Fed's John Williams Strikes The Alarm Bell; Markets, Economists Respond With Aburptness, Gibberish

President and CEO of the San Francisco Federal Reserve Bank, John Williams, released a white paper on Monday that caught the attention of just about everybody even tangentially aligned with economics or finance called Monetary Policy in a Low R-star World.

Williams, who was Janet Yellen's chief researcher when she was head of the San Fran Fed, has, with the release of this paper, struck the alarm bell with an enormous policy mallet. In effect, he's telling the world that the central banks of the world - including our own, all-powerful Fed - that the past seven years of low interest or zero interest rates have not produced the desired results, which would be a robust economic climate coupled with adequate inflation.

What the Fed and other central banks consider adequate inflation is something of a mythical, though essential, concept in Keynesian economics. Central bankers talk of a target inflation rate, figuring that two percent is about the right level to keep GDP and the associated debt burden growing.

In essence, the concept that any level of inflation is good for anybody other than central bankers is complete and absolute buffoonery, designed only to perpetuate the counterfeit of fractional reserve banking and fiat money. It should be pointed out that true inflation is always and everywhere a monetary phenomenon, strictly defined as an increase in the money supply, that being debt in every case involving fiat money. What Williams is talking about is price inflation, an entirely different animal. A price inflation rate of two percent, over any expanse of time, be it 10, 20 or 50 years, does nothing but erode the value of the currency, increasing the price of everything and impoverishing the citizenry coerced into using said currency.

It's horribly bad policy for the bulk of the population, enriching the banks, distorting the natural business cycle and inducing government spending beyond its means, causing deficits and eventually, unpayable, unservicable debt burdens, the exact condition the entire global economy finds itself in today.

Williams chooses to blame all of the central bank policy errors on an amorphous concept known as the natural rate of interest, or R*, or R-star. The conceit of his missive is where he states, "While a central bank sets its short-term interest rate, r-star is a function of the economy that is beyond its influence."

In other words, Williams is conceding that the natural flow of economics is something a central bank cannot control, manipulate, massage, or otherwise rig. It's utter nonsense. The reason the mythical R-star is so low is because central banks worldwide have been dropping key interest rates to previously-unforeseen levels, in many cases (notably the BOJ and SNB) instituting negative interest rates. Central banks have caused the massive global economic problems and Williams' propose solutions indicate that the central bank models are broken beyond repair and that their only tools remaining are empty rhetoric and finger-pointing, obviously ill-suited to stave off recessions or induce growth and prosperity.

Williams wags his finger at governments, proposing that fiscal measures be taken to combat low inflation (eventually outright deflation) with more insanity such as targeting GDP or using some kind of sliding scale of taxation based on centrally-planned, goal-sought data points such as inflation and/or unemployment.

It this were a football game, Williams could be accused of punting on second down from his own goal line. He's given up, as he - and his central bank brethren - should have eight years ago at the height of the Great Financial Crisis (GFC), allowing the market to clear out the malinvestments, cripple the broken, over-leveraged banks and allow the economy to recover on its own terms, without the aid of central bank intervention. The associated pain might have been immense, but it would have been contained and recovery would have been swift.

Instead, Williams and the central bankers of the world have brought the global economy to the brink of a mammoth financial crisis, one in which entire nations' economies will be completely torn asunder. Williams and his friends have given us the most extreme policy initiatives the world has ever seen (ZIRP, NIRP, QE) and saddled governments, businesses and individuals with outrageous debt loads.

If ever the world has been at the cusp of a debt jubilee, this is it. The central banks have failed even themselves and their clandestine shareholders and its time they be relegated to the dustbin of history, along with other failed ideologies.

A return to gold and silver as base capital in a demand economy, various barter exchanges and fixed exchange rates in foreign currencies would be far better solutions than what Williams has proposed and eminently superior to the devilish constructs of the IMF, World Bank, the European Union, futures, derivatives, federal mandates, and other complexities of modern economics.

At the end of error-prone regimes, be they in finance or governance, wild, weird, unwieldy ideas will be promulgated by supposed "experts." Williams' institutional heresy is only the beginning of the coming madness. Expect even more desperate distortions and departures from reality from the very people who created the economic mess. They're uniquely positioned to cause nothing less than global economic, political and societal calamity.

Good luck.

*************

The market response to San Fran Fed's Williams' policy punt has been swift and poignant. In Japan, the Nikkei fell 273 points. European markets were lower across the board, with the Dax, FTSE and France's CAC-40 each losing ground. US stocks opened lower and remained in the red through the session.

It worth noting that this is still August and most of Wall Street's heaviest hitters are still stupefied by drugs and booze out at their Hampton retreats. US markets hit all-time highs in recent days, akin to ringing a bell at the tippy-top of the market. Values are extreme and detached from fundamentals. The dollar was whacked and will likely continue to decline, and, as just about the only barely viable economy and bond market, US treasuries are about to head further toward zero and negative rates. The world is upside down, ripe for complete overhaul. What many have been predicting and anxiously awaiting for the past seven or eight years may finally be upon us.

Of course, to offset the negative effects of Williams' paper, NY Fed head, Bill Dudley trotted out a statement just prior to US markets opening, saying, in effect, that a September rate hike by the Fed is under consideration. There you have it: more jaw-boning and utter nonsense designed to alter perception. To say that the Fed is close to another rate hike is tantamount to thinking that the moon is about to tumble into the earth.

