Monday, June 02, 2014

The Destroyer of Fake "Recoveries": Unintended Consequences

Destroy the market's ability to price assets, risk and credit, and you take away the essential information participants need to make rational, informed decisions.


A correspondent recently summarized why unintended consequences eventually destroy all politically expedient strategies that temporarily prop up a systemically unsustainable Status Quo:

"Unintended consequences almost always equal or exceed the benefits of whatever your temporary gains were in a complex system. We see this over and over again, in all sorts of different complex systems."

In other words, all the "kick the can down the road" strategies being deployed across the globe by central states and banks will inevitably backfire because central planning fixes always trigger systemic consequences that were unintended by the planners, who are fixated on minimizing the political pain of powerful constituencies, not understanding or repairing the real problems.

Example #1: The Federal Reserve "saves the Status Quo" by lowering interest rates to zero, eliminating mark-to-market valuations of collateral and opening the credit spigot to banks and financiers.

Intended consequences: A) transfer wealth from savers who once earned substantial interest on their savings to the banks, which can borrow money for near-zero and loan it out to businesses and consumers at fat spreads, reaping billions of dollars that once flowed to savers.

B) By making cash into trash (i.e. it earns no interest, effectively losing value in a 2% inflation environment), the Fed intended to push everyone with cash and/or credit to put their money in risk assets such as stocks and real estate.

Unintended consequences: A) Now that everyone has been pushed into stocks and real estate, valuations are once again at bubble heights--and bubbles always pop, destroying every participant who has been lulled into believing this bubble will never pop because "the Fed has my back."

B) By allowing mark-to-fantasy valuations of collateral, the Fed hasn't cleared the credit system of impaired debt: it has enabled an expansion of bad debt and eroded the fundamental credibility of the system.

C) By enabling the wealthiest slice of America to borrow essentially limitless sums for free, the Fed has fueled wealth disparity, as the super-wealthy can buy rentier assets for nearly free with Fed-created credit, outbidding everyone in the 99.5%.

D) In becoming the buyer of last resort for Treasury bonds and home mortgages, the Fed has destabilized the bond and mortgage markets and undermined the U.S. dollar. As a result, the Fed has to taper its buying lest it end up owning the entire short-term Treasury market.

E) By buying $2 trillion in mortgage-backed securities, the Fed (in conjunction with Fannie Mae, Freddy Mac and the Federal housing agencies such as FHA) has essentially socialized the mortgage market in the U.S.-- virtually all home mortgages are now backed or issued by the government. less than 5% of all mortgages are privately issued and not guaranteed or owned by the government.

Destroy the market's ability to price assets, risk and credit, and you take away the essential information participants need to make rational, informed decisions. By crushing the market's ability to generate accurate pricing information to save the Status Quo from necessary repricing and reforms, the Fed and the Federal government have generated enormously destructive unintended consequences that will not respond to additional politically expedient fixes.

All the other central planning fixes around the world share the same fatal flaw. 





Get a Job, Build a Real Career and Defy a Bewildering Economy(Kindle, $9.95)(print, $20)
go to Kindle editionAre you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible.

And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career.
You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck.

Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers.


So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy.


It details everything I've verified about employment and the economy, and lays out an action plan to get you employed.

I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read.

Test drive the first section and see for yourself.     Kindle, $9.95     print, $20


"I want to thank you for creating your book Get a Job, Build a Real Career and Defy a Bewildering Economy. It is rare to find a person with a mind like yours, who can take a holistic systems view of things without being captured by specific perspectives or agendas. Your contribution to humanity is much appreciated."
Laura Y.





Thank you, Howard R. ($25), for your exceedingly generous contribution to this site -- I am greatly honored by your support and readership.Thank you, Jerzy W. ($10/month), for your outrageously generous subscription to this site -- I am greatly honored by your support and readership.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


Our Privacy Policy:


Correspondents' email is strictly confidential. This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative). If you have other privacy concerns relating to advertisements, please contact advertisers directly. Websites and blog links on the site's blog roll are posted at my discretion.


PRIVACY NOTICE FOR EEA INDIVIDUALS


This section covers disclosures on the General Data Protection Regulation (GDPR) for users residing within EEA only. GDPR replaces the existing Directive 95/46/ec, and aims at harmonizing data protection laws in the EU that are fit for purpose in the digital age. The primary objective of the GDPR is to give citizens back control of their personal data. Please follow the link below to access InvestingChannel’s General Data Protection Notice. https://stg.media.investingchannel.com/gdpr-notice/


Notice of Compliance with The California Consumer Protection Act
This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising. If you do not want any personal information that may be collected by third-party advertising to be sold, please follow the instructions on this page: Limit the Use of My Sensitive Personal Information.


Regarding Cookies:


This site does not collect digital data from visitors or distribute cookies. Advertisements served by third-party advertising networks such as Investing Channel may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative) If you have other privacy concerns relating to advertisements, please contact advertisers directly.


Our Commission Policy:

As an Amazon Associate I earn from qualifying purchases. I also earn a commission on purchases of precious metals via BullionVault. I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP