Instead, he bought the obvious consumer names of the Baby Boom demographic wave like Coke and Gillette; had a keen facility for grabbing what he believed slower footed investors would also be buying later; appreciated the value of banks and other financial companies (like Goldman Sachs) that suckled on the public teat; and mainly rode the 29-year wave that caused finance to soar from $12 trillion to $93 trillion after Greenspan took the helm at the Fed.
Stated differently, under a regime of honest money and free market finance no mere insurance company portfolio manager could make 19X in real terms in 29 years. It can’t be done purely through the money game.
Moreover, on the insurance side of the Berkshire Hathaway house, Buffett didn’t invent any new products or services, either—except the standard gambit of paying claims as late as possible.
That’s right. A 19X real gain in three decades can occasionally be achieved by inventors of something fundamentally new and economically transformative. Thomas Edison, Henry Ford and Bill Gates fit that mold, but not an insurance portfolio manager from Omaha.
The truth of the matter is that the better part of St. Warren’s fortune was manufactured in the Eccles Building.
Even he backhandedly admitted as much in his famously unctuous and gratuitous letter thanking the Fed for bailing out the financial system (and his investment in Goldman, Well Fargo and other financial institutions) during the so-called “financial crisis.”
The actual purpose of the Wall Street meltdown was to purge decades of speculation, leverage and excessive risk-taking—the very thing that Buffett thanked them for averting and which preserved his fortune.
And that’s the evil of Bubble Finance. It not only transformed a competent and preserving manager of insurance company assets into an alleged investment genius, but also conferred on Buffett an utterly underserved reputation for financial expertise and wisdom.
In fact, the man is a statist windbag who constantly talks his own book. The very sound of it must cause his libertarian and gold-standard father and storied congressman from Nebraska, Howard Buffett, to roll in his grave.
CHAPTER 4
The Case Against Keynesian Central Banking and Why the FOMC Should Be Abolished
THE MYTHOLOGY OF BUFFETT’S PURPORTED INVESTMENT PROWESS, however, is just emblematic of the larger narrative that obfuscates the destructive monetary regime that has been in place since Greenspan’s ascension.
As the Fed and its Wall Street megaphones have it, the $45 trillion “bubble” identified in Chapter 3 is no such thing. Instead, it is held to be completely natural and a sign of long-term economic progress—even if this vast expansion of finance was interrupted by temporary meltdowns in 2000–2001 and 2008–2009.
These latter financial disorders, in fact, are purportedly not the fruits of the central banking regime at all, but are chalked off to exogenous factors and nonrecurring events. That is, the devastating financial busts since 1987 were allegedly owing to a mix of too much investor exuberance, too much deregulation, a one-time housing mania and a smattering of Wall Street greed and corruption, too.
And that’s not to overlook some of the more far-fetched reasons for the two big financial meltdowns of this century. Foremost among these is the Greenspan-Bernanke fairy tale that Chinese workers making under $1 per hour were saving too much money, thereby causing low global mortgage rates and a runaway housing boom in America!
Needless to say, not only are these rationalizations completely bogus; but so is the entire underlying predicate for Keynesian monetary central planning.
To wit, the claim that market capitalism is chronically and destructively unstable and that the business cycle needs constant management and stimulus by the state and its central banking branch is belied by the historical facts.
Every economic setback of modern times, including the foundation events of the Great Depression—was caused by the state. The catalyst was either inflationary war finance or central bank fueled credit expansion, not the deficiencies or inherent instabilities’ of market capitalism.
THE “AGGREGATE DEMAND’ DEMAND” DEFICIENCY MYTH AND SAY’S LAW OF SUPPLY
Nevertheless, the Fed’s model gives short shrift to the millions of workers, entrepreneurs, investors and savers who comprise the ground level economy and the billions of supply-side prices for labor and capital through which they interact and ultimately generate output, income and wealth.
Instead, the Fed focuses on the macroeconomic aggregates as the key to achieving its so-called dual mandate of stable prices and maximum employment. Essentially, the United States is held to be a closed economy resembling a giant bathtub. In the pursuit of “full employment,” the central bank’s job is to keep it pumped full to the brim with “aggregate demand.”
As I shall explain below, however, the domestic macroeconomic aggregates of employment and inflation cannot be measured on an accurate and timely basis. Neither can they be reliably and directly influenced by the crude tools of the central bank, such as pegging the money market rate, manipulating the yield curve via QE, levitating Wall Street animal spirits via wealth-effects “puts” and various forms of open-mouth intervention such as “forward guidance.”
For reasons mentioned in Chapter 3, of course, these Keynesian aggregate demand management tools did appear to work for several decades prior to the arrival of Peak Debt. But as I have indicated, that was a one-time monetary parlor trick. Households and other economic actors were repeatedly induced to “lever up” via periodic cycles of cheap-money stimulus, thereby supplementing consumption spending derived from current incomes with the proceeds of incremental borrowings.
That did goose “aggregate demand” but only on an intertemporal basis. That is, ever-rising household leverage ratios simply borrowed economic activity from the future; they did not generate new, sustainable wealth.
