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Thoughts from the Frontline

The Consequences of Easy Monetary Policy

September 1, 2012

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"No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future."

– Ludwig von Mises

We heard from Bernanke today with his Jackson Hole speech. Not quite the fireworks of his speech ten years ago, but it does offer us a chance to contrast his thinking with that of another Federal Reserve official who just published a paper on the Dallas Federal Reserve website. Bernanke laid out the rationalization for his policy of ever more quantitative easing. But how effective is it? And are there unintended consequences we should be aware of? Why is it that the markets seem to positively salivate over the prospect of additional QE?

Quickly, I will be doing an inaugural "Fireside Chat" with Barry Ritholtz on Tuesday, September 11 at 1 PM Eastern. This webinar will be hosted by my friends at Altegris Investments and will be available to accredited investors and financial professionals. If you have already registered with the Mauldin Circle (and are in the US), you will shortly be receiving an invitation to attend. If you have not, I invite you to go to and register today, so you can hear Barry and me discuss the latest news and, of course, touch on the election and what it means for investors. Now, let's delve into quantitative easing.


No one really expected any fireworks in Bernanke's speech, and he fully met expectations. We got the obligatory rationalization for what passes as current Fed policy. The part the markets wanted to hear is highlighted below for you.

"… As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in…

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Fred Wiedemann

Sep. 15, 2012, 9:20 a.m.

Loved Mr. Cole’s 3:13 p,m., Sept 6 comment.  Sounds like the perfect description of Bain
Capital.  Now who in their sound mind wants our country to utilize this as a model for
our government?  Fred Wiedemann, retired ChFC

William Matz

Sep. 8, 2012, 1:58 p.m.

Nice that John points out how distorted is the the view most folks (including econmists) have of Keynes. Most modern Keynesians are at best semi-Keynesians or even anti-Keynesians. While JMK did support deficit spending during recessions, liberal Keynesian revisionists fail to acknowledge that JMK advocated surpluses in good times. Thus Keynes view was that gov’t could act as a shock absorber to even out the cycles; he certainly never advocated the perpetual deficit spending, s has become the norm.

Kudos to my old Naval Academy classmate Richard Fisher, one of the few voices of sanity in the Fed clique. Especially love “Too big to fail - too big to exist.”

To Craig Rodby: supply side is hardly nonsense. It is undisputed that after the ‘81 and ‘95 tax cuts, Federal income tax receipts rose. While that does not prove causation, it demands a serious inquiry from anyone with an open mind.

Said Armutcuoglu

Sep. 3, 2012, 4:44 p.m.

The Fed is orchestrating the biggest wealth transfer from savers to debtors (banks). This is like a ponzi scheme. Give that 70% of our economy depends on those the Fed is stealing from, this will end bad

David Oldham

Sep. 3, 2012, 4:23 p.m.

John, I trust you will take time out to deliver this A game report to the police officer in question. Luvit :-)

Craig Cheatum

Sep. 3, 2012, 3:55 p.m.

From what I can tell tax cuts add to the deficit and Fed policy does not, so our debt will continue grow with more lose tax policies.  We’ve had about 10 years of tax cut welfare (since there is no schedule to pay it back with interest)for job creators but we’ve lost some 6 million instead and are experiencing overall economic contraction. A present value calculation could only rely on interest and dividend income on unspent tax benefits that presumably are earning something.  Likewise for money borrowed to fight 2 wars in the Middle East-the only value can be based on taxes paid on net profits from military contractors.  Likewise for money borrowed to pay for Medicare Part D.  Thank you Junior for your contributions of some 10 trillion in new debt.  Obama is getting credit for about half of that but the data suggest that there has been a very small marginal increase in government spending during his presidency.  If we are going to continue stimiution sending it should be limited to projects that benefit all taxpayers and has a positive present value (just like a business would require).

Rimvydas Mieliauskas

Sep. 2, 2012, 7:06 p.m.

