Wednesday, May 29, 2013

Krugman & Weisenthal Are Caught In The Headlights

By, Chris Rossini

We have an economy that is dependent upon and addicted to zero percent interest rates. Rates are artificially forced to those levels by the monetary easing of the Federal Reserve.

We've been told by the likes of Paul Krugman & Joe Weisenthal that such policies were necessary; that the monetary accommodation (i.e. counterfeiting) acts like "training wheels" for the market. The Fed is there to make sure the bike gets moving, and then the training wheels can be removed.

And it's no big deal...When the "training wheels" come off, you'll barely notice a thing.

The truth is that when the Fed takes away its QE, the malinvestments in the economy (which are created by the artificially low rates) will ultimately be revealed. Entrepreneurs will discover that their investments have been made in error.

We've been through this several times just in the last decade. Have we forgotten the multitude of dot-coms that went into extinction, as well as the uncompleted skyrises and neighborhoods that were erroneously built during the housing charade? You can still go down to Florida to see the results with your own eyes.

This time around, contrary to Weisenthal's claim, will be no different. Sadly, it'll be much worse, because the Fed has twisted the economy into an even bigger knot!

And as far as an "exit" is concerned for the Fed, I agree with Peter Schiff that the Fed doesn't have one. Peter stated recently:
"You know when the Fed tries to unload all these mortgages and U.S. Treasuries, there are no buyers. The Fed is the buyer, and the only reason other people are buying is because they think the Fed is going to keep doing it."
And a rise in rates will equal disaster for the government:
"The banking system can't handle a big increase in rates. The housing market can't handle an increase in mortgage rates. The U.S. government can't handle an increase in interest rates because it doesn't have the money to make the payments."
Well wouldn't you know - long-term rates have risen significantly over the last several weeks.

Krugman is (of course) spinning the recent rise:
Those rates are still at levels that would have seemed absurdly low not long ago — but they are up significantly from a few months ago.
Interesting that he's taking that approach, because last month, when gold began its very healthy correction, Krugman and Weisenthal were both giddy. I saw no mention of gold being significantly higher over the last decade and that this was just a minor correction. No sir! Instead it was called GOLDENFREUDE: "the pleasure of seeing gold fans lose money".

So the climb in long-term rates will be accompanied by plenty of spin. Expect lots of charts too.

Can the recent surge signal a beginning of end for the Fed's frankenstein economy? We'll have to wait and see, but in any case, rates will have to rise eventually and the malinvestments will be exposed.

To think that it will be a 'non-story' is equivalent to being a deer caught in headlights.

Reality is zooming towards the Fed and its idea junkies...And it's gonna be a massive story indeed.

Follow @ChrisRossini


  1. That deer in the headlight (a staple at Zero Hedge) always makes me ruefully smile.

    These morons don't know what's coming.

  2. "Reality is zooming towards the Fed and its idea junkies...And it's gonna be a massive story indeed."

    Yes, the Word Wide Depression will be a massive story about ELECTION TIME!! Unless there's an even greater story. In which case, I'll try to find one of those 1950s houses with the fallout shelter built under the garage.



  3. The funny thing is that "tapering" (the latest buzzword replacing sequestration) is enough to get everybody in the mainstream spooked. If the Fed begins to taper, that means that they're still easing, and their balance sheet is expanding. The Fed isn't even exiting until it begins to SELL some of those worthless "assets." If just slowing the buying is enough to have people running for the exits, just wait and see what happens when they attempt to sell. Grab your popcorn (and gold), sit back, and enjoy the show.

  4. Krugenfruede: The pleasure of seeing Krugman's theories fail.