No, the judgment for the most amazing bit of paternal idiocy is reserved for what took place last weekend involving the Fed.  John Hilsenrath, the unofficial media spokesperson for the Fed wrote an article last weekend that basically said the Fed was on hold for awhile in order to take a step back and assess the state of the economy, which had seemingly been doing better than expected.  The S&P500 proceeded to drop from about 1370 to 1343 over 2 days, or about 2%.  This after rising about 9% from the start of the year in an almost unbroken straight line, and 24.5% from the October 2011 closing low.  But apparently this 2% was too much for the Fed and its puppetmaster Barack Obama.  So only 2 days after floating the trial balloon that they were on hold, the Fed leaked a new story through Hilsenrath that they were considering further “sterilized” bond purchases.  This was enough to reassure markets that the Bernanke Guarantee was alive and well and the S&P500 promptly rose to its pre-weekend “Fed on Hold” level.

Prior to the Bush administration and the rise of Ben Bernanke, no self-respecting Fed Chairman would so blatantly and openly pander to the equity markets.  Even if you believe that equities need to be high to support pension and retirement funds or because as a component of economic indicators, stock prices need to be high to maintain levels of confidence, the pandering Fed’s actions are unseemly at best and destructive at worst as they interfere with normal price discovery and perpetuate the misallocation of capital, thereby lowering aggregate wealth in the long run.  The “leaders” of our institutions have really drunk the kool-aid that they must at all times spin a positive story in order to manipulate asset price levels and “fine-tune” “policy” to avoid bad outcomes.  This story-telling meme has a grain of truth to it but it has gotten out of hand.

During the 2008 election, Michelle Obama famously said, after her husband won the Democratic nomination, that for the first time in her life she was proud of her country.  Well, for the first time in my life I am not proud of my country.  Or rather I am not proud of my country’s institutions.

Crude was more or less stable until 2002 when Bernanke joined the Fed.  In response to the recession and to 9/11, Greenspan kept rates at or about 1% for an extended period from late 2002 to mid-2004 at the likely urging of Bernanke the “Depression Expert”.  Then after rates were somewhat normalized, though always behind the curve, in the period of the housing and commodity bubbles that the extended 1% rates caused, Bernanke took rates down to 1% in October 2008 and then 0% in December 2008 where they have been for the last 3 and a quarter years and where he has promised to keep them for nearly another 2 years until the end of 2014.  Note that late 2014 is actually after his current term expires in January of 2014.  With the only interlude in outrageous energy prices caused by the housing market crash, crude has been rising to the stratosphere since Bernanke joined the Fed and put his Helicopter Money speech out into the public consciousness shortly after joining the Fed.  Look at the Adjusted Money Supply as put out by the St. Louis Fed:

Of course what you really want to know is what real yields have been or what short term real yields are relative to real GDP growth.  You can find Treasury Real Yields at the treasury Web Site.  Real yields have been negative for a year and a half on the five year and longer for shorter dated maturities.  This is what has been referred to as Financial Repression.  The Fed knows it has a captive audience of buyers that must buy only treasury paper and so they can manipulate rates until the yield is below the rate of “inflation”.

So what does this all mean for real people?  What it means is that we are screwing ourselves.  We are selling the things we make and produce here, like Grain at rock bottom prices to the rest of the world while paying through the nose for things they sell us, like Crude Oil solely because our government has, as a matter of policy, sought to weaken our currency for the last 10 years.  Look at the accumulation or Reserves in the table below which I took from the Motley Fool originally from RealClearMarkets and which is apparently sourced from the St Louis Fed:

As you can see, reserves have been rising fastest in China, Russia and Saudi Arabia, home to some very nasty rulers.  Why?  Because we have been paying them through the nose for goods in the case of China and Oil in the case of Russia and Saudi Arabia, as a result of our Weak Dollar Policy.  At the same time, that policy has made it cheaper for them to buy our foodstuffs – corn, wheat and soybeans – which raises the price worldwide and causes starvation and a declining quality of life even here in the US.  Why would they do this?  A number of reasons come to mind.  First, a cheaper dollar makes our exports cheaper in foreign currencies locally to the foreigners and so should boost our exports and hence GDP.  It also creates inflation in China as their currency is pegged to ours and so puts pressure on the Chinese to allow their currency to rise, also then helping our exports and slowing the drive to outsource manufacturing abroad at the expense of labor domestically.  But exports as a percentage of GDP are pretty small part of our domestic economy.  According to the World Bank, in 2010, exports represented about 13% of GDP in the US.  Consumption on the other hand is supposedly near 70% of GDP.  And so the Fed and successive administrations have engineered a declining dollar to help 13% of the economy at the expense of 70%?  Not a very good trade-off I would assert.

