by Egon Von Greyerz, Gold Switzerland:
“The report of my death has been grossly exaggerated” are words that Janet Yellen is likely to utter within the next few years. It was of course Mark Twain who said it over 100 years ago, before the Fed even existed. Yellen has recently stated that there won’t be another financial crisis in her lifetime and she will most likely have to eat those words in coming years. We know that the Fed’s record of economic forecasting has been abysmal. They have never forecast or anticipated a single economic downturn. Here is what Greenspan said in 2010: “We didn’t forecast better because we can’t”.

Well there we have it from the master himself of both Fedspeak and gobbledygook. For over a century the Fed has not anticipated any of the major economic or financial events that have plagued the world. Instead of predicting these events, the Fed has actually caused most of the economic downturns or financial crashes.

The Fed has a Dual Mandate of Price Stability and Maximum Sustainable Employment. Since the US government uses a yardstick with infinite flexibility, they should be able to produce whatever figures the they need to meet their targets.

If we take the official US consumer price inflation, it has fluctuated from 25{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} to -15{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} in the 1920s and between 12.5{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} in 1980 to -0.3{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} in 2009.

This can hardly be called price stability and shows that at no point has the Fed achieved their goal. The fact that official inflation is now just under 2{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} is just sheer fluke and has nothing to do with Fed policy. Inflation levels in most industrialised countries are currently between 0 and 2{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}. Real inflation is substantially higher as anyone buying food, insurance, paying for education etc knows.

As regards the Fed goal of Sustainable Employment, they have found a very elegant way of solving this. By eliminating everyone who hasn’t found a job after six months, the unemployment rate miraculously declines from 23{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} to 4{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}. The fact that 95 million Americans capable of work can’t find a job is not taken into consideration. There are many ways to skin a cat and the Fed has used every method possible to achieve their goal. No one should be fooled because all is certainly not well in the kingdom of America (Hamlet paraphrased).

The Fed’s stated Dual Mandate does not seem to be the real policy they are pursuing. Instead their actual policy is to create cheap money by setting interest rates at zero and to print massive amounts of money. This benefits their banker masters and shareholders by having access to free financing which can be leveraged 10-50 times thus generating super-profits. The Fed policy also creates massive gains for the banks and the wealthy in stocks, bonds and property. These bubbles are now so big that the Fed doesn’t dare to pop them. But regardless of Fed policy, the sheer size of the bubbles will lead to their implosion in the next few years.

Central banks worldwide have gradually stepped up their attempts to create a demand induced inflation for the last two and a half decades. It started with Japan in the 1990s with the rest of the world following in the 2000s. Since 2003, the major central banks have printed $12.5 trillion and still not manged to boost inflation figures. But this is just a small part of total credit creation since global debt has increased by $130 trillion in the last 14 years to $217 trillion.

This means that since 2002 we have seen a credit explosion which is equivalent to 2 years’ global GDP. It is a frightening thought that for 2 out of the last 14 years there would have been ZERO GDP without a credit expansion of $130 trillion. And even with this credit growth, world GDP has grown on average by less than 2{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} (excluding China). Debt to GDP has grown from 160{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} in 1979 to 375{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} today in the US and from 320{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} to 580{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} for Japan. Most countries have seen similar increases to levels which are totally unsustainable and thus confirm that this will not end well.

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  1. Fedspeak? Gobbledygook? What’s the difference?
    Anyone else remember Bernanke claiming on financial TV programs that “Now is a great time to buy a house!”? And this less than 3 weeks before the bottom fell out of the US housing market in 2007.

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