eroded in real terms by circa 9%….hence the lack of any of the recovery symptoms one would expect to see: people are worse off, and growth is little more than stimulation.

Without any stimulation to record, the eurozone is dead flat. And with massive QE since 2013, Japanese GDP has climbed…but is still 3% below where it was in 2008.

Bottom line: the only things hiding the serious slump around the world, and maintaining the high stock market levels, are selective data, crazily interpreted data, and loose money – cheap credit/Zirp + QE. Remove those things, and the edifice collapses.

The US is just about holding its own having tapered off QE…if it really has been tapered, upon which these data cast doubt. Britain is still at it, and in net terms getting nowhere. So far the eurozone has seen no effect from QE, and in Japan and China the decline has deepened.

Now Ms Yellen has run out of options: others would dispute this, but I fail to see how they can. If Yellen doesn’t raise rates by the end of the year, the US market sentiment will change from slightly reduced anxiety to the realisation that the mismatch between stock prices and economic performance is unbridgeable. I suspect, in fact, it might even turn to panic before the next fence-sit occurs.

What we’ve seen so far is a small market correction, one of several more pre-quake rumbles to come.

The Fed’s job, to a large extent, is the management of expectations. It has failed in that job. And now there’s no way to get smelly-cat back in the bag.

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37 thoughts on “ANALYSIS: Why the Fed’s decision confirms to every thinking analyst that economic recovery is a myth

  1. Old Mr Schrodinger who used to live next door had a cat like that until it made a quantum leap and disappeared up it’s own hypothesis. He spent every penny he had trying to find it, even put up ‘Wanted Dead And Alive’ posters, but to no avail. In the end he took up growing raspberries instead. No, it was blowing raspberries come to think of it.

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  2. So, when you’ve maxxed out on credit what else can you do?

    “The first comprehensive independent analysis shows that 204,581 people have taken advantage of the pension freedoms bought in by George Osborne on 6 April that give those aged over 55 unfettered access to their money for the first time.

    137 savers cashed in pension pots worth £250,000 or more and over 47,000 withdrew pots worth up to £30,000.

    At the same time, the sale of annuities took a major hit. Just more than 12,000 annuities were sold between April and June compared with almost 90,000 in the same period two years earlier.”

    http://www.theguardian.com/money/2015/sep/17/hundreds-of-thousands-of-people-empty-pensions-pots-since-relaxation-of-rules

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  3. QE has destroyed annuity rates and people who previously had no alternative are now able to remove their assets from a pensions industry which offers atrocious value in an increasingly uncertain financial market. One can hardly blame them for enjoying what they have saved when probity appears to provide nothing but increased risk.

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  4. Again, one of the reasons the world is in a slump that it can not get out of, is that regulators, with their credit-risk weighted capital requirements for banks, want these to lend out their umbrella even more than usual when the sun shines, and take it back even faster than usual when it looks like it could rain. That keeps the tough we need to get going when the going gets tough, like SMEs and entrepreneurs, from gaining fair access to credit.

    http://subprimeregulations.blogspot.com/2012/05/but-whatever-it-does-europe-first-needs.html

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  5. thank you JW.. another really good article.. Yellen did mention NIRP which is the opposite of what she previously trailed.. Dead ducks all round so now it is outright lies about absolutely everything. If they say something its going to be a lie. they say they are not doing QE. they are but its under the table. Printing money and buying stocks is their basic stock in trade….
    Truth must not be known at all costs.

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  6. There isn’t much to be done. Allow the confidence to go and economies collapse around the world; homelessness; hunger; civil disorder, hungry people invading your village gardens to steal potatoes and cabbages. Or the Fed etc. keep bluffing to maintain some sort of confidence. Then slowly; ever so slowly, there will be a new level of norm. OK some rich folks get richer and most of us get poorer but realistically Europeans have been living beyond their means for years. The choice is a painful; correction done slowly or a sudden collapse and disaster. I don’t know why you keep willing the latter. I can’t believe any of the central banks really want to destroy populations. They are just struggling to manage events.

