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6/30/2003
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Contrarian
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Fed's truly
scary idea: tax you into spending
It's positively
diabolical. Some Dallas Fed economists suggest perking up the
economy by taking a piece of every dollar you have the gall to
save.
By Bill
Fleckenstein
There's
always a loss of pride involved when we own up to our
mistakes. It's a moment in time, though. It passes. Then we
are enriched for what those mistakes have taught us. But when
pride turns into hubris, there's no learning from one's
mistakes. In fact, hubris sometimes drives the need to
actively cover them up. That is the story of our Fed.
A
few weeks ago, I was sent a paper by Evan Koenig and Jim
Dolmas of the Federal Reserve Bank of Dallas, titled "Monetary
Policy in a Zero-Interest-Rate Economy." I started to write up
my thoughts about it, but I was so incensed that I had to set
them aside. I returned to the paper recently, only to feel the
same sense of outrage. What it proposes is one of the most
maniacal, diabolical ideas this group of idiots has come up
with so far. I urge everyone to read this paper and consider
what its implications are. This will be on the final,
guaranteed. To read the text of the paper, click on the link
at left.
Fed pens
Frankensteinian nonfiction
Koenig and Dolmas start
out by not understanding that deflation is a consequence of
prior policy actions that create a bubble and have severe
economic consequences. They fall into the trap that many
people do, thinking that deflation is a disease, rather than
the symptom of a previous disease -- wildly excessive
monetary policy and the misallocation of capital associated
with it. What they do is talk about how our experience in the
1930s and Japan's problems were a function of central banks
not acting quickly enough. They fail to recognize that the
problem is a function of the fact that the central banks acted
like complete drunken fools in the first place. That
precipitated the ensuing economic problems -- and today's
environment that doesn't have enough inflation to suit
the Fed.
They
then go on to talk about the challenges of, in essence,
diddling the market in a near-zero-interest-rate environment.
(In the past, I have likened this to the problems encountered
by physicists near a black hole. Things are just different.)
The Fed is so panicked about the stagnant economy that it's
thinking about resorting to mad experiments to get its own
way, i.e., make the economy do as it commands. Now as regular
readers know, I don't really expect to see deflation. But the
fact that the Fed would contemplate these measures is
absolutely frightening.
Capital
punishment for savers
There’s a lot of chatter in
this paper about the Fed helping the economy by buying real
goods and services, or other domestic securities, such as
longer-term Treasurys. But here’s the most staggering idea in
the paper: It contemplates taxing your savings.
Koenig
and Dolmas propose what they admit is a radical idea: a "stamp
tax." In this, a currency would have to be stamped
periodically, and you would be charged for your currency, "in
order to retain its status as legal tender. The stamp fee
could be calibrated to generate any negative, nominal interest
rate the central bank desired." They toss out a few numbers,
say 1% a month, to validate your currency. In other words, it
would cost you 12% a year to have the gall to save money.
So basically, these unelected morons are
contemplating a new law -- "Thou shalt not save, thou shalt
spend." And, if you don't, we're going to confiscate your
money, via a tax, after we've already confiscated your money
via debasement.
It is truly breathtaking to witness
the measure of hubris, arrogance and wanton disrespect of
people's money on the part of these idiots. That they would
even entertain the idea of such a penalty (not that they will
necessarily be able to get away with it) boggles the mind.
That's the mindset of this group of lunatics, that it would
cast itself as a dictator from ancient times, with the public
there to do its bidding.
Meantime on Wall Street, the
current mindset can best be described as remarkably bullish.
Investors Intelligence recently reported that that its
investor sentiment index indicated 60% bulls and just 16%
bears -- a reading that has not been more lopsided since the
spring of 1987, which I believe is saying something. I myself
have not been operating bearishly, as I have been waiting for
this rally to play itself out. I have a very dim outlook for
the second half. Yet virtually no one seems to share that
view, other than my good friend Fred Hickey, editor of the
influential High-Tech Strategist newsletter, or Morgan Stanley
chief economist Stephen Roach (more about him in a minute). As
I continue to reappraise my assessment, I ask myself, what is
it that these folks see that I do not see? Why is it that they
are so lathered up about this particular moment in
time?
