The Fed Needs To Have A “Moment of Clarity”

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As I mentioned in Confessions of an Economic Witch Doctor, the analogy of the economy having been in a car accident is the wrong metaphor to describe the predicament we’re in, and that a much more appropriate one is that of the alcoholic. We have become so accustomed to collectively living beyond our means, to consuming without producing, to buy now, pay later that we have become a society addicted to debt.
I remember speaking with a recovering alcoholic in New York City, when I was barely 1 year sober, an Irish gentleman who told me,

“I did not want to drink and yet I couldn’t stop drinking and son when you’re in that place, that place is called hell.”

Ask any recovered alcoholic and they’ll know exactly what that guy was talking about. Everything has become one big intractable bloody mess. You can’t do anything without a drink, you would kill to not take a drink but the reality is you can’t imagine your life without drinking and even thinking about it drives you to drink and you just can’t stop. You’ve arrived at rock bottom, and if you’re lucky, you have your moment of clarity:

I am an alcoholic.

When that finally hits you full force a kind of calm comes over you because you know what has to happen next: you have to stop drinking. Yes, it’ll suck and it won’t be easy, but the thing about the “moment of clarity” is that it irreversibly ruins your drinking. You can’t even pretend to rationalize it anymore.

Unfortunately, in our addiction to debt we have not had our collective “Moment of Clarity”. The Fed certainly hasn’t. The Global Financial Crisis could have been it. Instead, we are like the impaired driver, slumped on a curb with his car wrapped around a tree, he had a good scare and has spun a million reasons why he better be more careful next time and why this had nothing to do with the empty 40-pounder on the passenger seat.

There are three iconic utterances or writings by the three individuals who comprise the past, present and likely future Chairmen (Chairwomen) of the Fed:

Alan Greenspan’s “Gold and Economic Freedom” essay of 1966 in which he laid out in clear, unarguable logic why everything he did as the Fed Chair later in life was destructively and malevolently wrong. Why he set about to do everything he warned against in his own writings will be one of the great mysteries when future historians do a post mortem on the collapse of our financial system.

Ben “no surprises” Bernanke came next, and in his famous “helicopter speech” he made clear his intentions to debauch the currency and relentlessly punish savers if he ever had his druthers. Once he was appointed Fed chief, he set about doing exactly what he prescribed.

Next up, in all likelihood will be Janet Yellen, who has made it clear that Fed liquidity (read: cheap money, more debt) is here “for the foreseeable future”, that austerity is bad because it causes unemployment and if she could vote for negative interest rates, she would do it.

There is no moment of clarity to be found in there. No “aha!” realization that what caused all of this was too much debt, and whatever is wrong now, it isn’t going to get fixed with more debt.

Charles Hugh Smith, in his Resistance Revolution Liberation sums up the entire quagmire of how irreversibly ensconced debt based financialization is in our society and what happens as a result:

“There is a deeply pernicious dynamic in this financialization.

As financial profits come to dominate an economy, then the economy (and the Central State that lives off its tax revenues) becomes increasingly dependent on the creation of new leverage, new debt and new financial instruments to sell for its growth and profits. This need to issue new debt and debt instruments creates irresistible incentives for lenders to push newly borrowed money into increasingly risky and marginal investments whether the investments fail or not no longer matters because the profits are made in the origination and selling of the leveraged debt.

The interests of the financial sector and the Central State that depends on the financial profits thus diverge from those of real-world, non-financial enterprises….The financial sector makes money by creating debt and debt-based instruments from thin air and selling them for immediate profit. When the debt goes bad…then the Central State steps in and transfers the losses from the private financial sector to the public. These enormous losses burden the taxpayers for decades to come.”

Or in short,

“Financialization richly rewards all who originate vast quantities of debt and out-of-thin-air financial instruments that end up burdening the real-world economy. Financialization is thus a feedback loop of self-destruction”.

Sound familiar?

This is why things will never improve until there is a global, and widely participated in epiphany where it is finally understood that we are all a bunch of drunks trying to cure our hangovers with ever increasing doses of hair-of-the-dog.

Iceland got the message, they quit drinking cold turkey and toughed it out. Look at ’em now. Happy, joyous and free.

The alternative? Take a look at Cyprus, keep an eye on Japan, and at some point “eventually” will finally slam home and we’ll see some kind of “it can’t happen here / nobody could have seen it coming” Black Swan contagion sweep through your bank, your government and your savings account.

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