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  7. Stan if a crash had been allowed to happen in 2008 there would by now be real growth. A crash then would have been a fraction of what we are looking at now courtesy of central banks. Anyone that wants to keep them in power is looking at endless Japanese style stagnation or worse. We need a new paradigm that is not an option with the status quo.

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  8. +1
    From what i understand, the pension companies need a 6-7% return on their investments in order to cover future payments. Who is getting 6-7% anywhere! (pension companies must have,by law, low to medium risk investments, so, I believe Junk bonds are off the table).
    All the people cashing in their pensions over the 25% tax free will pay tax which helps the gov. and creates spending i n the economy, that is the main reason for the gov. point of view(I believe) but I do agree that this is a good thing for people to get their money out before it disappears.

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  9. The failure of QE to stimulate the Economy is down to the reluctance of banks to lend money to Industry. Only 8% of issued money finds its way into productive industry. Without investment there is no increase in productivity, employment or wealth in an Economy. Banks are not fulfillingtive their obligations to the economy, by their mal-investment in Financial chicanery, Insurance and property.
    Quantitative easing is distinguished from standard central banking monetary policies, which are usually enacted by buying or selling government bonds on the open market to reach a desired target for the interbank interest rate. However, if a recession or depression continues even when a central bank has lowered interest rates to nearly zero, the central bank can no longer lower interest rates. The central bank may then implement a set of tactics known as quantitative easing. This policy is often considered a last resort to stimulate the economy.
    below from WIKIPEDIA
    A central bank enacts quantitative easing by purchasing—without reference to the interest rate—a set quantity of bonds or other financial assets on financial markets from private financial institutions.( some of which may be toxic) The goal of this policy is to facilitate an expansion of private bank lending;[ if private banks increase lending, it would increase the money supply, though QE does directly increase the broad money supply even without further bank lending. Additionally, if the central bank also purchases financial instruments that are riskier than government bonds, it can also lower the interest yield of those assets.
    Quantitative easing, and monetary policy in general, can only be carried out if the central bank controls the currency used in the country. The central banks of countries in the Eurozone, for example, cannot unilaterally expand their money supply and thus cannot employ quantitative easing. They must instead rely on the European Central Bank (ECB) to enact monetary policy. They are not Sovereign or independent.
    Jeremy Corbyns Peoples QE is a misnomer and confuses the policy. What is meant is direct fiscal/money investment into the Economy to create employment and wealth. A Sovereign country can issue as much money as required,with the proviso that it is invested in productive wealth creating industry, using the natural resources ,labour and ingenuity of the population. Fiscal deficits do not matter. Money is created from thin air and is cancelled by repayments of corporate and income taxes., having done its work as a tool of productive investment.
    Money is not wealth, it is a tool, a means of exchange, a token, When issued as debt,it is a weapon of extortion,(see Greece).
    Consider 2 men ,stranded in an arid desert, one with a suitcase full of £1 million pounds, the other with a bottle of water. Who is the wealthiest.?

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  10. Well I’m in the situation of having been gardening the last few years, it is great but I don’t earn anything doing it. So I am turning to freelance IT. I’ve taught myself Java/Swing/Android the last few months but am looking for people who need small software projects undertaken. I’m of course “unproven” but I’m even happy to work cheap/free to get started. I even have police/military clearance from my past life if it’s secure stuff.

    Anyone out there need help?

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  11. Relax John,

    They’ll have started bombing Syria in ernst by the end of the year.

    Everything will come good when Basher al-Assad has been regime changed and reconstruction and pipeline contracts are signed.

    Everything! We’re planning on having granny come to stay for a long weekend next Easter break – she’s been dead for 30 years. I wonder if she’ll still recognise the old place?

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  12. I watched a video that tried to explain the fractional banking system. I used to wonder who had all the money if everyone was in debt. Now I think I can see that there is no money, just debt. So what would happen if all the debt was just cancelled?

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  13. From the DT today discussing the BoE’s chief economist, Andy Haldane suggestions of potential moves to save the economy:-
    “Traditionally policymakers have resisted cutting rates below zero because when the returns on savings fall into negative territory, it encourages people to take their savings out of the bank and hoard them in cash.This could slow, rather than boost, the economy. It would be possible to get around the problem of hoarding by abolishing cash, Mr Haldane said”

    So, they’re now thinking of stopping people accessing their own money ……. wouldn’t that create a run on the banks? Wouldn’t they have to do it swiftly to avoid creating an Argentinian type of situation?