Where will this lead?  Well look at that chart of Crude oil again.  Notice the giant drop off in 2008?  Prices will rise until the economy cries uncle and activity slows or stops.  Prices will plummet. Then, if Ben Bernanke is still in charge, we will start the process all over again.  How did Eintstein supposedly define insanity?  Doing the same thing over and over again and expecting a different result?

Here is what Apples trade yesterday looked like:

Do you see an island reversal there?  No?  No.  You see a reversal.  Maybe a “key” reversal.  Certainly an outside daily reversal.  If AAPL drops another $40+ you could have a weekly reversal.  But not an Island Reversal.   Now it did gap higher in late January right after its blowout earnings.  So there actually is a chance of a Giant Island Reversal, something analogous to the size of, say, Australia.  Whereas most are analogous to the size of, say, Big Island in Lake Minnetonka (for those familiar with the Twin Cities) or maybe Ellis Island in New York, possibly even Long Island. But to do that, the price would have to drop to something around $440 and then open up the following day at $430 or below and not trade in the space between $430 and $440 again.

There are very few Island Reversals these days because markets are essentially open around the clock and most trading is now done electronically.  The days of the island reversal were the days of the pit trade, where the market was open a limited number of hours and the state of the world could change overnight, leading to substantial price dislocation on the next opening session. Stocks are actually one of the only places you can see Island Reversals these days as most trade only during NYSE hours between 9:30AM and 4PM Eastern.  I am not sure why this bothered me enough to actually take the time to write about it, but I suppose I am annoyed that a person who holds themselves out as an expert could say something so foolish and wrong.  It reflects poorly on him and on CNBC as well.  I suppose that is why I have Bloomberg on all day instead now.

On the majority of the recent speed bumps that have been implaced, you are lucky if you can still see the road; as the nose of your car goes skyward your vision out the windshield is looking at baby birds being fed little worms by mommy birds in nests in the trees.  When you get to the top, it is a breathtaking view of the horizon. I think of Nietzsche’s descriptions of Zarathustra on the mountaintop contemplating how to exercise his will to power on the world.  If you attempted to go over these bumps at anything like the posted speed limit, you would find your axles behind you rolling down the street as the sparks flew and your chassis ground to a halt underneath you.  At some of these it looks like people have done just that and there are massive craters in the pavement on either side where the engine block of some poor idiots gouged and scooped entire chunks of pavement out of the street.

And on most streets they put 3 of these things down the street.  So essentially you come to a nearly complete stop 3 times before you even get to the stop sign at the next intersection.  Imagine the gas that could be saved by making these bumps correctly so one did not have to use the gasoline necessary to start the car from a dead stop 4 times on every street bedecked with the lifesavers.  Ah the tradeoffs we face in modern civilization.  Seriously, these could be done on a better pattern and lives would still be saved.

ECB won’t take loss on Greek bond holdings – Benoit Coeure, member of the ECB’s executive board

And that is when I really started laughing.  The European Central Bank (ECB) may not REALIZE a loss on its books for accounting purposes and they may cross their arms and refuse to accept a Greek default.  But that in no way means they will get paid.  They will take a loss.  If the Greeks were smart, they would force their government to default on ALL their obligations immediately and start over.  Instead they are passing laws in their parliament mandating massive cuts in government spending.  While that is probably a good idea (less government can safely be assumed to ALWAYS be better), it simply is not going to fly.  They have had collectivist and even Communist leadership over the years and their whole system is completely FUBAR.  So what they have is a cultural problem.  At the end of the day, you may have a European Central Bank or its successor when my kids kids are going off to college that may try to press what by then will be ancient claims for repayment of the bonds from the start of the 21st century that are still on their books, and on which they never realized a loss.  Of course by not realizing it, they are being willfully blind.  And that is itself part of a larger cultural problem that has jumped all borders and spread like a plague to all corners of the world.  Willful blindness and stupidity.  It must share its psychological roots with man’s propensity for religion and religious thought.  In a word, fantasy.  And the problem with fantasy as a political proposition is that like all utopic urges, it leads in the end to totalitarian action and state sanctioned murder and repression in the name of the common good.  That is where the world is headed.

