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I read this twice before realizing the last name of the author perfectly fit the so-called "fix" for 2008 -- and the premise that "they could do that again."

By the end of the week, stocks, currencies and commodity prices weren't crashing any longer but financial markets were far from settled. Over the past 10 days, markets have plummeted, paused, recovered and fallen again. There's little sign the anxiety is lifting.

Until recently investors had been preoccupied with the weakness of the post-2008 recovery. Now some are asking whether 2008 might come round again. It's an especially disturbing possibility because, on the face of it, the policy options for responding to another slump are fewer than last time. Governments have run big budget deficits to support demand, so there's less so-called fiscal space for a new round of stimulus, or so the thinking goes. Interest rates are still at zero, and even the advocates of quantitative easing recognize that it ran into diminishing returns. What's left?

Clive goes on to raise the old flag once again; that the "effective remedies" could once again be trotted out.

There's a problem with this premise: They didn't work the last time.

My evidence?  All of those measures are still in place!

If they were effective then they could have been withdrawn.  They were not, any more than opiates are effective at resolving the source of pain.  Oh sure, opiates mask pain (at the cost of making you stoned out of your mind!) but they don't fix whatever is causing the pain itself.

What's worse, of course is that in order to maintain their effectiveness you must continually increase the dose of these monetary instruments exactly as tolerance does the same thing with opiates.  In the case of opiates you eventually reach a "coffin corner" as there is a depressant effect on the body that has a hard upper limit; when you reach it the user's respiration and heart stop, and that's the end of the show.  As the effective dose ratchets upward you eventually reach the point where either the user accidentally takes too much and dies, or worse reaches the point that the effective and lethal doses cross and he dies that way.

In the case of so-called "monetary stimulus" the facts are in at this point -- the 2008 nostrums did not work.  Yes, the stock market went back up.  But here's the rub -- they "worked" by increasing the debt in the system, and since GDP is computed in units of currency you must back out of the GDP equation the additional units that were added.

If you do this you'll find that from the time of the crisis to today GDP has in fact expanded by less than 1% a year.  Since the population expands by about 1% a year in the United States (and has been for the last 50 years or so) this means that on a per-capita basis GDP has actually been negative the entire time.

Read that last paragraph however many times you need to until it sinks in: There has been no economic growth in real terms on a per-person basis since the economic crisis.  Zip.  Zero.  Nada.

The so-called "prescriptions" or "remedies" did not work to restore economic expansion.

The idea goes back to Milton Friedman, if not before. The central bank can always -- repeat, always -- add to demand in the economy by directly creating purchasing power.

Nope.  The central bank cannot create purchasing power.  This is a lie and it is trivially proved.

Let us assume there is $1,000 in existence in the entire economy.  Let us further assume that something horrifying happens to said economy and the central bank decides to double the amount of money by playing "helicopter."

Does this increase demand or increase purchasing power?  No, it does not and cannot; since GDP is denominated in currency units all that has happened is that the same value is added to both sides of the equation; the net change is zero!

This is literally first-year algebra; start with the following:

GDP * $ = (C * $) + (G * $) + (I * $) + ((x - i) * $)

That's the equation for GDP.  Note that every term is stated in terms of dollars (in the United States.)

So let's assume the central bank "prints money."  The term "$" increases by some amount; on the left side that entire amount appears and on the right side the exact same amount appears.  Plug whatever values you wish into the terms and the equality does not change with or without the so-called "money printing"; demand, as defined by GDP in invariant units, has not moved a millimeter.

The scam that is run by the money printers and the columnists like Crook (along with the government statistics offices) is that they never state GDP in an invariant unit.  Instead they state it in units of currency, but first year algebra tells us what we have to do in order to solve the equation.

There's no question that helicopter money would stimulate demand.

Oh really?

The truth is that algebra -- basic algebra that cannot be denied -- says that helicopter money cannot stimulate demand.  At best it can (and does) blow asset bubbles!

In other words while it doesn't change total demand in the economy (as evidenced by the fact that it didn't over the last eight years on a per-capita basis) what it can and often does do is distort the economy by enticing people to do uneconomic things.  Specifically, it makes borrowing to goose stock prices (e.g. buy back stock and pay dividends) look attractive in comparison to borrowing only to build new facilities that produce more output than they cost in both principal and interest and thus that tends to happen.  This in turn makes for companies with P/Es of 1,000 (Amazon) and others with both huge P/Es and monstrous off-balance sheet obligations (e.g. Netflix), all of which sell at astronomical valuations that have utterly no rational basis.  In other words the stock market roars but it is doing so as a result of hydrogen-filled balloons, all of which require just one spark to go up in smoke.