A global crisis, what’s next?

My letter is about the next stage of the current crisis. Now about my forecast accuracy - as I chose a job in Scotland in 2005, I have been thinking about this crisis;  I knew, that it is unexpected and that it lasts until 2020. Nouriel Roubini predicted the twelve stages of current crisis, I predicted the first eight stages - how it will start and develop in USA and UK, but I didn’t predict that it covers the whole world and in 2005 I knew that 2020 China will be the largest economy in the world.

A dollar crash is inevitable, as now is going the four processes, which can not be stopped:
1. The ever worsening economic situation in the world, because has been not eliminated a main reason for this crisis - the financial black holes - tax havens, which sucked from world economy 21-32 trillions $.
2. The decreasing dollar market share.
3. The protectionism, the regulation of investment, prohibition to sell the most important companies and more and all these measures have been taken to guard against the dollar…
4. The global system of the tax havens is becoming every year bigger and stronger and more influential, it is practically imposible to reform it now, as show the tax havens history.
A only way to reform the global financial system and central part of it - tax havens is crash, a only question is when?

Now, about the financial system and globalization. The crisis in 2008 showed that the world has become a gigantic financial superpower in which all countries are financially bonded together, and crisis in one big country is a crisis almost everywhere in the world. Such fact has approved the current crisis in the euro area. The money in this system is something similar to water: a small country or its currency market is like a very small body of water, and if you add a lot of water and if it is isolated, the water level rises abruptly, similarly it is with the money - if a small country prints a big number money, hyperinflation occurs, an example - Zimbabwe, a big country is like a great pond and you need a lot more water to launch a level rise, as well as lot more money to rise the inflation and if there is leak – the water flows away. Something similar happened with the convertible currencies. UK 1973 and in the years Margaret Thatcher as prime minister and USA 1983 Ronald Reagan as prezident, with help of the representatives the largest business began the reforms taking away limits amount of credit issued by the banks and taking away limits for capital flow abroad and helped create a global network of tax havens, soon followed by the main other developed countries and globalization began. The world is like a large lake, which requires a lot of water in order to launch its level to a rise, similarly the finance require a lot of money to launch a rise in level, but unlike water, for every human being the income and the amount of money in his account is very different. The peculiarity of this crisis is, that in the developed countries the money have been allocated very unevenly. During 30 years of globalization for 90% of the population real incomes increased slightly or remained the same and the illusion of the better life was created by the credits and mortgages, that triggered real estate bubble. The only winners from globalization were 10% of population and a real winner was 1% of population.

And now about what scares me, it’s not the eurozone crisis, permanent eurozone crisis is very useful for one country - Germany, a low euro rate promotes its exports, a unemployment is reduced to a record level and enables Germany to reform EU in the way they want and because of the euro collapse its interests would be seriously undermined and the crisis is easy to complete, by release the required amount of eurobonds or simply printing electronic money, as are doing the UK and the USA and not a single eurozone country’s elite, even Greece don’t want to leave euro, because new national currency will be significantly devalued and who want lose their money or receive lower wage and this crisis is creating United States of Europa, a economic system, where Spain is like California with the big problems and Greece like Montana.

Different from Eurozone banks, UK and USA banks may use the same scheme as Barclay‘s bank - after loosing 28 billion £ they called them the bad debts, set up a bogus offshore company, gave it a credit of 28 billion £, bogus company bought the bad debts and a bank loss turned into a normal credit with base percentage 0.5%. In USA it‘s even better, a base percentage is 0.0% and it will remain so for two years and this only encourages short-term speculation and financial casino. That scheme is good for increasing bank’s actives too, so that they can meet all the requirements and increase the size of issued credit. USA has a big budget deficit, commercial banks credits, quantitative easing, economic stimulus packages, trade deficit flood with dollars the world and that triggered two processes that lead to the next phase of the crisis:
1. Dollar is a central part of the world’s reserve currency and its market share in 1999 reached 71.0% and decreased in 2011 to 62.1%, this process was slowed down by the euro crisis, but from beginning of year 2012 this process has gained momentum; the BRIC and OPEC member countries and other countries signed the trade agreements to use local currencies between them. During the first four months of this year yuan part in China foreign trade increased from 0.0% to 7% and is projected to reach 50% soon. USA strengthen this trend with sanctions against Iran, which are pushing Iran from dollars market. All these measures have been taken to guard against the dollar.
2. This trend is accompanied by the second process, tightening regulation of investment, prohibition not to sell the most important companies and this trend is only getting stronger because of the recent economic stimulus packages.