I really grasped the plight of reasonable people in the runup to the 2008 election.  In one of the early Republican debates with <sarcasm>powerful</sarcasm> figures like Sam Brownback, Rick Santorum and Mike Huckabee on the stage, the moderator asked for a show of hands of those who did not believe in evolution.  Of the 10 people on the stage, 9 hands went up if I recall correctly.  I knew the nation was screwed at that point.

So why is it that no one of any substance will take the plunge to lead the nation?  I think it is because they have to run the gauntlet of religious whack jobs.  People who live a daily shared fantasy about an evanescent force that allows them to believe all kinds of crazy notions without any reason behind them.  Religion.  The scourge of man.  Religion has given us plenty of beauty, don’t get me wrong.  Chorale music of sublime power.  Charity and love, yes.  But also war and pointless destruction on a mythic scale.  Christians have been largely pacified in recent centuries and now coexist with the notion of separation of church and state that is the signature historical achievement of the United States.  Muslims have taken up the banner of dogmatic intolerance.  Demographics favors them sadly.

But people who would relegate personal matters to the realm of personal choice, such as Mitch Daniels and a few others will not get involved.  Ralph Reed has long since organized the fantasy corps and set up a screen through which only crazy religious types may pass.  Romney stands out as an exception.  He is a billionaire and obviously made a deal with someone.  But he also professes some crazy religious ideas.  And he is really a North East liberal on the issues that matter: economic issues, the nature of the state and society.

And then there is Illinois.  In the 2010 election cycle, when Republicans swept nearly all of the offices nationwide, Illinois put up a candidate for Governor that was right out of the Ralph Reed playbook.  His top issue of course was abortion.  No abortions under any circumstances.  Not for rape.  Not for incest.  He spent election day in church praying.  He lost.  Everyone wanted to throw out the Democrats but still this moron lost because he was incredibly extreme and focused on the wrong issues in his extremism.  Abortion is ugly.  But the issue is settled.  It is not an issue for big stage politics as the top-heavy socialist state crumbles around us.  So we have Quinn.  And we immediately got a tax increase.  And the schools are still underfunded.  And there is rampant corruption and an intractable public pension problem that will drag the state down in the end.  Will Quinn and the idiots in Springfield do the right thing about it?  I am not holding my breath.  Could we have had a better candidate?  Not in a world organized by Ralph Reed and his minions and clones.  A face that needs a fist firmly planted in it.  Bile rises just looking at it.

Democrats are destroyers.  But Republicans will not be saving the day until they throw off the shackles of the religious.

Rahm’s daughter was on my daughter’s Lacrosse team this fall.  I chatted with his wife on the sidelines.  She seemed nice.  Strange she would be married to such a person.  Overbearing government puts Hizzoner, and the idiots in Springfield who voted for this outrage  on the list.

Let us briefly review Mr. Corzine’s history.  Head of the giant squid – Goldman Sachs – from 1994 to 1999.  Not sure how his tenure there was regarded but he was forced out as Paulson took control of the firm.  Next he went on to help destroy the United States as a Demunist Senator from New Jersey.  Not content to inflict pain and death at the national level, he then decided he had to further destroy New Jersey as its governor.  After his maladroit stewardship there, he was put in as the Key Man at MF Global, considered so important to that firm that the codicil to a bond offering by the firm provided for penalties to be awarded to bond holders in the event he left MFG for the US Treasury.  Yep, he was on his way to further destroy the US.  Fortunately for the country, he crashed MFG first.  Unfortunately for everyone who had any nexus with MFG, it seems the firm had the temerity to misuse client funds, leading to the missing $600Million or more.  Democrats are destroyers, but Corzine has a particular knack for it which has now crossed the line, probably, into outright illegality, to the extent that crimes by politically connected and powerful people are any longer considered wrong (see, Congress enriches itself by insider trading).

