NotQuant’s response to Mish’s Response to NotQuant

Yesterday, we read Mike Shedlock’s response to our piece Is the Fed Going to Initiate A Controlled Collapse with interest.

He called our piece “complete silliness” and then attempted to deconstruct our logic with this silliness:

Mish wrote:

  1. Does the Fed know the difference between an asset bubble and my mom’s tuna casserole?
  2. Does the Fed know the difference between an asset bubble and a moon of Jupiter?
  3. Does the Fed care about asset bubbles even if it could detect them?

As chuckle-worthy as that was, and as tempting as it is to believe that the Fed is run by dummies — we simply can’t allow ourselves to settle for such a simplistic explanation.


Fool me once...

Fool me once…

Mish says they can’t see bubbles

Mish’s position is that the Fed does what the Fed does because the Fed is “dumb” and incapable of seeing bubbles.  They are, one must infer from Mish, mentally incapable of perceiving that which so many of the rest of us perceive.  Bernanke didn’t publicly predict the crash, ergo Bernanke must be too stupid to see crashes coming.  Or something like that.

Likewise, Mish says Yellen too is “clueless” and doesn’t understand bubbles.

“I propose Yellen is clueless. If she had any sense, she would have acted in advance to prevent an asset bubble or at least stall the one Bernanke had started.”

Yeah well.  We’re not buying it.

Short-termist, yes.  Blind, no.

The Fed is a distinctly political entity despite protestations to the contrary and repeated claims of “independence”.  They are also (as we all know) strongly influenced by Wall Street.   Those two despicable influences create obvious internal conflicts and raise an unholy mandate for painfully cautious policy language and highly-processed public statements.

When we see the results of the Fed’s policy diverge from it’s supposed mandate, it would be too easy to assume that they are “stupid”. A more astute observation would be to note that the priorities of their mandate may not be what we think they are.   And that the Fed has a wide series of non-public agenda items which supersede their public mandate.   Should that be the case?  No.  But it is.

In fact — we know this to be true and the evidence abounds.

Bubbles are intentional creations

Despite what we all know about the destructive nature of bubbles, one cannot escape the flipside reality:  That bubbles stave off the effects of the previous collapse.  That the bubble-creation game cannot be played in perpetuity is obvious.  But that does not change the intentional nature of their creation in these past cycles.

To put it bluntly: Where Mish sees stupidity, we see intent.

The Fed is in the business of preserving the unfettered hand of the banking system. Through policies which masquerade under the banner of “stability” The Fed ensures (they hope) that no matter how destructive or irresponsible the banking system may be, the underlying structures which enable it will endure.   Comparatively little concern is given to what the long-term impact of the required policy responses may be.

And we know exactly what those policies look like, because we are continuously subject to their destructive power.

The only time the Fed engages in anything remotely resembling “regulation” is when the system threatens to destroy itself.

But this time really is different.  The underlying structures themselves might not endure.   The problem with short-termism is the long-term.  And we’re there.

The ponzi “singularity”

Just yesterday, as we noted in our piece on Bernie Madoff we said the following:

The problem of not dismantling a ponzi scheme ultimately becomes as impossible as the problem of dismantling it. Given enough time, neither option is an option at all:   To taper is to implode it, but to allow it to reach critical-mass is also to implode it.  Both paths converge at the same point.   “Extend and pretend” is simply a longer route to the same dismal result.”

The ponzi scheme of the US economy is now approaching that singularity:  The point where both paths will clearly meet and terminate.

The Fed knows this.

Without a controlled collapse there will and must be an uncontrolled collapse.  And they also know that this time will be exponentially more damaging because the last collapse was staved off with a degree of leverage which cannot be replicated.

The second to last thing in the world that the Fed wants to do is initiate a controlled collapse.

The last thing in the world that the Fed wants is an uncontrolled collapse.

The “central bank’s central bank” clearly suggested a policy response of intentionally bringing forward the downward leg of the cycle, and starting that journey sooner than later.  

That initiating a downward trend in the markets and the economy at-large is an openly discussed (and recommended) policy response at this time is not open for discussion.  It’s in print.

That’s our evidence.   Where’s Mish’s again?  

We’re not sure where Mish’s assessment of “complete silliness” comes from, but it certainly doesn’t come from evidence.

His explanation for the past few bubbles seems to that he can see bubbles — but Fed board members can’t.   Or something.  If only the world were that simple.



  • Gilles


    But what if the Fed really think that they have 2-3 years ahead of them, and that the problem will only become serious when/if the Dow Jones climb to 20 000 and the S&P500 reaches 2400 ?

    What if they think that now it’s still party time ?

