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The Daily Reckoning | Friday, September 7, 2012 Pity the poor, insane Federal Reserve Chairman... A sincere thank you note for all Big Ben has done for us... Plus, Dan Amoss on perpetual insanity at the Fed, and plenty more... ------------------------------------------------------ Amazing... But True! Tobacco is being resurrected — making it the profit opportunity of the decade. It turns out that one man’s quest to help people quit smoking has led to what could be the most important “accidental” health discovery since penicillin.  And for you — it could be the biggest potential “profit bonanza” since Pfizer accidentally discovered Viagra.  Discovered by accident: A chemical compound in tobacco that doctors are now recommending to slow aging! BUT because Wall Street inexplicably thinks the biotech firm that owns the patent — and is already selling this miracle product without a prescription — is a nasty, dirty tobacco company, you still have a little time to load up before the truth is finally revealed! Learn more about this amazing opportunity right now, right here.   Quote of the Day... “Easy credit also engenders a systematic redistribution of social wealth in favor of...the central bank, and the commercial banks within [its] cartel.” — Hans-Hermann Hoppe, author of the new book, The Great Fiction Worse Off in a “Better Than” Economy Examining the True Effects Ben Bernanke’s “Non-traditional Tools”   Eric Fry Reporting from Laguna Beach, California... Yesterday we examined Bernanke’s dishonesty; today we’ll examine his insanity. If the definition of “insanity” is, as Albert Einstein asserted, “doing the same thing over and over and expecting a different result,” Federal Reserve Chairman Ben Bernanke is insane. And if he is insane, he deserves our pity, rather than our scorn. Therefore, your editors here at The Daily Reckoning pity the Federal Reserve Chairman...poor ol’ “Crazy Ben.” They also pity the rest of the folks on the Federal Open Market Committee who repeatedly endorse Crazy Ben’s failing tactics. After several years of pursuing “nontraditional policy tools,” as Chairman Bernanke described them in his speech last week at Jackson Hole, the US economy continues to exhibit a nontraditional lethargy. Nevertheless, Crazy Ben credits his non-traditional — we call them “wacky” — tools for making the economy stronger than it would otherwise have been. And if the economy doesn’t improve soon, Ben promises to do more of what hasn’t worked.  In simple English, Bernanke’s non-traditional policy tools consist of manipulating and/or “communicating” his intention to do so. [Other tools include clandestine market manipulations that do not make their way into the minutes of FOMC meetings or the transcript of Jackson Hole addresses]. “Now, with several years of experience with nontraditional policies both in the United States and in other advanced economies,” the Chairman explained last week at Jackson Hole, “we know more about how such policies work. It seems clear, based on this experience, that such policies can be effective, and that, in their absence, the 2007-09 recession would have been deeper and the current recovery would have been slower than has actually occurred...” The Chairman even goes so far as to put hard numbers on the “better than” economy he claims to have produced. “Model simulations conducted at the Federal Reserve generally find that the [Fed’s] securities purchase programs have provided significant help for the economy,” Bernanke asserted. “For example, a study using the Board’s FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs [large-scale asset purchases] may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.” (Hmmm...that’s interesting because model simulations here at The Daily Reckoningfound that the Fed’s activities during the crisis raised the earnings of Goldman Sachs by infinity percent, while also increasing the compensation of Goldman’s CEO, Lloyd Blankfein, by more than $200 million.) So there you have it; the US economy is better by three percentage points of growth and by 2 million jobs, thanks to the fact that Bernanke printed $2 trillion and used the funds to purchase distressed bonds from Wall Street banks. Even if we were to accept Bernanke’s guesses as Gospel, the results would be pathetic. In round numbers, Bernanke printed up dollars equivalent to about 15% of GDP and, therefore, enabled the nation’s GDP to grow by 3%. That’s called a “bad trade.” Here’s a “model simulation” to consider: What would have happened to the economy if Bernanke had taken those $2 trillion he printed up and mailed the money to every household in America, instead of funneling it to Wall Street banks? Under this simulation, each American household would have received a check for about $17,507. Just maybe, a $17,500 windfall per household would have produced something better than a 3% bounce in GDP. But that’s not what happened. Instead, the Chairman squandered all that cash buying the distressed bonds the Wall Street banks couldn’t sell to anyone else. This “policy tool” was not capricious, mind you. Bernanke explained that his non-traditional tools were all “guided by general principals and some insightful academic work.” Still not convinced? Let’s take a look at the “better than” economy Ben Bernanke has produced and see what it looks like... 1) On average, every cohort of working-age Americans is worse off today than it was in 2009, which is roughly when Bernanke began firing up his non-traditional policy tools. Median incomes are down in every age group from 25 to 64. Even so, Bernanke says working-age Americans are better off than they would have been. 2) The nation’s (official) unemployment rate can’t seem to break below 8%. Further, the total number of employed Americans today is still below what it was at the end of 2008, even though the size of the American workforce has continued to grow during that timeframe. Even Bernanke admits that the nation’s employment growth is “far from satisfactory.” Nevertheless, the Chairman says the unemployment rate would have been even worse without the help he provided. 