In the Percy Jackson series of books, the demigods have some kind of Mist they use to confuse mere mortals into seeing something other than what is real.  Somehow guys like Corzine get people to think they are a person to be entrusted with authority instead of sent straight to the nearest prison.  Amazing really.

What is not reported are the consequences for thousands upon thousands of people.  For one thing, all of the employees of the firm have been cashiered, losing any equity they had built up and without severance or benefits.  But more pernicious is what is happening to the clients of the firm.  And though I have never had any dealings with MF Global it has even affected me personally.  One of the clients of MFG, who probably had hundreds of millions of dollars parked there, is an interesting character who gives traders a chance to make their own fortune by sponsoring an account for them.  This persons business is now dead in the water.  But not only is his business dead in the water, all of the people employed by the more than 50 CTAs sponsored are also dead in the water, at least to the extent they depended on the funding they had via this program.  I was set to get some money via this program, literally as MFG was imploding.  That is now gone.

Maybe these people will get their money back and maybe they will not.  If not, and it turns out that MFG misused the customer segregated funds, as seems likely, it boggles the mind how it could be that Corzine is still free, unless his political connections are keeping it that way.  In any event, if that turns out to be the case, Corzine and anyone who shields him ought to be in the set of those that “just needs killing”  (see Consequences of Kerffufluous Tomfoolery below).  Full stop.

They believe, apparently, that the multiplier effect of a government dollar spent is greater than 1 over the medium to long-term. The reason they believe this is that the way we have chosen to measure economic output and growth is via Gross Domestic Product or GDP.  And GDP is defined thus:

GDP = private consumption + gross investment + government spending + (exports – imports)

See that “government spending” part of the equation? Tempting it is to just ramp government spending and – voila! – you have as much “growth” as you want!  Well hell, why didn’t someone tell us it was that easy?!  Of course it is because it is not that easy.  If it were that easy, you would have discovered the perpetual motion machine, we could all lie around all day fornicating and eating grapes because the government will just spend us up some GDP growth and we will all be fat and happy without having to lift a finger.

How would the government do that anyway?  Well I can think of only two ways the government (which remember is supposed to be us, the populace) can spend as much as they want.  Either you take the resources from someone who has them or you print up some money to spend.  You may object that we can borrow to spend – and we are borrowing to finance this attempted government contribution to GDP at a frightening pace – but that borrowing just represents a claim on future resources that have to be taxed from those who have resources, or will result in printing money to pay off the debts.

If the government relies on the confiscation of resources from the private sector, it should be obvious that total wealth of the society will be less than it otherwise would be as government does not have incentives to spend those resources efficiently.  After living through the last 100 years of political experimentation worldwide, the evidence is in and government allocation of resources does not in fact result in more aggregate wealth than private allocation.  Anyone still arguing otherwise needs to go on the list of those who “just need killing” (see below) as they represent a willful threat to the public safety and welfare.

This leaves money printing.  That too has been tried repeatedly throughout history and the result is inflation or its second cousin, hyperinflation.  Ask someone who lived through the German hyperinflation and its consequences what that does to a society (precious few left now).  Regular inflation is also pernicious as it robs savers and ultimately destroys the middle class.

It is clear then that GDP is a very flawed measure that is leading to absurd policies that are actually destroying our aggregate societal wealth rather than enhancing it.  John Tamny wrote a good piece about it at RealClearMarkets here recently.  First we must have a realistic discussion about the assumed multiplier for government spending and we must agree that it is in fact less than zero.  Then we can discount the government spending element in GDP to reflect its ultimately destructive contribution to GDP.

Having come to the belated realization that the size of government is the problem rather than the solution we can take sensible steps to reduce the size of government and bring down the debt.  What you will find is that contrary to the perceived wisdom, the world will not fall apart, it will heal.  And after some uncertainty, the economy will mend and the standard of living will rise.  If we fail to come to this collective realization, more pain lies ahead.  Austerity is not a curse, to the extent it shrinks the Government, it is a boon.