    In other words, what if those dangerous psychopaths think that they are not yet near that singularity (despite growing evidence of the contrary).
    It is so nice (for a banker) to still be partying and enjoying the ever rising market…
    Of course, bears (myself included) are DEAD ! But no, they still have time, and they will start looking at that problem, oh well, let’s say in 2015 …
    They have the agenda,… But they think they can keep things for a while (6 months to 1 year) under control.

    In a nutshell, Mish says the Fed is stupid, you say it’s evil.

    What if it’s stupid AND evil at the same time ?


    • hashman

      Giles is right :) As are OP and Mish, though they are also both wrong. One problem is that you are writing words that indicate the fed is a person. “The fed thinks.. the fed says..” these statements could only be wrong no matter what is on the right hand side. The true story will involve the real players. I’d like to hear a few more words about why the folks able to issue currency and manipulate markets don’t have the leverage they did in 2008.. and also what exactly will “collapse” in the end. In my biased reading it is the amount of food we will be able to buy with a USD that is under discussion but there are doubtless other things on your minds as well. Let us know :)

  • dress

    You shouldn’t be too harsh with MIsh. I followed his blog for a long time until I gave up last year. In the beginning I thought he is a smart guy. But over time I found out he is a frigging idiot!

  • EDJH

    This is just a short bit, maybe more later. But it is of central & large importance.
    Historical asset price data are important — like the Dow (DJIA) and home prices. If they are in U.S. Dollars, it is sound to adjust the prices for inflation, OBVIOUSLY! Here’s what the two histories look like:
    (Do you like financial roller-coasters?)

    These are overwhelmingly instructive, and promoting people’s ignorance thereof is intellectual savagery, I say.
    The financial sector has bought the information providers … E.g., “How much did journalism get for its soul?”.

  • Inez Babington

    Here is something that BOTH opposing articles leave out: EGO.

    Take Obama, for example. How could someone be so ‘stupid’ as to go play pool and make jokes about pot and seemingly ignore the crisis on the border? How could someone be so ‘stupid’ to openly mock his enemies and accuse them of being the ones who won’t compromise? I say it is not stupidity, but a Messiah complex that makes him enraged at any criticism of his bad policies. This ego feeds his stubbornness and out of spite he sticks with the same policies. At the first sign of any indication that his policies are bad, he blames others and pushes even harder with the same policy. (Syria, Arab Spring, Video Benghazi excuse, Obamacare broken promises, Israel…)

    Janet Yellen is a Keynesian. Period. She and her ilk on the board believe in their policies and anyone who criticizes them is simply wrong and stupid in their eyes. To reverse any of these policies publicly would be admitting to a $4 trillion mistake — something they will never do.

    I personally believe that the Fed is secretly wishing for a black swan. They don’t have the intestinal fortitude to change their policies, so if a black swan happens, they can point to that and say “It’s not our fault. Everything was working fine until XXXX happened.”

    Having said that, if they finally reach a moment where they privately see an uncontrolled collapse is coming, then they would seek to initiate a controlled collapse covertly (maybe order the dark pools to stop or something…) BUT to reach that moment, they are going to have to put aside their EGO. Don’t know if they will be able to do that.

  • Al Tinfoil

    1. When will the Fed raise interest rates? Never, unless it
    intends to crash the market. The economy crashed long ago.

    2. When will the Fed “taper”. See answer to 1. above.

    3. What is Yellen doing? The job assigned to her, which is to keep
    the Great Ponzi Scheme going while issuing bafflegab to the masses to assure
    them that all is well.

    4. What is Mary Jo White doing at the SEC? The job assigned to
    her, which is “See no evil, hear no evil, speak no evil”. If
    she ever admits that there is any market manipulation, then she might have to
    do something about it.

    5. When will the US go bankrupt? It already did, starting in the
    1970s. Ever since, the US has been living off its credit cards, sinking
    ever deeper into debt. The point at which the debts became too high ever
    to pay off occurred many years ago, but money printing and cheap credit allowed
    America to pretend it remained solvent.

    6. US GDP shrank by 2.9% in Q1 2014. The decrease in GDP for the
    1st quarter of 2014 is bad enough, but among the figures there is an even more
    shocking reduction in US exports of goods and services (8.9% loss), while
    imports of goods and services increased by 1.8%. The BEA reports the US
    trade deficit increased to $47.2 Bn in April 2014 from $44.2 Bn in March.
    The Current Account Deficit increased by $23.8 Bn to $111.2 Bn in Q1
    2014. Unemployment is reported at 6.2%, but if calculated as done in the
    past, would be 24%. Some commentators put it at 27%. 60% of the
    jobs lost since 2007 have been high to medium wage jobs, 58% of the jobs
    created since then have been low-wage jobs.