Janet Yellen Is Caught Between A Rock And A Hard Place

Via Monty Pelerin’s World blog,

“Caught between a rock and a hard place” is a colloquialism meant to convey that there are either no options or at least no good options left. That describes quite nicely the position that Janet Yellen has been put into.

The US (and world) economy are not growing. Ben Bernanke and his counterparts in other countries pumped like mad to hide the dysfunction. Flooding with liquidity did nothing to heal the distortions and made them worse.

In his last meeting, Bernanke began to “taper.” Ms. Yellen came into this no-win situation, made worse by Bernanke’s parting shot. I suspect Bernanke was attempting to mitigate his role in the inevitable disaster that lies ahead. He will likely claim that the economy was doing fine when he left and that was why he began to reduce QE.

The implication Bernanke hopes to convey is that the economy was just hunky-dory when he departed. If this interpretation is correct, then Bernanke is truly a loathsome person. If, on the other hand, Bernanke truly believed that the economy was fine, then loathsome is an improper description. However, that brings “stupid” into play as it is just another in a long line of examples that suggest Bernanke had little to no understanding of what was happening.

Perhaps his most famous prediction was believing the housing market was fine prior to the crash. Silverunderground reported:

In January of 2007, Ben Bernanke said, “The housing market has looked a bit more solid, and the worst outcomes have been made less likely.” His view was that the fundamentals in housing were improving, thus reducing the risk of a crash.

The graphic below provides other examples (click image to enlarge):

There is no way to stop infusing liquidity into the economy without creating a massive recession/depression. The withdrawal process is much like that of a heroin addict. It is hell, but if you get through it, you will regain your health. Jim Sinclair explains:

The idea that stimulation, even if only in form but not reality, can be withdrawn without draconian economic results is simply false. Chair Yellen is truly dedicated to full employment and is going to go into shock over the next few short months at the divergence between her economic modeling, the behavioral economic projections and the degree of economic contraction in the US. She will revert to her long standing dovish viewpoint of the mandate of the Federal Reserve and move this hyper stimulation (4 trillion) into a higher gear than before.

Mr. Sinclair is correct in his conclusion. Whether his timing is correct will be known soon.

Bernanke, attempting to avoid historical comparisons to John Law, left Ms. Yellen holding this smelly bag. His exit does nothing to absolve himself from the blame. He and his predecessor Greenspan created the monster that will devour the economy. Regardless of whether Yellen is a hawk or dove, there is no avoiding what is coming. The Bernank is to blame, although Ms. Yellen will likely make matters worse in an effort to avoid the politically unpalatable outcome.

Political reality (Obama and Democrats plummeting in polls and likely to get slaughtered in the next election) suggest that Ms. Yellen has little time to continue the pretense of tapering. Her message from the last Fed meeting suggests she is laying the groundwork. The hard red line of 6.5% unemployment has been removed and replaced by some amorphous judgment call pertaining to economic conditions.

Ms. Yellen’s reversal will be hot on the heels of the first set of bad economic data. Markets, if they can hold out until then, will probably continue to rise after the policy change becomes public.


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