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Minyan Mailbag: The Fed's Ponzi Scheme


Remember how your professor at college lectured with certainty and rationalized philosophy with reality?


Professor Succo

I realize you are very busy however there is a Minyanville theme shared by many a professor that I can't seem to wrap my head around and I was wondering if you could help me. On April 10th you wrote.

"We agree. U.S. GDP is imbalanced with nearly 50% attributed to housing activity. Capital gains from houses and stocks are fueling the accumulation of more marginal debt, which fuels more capital gains. This ponzi situation is not lost on the FED who is desperate to keep the music going."

If the Fed knows that they are injecting liquidity which is helping to inflate commodity/equity prices and they realize this is a "ponzi" situation why would they not try to gradually ease off this liquidity in the hopes of creating a soft landing for equity prices. Is it that I misunderstand the option available to the Fed to deal with this current situation or do I not fully understand their motives?

Thanks for all of your great insight on Minyanville.

Minyan MTV

Minyan MTV,

Professor Reamer and I discuss this often.

He is of the opinion that they do not consider it a ponzi, that they truly believe that "creating" money (creating credit) can indeed always manage an economy out of a slump. Remember how your professor at college lectured with certainty and rationalized philosophy with reality? This view describes "academics" in general under-appreciating the laws of probability and chance events. Fed bankers are academics that believe their own hubris, that their "experiments" can manage an economy.

I sort of agree with this, although it is hard for me to imagine smart people that do not even consider that certain events are uncontrollable. I think part of it is explained above, but that part of it is desperation, that there are no other solutions available so they rationalize their own. Or part of it is that they know they must reduce liquidity, stabilize debt growth, and are trying to find the right mix of dis-information and policy to calm markets and bide time.

There are other solutions that involve no pain. The real solution is what we always did before Greenspan: let markets work, let there be a recession to purge unproductive capital and excess debt so the economy can grow through innovation and not credit expansion. Common sense (like letting markets work for themselves, purging the system of unproductive debt and excess speculation) is politically unacceptable. The default is to keep things going at all costs and let future administrations and citizens deal with the by-products of excess debt.

The problem with that is the day of reckoning could be any day. This day is no longer in our own control as the majority of our debt is now owned by foreign countries. Prior to 2001 in the whole history of the U.S., a cumulative total of $1 trillion of U.S. debt was issued to and bought by foreigners. Since 2001 in just the last four years we have issued $1 trillion in debt to our foreign "owners."


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