And now monetary stimulus doesn’t work anyway because household balance sheets are fully leveraged relative to income. This cardinal reality is completely ignored by the central bankers, however, because they are in thrall to the primitive idea handed down by J.M. Keynes himself: namely, the notion that the capitalist business cycle is always running short of an economic ether called “aggregate demand.” The latter is purportedly an independent quantity of household and business “spending” which should be happening in order to fully utilize domestic labor and business capacity.
The term independent needs special emphasis. Under the historical and sound economics of Say’s law, aggregate demand is not independent; it is a derivative of production and income. It is what households and businesses choose to spend, rather than save, from current income and cash flow.
Prior to the confusions introduced by JM Keynes, most economists understood the common sense proposition that production comes first. In an honest and stable economy, it still does.
Accordingly, true “aggregate demand” never needs any help from the state and most especially its central banking branch. It will expand automatically and proportionately to the rise in current production and the increased application of the supply side factors, which make it happen.
That is, the true source of increased aggregate demand is more labor hours and improved productivity, increased entrepreneurial effort and managerial efficiency, greater savings and investment and more technological innovation and invention.
By contrast, today’s central bankers—both those who lean toward the Keynesian texts and those who follow Milton Friedman’s revisionist version—are statists. They claim to know that the actual level of “aggregate demand” derived from current production and savings is incorrect and chronically deficient.
This purported demand shortfall occurs, apparently, either because incomes are too low owing to underutilized labor and capital resources; or savings are too high owing to hoarding, lack of confidence or just plain stupidity among consumers and businessmen.
Accordingly, the job of the state—the fiscal authorities in the original 1960s Keynesian
incarnation and since Greenspan essentially the central bank—is to supply this chronically missing quotient of “aggregate demand.” Say’s law of supply is thus superseded by the supposedly greater wisdom of central bankers.
Having divined the correct level of “aggregate demand”, in fact, the central bank is then charged with making up the shortfall. This spending increase is accomplished by cutting interest rates or monetizing the public debt to order to foster increased borrowing, thereby supplementing spending derived from current production with the incremental proceeds of expanded credit.
At length, according to the Keynesian texts, the nation’s economic bathtub becomes filled to the brim with just the right amount of “aggregate demand”. Accordingly, labor is fully employed, industry operates at 100% of capacity, government coffers bulge with “full-employment” revenues and unicorns prance around happily throughout the land.
WHY “POTENTIAL GDP” AND FULL-EMPLOYMENT ECONOMICS ARE A CROCK
Here’s the thing. The whole bathtub model of “potential GDP” and the associated state of “full employment” is a crock. It consists of a bunch of made-up roundhouse benchmarks that are absolutely meaningless in today’s global, fluid and technologically dynamic economy.
This also means that the theoretical “aggregate demand” that is the target of Fed policy is a chimera, too. Unlike true aggregate demand derived from actual current production and income, the Keynesian central bankers’ version is merely inferred from crude guesses about the theoretical production and employment capacity of the domestic economy.
In fact, these “potential GDP” and “full employment” benchmarks are not scientific in the least; they are little more than the econometric scribblings of Keynesian academics.
The results are so silly, primitive, constantly changing and logically superficial as to beg a basic question: to wit, if massive financialization and cheap money were not so convenient for Wall Street and Washington alike, would real adults actually take our Keynesian central bankers seriously?
I think not. Bubble Finance liquidity for Wall Street and endless monetization of the public debt for Washington is the veil of convenience that enables our monetary central planners to operate virtually without restriction.
Accordingly, the Federal Reserve soldiers on in a constant state of heavy-duty intrusion in the financial markets, including the lunacy of what is now 93 months of ZIRP.
The denizens of the Eccles Building are like the crazy man in the bus station waving his arms in a circular motion to ward off an elephant attack. In a similar manner, the FOMC fiddles with fractional changes in the money market rate under the delusion that it is making up the aggregate demand shortfall and thereby closing the gap between actual and potential GDP.
Well, let’s see. Everyone knows this is a service economy. So how do you measure the potential output of a Pilates studio and whether its instructors, equipment and facilities are fully employed?
Should that computation be based on five or seven days a week and one, two or three eight-hour shifts of instruction per day—or something else? And what are the units of output—solos, duets and group sessions of one hour or more or less?
How about black car limo fleets and drivers? Now that Uber has arrived in so many cities with digitally dispatched service on demand, vehicle fleets do not spend half of their time sitting around waiting for clients anymore.
Huge latent fleet capacity has thus been liberated by technology in this instance, and in too many like and similar circumstances to even recount. For instance, what is hotel room capacity in a world of Airbnb, and do the owner-hosts who supply clean, equipped and serviced rooms count as “employed.”
That is to say, “capacity utilization” is an utterly fluid and dynamically changing condition that cannot be even remotely fathomed in a globally traded, technologically dynamic, and service-focused modern economy. The whole idea of measuring potential output is a stupid throwback to the 1950s, when freshly minted Keynesian PhDs were looking for an excuse to practice their math skills.
