Is The Era Of The Fed Closing ?

The recovery from the recession is showing some bright spots such as retail activity and corporate earnings. The big bug-a-boo still is employment. It continues to carve out a record weak post-recession return to normal.



What's the problem ? With our high-powered fed, now more high-powered than ever, you would think we could snuff out a nagging problem like this. But maybe that's just the problem. Our fed has been busy snuffing out problems for so long that it has created a problem that can't be snuffed out - the mountain of debt left over from all the snuffing.




If you compare these two charts, you can see the sharply growing employment lag back to normal in each recession recovery from 1980 onward in chronological order with the sharply growing debt level. Hmmm - I wonder if there could be a relationship there.

We hear a lot about all the fed's largess going to repair the mortgage ravaged balance sheets of banks, making them hesitant to lend. But the mortgage ravaging was the left-over of the fed's previous snuffing project. I guess these lenders' repair of the balance sheets gets to be a bigger job each time.

For all the trouble the fed's debt creation causes, we are getting less and less bang for the debt dollar as the decades roll by:


This chart shows the diminishing positive effect of each debt dollar on GDP growth since 1954. Marc Faber likes to show this and project "zero hour" - when piling on new debt gets us nowhere. A straight line fit through the data hits zero at 2015. A curve fit (red line) gets there even sooner. This out-of-control debt dynamic is nothing new here in modern America. A fascinating article over at zerohedge.com points out the math of debt creation vs the math of economic growth (very simple math) and how previous civilizations have dealt with it. We may be approaching such a point now.

Last November's election was, at its core, a debt revolution. The Tea Party this time is a revolt not against England's meddling with our colonies, but against another foreign entity meddling with our freedoms - the government in general and the Federal Reserve System in particular. I always used to think Jim Rogers' call for abolishing the fed to be a little extreme. Now I see a poll out just today with the stunning title "More Than Half Of Americans Want The Fed Reined In Or Abolished". Many are wondering how much of the good economic numbers is fed-snuffing. They look at employment as being the one thing perhaps not so easily juiced by the fed.

We needed the fed to bail the too-big-to fail entities in 2008. But runaway corporate 'government' with no federal regulation was why we needed this extreme action in the first place. All they did was encourage the mortgage bubble and abolish the Glass-Steagall safeguard that emerged from the last fiasco of the 1930s. One thing is certain, debt and the fed both are not viewed the same way anymore. Most Americans don't want too-big-to-fail anymore and they don't want too-big-to-bail either. The Fed model has run into the ditch, and we may not be too excited about pulling it back onto the road.