Today we have the confirmation hearings for proposed Fed chairperson Janet Yellen. The markets rallied strongly yesterday afternoon as her prepared comments were released early which continued to show her easy money/dovish stance. Other than a change of “face,” will anything change? Other than knowing who will be driving the bus for the next few years, is she a better driver than Ben Bernanke or Alan Greenspan?
Mrs. Yellen says that the economy is still performing sluggishly and under its potential. She also says that inflation is too low and unemployment is too high…thus we need more fuel! Really? We have already had 4 swings of the bat with each successive (and larger dose) of QE, a foul tip or two has been at best the result. She says that, “A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases.” Aren’t these almost the words verbatim from Ben Bernanke nearly 5 years ago while trying to “sell” the markets on the original QE?
Yellen is (Bernanke was) basically saying that like a child learning to ride a bike with training wheels, they can be taken off once they are no longer needed. I went on record back then and will say again, more “liquidity” cannot solve the problem of insolvency. This has turned out to be correct, in fact, the liquidity provided by the Fed has enabled the Treasury to bankrupt us by adding another $6-$7 trillion of new debt in just 5 years. I would ask the simple question that any 10 year old would, “If it hasn’t worked yet then why will it work in the future?” If a bigger and bigger hammer that has led to the current sledgehammer has not worked…could it be that you are using the wrong tool?
While listening to her comments I just have to laugh. She said that the, “Economy is significantly stronger and continues to improve” and also that “unemployment has dropped from 10% to 7.3%.” She made the comment that “once the recovery takes hold they will be able to reduce purchases.” Recovery? Really? We are now 5 years (and four QE attempts) out and yet we are still waiting for a recovery? In one sentence she is telling us that the economy is strong and continues to improve yet we are still waiting for “recovery?” As for unemployment, has she even glanced at how many people have dropped out of the work force? Is this because things are so good that people can kick back, relax and live off of the fat? Does she think that the workforce has dropped back to 1978 levels because the population has shrunk?
She speaks so often about “models,” has she ever considered that some “models” are faulty in logic and that sometimes plain old common sense is the best “model?” Yes models (based on history) are helpful but times and circumstances change over time, should you continue to use a model when it no longer works? Clearly what used to work is not working now; deficit spending and monetary ease have not worked. Maybe it’s time (a reset and new currency) for a new model to be created?
I say this because unlike her predecessors she is contradicting herself so that even commoners can see. In street language “she is not even a good liar.” I probably should put some blame on the softball questions she is being asked but Mrs. Yellen is not even giving answers that contain logic. Maybe it is because we are too far down the road now and monetary policy has not worked while she is using arguments that were specious at best 5 years ago. The economy has already proven her arguments (dated 5 yrs.) false yet she sticks to the script.
There was one question about the size of the Fed’s balance sheet which will grow to 1/4 the size of GDP by next year, “No problem,” she says. Other Fed governors have said that theoretically there is no limit to the size of the balance sheet. Yes, “theoretically” maybe but in the real world the Fed is crowding out investors who need 10 yr. Treasuries (and other maturities) to perform their business. Insurance companies, pension plans and let’s not forget the shadow banking system’s credit creation abilities, how will they function if there are not enough “risk free” debt instruments to fund them? They must taper but they cannot while at the same time they must increase the level of QE…but they cannot.
To cut to the chase, no one on the planet as Fed Chairman could “fix” where we are now. Yes the system could be fixed were the Federal Reserve to be banished and a “backed” currency was introduced but no one can fix a system that is illogical in its own charter. I will say that I think it’s a big mistake for Mrs. Yellen to become Fed Chairman. Her speaking abilities in my opinion are strained and her logic is scripted in already proven false logic. As I have said many times before, who in their right mind would take that job in the first place?