This sort of crap ripples through everything that can be financed on credit -- college, cars, houses.... and stocks.

What did we really do in 2008 and 2009?  We made fraud legal.  Remember that?  Oh, you don't?  Well you should -- the market bottomed on the very day that intentionally lying about bank asset values was literally shoved down the financial standards board (FASB) by the US Congress.  I reported on it at the time.  I didn't believe anyone would be so stupid as to actually buy into that crap, but you and millions of others did.

So be it -- but no amount of arm-waving can change arithmetic, nor do lies change outcomes.  They can delay, they can obfuscate, they can paper over for a while but dead fish continues to rot and eventually the maggots make their appearance.

Mr. Crook appears to believe that somehow these tools "remain available for use again", as if they were put away.  The raw truth is that zero of these policy accommodations have been withdrawn in the ensuing seven years after 2008; they all remain firmly in place.  Not one dollar has been taken off the Fed balance sheet nor have interest rates been raised on the short end.  The market had a crapfest over the prospect of a mere quarter-point increase in the short-term rate while more than $4 trillion dollars, or roughly a quarter of all economic output in the US for a year, remains out there.  Further, there are at least twelve and probably closer to sixteen quarter-point increases to come before rates "normalize" and that entire $4 trillion has to come off.  If the prospect of just one quarter-point increase was good for a 10% sell-off would you mind explaining to me how much of the current DOW level will be left when it has all been reversed?

I'll see you at the figures on the top of The Market Ticker -- which are in fact optimistic if last week is any indication.

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Sigh...

Stephanie Ritter, a 26-year-old Florida State University alum, has listed her diploma on eBay for the staggering sum to cover the 'actual cost' of attending the school. 

Now $40,000 in debt and living in Southern California, Stephanie is fed up with being unable to find a job in her field, despite having a Bachelor's degree - so she's come up with a drastic solution to pay off her loans and 'validate my use of time between 2007-2011'. 

She took $40,000 in debt to study.... theater.

Seriously.  Theater.

What did she think she was going to do with that degree that was worth the money?

This, in the end, is the problem -- universities and other "higher educational" institutions, including High Schools for that matter, that push people to get a degree -- any degree.  What's missing from that discussion is any sort of honest examination of the degree itself and what it does for your earnings potential.

An utterly huge percentage of "degrees" today are worth exactly zero.  Most humanities degrees are in this realm; "sociology", "woman's studies", "african-american studies" and similar "fields" are simply worth zero.

So where did she get this idea from?  Let me guess: Her parents and/or High School?

Here's my suggestion: If you encourage someone -- or fail to warn them, having a position of authority (such as a parent, high school counselor or similar) in regard to such a person who is not yet an adult to go chase such a "dream" while going into debt, you should be forced to cover it with your retirement funds so you get to go live in a refrigerator box under a freeway overpass.

And if you don't have it?  Then said student should eat you.

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smiley

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2015-08-30 06:00 by Karl Denninger
in Federal Reserve , 291 references
 

Hmmmm...

Clearly, the Fed has essentially achieved its employment objective, but it is somewhat below its self-selected objective of 2% inflation. Congress clearly specified the inflation goal for the Fed by calling for “price stability.” Since 2012, the Fed has redefined this congressionally mandated goal of no or zero inflation as being represented by 2% inflation of the Consumer Expenditure Survey. In fact, 2% inflation will double the price level every 35 years. This hardly represents price stability.

....

Robert Heller

Belvedere, Calif.

Mr. Heller is a former governor of the Federal Reserve System

Mr. Heller was nominated by Ronald Reagan in 1986 and confirmed unanimously.

Note that he has called out exactly the same point I have since I started writing this column -- that the actions of The Fed have been unlawful.  

More to the point said unlawful behavior has been policy and worse, it has been essentially continual since The Fed was formed.

To those who say that this points to The Fed as an "evil" institution may I point out that no law means anything if there is nobody who will enforce it.

There are 535 jackasses currently infesting Washington DC that are quite capable of enforcing their own law.  They can do so as they have absolute control over the authority of said Fed, can revoke its charter at any time and further can de-fund it any time they'd like.  They can also add an "or else" (in other words, criminal sanction for violations) to the Federal Reserve Act and then refer the entire Board of Governors to the FBI for arrest and prosecution.

The problem does not lie in The Fed.

It lies in Congress, and since we directly vote for those who are in Congress, and we continue to sit for the rank and outrageous theft that takes place through the acts of this body, with the full consent of Congress, the fault is ours.

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