The Monetary Monkeyshines of Elmer Fudd And Mr. Magoo

There was zero, nichts, nada and nugatory reason for the Fed’s 25 basis point cut yesterday, but that didn’t stop the Donald from coming out with his anti-Fed twitter-guns blaring this AM.

People are VERY disappointed in Jay Powell and the Federal Reserve. The Fed has called it wrong from the beginning, too fast, too slow. They even tightened in the beginning. Others are running circles around them and laughing all the way to the bank. Dollar & Rates are hurting our manufacturers.

We should have lower interest rates than Germany, Japan and all others. We are now, by far, the biggest and strongest Country, but the Fed puts us at a competitive disadvantage. China is not our problem, the Federal Reserve is! We will win anyway.

We very much applaud the Donald’s relentless and increasingly vicious attacks on our rogue Keynesian central bankers. That’s because at least he is making the hoi poloi in Flyover America aware that their financial lives are ruled by a handful of unelected pointy heads, and not for the better by any stretch of the imagination.

Like in so many other areas, the Donald is busting wide-open the bipartisan consensus that shields the Eccles Building from democratic scrutiny. The ruse is that the Fed is some kind of sacred college of monetary experts who are vitally necessary to keep main street capitalism from continuously slumping and dumping.

The truth of the matter, of course, is exactly the opposite—and it’s being documented month after month, quarter after quarter, year after year.

To wit, the Fed has almost no direct influence over short-term inflation, employment, GDP growth and the other main street macro-variables it obsesses over. Those are driven by the powerful currents—trade, capital and money flows—of a $85 trillion global economy and a competing convoy of Keynesian central bankers racing to the bottom of economic sanity itself.

Yet by foolishly and systematically falsifying interest rates and all other financial asset prices, it makes longer-term economic performance far worse than it would otherwise be.

That’s owing to the strip-mining of corporate American by C-suites addicted to financial engineering and goosing their own share prices and stock options; and the Fed’s moronic 2.00% inflation target that simple drives nominal wages, prices and costs in the domestic economy to ever less competitive levels in the global economy.

As to the former point, here is still another debunking of the Fed’s Fake Stimulus operations on main street. Elmer Fudd Powell was crowing relentlessly during his presser yesterday about the robust consumer–implying that the Fed’s deft ministrations have enabled the personal consumption expenditure (PCE) sector to power the US economy forward.

But that’s complete hogwash as we learned again with this mornings punk PCE report for September. It turns out that on an inflation-adjusted basis (2012$), the year over year gain in PCE during Q3 2019 clocked in at $324 billion. Alas, 16 years ago in Q3 2003, the year-over year gain posted at $336 billion!

You can’t make this stuff up. The real PCE sector currently is 42% larger than it was in mid-2003, but Mr. Fudd insists on citing the same dollar gain as evidence of the vaunted “strong consumer”. In fact, however, growth of 2.45% in the September quarter just ended amounted to only two-thirds of the 3.61% year-over-year growth rate posted back in Q3 2003.

Moreover, the chart points to flagging real consumption growth in a manner not dissimilar to the slide shown for 2007 on the eve of the Great Recession. Thus, at the peak of the current recovery in Q1 2015, real PCE growth posted at $484 billion or 4.14% over prior year, and at the sugar high in Q3 2018, the gain was $434 billion or 3.36%.

Needless to say, in the context of the longer-term levels and directional trends shown below, the most recent gain of $324 billion or 2.45% over prior year is anything but “strong”.

Well, that is unless Lewis Carroll’s rules pertain:

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose …

What we are saying is that either the Fed’s massive money-pumping “stimulates” the main street economy or it doesn’t.

On the evidence, it does not—unless you deploy the self-serving tautology that whatever the economic outcome of American capitalism happens to be, the Fed caused it; and regardless of how it measures up by historical standards, it’s all “strong” and “good” by definition.

Moreover, the contrafactual case—the claim that outcomes would be far worse save for the Fed—is just self-serving institutional propaganda; it is belied by decades of capitalist prosperity which occurred without the benefit of any activist central banking at all.

Between 1870 and 1913, for example, real GDP in the US grew by upwards of 4.5% per annum, averaged over 43 continuous years. There was no Fed then, of course, and there has been no comparable 43-year span of growth even remotely at the level ever since.

During the most recent 43-year period, real GDP growth has averaged just 2.7% per annum; and during the last 12-years, growth posted at only 1.7% per annum.

As we demonstrated yesterday, 90% of US households are at Peak Debt and can’t borrow—now matter how low the Fed’s presses the money market rates. And the other 10% of affluent households own most of the stock, have been showered with Fed-fueled financial asset windfalls and don’t need to borrow.

In fact, even when the top 10% does borrow, it is mainly to fund further speculations in financial assets or to bid up the price of trophy properties and luxuries. And that most definitely does not trickle down to the main street majorities.

So let’s be clear about the implications of the chart below, which reflects the eruption of the Fed’s balance sheet over the very same 16 year period shown above for real PCE.

Between Q3 2003 and the Q1 2015 peak under QE, the Fed’s balance sheet exploded by 544%. And it’s still 438% larger after accounting for the Fed’s short-lived episode of QT, which has now been decisively reversed.

Stated differently, the Fed’s balance sheet has injected upwards of $3.5 trillion into the canyons of Wall Street since mid-2003 and it has produced no increased at all in the aggregate growth rate of real consumer spending.

So can you say pushing on a wet noddle?

Better still, when you combine the chart above with the one just below, what comes to mind is not the sacred college of monetary experts worshipped on both ends of the Acela Corridor

The Harlot of Wall Street is the more apt way to phrase it.

So the Donald is rambunctiously exposing the institutional rot in the Eccles Building, but he doesn’t dare go all the way to the Harlot of Wall Street part.

Self-evidently, were he to attack the real enemy of Flyover America—the Fed/Wall Street tryst—it would bring the stock averages crashing down and pave the way for a post-2020 abode that the Donald would find far less commodious than the White House or Mar-A-Lago

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