My golfing buddy sends out an email occasionally with his ideas on a myriad of matters. His ideas parallel mine in quite a few ways. I wanted to post his latest thoughts, and see if anyone agrees/disagrees with his ideas. He usually spends the summer out in Bend Oregon. He titled this "Limits of Public Education", even though he writes alot about his favorite topic, the Fed. "My nephew recently commented on the absence of La Plumes recently. Bend is alot of fun but having a good time is hard work, so I'm recovering today and creating this missive. The market is unfathomable to me except that Marty Zweig's time honored principle of not fighting the Fed has gone exponential these days. The financial repression in practice today which has made the return on cash negative and on "safe collateral" negligible has resulted in a growing equity market bubble. In today's world, central bankers, ours in particular, are viewed as omniscient and omnipotent. The PhD standard has replaced the markets as a determinant of asset prices. What would happen if the tables turned and rather than controlling events, events controlled the bankers. Today, our central bank materializes, (counterfeits) money and buys our debt to the tune of 45 billion of Treasuries per month. In essence, we are monetizing our debt. It was interesting that non other than the Bernanke, when asked whether QE1 was debt monetization, responded in the negative and stated that we would only be monetizing the debt if we failed to release these balance sheet assets into the markets at a later date, in essence sterilizing the original injection of liquidity. Today, the only relevant question is how much QE for how long; reducing the balance sheet is out of the question. Now back to the original question of how our or any central bank could lose control. 45 billion of Treasury purchases seem like alot but remember that our debt market is 17 TRILLION. That 17 TRILLION sits complacently for the moment but what if there was a crisis of confidence or perhaps even inflation? What happens if the Fed loses control over the long end of the bond market? The fact that bank reserves at the Fed have gone from about 100 billion in 2007 to over 2 TRILLION today is alarming. Since, by the end of this year, the Fed will have raised our monetary base by about 4 TRILLION, the only thing preventing inflation is the absence of money growth and money velocity because of of the absence of credit expansion. Come to think of it, financial repression may be a cause. Why would a bank be eager to loan money, say a 30 year mortgage to a deadbeat, default -risk American for 3.5%? Suppose, however, the rate increased to say 5-6%? Do you think the spigots might open up abit? If they did, money velocity, hence inflationary pressures might appear and jack up rates further. If this trend became apparent, what portion of the 17 TRILLION roosting in the bond market might flee and what effect would that exert on interest rates. Now imagine, for a moment, a situation where the economy still sucks but inflationary pressures and interest rates are climbing as this 4 TRILLION, starts to emerge in the real economy. The Fed would be faced with Sophie's choice; ignore inflation or ignore the economy. Just speculating. Have you ever wondered how much bullshit you were indoctrinated with during your respective tenures in public schools? Now some of it is harmless. For those of us older folks, we can remember the illusion of Camelot, the idyllic marriage of JFK and Jackie with their all so perfect children. In reality, of course, old Jack converted the White House into a whorehouse and his security staff into pimps. Jackie, for her part, was paid off by her criminal father in law to keep the myth alive. Well, I say no harm, no foul because we all like fairy tales. Slightly more pernicious is the myth of honest Abe. We forget that when he ran for President in 1860, he was not an abolitionist. He fought the Civil War to keep the Union together, not to abolish slavery. The slavery issue was an afterthought. He, like Jefferson, felt slavery was immoral but like Jefferson, felt that the races were incompatible. As recently as 1862, he conferred with Northern free blacks about the concept of relocating the blacks to Africa. Since they were more aware than Lincoln of the "limitations" of living in Africa, they refused. He realized that he could undermine the stability of the South by freeing the slaves, inciting revolt and hopefully recruiting these individuals for service in the Union Army and subsequently passed the Emancipation Proclamation. Importantly, this document did not free slaves throughout the country but merely in states aligned with the Confederacy. Hence, slavery was still permitted in Missouri, Kentucky, Maryland and Wash. D.C. But, we've got to give the guy a break; we can all agree that slavery is wrong, (even in Africa where it is still endemic) and besides, he was afterall, a politician. Some forms to disinformation are, however dangerous because misinterpretations of history lead to future errors in policy. Have you ever wondered why the US got into WW1? Kaiser Wilhelm was no Adolph Hitler and as far as I can see, was no worse than Lloyd George, Clemenceau or the Russian Czar. US vital interests were never threatened by the outcome of this catastrophe. Nonetheless. our Princeton grad du jour, Woodrow Wilson decided that we should fight this war to "end all wars" and at the successful conclusion, created the League of Nations to prevent all future wars. Perhaps, his policy failures were an early warning of the fanciful notions of Liberals. Anyway, our newborn Cental Bank was enlisted to fund the deficits of this war with measures like today's financial repression. US borrowing costs were arbitrarily capped at 3% at a time when war time inflation was measured at 18%. Needless to say, as always, in response to this easy money, leverage, speculation lead to malinvestment and bubbles. Post war, in 1919, the economy went into a deflationary depression of great magnitude and the PPI plunged by 40%. Unemployment soared. The stock market was hammered. But remember that those were the days of the gold standard and the Central Bank had but one mandate, price stability which required actions to preserve the nation's supply of gold. That required an increase in the discount rate, ultimately by 3% to 7%. The President of the day, Harding, a guy we were taught to loathe because of Teapot Dome and since he didn't know better and John Maynard had not yet been born, embarked on the irresponsible path of cutting federal debt. Now in our enlightended age, we know in an economic deflationary pit, the worst thing you can do is elevate interest rates, tighten money and cut the government's role in the economy.....or do we? The economy contracted enormously from 1920 to 21 but rapidly regained it's footing and was reslient by 1922 and continued to be robust until 1929. Now the fact is that few of us were ever educated about this Depression which in it's initial magnitude was everybit as large as the Great Depression and it's lessons which are that if the Federal govt. does NOT intervene, the healing is much more rapid because markets are allowed to correct, equilibrate and subsequently heal. Now consider the fiasco of the New Deal. We were taught that FDR was heroic in his policies of repairing the damaged economy in the 30's. The cornerstones of his strategies were the National Relief Act and the Agricultural Adjustment Act both of which were forms of centralized economic controls, price controls and were ultimately determined to be unconstitutional by the Supreme Court. Interestingly, in his arrogance, he attempted to rebuke the Constitution by packing the Supreme Court, a move which was thwarted by his fellow Democratic colleagues. The economy improved rapidly, undoubtedly more due to the resilience of the US economy than any of his particular policies but deteriorated severely later in the decade. Economic growth went negative and unemployment once again exceeded 20%. What happened? We are told that the error lay with the Federal Reserve which concerned with price stability raised the discount rate inappropriately. A factor to be sure but not the only error. Remember the Social Security Act of 1935? This newly created entitlement sucked money out of the economy from both employer and employee. The Wagner Act, the magna charta for labor unions resulted in new power for the workers who rapidly priced themselves out of a job. (How many members does the UAW have now compared with say 1980). FDR raised exponentially, the taxes, particularly on those who hire and make capial allocation decisions. Finally, he waged a continuous war on business, creating a hostile environment for the backbone of our economy. Lest you think I am being unfair to this Liberal scumbag, consider the judgement of his contemporaries: in the 1938 Congressional elections, Democrats lost 6 Senate seats and 86 House seats. Democratic leadership told FDR to focus on events in Europe and stop meddling in the economy. What we really learned from this epoch of history is not to pursue the very policies which are now being advocated by the current Administration. I'm done and will go back to more worthwhile endeavors like golf and biking."