Behind the Curve

Economic nonsense comes a dime a dozen.  For example, Federal Reserve Chair Janet Yellen “think(s) we have a healthy economy now.”  She even told the University of Michigan’s Ford School of Public Policy so earlier this week.  Does she know what she’s talking about?


Somehow, this cartoon never gets old…


If you go by a partial subset of the ‘official’ government statistics, perhaps, it appears she does.  The unemployment rate is at 4.5 percent, which is considered full employment.  What’s more, inflation is ‘reasonably close’ to the Fed’s 2-percent inflation target.  But what does this mean, really?

According to Fed Chair Yellen, it means that now’s the time to tighten up the nation’s monetary policy.


Behold this display of awesomeness, citizen. Doesn’t it prove that central planning “works” after all? Unfortunately the ointment is never entirely fly-free, especially when one is pondering statistical aggregates – click to enlarge.


By now you’ve likely seen this upcoming – choice – quote from Yellen.  Nonetheless, we can’t resist repeating its remarkable idiocy.  For Yellen, who was in the greater Detroit metropolitan area, was kind enough to humor us all with a nifty automotive analogy to explain how to go about normalizing monetary policy.  Here Yellen elaborates with a variety of technical terms:


Whereas before we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could, now allowing the economy to kind of coast and remain on an even keel – to give it some gas but not so much that we are pressing down hard on the accelerator – that’s a better stance of monetary policy.  We want to be ahead of the curve and not behind it.”


As far as we can tell, Yellen’s merely huffing and blowing gas.  What curve she wants to stay ahead of is unclear.  We assume she’s referring to the inflation curve, although this does seem a bit out of context.

By our account, inflation of the money supply is, indeed, inflation.  Hence, the Fed fell behind the curve between September 2008 and December 2014 when it inflated its balance sheet from $905 billion to $4.5 trillion. By our back of the napkin calculation that tallies up to nearly a 400 percent inflation of the Fed’s balance sheet.  But what do we know?


The broad true US money supply TMS-2 vs. assets held by the Federal Reserve since the GFC. A few points worth noting: TMS-2 expanded by ~140% between January 2008 and January 2017. One way of looking at this statistic is “in the entire history of the US, an amount X of money was created until early 2008. Since then, the amount of money in the economy has increased by 2.4 times”. The money supply had doubled by November 2014, so it took a little less than six years to print as much money in the US than in its entire preceding history. Yes, this is quite a bit of inflation. The fact that it has “bought” the weakest recovery of the entire post WW2 era is apparently considered a surprise by many people, but it shouldn’t be (the capital theory of the Austrian School provides answers). Also noteworthy: since peaking at ~$12.64 trillion in January 2017, TMS-2 has actually declined by roughly $110 billion. Whether this trend will continue remains to be seen, but if it does, the weak recovery will turn into an outright bust – click to enlarge.


Economic Flatline

Apparently, the Fed is so thrilled with the economy’s health that it wants to start shrinking its balance sheet later this year.  In fact, New York Fed President William Dudley wants to execute balance sheet shrinkage by ending reinvestment of maturing principal.  Easy come easy go, right?

Unfortunately, Dudley’s plan ain’t gonna be easy.  When it comes down to it, it’s unlikely the Fed will ever be able to shrink its balance sheet in any meaningful way.  Quite frankly, both the economy and financial markets simply can’t afford it.

Sure Yellen says that “we have a healthy economy now.”  However, the economy may not be nearly as healthy as she believes.  This becomes much more evident when looking beyond just the unemployment rate.

In particular, as of 4th quarter 2016, GDP is increasing at a lethargic 2.1 percent.  Yet that’s not the half of it.  As of April 7, the Federal Reserve Bank of Atlanta’s own GDPNow model forecast for real GDP growth in the first quarter of 2017 is just 0.6 percent.  By the time you read this they’ll have published an update.

The point is, in the face of 0.6 percent GDP growth, Yellen’s statement that we have a healthy economy is patently absurd.  For all practical purposes, 0.6 percent GDP growth is at economic flatline.

Clearly, it’s not the type of growth that will lighten the load of today’s massive public and private debt burden.  Nor is it the type of growth that propels first term presidents into a second term in high office.


Fresh from the Atlanta Fed: the latest GDP Now forecast for Q1 2017 stands at a paltry 0.5%. Keep in mind that GDP is a measure of economic activity that leaves a lot to be desired, but as is generally the case with such macroeconomic aggregates, it does give us a rough idea of general growth trends. It remains to be seen if the forecast turns out to be correct, but this particular model has so far worked quite well, so we would not dismiss it.


Hell To Pay

President Trump doesn’t want 0.6 percent GDP growth.  He wants 4 percent GDP growth.  He demands it.  He’s even promised it. But promising something and then delivering on it are two entirely different things.  One takes cheap blather.  The other takes hard work, persistence, tenacity, and good luck.