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  14. @Jackie, exactly zilch economically, but lots of screams from the Shylocks and a few assasinations of their compliant politicians ,who are induced (sic) to maintain the fraud.

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  15. Jackie.
    For a start, the moneylenders would be a tad miffed, -unless someone else, and they don’t really care who, picks up the tab.
    This is usually the government, through the public purse.
    Thereby, the debt is transferred from the debtor who can’t/won’t pay onto the suckers. (You and me).
    The moneylenders are very powerful and control governments.

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  16. Desmond, I would actually say that the correction should have been allowed to run it’s course in 2005 and proper regulation and oversight put in place afterwards, but as I recall interest rates were cut in August 2005, only by a quarter point but it gave all of the wrong signals at that time.

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  17. Reply to Hiero & WFD
    Had Zirp never been attempted, a zillion banks would’ve fallen over, but every Western economy would’ve benefited from Silvers sending. Those same silvers would not now be looking to cash in.
    For me, I confess, the temptation to cash in and buy an asset I can sweat is very real.

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  18. And those rates can’t move upwards because of all those derivative bets leveraged in de-regulated London.

    I know, the worlds banks regard it as their private casino…

    I’ll be there are a stack on Wall St as well… a helping nudge to the likes of Yellen not to do anything silly…

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  19. I presume you are aware of the double-entry book-keeping system? That means the derivatives the bank holds are one side of a credit-debt contract – when that debt is cancelled, all the credit contracts then become real money…

    One could suggest cancelling all those derivatives first, but with several billion of them, it’d take a little while to sort that all out.

    A truly aggressive government* would simply say “they’re cancelled” and (in the case of the British government at least) wait for the hole to open up underneath them; after all, most of the UK’s GDP figures are generated by banks fiddling their accounts in one way or another.

    *(like China? Germany simply didn’t allow it in the first place, thus compelling their banks to the penury of lending to businesses. But then, that’s one reason the banks do not like Germany… )

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  20. A friend of mine in the energy sector told me that some West Texas wells that have recently been revisited after years of inactivity with the possibility of fracking them back to life have been found to have REFILLED with oil, standing the old dead dinosaurs theory on it’s head.

    Commodity prices might stay low for quite awhile.

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  21. And of course ‘managing’ to ensure that they themselves in the top echelons of those banks don’t get the same results which they are managing for the rest of us….. The reason I’d be happy to see the huge crash landing is that EVERYONE would see immediately who caused it and string the bustards up…..leaving their ill gotten gains useless to them ! If we’re all going down I want to see these clowns going down alongside ! Angry & bitter…. For personal reasons due to corporatism and political shysterism I’ve been fooked over good and proper ! So yes I am !

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  22. It’s all turned out pretty much as many of us predicted. The talk of the interest rate rise in the US and UK was merely another attempt to string the gullible along with hope of better times. There is no recovery. The West is in long-term decline and the best we can hope for is that we do not lose what we still have.

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  23. Pity that Obama and Kerry are the worst US presidential team in history. They f*cked it up big time in the middle east including the latest problem syria, and we are now suffering that bullsh*t of migrating fornicating muslim infidels crossing our HOME borders with nothing to offer except litter and lies
    Second comes the EU management team who are at a loss as to what to do with this uninvited invasion of cockroaches. Emergency meetings take 2 weeks to appointment and then they cannot agree what to do.

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  24. Ricoh,
    the vast majority of these people crossing borders are ordinary people like you and I, they are fleeing war, torment, death and the destruction of their homes. None of them want to live in cold damp northern Europe, where they come from life wasn’t bad and the weather was better. It was foreignors interfering with their government, equiping and aiding terrorists and then bombing the place back in to the stone age that forced them to leave.
    That you are too dim to see that your government (that you pay to keep in power) has instigated all of the above in order to profit from the Middle East land grab and to solve the European demographic crisis betrays the true meaning of ‘Useful Idiot’

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