The Aleph Blog » Blog Archive » Silence is Golden, Fiat Money is Noisy

Silence is Golden, Fiat Money is Noisy

I’m not a fan of the enhanced communications of the Federal Reserve.  In general, I think central banks should say nothing.  Nothing.  Just do your work through fed funds, and make sure you squeeze out bad debts before you stop tightening.  That was the way Martin and Volcker did it, arguably the best men ever to have been Fed Chairman.

The idea that more transparency is needed stems from the wrongheaded idea that giving people more data will make them do what the Fed wants.  Rather, they will more quickly react to the hints of policy change.  If you are a smart central banker, you should want people/firms to be confused.  Confusion is helpful because when people finally figure out what is going on, they react with more punch.

I am amazed that economists imagine things, and then they expect the world to act ideally, rather than the messy way that it normally does.  It is worse that we let them control policy with their bankrupt theories that may bankrupt many.

So to the Fed, I say “Be quiet.  Act in silence and your powers will be enhanced.”

But now, what of the Fed’s enhanced communications?  Let’s look at their expectations of GDP:


In general, FOMC participants have been optimists.  That is what they are paid to do.  GDP has consistently been lower than what they predicted.  They give us the “smiley face,” and then explain disappointment quarter after quarter.


Again, optimism is the operative word, that is what they are paid to do — be optimistic shills for the US Government.  In this case, they have been more accurate, as the unemployment rate has come down.  Please ignore the discouraged workers, and all of the new people on disability.  I’m sure that last four years have injured far more people than the four years prior, not.


This graph is different.  Because we are listening to FOMC participants, we must get a dose of their religion.  Long-run future PCE Inflation will be 2%, they guarantee it.  But in the present, their expectations for inflation keep falling.  We are in a deflationary world where labor has no ability to improve wages, and thus stimulate inflation.

Fed Funds

Regarding predictions of the Fed funds rate, for the most part expectations for the rate have declined for 2012-2014.  Only today has 2015 expectations expanded, as the Fed hints at the end of QE.  As I have said before, at inflection points, markets often react in a wild fashion, because the received wisdom gets called into question.


When the Fed started their enhanced communications, they had no dream that they would be trapped in easing for so long.  As it is, it is only over the last half year that expectations for when policy would tighten have coalesced at September 2015.  I don’t know if that is the right time or not, but it is interesting to see the views of the FOMC converge here.

The last two graphs reinforce each other as they indicate tightening two years from now.  But if the tightening is two years away, why did the market react so badly?  Markets are discounting mechanisms, and react to expected future changes, not the mistaken view of Bernanke that stocks of debt still affect the markets.  No, it is changes in the stock of debt, and changes in the expected changes in the stock of debt that affect the markets.

Please be aware that the the Fed is not working off of established theory here, but only presumption.  They are imitating the failed policies of Japan, because the theories tell them it will work.  With economics, theories have a bad track record.  Maybe they should get out of the prediction business, and in the process, replace the Fed with a currency board based on gold, commodities, or limited fiat money that does not let the yield curve gat too steep or too flat/inverted.

Bonds, Fed Policy, public policy | RSS 2.0 |

6 Responses to Silence is Golden, Fiat Money is Noisy

  1. Crocodile Chuck says:

    “Maybe they should get out of the prediction business….”

    Bernanke should read Sartre:

    “No Exit”

  2. Greg says:

    For a student of economic history, Bernanke seems rather dim witted.

    He made his famous speech — no, not the one where he assured “the subprime contagion appears well contained” … his other famous quote. No, not the one about the helicopter either.

    The speech in which he admitted that Milton Friedman was right: the Federal Reserve essentially caused the Great Depression back in the 1930s. And Bernanke promised “not to do it again”

    Of course, anyone who actually studied the writings of John Maynard Keynes knows Keynes promoted conservative policies: deficits in recessions but surpluses when one is claiming the economy is recovering slowly … not endless subsidies, zero interest rates and money printing while claiming a claiming a slow recovery. Bernanke doesn’t know Keynes.

    Bernanke doesn’t know Milton Friedman either. Friedman himself supported the Lombard Street rules of Walter Bagehot: “Lend freely, at penal rates, against good collateral”

    Bernanke lends freely, at zero percent, against collateral that couldn’t pass for toxic waste.

    I agree that academics frequently place too much faith in theories that are not supported by real world experience … but lets be honest here:

    Bernanke’s stupidity is not supported by academic theory nor real world experience.

    Between Krugman and Bernanke, its hard to figure out what warped version of reality Princeton’s economic department lives in. Two idiots just making stuff up to suit their preconceived political views, reality and theory be damned.

    Bernanke (with help from easy Alan G) caused another economic depression, and then Bernanke (solo) made it 1000x worse.

    Whether one agrees with Friedman and Keynes theories or not … there is no way anyone who actually read their work would see any similarities with the stupidity of Ben Bernanke’s FOMC.

  3. [...] _uacct = "UA-1957608-3"; urchinTracker(); The Aleph BlogHelping Institutions and Ordinary People Invest Better by Focusing on Risk ControlSilence is Golden, Fiat Money is Noisy21Jun [...]

  4. [...] I’ve looked around for a transcript for Bernanke’s press conference, and I can’t find one. Here’s my gripe, and I mentioned briefly at the end of last night’s article. [...]

  5. [...] I’ve looked around for a transcript for Bernanke’s press conference, and I can’t find one. Here’s my gripe, and I mentioned briefly at the end of last night’s article. [...]


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.

Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

 Subscribe in a reader

 Subscribe in a reader (comments)

Subscribe to RSS Feed

Enter your Email

Preview | Powered by FeedBlitz

Seeking Alpha Certified

Top markets blogs award

The Aleph Blog

Top markets blogs Bull, Boards & Blogs

Blog Directory - Blogged

IStockAnalyst supporter

All Economists Contributor

Business Finance Blogs
OnToplist is optimized by SEO
Add blog to our blog directory.

Page optimized by WP Minify WordPress Plugin