Like many of President Trump’s promises, we are certain the promise of 4 percent GDP growth will be broken.  But Trump’s only fault in the matter is promising it to begin with.  It’s been over 13 years since the U.S. economy had a single year of 4 percent GDP growth.  The simple fact is, the U.S. economy’s too larded over with debt and intervention to attain it.

On top of that, Trump has the cards stacked against him.  The Fed’s plans to increase the federal funds rate and shrink its balance sheet, either simultaneously or in sequence, will likely be counterproductive to President Trump’s GDP target.  As the price of credit becomes more expensive, less borrowing and spending will occur.


Agiant inflationary illusion: total credit market debt, federal debt, stocks and GDP (no points are awarded for guessing what comes dead last). A little aside: the Fed has stopped updating total credit market debt in late 2015. But fear not, the underlying data set keeps being updated. Thanks for nothing guys – now we will have to reconstruct this chart manually if we want to keep publishing it (if we understand this correctly, they simply removed one equation from their spreadsheet – the only effect is to make it more difficult to track, chart and compare this aggregate number. Honni soit qui mal y pense) click to enlarge.


Of course, over the long-term, less borrowing and spending is precisely what the economy and financial markets need.  Contracting credit.  Deflating asset prices.  Bankruptcy and default of marginal businesses.  Most of all, default of U.S. government debt.  Liquidate it all.


That’s just the federal debt bomb – and it’s less than a third of the total.


These are the solutions to an economy that’s been distorted so far out of balance – where a median income job doesn’t buy a median priced home.  This is also the solution to a government that’s gotten too big for its britches.  Cutting off the government’s overdrawn credit line will be the surest way to shrink it down to right size.

No doubt, there’s hell to pay for 100 years of ever escalating financial insanity.  Take it in stride.  The downside is here and it’s not going away any time soon.


Charts by St. Louis Fed, Atlanta Fed


Chart and image captions by PT


MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.




Emigrate While You Can... Learn More




Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


2 Responses to “Hell To Pay”

  • love-sietsKl:

    10 mma fighter murdered to sudden low intake

    your first females if you want to rise China’s j 10 jet fighter jet been recently murdered in a collision for the time of an aerobatics work out exercise, assert perform presentation seen from monday.

    Yu Xu, 30, A person in the offshore air force’s “september 1st” Aerobatic have company, thrown out of her planes during a training operate involved in the north province connected Hebei during the week, the very tibet time of day magazine supposed.

    “among simply four customer aircraft pilots in the nation efficient at driving domestically finished mma fighter jets, the woman’s passing comes as a massive deficit in direction of the chinese language program air make, the global occasions when magazine defined.

    Yu, ranging from Chongzhou from your north western state relating to Sichuan, signed up with you see, the some people’s liberation navy (PLA) Air pressure using 2005, says spoken.

    your lover managed to graduate brought on by practice four quite a few at some time, one of the first 16 offshore individuals pilots highly trained which can soar killer aircraft, the china’s websites every day said, and in tuly 2012 provides most of the first lady so that it will travel 10. lovers dubbed your loved one their “gold peafowl, your idea said.

    this woman went up to become flight squadron alpha dog as well as,while good Global amount of times dreamed to become an astronaut.

    Yu became the actual most [url=]sexy chinese women[/url] two customer players together with the june 1st producers termed to the court founding the best indicate to PLA pictured at China’s a long time ago air in Zhuhai two.

    The husband and wife strode with their fighter aeroplanes in about fastening go by means of man [url=]hot chinese women[/url] pilots, each and every one working out in similar eco-friendly jumpsuits but solar shades.

    right at that moment the tiongkok routine classifieds quotation Wang Yan’an, Deputy editor about Aerospace abilities interesting, basically announcing: “female pilots have learned of run off a step ahead jet fighter [url=]chinese dating sites[/url] jets inside a chinese language program air strength.

    “this would mean the air trigger is bound to have diversified the device’s pilot collection and could hire additional woman aircraft pilots,

    Yu shown up consistently during this springs indicate to recently, in statements.

    the official scoops corporation Xinhua offered Air team spokesman Shen Jinke reporting its office personnel ended up being “intensely regretful and moreover mournful” by visiting the actual woman’s “depressing loss,

    The t 10 can be described as workhorse while using japanese air energy source. nearly 400 while using jets occur to be crafted, a great number for the chinese take advantage of, in self defense analysts IHS Janes. this item referred to keep away from studies expressed came forth related to three failures in the earlier three months.