Nor is full utilization of “labor” a serviceable proxy. As explicated further on, in a gig-based world, where labor is increasingly scheduled by the hour and according to computer-monitored demand loads, the traditional concepts of “unemployment” and “slack” labor resources are completely obsolete and immeasurable. When Janet Yellen mumbles about “slack,” she might as well be talking about leprechauns.
Indeed, in a globalized market for labor, what counts is the price of labor (i.e. the wage rate) not the theoretical volume of unused bodies deemed to be “participating” in the labor force during any given month by the bean counters of the BLS.
If domestic labor is overpriced on the margin, which it surely is in the United States, then no amount of aggregate demand “stimulus” is going to put displaced textile and furniture workers back to work. Household spending on these items based on induced borrowing will actually end up being collected by overseas shipping lines and Chinese factories.
Worse still, when monetary central planning is practiced on a global basis, as it has been for most of this century, it causes enormous overin-vestment in industrial capacity in the developed-market world owing to the repression of capital costs. To take one example, China now has excess steel capacity—700 million tons—that is well more than double the entire steel industry of the United States and Europe combined.
That monumental excess capacity, built in less than two decades from cheap state-supplied credit, is now being dumped into the world steel market. This tidal wave of cheap steel amounted to 110 million tons last year and is growing rapidly, reflecting the desperate efforts of the red suzerains of Beijing to stabilize their out-of-control credit and construction bubble.
When it comes to fiddling with the monetary policy dials, therefore, the capacity utilization figure at any point in time for the U.S. domestic iron and steel industry—which produces less than 100 million tons per year in its entirety—is just plain noise. The level and price of steel and steel-containing product import volumes, and Commerce Department actions under the antidumping laws, are literally hundreds of times more important than 25 bps on the money-market rate.
The same is true of the automotive industry and most other durable-goods manufacturers. A 70-year-old $60-per-hour UAW auto assembly plant in Indiana limping along on a single shift is not merely under-utilized by 66% owing to a three-shift global best-use standard. When it is up against spanking new $20-per-hour assembly facilities elsewhere in the world, it is effectively 100% under-utilized from an economic-efficiency and return-on-capital perspective.
Nevertheless, these types of labor and industrial-capacity-utilization rates comprise the “potential GDP” benchmark on which the Fed predicates its incessant monetary pumping. It is the basis for over-riding Say’s law and for postulating that “aggregate demand” is deficient and that the Main Street economy always veers toward underperformance, recession and worse.
No it doesn’t. The claim of business-cycle failure and the need for relentless and plenary monetary-policy interventions in the financial markets designed to smooth and optimize it is a self-serving invention of central bankers and Keynesian economists. It’s the founding myth on which their very power, livelihood and self-importance depends.
The truth of the matter, however, is that if production and income growth is slow or even non-existent, that condition everywhere and always is caused by supply-side barriers to advance, not the postulated shortfall of “aggregate demand”.
So the business-cycle-failure story is complete nonsense. Cutting to the chase, the Humphrey-Hawkins Full Employment Act is one of the stupidest, most dangerous and anti-democratic laws ever enacted.
It amounts to a plenary delegation of power to a tiny unelected and unaccountable posse of monetary bureaucrats. Under the statute’s enabling act remit, the latter are free to define its vague and purely aspirational goals—maximum employment and stable prices—anyway they wish.
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br /> Moreover, they are then further empowered to manipulate in hot pursuit of these arbitrary quantitative targets any and all financial prices—and to do so without standards or limits, and regardless of whether these rubbery targets for societal betterment are efficacious or not.
In plain English, 5.0% unemployment on the U-3 measure and 2.00% inflation on the core PCE deflator are economically meaningless targets. They are impossible to achieve through interest-rate manipulation and the rest of the Fed’s tool kit, especially its wealth-effects “put” under the stock market.
Likewise, these so-called Humphrey-Hawkins targets have no discernible relationship to societal betterment. There is not a shred of evidence, for example, that wage workers are better off with 2% inflation than they are with 1%, 0.0% or any other arbitrarily chosen rate. And that’s even truer when the inflation target is derived from a deeply flawed price index like the core PCE deflator and measured over a completely arbitrary, and usually unspecified, time frame.
THE FED ISN’T NEEDED TO COMPENSATE FOR BUSINESS-CYCLE FAILURE—MODERN HISTORY PROVES IT
So it needs to be reiterated: Forcing the macro-economy into adherence to these crude Humphrey-Hawkins policy targets is utterly unnecessary because the predicate that capitalism has a death wish and is prone to recessionary collapse is dead wrong.
In truth, that is a self-serving scary story peddled by the monetary central planners and their grateful Wall Street beneficiaries. I have addressed the myth of the foundation event—the Great Depression of the 1930s—at length in my book The Great Deformation: The Corruption of Capitalism in America. Suffice it to say that the modern Keynesian narrative has it precisely upside down.
The Great Depression did not stem from a fatal flaw of capitalism or the failure of the 1930–33 Federal Reserve to crank up the printing presses, or even Hoover’s allegedly benighted dedication to fiscal rectitude and honest gold-standard money.
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