A few things come to mind that separate the
environment right now from other bear market rallies:
- Many people were just tired of being bearish.
- The market has been rallying for a time now, and it's
currently up on the year.
- In February and March, many folks feared terrorism and
war. Those fears in particular made me nervous about being
short back then (i.e., folks were bearish for the wrong
reasons). But these reasons don't tempt me to change my
view.
Lip service vs.
embracing the bubble
More importantly, it strikes me
that many people fail to understand that we had a bubble, and
that it has created long-lasting, unavoidable repercussions.
They can say the words, "We had a bubble," but they never get
beyond that to accept the implications. So, when you put a
summation sign in front of all this, it adds up to folks being
particularly optimistic (more so than at any time in 16 years)
about right here, right now, when in fact, it's just another
bear market rally and rate cut.
Perhaps the cumulative
effect of the previous 12 cuts will make the 13th magical.
Perhaps the cumulative effect of what's gone on from a
downsizing standpoint may matter. Perhaps the economy will see
a bounce, but I find it unlikely that we will see anything
more than that, if we even get that. To summarize, the bulls
have yet to come up with a persuasive argument for their case.
I still firmly believe that the second half is going to be a
disappointment, both in the economy and the stock
market.
Sentiment is getting
set up for a letdown
Further, since so many people
have swung their views around so hard, betting heavily on
second-half wonders, I believe that sentiment is now more
binary than ever. If disappointment starts to rear its ugly
head, we will see a real wipeout in the equity market. That
could happen later this year, even if the economy does better
for a short period. (As an aside, and to repeat my recent
comments, the Fed has now positioned itself so that in the
event of an economic recovery, the law of unintended
consequences might surface, in terms of a bond market wipeout
-- especially if the Japanese bond market starts to decline.)
And that's the situation in which we find ourselves, with very
few skeptics remaining. Yet, the people making the bullish
case, though they could possibly turn out to be right, have
nothing new to bolster their prior arguments, which have not
worked.
The only
person who inhabits the Wall Street mainstream and has voiced
concern about the bubble and its aftermath these past three to
five years is Stephen Roach. In his piece titled "Endless
Bubble," he paints the picture of a Fed in the serial
bubble-blowing business. First, the Fed created the stock
market bubble. Now, to try to solve the problems of the bust,
it's creating a bubble in the bond market. "The result," he
writes, "is a seemingly endless array of bubbles that only
heightens the perils of the post-bubble endgame. . . . The
legacy of these bubbles is a sad testament to the excesses of
an increasingly wealth-dependent U.S. economy: Consumers have
now become addicted to the 'extra' purchasing power they can
extract from overvalued assets." This is as succinct and
brilliant a discussion as you'll find on the subject.
Time to own up to the
bubble
My favorite part, however, was his
conclusion: "The biggest difference between my bearish view of
the world and the more sanguine views of others can be traced
to the bubble. More than three years after America's equity
bubble popped, there is an understandable temptation to
believe that it's time to move on. A massive dose of fiscal
and monetary stimulus, in conjunction with a sharp rebound in
the stock market, adds to that conviction.
"As I see
it, however, the legacy of this monstrous bubble endures --
not just in financial markets but also in the form of the
excesses that it has fostered in the real economy and in its
balance-sheet underpinnings. Until those excesses are purged,
I maintain my view that America still needs to be seen through
the lens of a post-bubble workout. As one bubble morphs into
the next one, the moral hazard dilemma only deepens. And the
endgame -- including the risks of deflation and a dollar
crisis -- appears all the more
treacherous."
Editor's note: Last Wednesday,
following the Fed's announcement that it would cut rates 25
basis points, Bill Fleckenstein weighed in with his comments.
To read them, click
here.
Bill Fleckenstein is president of
Fleckenstein Capital, which manages a hedge fund based in
Seattle. He also writes a daily Market Rap column for
TheStreet.com's RealMoney. At the time of publication, he had
no positions in any securities mentioned in this article. His
investment positions can change at any time. Under no
circumstances does the information in this column represent a
recommendation to buy, sell or hold any security. The views
and opinions expressed in Bill Fleckenstein's columns are his
own and not necessarily those of CNBC on MSN
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