  • wmbean:

    Ah, validity and reliability, the two eternal flies in the ointment of econometrics. I’m sure most economist mean well and can do their share of complex economic modeling, but that assumes the models have any close relationship to reality. Ah, another fly, those pesky devils keep sticking the longer one looks. Perhaps Ms Yellen would be more believable if she imported a few good witch doctors to drive the bad juju from the economy. Can’t hurt and as long as it keeps her from doing anything might even help.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • US Stock Market: Conspicuous Similarities with 1929, 1987 and Japan in 1990
      Stretched to the Limit There are good reasons to suspect that the bull market in US equities has been stretched to the limit. These include inter alia: high fundamental valuation levels, as e.g. illustrated by the Shiller P/E ratio (a.k.a. “CAPE”/ cyclically adjusted P/E); rising interest rates; and the maturity of the advance.   The end of an era - a little review of the mother of modern crash patterns, the 1929 debacle. In hindsight it is both a bit scary and sad, in...
  • A Giant Ouija Board - Precious Metals Supply and Demand Report
      Object of Speculation The prices of the metals fell last week, $22 and $0.24 respectively. It’s an odd thing, isn’t it? Each group of traders knows how gold “should” react to a particular type of news. But they all want the same thing — they want gold to go up. And when it doesn’t, many hesitate to buy. Or even sell. This is why speculation cannot set a stable price (I’m talking to you, bitcoiners).   Everybody wants gold to grow wings. Unfortunately it's rather...
  • How to Blow $12.2 Billion in No Time Flat
      Fake Responses  One month ago we asked: What kind of stock market purge is this?  Over the last 30 days the stock market’s offered plenty of fake responses.  Yet we’re still waiting for a clear answer.   As the party continues, the dance moves of the revelers are becoming ever more ominous. Are they still right in the head? Perhaps a little trepanation is called for to relieve those brain tensions a bit?  [PT]   The stock market, like the President,...
  • Purchasing Power Parity or Nominal Exchange Rates?
      Extracting Meaning from PPP   “An alternative exchange rate - the purchasing power parity (PPP) conversion factor - is preferred because it reflects differences in price levels for both tradable and non-tradable goods and services and therefore provides a more meaningful comparison of real output.” – the World Bank   Headquarters of the World Bank in Washington. We have it on good authority that the business of ending poverty is quite lucrative for its practitioners...
  • Broken Promises
      Demanding More Debt Consumer debt, corporate debt, and government debt are all going up.  But that’s not all.  Margin debt – debt that investors borrow against their portfolio to buy more stocks – has hit a record of $642.8 billion.  What in the world are people thinking?   A blow-off in margin debt mirroring the blow-off in stock prices. Since February of 2016 alone it has soared by ~$170 billion - this is an entirely new level insanity. The current total of 643...
  • Stock and Bond Markets - The Augustine of Hippo Plea
      Lord, Grant us Chastity and Temperance... Just Not Yet! Most fund managers are in an unenviable situation nowadays (particularly if they have a long only mandate). On the one hand, they would love to get an opportunity to buy assets at reasonable prices. On the other hand, should asset prices actually return to levels that could be remotely termed “reasonable”, they would be saddled with staggering losses from their existing exposure. Or more precisely: their investors would be saddled...
  • Despondency in Silver-Land
      Speculators Throw the Towel Over the past several years we have seen a few amazing moves in futures positioning in a number of commodities, such as e.g. in crude oil, where the by far largest speculative long positions in history have been amassed. Over the past year it was silver's turn. In April 2017, large speculators had built up a record net long position of more than 103,000 contracts in silver futures with the metal trading at $18.30. At the end of February of this year, they held...
  • From Bling to Plonk – An Update on the Debt Mountain
      Serenely Grows the Debtberg We mentioned in a recent post that we would soon return to the topic of credit spreads and exotic structured products. One reason for doing so are the many surprises investors faced in the 2008 crisis. Readers may e.g. remember auction rate securities. These bonds were often listed as “cash equivalents” on the balance sheets of assorted companies investing in them, but it turned out they were anything but. Shareholders of many small and mid-sized companies...
  • US Equities – Mixed Signals Battling it Out
      A Warning Signal from Market Internals Readers may recall that we looked at various market internals after the sudden sell-offs in August 2015 and January 2016 in order to find out if any of them had provided clear  advance warning. One that did so was the SPX new highs/new lows percent index (HLP). Below is the latest update of this indicator.   HLP (uppermost panel) provided advance warning prior to the sell-offs of August 2015 and January 2016 by dipping noticeably below the...
  • Return of the Market Criers - Precious Metals Supply and Demand
      Ballistically Yours One nearly-famous gold salesman blasted subscribers this week with, “Gold Is Going to Go Ballistic!” A numerologist shouted out the number $10,000. At the county fair this weekend, we ran out of pocket change, so we did not have a chance to see the Tarot Card reader to get a confirmation. The market criers are back in gold town [PT]   Even if you think that the price of gold is going to go a lot higher (which we do, by the way—but to lean on...
  • Good Riddance Lloyd Blankfein!
      One and the Same   “God gave me my money.” – John D. Rockefeller   Today we step away from the economy and markets and endeavor down the path less traveled.  For fun and for free, we wade out into a smelly peat bog.  There we scratch away the surface muck in search of what lies below.   One should actually be careful about quotes like the one attributed to Rockefeller above, even if it of course sounds good and is very suitable for the topic at...

Support Acting Man

Item Guides


Austrian Theory and Investment



THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Buy Silver Now!
Buy Gold Now!

Diary of a Rogue Economist