3) Over in the manufacturing sector, the ISM Index of manufacturing activity in the US has been slumping for 19 months, and has achieved zero net improvement during the last four years. The Chairman says that’s a better result than what would have been. 4) Many of America’s leading companies are reporting poor profitability...and forecasting more of the same. McDonald’s recently announced its worst quarterly sales in two years. Priceline, PepsiCo and Procter & Gamble all announced similarly downbeat results. “Bad news to be sure,” Bernanke would probably say, “but be happy you didn’t see whatwould have happened.” Maybe so. But who’s to say what’s “better than”? As the Chairman himself admits, “While there is substantial evidence that the Federal Reserve’s asset purchases have lowered longer-term yields and eased broader financial conditions, obtaining precise estimates of the effects of these operations on the broader economy is inherently difficult, as the counterfactual — how the economy would have performed in the absence of the Federal Reserve’s actions — cannot be directly observed.” In other words, unborn statistics tell no tales. The only thing we know for certain is that the Fed’s balance sheet is MUCH larger than it would otherwise have been...and that the economy is still stuck in neutral. As the nearby chart illustrates, the Federal Reserve’s balance sheet has more than tripled during the last four years. And yet, during that identical timeframe, the ISM Manufacturing Index has achieved zero net growth. Intriguingly, despite the Fed’s multi-trillion- dollar hyperactivity and market manipulations, US manufacturing activity is not performing any better than manufacturing activity in Europe and China. In fact, all three are tracking each other very closely. So just maybe, the economy would be much better off today if the Chairmen had spent the last four years playing golf, instead of overtly and covertly manipulating the financial markets. Just maybe the time has come to draft a simple “Thank you” note to the Chairman. Dear Ben, Thanks so much for all your help. But you can take a break now. Really, it’s okay. Sincerely, Impoverished Masses Unfortunately, Crazy Ben has no intention of taking a vacation. To the contrary, he continuously promises to do more of the same stuff that may or may not be helpful or harmful. As only the Chairman could put it, “[B]oth the benefits and costs of nontraditional monetary policies are uncertain; in all likelihood, they will also vary over time...[Therefore], taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.” In other words, “We have no idea if what we are doing is helpful or harmful, but we promise to do more of it if conditions worsen.” If this is the cure, should we try the disease for a while? Ed. Note: That central banking is capable of delivering us from the evils of “free market capitalism run amok” is just one of the many myths Austrian School intellectual giant, Hans-Hermann Hoppe, disabuses readers of in his new book, The Great Fiction. Hoppe’s latest work will be released to Laissez-Faire Club members later today as the feature book of the week. “If you are unfamiliar with the works of Hans-Hermann Hoppe,” writes LFB executive editor, Jeffrey Tucker, in a review of the book, “prepare for The Great Fiction to cause a fundamental shift in the way you view the world. No living writer today is more effective at stripping away the illusions almost everyone has about economics and public life.” Among the subjects addressed by Hoppe in The Great Fiction: Three marks of a state (that the state does not advertise) Why a population puts up with the taxes, bullying, and bad service from the state Why intellectuals turn to the state for support Why compulsory education really exists Why and how the state brings about the war of all against all... ..and many, many more.  Fellow Reckoners interested in grabbing a copy of Hoppe’s The Great Fiction can do so here. Better still, join the Laissez-Faire Club and download Hoppe’s book, along with the entire back catalogue, for just $10 a month right here.   