Paul Singer didn’t intend to bash the U.S. Federal Reserve… again. But then he heard Fed Chair Janet Yellen give a speech about income inequality, “sounding like a presidential candidate,” and he had to address what he considers the “Krugmanization” of a large portion of the economics profession.
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Paul Singer says quantitative easing that created income inequality
Under the heading of “Faking It,” an Elliott Management investor letter reviewed by ValueWalk noted that it was the policy of quantitative easing that created income inequality. The letter says that during the 2008 financial crisis, central bankers appropriately flooded the system with liquidity and reduced interest rates to stabilize the system and “truncated the crisis.” The problem was they didn’t address the root cause of the crisis. “Central bankers do not understand that it was their tinkering, manipulation, bailouts and false confidence that encouraged and enabled the insanity that led to the fragility and collapse.” As a result, the Fed has doubled down on the same policies and political leaders, rather than deal with the problem, allow central bankers to work their magic that is more a game of three card Monte than anything mystical.
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Furthermore, Singer states:
Partially as a result of that misunderstanding, the developed world has doubled down on the same policies, feeding the central bankers’ supreme self-confidence. Political leaders have been content to stand aside and watch the central bankers do their seemingly magical and magnificent work.
The believers in the wisdom of this central-banker-centric economic world have been crowing and gloating that those (like us) who have raised concerns about the risks posed by the post-crisis, monetary-dominated policy mix (inflation, distortions, growing inequality, lower growth) are just “wrong” and should apologize for a “massive error.”
This, shall we say, “Krugmanization” of a substantial portion of the economics profession and punditocracy is in its triumphalist phase, and whether its smug non-stop “victory lap” ultimately represents an embarrassing high-water mark is for subsequent events to reveal.
What does Paul Singer believe? He says:
At present, the situation in developed countries can be characterized as follows: Asset inflation is roaring, but it is sectoral and skewed. Consumer inflation is understated, and thus growth is overstated. Employment data is misleading. This combination of factors means that ordinary citizens are not doing well, but the owners of high-end everything are doing just fine, with few concerns for the middle-class people who know things are not “all right,” but cannot put their finger on why.
At or near this stage, either because of citizen resentment and distrust or (in the case of Europe) a pronounced weakening of economic activity despite all their efforts and experimentation, monetary authorities may decide that the real problem is that they just haven’t done enough. Historically, this is the point at which the risk rises that central bankers will take monetary actions that destroy their societies. Once the “tiger by the tail” phase of monetary debasement has gotten started, there has never been a good exit. Past that point of no return, the collapse of money and/or asset prices becomes the inevitable denouement, with the only questions being the timing and the severity of the collapse.
Our views are formed by an examination of historical episodes of societal monetary collapse. The script is not “baked,” but the common elements are clear and present. Given that the authorities are so far behind the curve in their understanding of the modern financial system, we have little hope that they can revert in time to the correct mix of policies, preserve the fiat money regime and also get the developed world growing again while whipping into shape the long-term entitlement obligations which are obviously unpayable in their present form. We wish we could report that a counter-movement is afoot, with some cadre of truth-tellers who are making the case for marching in a different direction, but sadly we cannot. The argument for “doing more” or “doing more of the same” is universal. The “risk” case is only being made circumspectly by people who are being ridiculed as clueless Cassandras.
Cassandra was proven right, of course, but we have no need or desire to be right about these views. Societal stability is a good thing for all, including skeptics and pessimists. Societal breakdown and uncontrollable inflation or financial crises are massively destructive, and typically accompanied by very bad policies. No disciplined investment approach can “work” in such an environment, in which preserving the real value of capital becomes difficult if not impossible. In extremis, political governance drifts toward totalitarianism, scapegoating and violence. Let us hope that leaders emerge who understand these realities and have the courage and political skills to reorient their societies toward growth, stability and soundness.
Our belief is that the global economy and financial system are in a kind of artificial stupor in which nobody (including ourselves) has a good picture of what the next environment will look like. The difference between “them” and “us” is that they mostly think that policymakers will muddle through, but we assume that a very surprising and scary environment lies in wait.
The problems and solutions are easy to understand, its a matter of will:
Either out of ideology or incompetence, all major developed governments have given up (did they ever really try?) attempting to use solid, fundamental policies to create sustainable, strong growth in output, incomes, innovation, entrepreneurship and good jobs. The policies that are needed (in the areas of tax, regulatory, labor, education and training, energy, rule of law, and trade) are not unknown, nor are they too complicated for even the most simple-minded politician to understand. But in most developed countries, there is and has been complete policy paralysis on the growth-generation side, as elected officials have delegated the entirety of the task to central bankers.
Paul Singer: Risk of monetary manipulation
Elliott then notes a wing of the economic system that thinks they should now be taking a victory lap. They crow and gloat when addressing those who have raised concerns about the risk of monetary manipulation that range from inflation, market distortions, growing inequality and lower real growth. These people, looking for an apology that includes acknowledgement from those who criticized the post-crisis monetary policy that they were “wrong” and committed a “massive error” in judgment. This apology is demanded by a group of economists who are smug in taking a “non-stop victory lap.” This behavior Elliott calls the “Krugmanization” of a large portion of the economics profession. This triumphalist phase, however, could ultimately represent “an embarrassing high-water mark” as subsequent market events have yet to play themselves out.
In other words, the jury is still out on the impact of stimulus and quantitative magic tricks. The tangible results of the distortions are yet to be felt as the impact of withdrawal of stimulus has not hit the economic numbers and might not do so for months and the big crash might not come for years. But the distortions that typically correct themselves are more than apparent.
As one example, a zero interest rate policy, Singer notes, has enabled insolvent corporations to issue debt at almost no premium to government bond rates. Such market distortions will come home to roost. “Companies that should be shuttered or taken over and chopped up are instead able to pursue projects that should never have seen the light of day, and to create fake demand that essentially borrows growth (and jobs) from the future.”
In other news, President Obama met with Yellen recently to receive an update on economic progress.