Gold and silver were each up sharply overnight and in early morning trading on the COMEX. Precisely at 8:00 am EDT, both were hammered lower, yet another signal that central bankers are desperate and nearly delusional.

Be prepared.

US Markets at 3:00 pm EDT (prior to close due to scheduling conflict)
Dow Jones Industrial Average
18,583.22, -52.83 (-0.28%)

NASDAQ
5,237.45, -24.56 (-0.47%)

S&P 500
2,182.27, -7.88 (-0.36%)

NYSE Composite
10,825.95, -32.54 (-0.30%)

Whoops. That's Why We Don't Offer Specific Investment Advice

What happened?

We thought the government was giving Wall Street the "all clear" signal to send the stock market upward and onward to all-time highs. That's why we - somewhat tongue-in-cheek - suggested buying stocks all the way through Christmas. Maybe we were getting a little ahead of ourselves.

Well, a few, not-so-funny things happened on the way to laughing all the way to the bank.

Momentum stocks are beginning to take on water as high-profile investors like Carl Icahn start cashing out of investments like Netflix. Speculative stocks like Chipolte Mexican Grill, Tesla, Facebook, LinkedIn and others have soared by more than 100% in the past year. Many came under heavy selling pressure yesterday and today.

China's largest banks tripled their debt write-offs, bracing for a full-blown implosion of their over-leveraged, over-inflated real estate market, much like the housing crash in the US from 2007 onward.

JP Morgan is close to settling another lawsuit over bad home loans (really? who cudda guessed?), this one for a mere $6 billion.

Late in the day, Bank of America was found liable for fraud on claims related to defective mortgages sold by its Countrywide unit.

Soooooooo, the major averages finished in the red. Of course, this is only one day, and it will take many more down days and confirmation of a failed rally for Money Daily to proclaim a bear market which will precipitate a crash, eventually. Timing is everything, and the final, fatal blow to the abhorrent US stock markets may not come for months or years, though 2014 is beginning to look pretty ugly.

One thing which is a positive, yet unexplained, is the collapse in the price of crude oil, which has dropped more than $10 in the past two months and about $7 in the past 10 days. With lower oil prices come - naturally - lower gas prices. It could be seasonal, though we're hoping the decline is more of a permanent one. Lord knows, car owners need a break at the pump.

Also, bonds have been rallying hard since the government got back to work, sending yields on the ten-year note down 25 bips in just the past week.

With Halloween rapidly approaching, it might be a good idea to begin getting scared in advance, thus, the frightful future of the US economy, according to John Williams of shadowstats.com in this revealing, startling interview by Greg Hunter:



BTW: We're still screwed.

Dow 15,413.33, -54.33 (0.35%)
Nasdaq 3,907.07, -22.49 (0.57%)
S&P 500 1,746.38, -8.29 (0.47%)
10-Yr Bond 2.49% 0.03
NYSE Volume 3,695,265,000
Nasdaq Volume 1,866,661,875
Combined NYSE & NASDAQ Advance - Decline: 2382-3210
Combined NYSE & NASDAQ New highs - New lows: 300-32
WTI crude oil: 96.86, -1.44
Gold: 1,334.00, -8.60
Silver: 22.62, -0.173
Corn: 442.75, +4.50

Do Not Watch at Your Own Risk

For those who think Nouriel Roubini (AKA Dr. Doom) is a little too pessimistic, the interview - linked at the end of this post - with John Williams (shadowstats.com) might be a bit much to bear. But, it is highly recommended that anyone with a time horizon of more than six to twelve months view the interview in its entirety (almost nine minutes) and heed well what Mr. Williams says about the future of the United States, hyperinflation, Fed policies and being prepared.

Mr. Williams' site, shadowstats.com, has general commentary on the state of the economy, though more detailed analysis is by subscription only. It's rare to see Williams live, this being one of the few interviews available, but he's a down-to-earth economist who examines the US economy with the bent of a CPA, using GAAP instead of the fuzzy numbers the government likes to throw around.

Just the kind of stuff one needs to hear before venturing out to the mall for Christmas shopping, but, essential viewing if one wishes to survive until, say, 2012.

First a quick recap of the markets:

Dow 11,370.06, -2.42 (0.02%)
NASDAQ 2,616.67, +7.51 (0.29%)
S&P 500 1,233.00, +4.72 (0.38%)
NYSE Composite 7,782.14, +31.82 (0.41%)
NASDAQ Volume 1,948,935,500
NYSE Volume 4,994,395,500

Obviously, not much to get excited about today, though House democrats did vote no in a caucus on accepting the President's "tax compromise" worked out with Republicans earlier in the week. It's a bit of a snag, especially since the Bush tax cuts expire at year's end and most of the cretins in congress would like to skip out of town in less than two weeks.

Advancing issues beat decliners, 3697-2758. NASDAQ New Highs: 182; Lows: 21; NYSE New Highs: 152; Lows: 28. Volume was poor, especially on the NYSE.

Oil put up a 9 cent gain, to $88.37. Gold recovered some lost ground, gaining $5.70, to $1387.00 on last print, as did silver, up 40 cents, to $28.76.

That's about it. Markets are dull as traders wind down positions at year's end, allowing more time to view the excellent video below.

Click here for John Williams interview.