USA, Germany and other countries, even the UK, as show a conflict with the Jersey, are starting to shake tax havens, but it looks like shaking a hornet’s nest: money, a lot of money, which until now was lying quietly, without making a damage, begins movement. The dollar world market share is like a lake - when it decreases, and the amount of water remains the same, the level is rising, and if more water flows, its level is still rising, similarly is with dollar, a shift from the dollar to trade in their own currency, the dollar was pushed from this market share, restrictions and regulations reduce the dollar market share, smaller market share and amount of dollars remains the same, in smaller dollar market new dollars are poured more - the budget deficit, bank credits, quantitative easing, economic stimulus packages, the result will be more regulation, more protection and these processes inevitably leads to the dollar crisis. The globalization‘s only winners in developed countries is 1% of the people and the official statistics show only visible part of their property - real estate, bank accounts, companies, shares and it is an iceberg peak, while the tax havens are the hidden part.

IMF specialists estimated that in 2010 in tax havens were 18 trillions $ and this numbers is without Switzerland, greatest tax haven in a world.The latest statistic from Tax Justice Network show that there is at least 21 trillion $, and possibly as much as 32 trillions $, but part of them are in a other currency. The tax havens, as show a their size, is a main reason for a this global crisis. In the developed countries revenue grew only for this group of people and this leads to inflation, their inflation. The houses cost 125 millions $, the yachts 125 millions $, the paintings 120 millions $ and the the stock price rose to unprecedented heights, for internet companies they pay crazy amounts of dollars, like Facebook‘s value estimated at once $ 104 billions, which last year received $ 1 billion profit, well below inflation, but since this is a very risky investment - changes in fashion, someone can find that there is a new site, which is cooler and Facebook can go after its predecessor My Space. The world’s most expensive company Apple is estimated 622 billion $ and the next Exson Mobile is estimated 405 billions $, Apple got max profit 2011, because iPad was an unique product. Apple has created at first iPod - a very small computer, then a small computer iPhone and the iPad is larger, now larger iPhone i smaller iPad, what next? These were the unique products, but now Apple only can improve existing products and profits will fall as competitors appear. The Dow Jones index reach 13 275, this is more than before the 2007 crisis and the situation is getting something like the Internet bubble in 2001, but now it covers a wider range economy’s - it is a detonator, US economy is suffering the same diseases as UK, only a milder form, financial stimulus are not working, the cuts will have the same effect, as in UK and a very large amount of money is flowing in the tax havens in USA and around USA and a result will be the second dip and it can be spark and the explosives are the hidden deposits in dollars in the tax havens - 15-20 trillions $  plus trillions $ in the commercial bank’s open accounts, it is 25-35 trillions $ in disposition of very small number of people, so we are talking about a very large deposits. The 30 years of globalization created global system of the tax havens, which become too powerful to reform, that system like a vampire is sucking money from the world economy.

The USA economic elite with help London City, through their greed, created a gigantic financial bomb, whose explosion will have unpredictable consequences and a bomb is growing a every hour, a every day, a every month, a every year, it is sufficient that a small group of global elite would panic and began change their dollars into other currencies and the situation would become out of control, because the amount of money is too big, that could intervene in the central banks, buying up dollars to keep rates, so when the dollar starts to fall down, there is no stop.

