Federal Reserve Chair Janet Yellen and her cronies are resorting to parlor tricks to prop up the U.S. economy, but the curtain will fall soon enough on their harmful efforts, according to David Stockman, White House budget chief during the Reagan administration.
One problem is that household debt is still off the charts even while Yellen et al are practicing "bathtub economics" in the face of a glaring gap between income and jobs on the one hand, and aggregate demand for goods and services on the other, Stockman maintains.
"This purported 'output gap' is conveniently self-serving. It has been interpreted to mean that the Fed has a plenary mission to fill up the nation's economic bathtub by generating sufficient incremental aggregate demand to offset the shortfall."
Writing on his Contra Corner blog
, Stockman said Washington has empowered the Fed "to manipulate, massage, twist, bend and pump any financial variable that in its wisdom is deemed to influence the transmission of its monetary policy (i.e., 'aggregate demand' stimulus) into the real economy."
However, the problem is that what drives the real main street economy, in his view, is nothing more than total spending by households and businesses. And spending can only be accomplished with income or debt.
"The Fed can do only do two concrete things to influence these income and credit sources of spending — both of which are unsustainable, dangerous and an assault on free market capitalism's capacity to generate growth and wealth. It can induce households to consume a higher fraction of current income by radically suppressing interest rates on liquid savings. And it can inject reserves into the financial system to induce higher levels of credit creation," he explained.
"But the passage of time soon catches up with both of these parlor tricks. When household savings decline to the vanishing point, as has occurred since the turn of the century, there is no more incremental spending to be extracted from current income," Stockman wrote.
Stockman said that despite the fact that the Fed has larded on $4 trillion of new reserves into the financial system since 2000, "there has not been a single hour of gain in private non-farm labor inputs supplied to the U.S. economy during the past 14 years."
According to Stockman, it may be no coincidence that Goldman Sachs' former chief economist, William Dudley (who he referred to as "B-Dud") now heads the New York Federal Reserve Bank. Stockman said there is typically a five-to-seven-year interval between when the Fed pushes easy money and Wall Street runs up risk assets to the bursting point while agile speculators get rich.
"That essentially is the reason for the present universe of some $3 trillion of hedge funds, and the trillions more of mutual funds and institutional investors which surf on their momentum driving waves. Their assigned function in the scheme is to be the first-in and first-out as these central bank financial bubbles inflate and bust," he said.
In a guest column for the Washington Examiner
, Ryan Young, a fellow at the Competitive Enterprise Institute, noted the Fed's total asset purchases stand at around $1.66 trillion, and that other central banks are pursuing similar strategies that he doubts will work.
"Central banks can manipulate economic indicators in the short run, but long-term prosperity doesn't come from monetary policy. It comes from private sector innovation and entrepreneurship," Young wrote.
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