The “Lost” Gold Bible Congress Never Wanted Anyone To See “Locked away” for almost 3 decades. Kept virtually secret...until now. You’ll soon discover why all the secrecy surrounds this book...and why it would be to your great benefit to read this book now. You’ll also see why I’m doing everything in my power to get this book into your hands for FREE by following one simple step Click here to read more. The Daily Reckoning Presents The Fed Is Officially Insane   Dan Amoss There’s an old saying that defines insanity as doing the same thing over and over again and expecting different results. The Federal Reserve wants to test that theory. Fed officials have been all over the media for weeks, laying the groundwork for a third round of quantitative easing. By preparing markets for QE3, the Fed refuses to let real-world evidence get in the way of its beloved theories. QE operations haven’t worked; they’ve just promoted government spending and higher savings rates to make up for low interest rates. The arrogance and groupthink among Federal Reserve officials won’t allow them to diagnose the following: The Fed, by its radical actions, mutates the very economy it’s trying to “boost.” An honest review of the Fed’s record would conclude that it’s rotten. In a recent update of The Speculative Investor, Steve Saville explains why the whole concept of central banking is “rotten to the core.” He describes how central banks are providers of gambling insurance to the banking system: “[The] central bank offers the equivalent of gambling insurance to the banking industry. “Imagine if an insurance company made the following deal with all patrons of a casino: In exchange for a patron’s promise to gamble prudently, the insurance company promises to come to the patron’s aid if he finds himself short of money. Knowing that the insurance company was essentially acting as a financial backstop, at least a few gamblers would take more risk than they would otherwise. “In a similar vein, knowing that the central bank will be ready, willing and able to provide support via emergence liquidity injections if things go wrong, some private banks will take more risks. Furthermore, due to the higher profits that tend to temporarily accrue to the banks that take more risk, most banks will eventually be drawn toward riskier business practices. This is why a mechanism supposedly (according to the propaganda) put in place to prevent banking crises ends up increasing the severity and frequency of banking crises.” It’s no mystery why the US banking system had built up reckless lending and securitizing practices in the years leading up to the 2008 financial crisis: Reckless behavior paid well. Now, instead of enabling reckless bank lending, the Fed (and other central banks) is enabling the addiction of governments to easy borrowing terms. It’s now providing gambling insurance to the biggest spending addicts in history: the US government. Suppressing interest rates near zero for years and years will transfer countless wealth from savers to the government budget. As budget deficits continue to be measured in the trillions, we will see the size of central bank balance sheets grow too. Inflation will remain stubbornly high worldwide, despite sluggish economic activity. Central bankers may talk tough from time to time, but they will ultimately do the bidding of governments — and print. For years, I’ve expected that at the end of all this central bank printing, we’ll see the end — not a reversal — of quantitative easing programs and a re-pegging of the US dollar to gold at much higher gold prices. A new gold standard would allow the Fed and other central banks to save face after the following sequence of events: 1. Central banks inflate their balance sheets and buy up many of the bonds governments issue to fund soaring budget deficits 2. Once the largest suppliers of scarce products realize they’re exchanging products for infinitely diluted paper money, they start demanding more and more money in exchange for sending their scarce products to the marketplace 3. Consumer prices start rising 4. Calls for monetary tightening (reduction of central bank balance sheets and interest rate hikes) grow louder 5. These central banks won’t be able to slash money supplies without crashing government bond markets and stock markets. They talk about tightening, but don’t tighten 6. As central banks lose credibility, gold launches on a final, near-vertical stage of its bull market 7. In response to inflation expectations running wild, governments and central banks draw up plans to re-peg currencies to gold in order to avoid having to drain trillions worth of cash from the banking system. It’s almost impossible to imagine the Fed managing a “soft landing” back to its pre-quantitative easing condition. I compare QE operations to a roach motel: easy to enter and impossible to exit in a practical manner. Say that the Fed doubles the size of its balance sheet yet again over the course of a QE3 operation, while the market’s expectation of future inflation steadily rises. The selling pressure on Treasuries would steadily grow, undermining the value of the Treasuries already sitting on the Fed’s balance sheet. On a mark-to- market basis, the equity on the Fed’s balance sheet would be negative — by several hundreds of billions of dollars. How long will it take investors to realize this dilemma is incredibly bullish for gold? At the end of these money-printing operations, central banks won’t be able to sell assets and shrink money supplies gracefully — or at all. Perhaps once the global paper money system is restructured, involving some sort of gold standard, sanity will return to the Fed and other central banks. Until we see more signs of sanity, hold a core position in gold, silver, and precious metal mining stocks. These asset classes will be the prime beneficiaries of future printing. Regards, Dan Amoss,  for The Daily Reckoning