Janet Yellen’s Shame


Playing Politics

In honest capitalism, you do what you can to get other people to voluntarily give you money. This usually involves providing goods or services they think are worth the price. You may get a little wild and crazy from time to time, but you are always called to order by your customers.


wallet-367975_960_720In the market economy, consumers reign supreme. There is no such thing as a “lost” vote in the marketplace; every penny spent affects production. Mises noted: “Consumers ultimately determine not only the prices of consumers’ goods, but no less the prices of all factors of production. They determine the income of every member of the market economy. The consumers, not the entrepreneurs, ultimately  pay the wages earned by every worker, the glamorous movie star as well as the charwoman. With every penny spent, consumers determine the direction of all production processes and the minutest details of the organization of all business activities.”



That is true of honest banking, too. Back when such a thing existed, the job of an honest banker was to aggregate people’s savings and lend them to worthy borrowers. You make too many mistakes, your customers leave and you go broke.

Politics is a different game altogether. It produces no wealth of any sort. So the only way you can prosper in politics is to connive, cheat, and steal – manipulating your friends… sidelining your enemies…  and exploiting the public.

It is a game of taking wealth, not making it. And you have no customers, so there’s not much of a check on how out-of-order you can get. Still, a politician is not always lying, not always stealing – and not always wrong. Occasionally, he blunders into honesty and slips into truth.

On Monday, for example, Republican presidential nominee Donald Trump said Fed chief Janet Yellen should be ashamed of herself for what she was doing to Americans and for creating a “false stock market.”


1-monetary-base-vs-spxUS monetary base vs. the S&P 500 Index. Although base money growth has leveled out since 2014, the money supply has continued to grow since then due to commercial bank credit expansion. Since 2008 the broad true US money supply has increased by 128%, and this chart is a reminder that the money didn’t just “print itself”.  A great deal of it was created directly by the Fed, which the rapid growth in base money demonstrates. Newly created money doesn’t affect all prices simultaneously or to the same extent and for a variety of reasons, asset prices are always likely to be at the top of the list (in other words, the above correlation is not a coincidence) – click to enlarge.


The financial press was quick to condemn Mr. Trump for “undermining confidence” in the Fed and the stock market. It was “irresponsible” to question the Fed’s integrity and its non-partisan mission, said the pundits.

Widely dismissed was the idea that Ms. Yellen was “playing politics” with the Fed by supporting the stock market to embellish President Obama’s last months in office and help Democratic nominee Hillary Clinton slide into the White House after him. But Mr. Trump is right: Politics is the Fed’s game.


Grand Larceny

No president has ever added to a nation’s wealth. Neither has any central bank. Neither produces anything, nor offers a service that anyone would willingly pay for. Nor does either have to make a profit or make payroll.

At best, a wise central banker – like a wise president – eliminates the errors of his predecessors, allowing an economy to recover. At worst, he doubles down. Of course, Ms. Yellen should be ashamed of herself. But the shame is far deeper than Mr. Trump imagines. He thinks she is just “playing politics,” trying to get Hillary elected; actually, her crime is far greater.

Ultra-low interest rates do not create wealth. They just shift it around, from savers to borrowers. Borrowers pay less to service their debts; savers see their interest income disappear.

The biggest borrower in the world is the U.S. government. It is also the biggest beneficiary of the Fed’s EZ money policies. You can do the math yourself.

Were the feds forced to pay another 2% on the national debt, for example, it would be nearly $400 billion a year in extra interest payments. That is money the feds don’t pay – and savers don’t get. It’s the grandest larceny on earth.


2-us-debt-to-gdpUS federal debt to GDP ratio; in nominal terms it amounts to nearly $19.4 trillion as of Q2 2016 – click to enlarge.


The Real Shame

Super-low interest rates – aided and abetted by QE – also boost stock prices. This creates the “false stock market” Mr. Trump is critical of. Central banks are buying stocks to feed their QE programs as bonds dry up. The idea is to stimulate their economies; the result is to stimulate Wall Street.

Between them, the Bank of Japan and the Swiss National Bank own about $300 billion worth of stocks. And many of the Swiss National Bank’s holdings are listed in the U.S. This, too, should be a source of deep shame for all central bankers.

Fed policies may not be designed to benefit Democrats or Republicans. But they are intended to prop up the entire class of Parasitocrats, chiselers, profiteers, zombies, and cronies that benefit from politics.

The Fed helps Wall Street steal hundreds of billions from middle-class savers, it favors powerful insiders with the lowest borrowing costs in 5,000 years, it connives to raise stock prices to the highest levels ever seen and it collaborates with the Parasitocracy to keep the whole shebang going – at the expense of ordinary households.

An honest banker protects the public from bad money and bad debt. Ms. Yellen does neither. That is a real shame.


Charts by: St. Louis Federal Reserve Research


Chart and image captions by PT


The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.


David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.

Get Access