How Ben Bernanke Is Destroying America

David Einhorn knocks it out of the park with his very first statement during today’s Buttonwood Gathering, in a segment dedicated to one thing only: explaining how the Fed’s policies are not only not helping the economy, they are now actively destroying this country. 

 

“Sometimes you have to look at what is the base assumption. because sometimes you have a groupthink around the base assumption and everybody agrees to the same thing and acts reflexively and doesn’t really challenge what is going on. I think we have reached that point with the monetary policy. The assumption is that if you want the economy to improve, if you want more jobs, if you want more consumption, what we need is ever-easing monetary policy. My point is that if one jelly donut is a fine thing to have, 35 jelly donuts is not a fine thing to have, and it gets to a point where it’s not a question of diminishing returns but it actually turns out to be a drag. I think we have passed the point where incremental easing of Federal policy actually acts as a headwind to the economy and is actually slowing down our recovery, and I am alarmed by the reflexive groupthink of the leaders which is if we want a stronger economy, we need lower rates, we need more QE and other such measures.”

And that, in a nutshell is it: everything else follows.

Because in addition to explaining the same fundamental error in the Fed’s logic (from an economic standpoint; we already showed what the “market” error is, namely that instead of forcing investors to buy risk assets as Bernanke’s wealth effect prerogative demands, these same investors are merely frontrunning the Fed’s purchases of bonds and MBS, in what is truly a risk free, if lower-returning trade, and is key reason why ever fewer equity market participants are left, leading to lower bank revenues, bank employee terminations, lower Federal and State tax refunds, and so on, in a closed loop) it also points out the social aspect. At one point in the interview, Einhorn observes that traders and economists now have diametrically opposing views on the effectiveness of QE (no need to explain whose view is what). The reason for this dichotomy is simple, if crucial: we are now at a point where the entire practice of new-classical economics – the bedrock thinking of all modern soecity – is at risk of being exposed for a sham “science” which is and has always been absolutely flawed. Because when one day the Fed fails to prop up the Fed, and fail it will, all the economists that encouraged the Fed to do what it does, without grasping the true implications of ‘diminishing returns’, will be forced to fall on their swords (hopefully metaphorically but who knows). And with that the end of the shaman cult that shaped the modern world will finally end. But not before every single “economist” keen on perpetuating their job, their tenure, and their paycheck for as long as possible, backs the Chairman fully and unconditionally: anything less, any outright dissent within the economic cabal, would lead to a far faster unwind of the Fed’s policy artifice even faster than it otherwise will fail.

Recall that this was precisely the dilemma before the Bundesbank as we explained yesterday, when it did what it had full right to do openly, yet did secretly, when it pulled its gold inventory from London: it implicitly confirmed it was no longer a willing participant of the NWO, and no longer is willing to sacrifice its sovereign independence at the altar of Keynesianism, and monetary theory.

But back to Einhorn, who presents one of the most coherent explanations why QE, contrary to the Chairman’s “best intentions” does nothing to stimulate the economy at the consumer level, and why it effectively serves as a hindrance to future growth: 

 

“Lower rates drive up the cost of commodities: oil and food. And money that is spent on oil is sent out of the country to the Mideast and it doesn’t help, and takes out income from people’s pockets that could otherwise be spent on other goods. The second [ZH: and this is by far the biggest thing that the Fed refuses to acknowledge] is that not being able to earn a safe return on savings, is causing people to hoard savings rather than consume. In other words if I know I am going to earn 3% in the bank I can spend that income and I can have visibility towards that, but if I know I’m going to earn zero in the bank, in order to figure out how much I need to save for retirement I need to save a much bigger number. Which means I can’t spend much now, I need to save more now, to build up those savings for retirement. If I am already retired and I am on fixed income, my income has now really gone down and I have to hoard money so I can spread it out thinner over a longer part of my life. So by denying individuals savings or interest on income on their savings, it is causing hoarding which is driving down consumption which is hurting the economy.”

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