  A dollar crash is inevitable, as now is going the four processes, which can not be stopped:
1. The ever worsening economic situation in the world, because has been not eliminated a main reason for this crisis - the financial black holes - tax havens, which sucked from world economy 21-32 trillions $.
2. The decreasing dollar market share.
3. The protectionism, the regulation of investment, prohibition to sell the most important companies and more and all these measures have been taken to guard against the dollar…
4. The global system of the tax havens is becoming every year bigger and stronger and more influential, it is practically impossible to reform it now, as show the tax havens history.
A only way to reform the global financial system and central part of it - tax havens is crash, a only question is when?

I wrote the words about EU even before the EU meeting on 30.06.2012. However, EU meeting decisions can make euro a real alternative to the dollar and that also increases the possibility of my scenario.

When I was writing this, I find Nouriel Roubini interview.

Bruce Rae

Sep. 2, 2012, 4:26 p.m.

The theories of economic approaches and wealth creation are interesting, but, in short, most economies need numerous and diverse small businesses and a range of larger businesses to operate effectively and produce an effective use of resources and distribution of income. Unfortunately, I don’t see the banks as having the desire, expertise or experience to make the best decisions for these businesses and the creation of an increasing number of jobs in an economy. My own minor personal experience, in a small country like NZ, is that many of the loan personnel don’t have a clue about business. Therefore, any government stimulus needs to be more directly targeted and provided to businesses.
Obviously, some conditions have to apply to the distribution of the money in terms of job creation and production, but I often wonder how many potentially viable companies fail in the short term because banks, traders and public shareholders have a very short-term view. In that regard, I’m always bemused at how people cite Amazon as an amazing success story, but forget it spent how many years in the red - I forget exactly - was it 10, 12 or 15 years?

Jim Jennings

Sep. 2, 2012, 1:55 p.m.

The Romers paper on Taxes and GDP. My quick look for backing on a tax decrease increasing GDP by 3% came up very short. No question they make a robust case (their word) for tax increases hurting GDP ~ 3%. I hope you are right, no wish you are right. But you I think are overstating the conclusion as below.
“As a short preview to next week’s letter, Christina Romer and her husband and fellow UC Berkeley professor, David H. Romer, published a paper in the normally staid American Economic Review which noted that tax cuts and increases have a multiplier of about 3.”
rgds. JJ

Adam Schwartz

Sep. 2, 2012, 10:56 a.m.

John, while I whole-heartily agree with most of your column, I think you needlessly set up a strawman argument by declaring that liberal economists deride supply-side economics while supporting the FED’s QE policies. 

Keynesians think that a debt-deflationary recession, like we have now, requires aggressive fiscal policy, not monetary accommodation.

Craig Rodby

Sep. 2, 2012, 7:45 a.m.

I think we should do what Alexander Hamilton did: Convert as much as we can to long term debt while rates are low, and produce a budget that scales down to less than 3% over 10 years, and begins to pay down the debt after 15 years.

As for tax policy, nobody argues that lower taxes are not stimulative. What makes supply side theory nonsense is that, somehow, lower tax rates generates MORE TAX revenue than before the cut—like some kind of perpetual motion machine.

Finally, the Romer article is often quoted out of context. The key measure missing is TIME. Consider this:

Christina Romer, who heads President Obama’s Council of Economic Advisers until she steps down Sept. 3, 2010, also addressed the question of fiscal multipliers in a speech at the University of Chicago Booth School of Business on Feb. 27, 2009. She began by acknowledging that “estimating these multipliers is difficult and that there is surely substantial uncertainty around any estimate.” She then went on to argue, however, that based on her analysis with Jared Bernstein (an economic advisor to Vice President Joe Biden) of the stimulus package that President Obama signed in February 2009, “a tax cut has a multiplier of roughly 1.0 after about a year and a half, and spending has a multiplier of about 1.6.” In other words, government spending is more effective than cutting taxes.

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