Jackson Hole: Monetary Policy Under Financialism

by: Tom Armistead

The markets are looking forward to the Fed's annual symposium at Jackson Hole, August 30 through September 1 (according to Calculated Risk -- the Kansas City Fed doesn't publicly announce the dates). It is widely hoped and believed that Chairman Ben Bernanke, speaking Friday, will announce, or at least mention, further quantitative easing. ECB President Mario Draghi, speaking Saturday, will hopefully provide some details to flesh out his central concept: "whatever it takes."

The gathering is sponsored by the Kansas City Fed, which describes it as follows:

The event is designed as a forum for central bankers, policy experts and academics to come together to focus on a topic that is not necessarily of immediate concern, but instead looks into the future at emerging issues and trends.

A key feature of the event is the thoughtful discussion that takes place among the participants. Given the participants and the topics being discussed, there is substantial interest in the symposium. However, to help foster the open discussion that has been so critical to the symposium's success, attendance at the event is limited. Similarly, although the Bank receives numerous requests from media outlets worldwide, press attendance is also limited to a group that is selected to provide important transparency to the symposium, but yet not overwhelm or influence the proceedings.

Investors will be well-advised to consider the context of this conclave. Global monetary policy governs a system driven by neo-liberal economic theory, with central banks as key players. Meanwhile, fiscal policy is fragmented, conducted along lines that subordinate sustainability to political and ideological considerations.

Neo-liberalism, the current consensus economic theory, may be more accurately described, and clearly understood, as Financialism. And monetary policy enjoys an inflated and dangerously prominent role in this scheme of things.


Financialism is an economic system in which the primary activity consists of creating and manipulating financial instruments. Financial institutions, rather than supporting the real economy, become parasites, feeding off the fruits of thrift and industry. Transactions become larger and more frequent, and progressively less attached to underlying economic reality.

Under financialism, monetary policy becomes imbued with an aura of mystic power. Rather than relying on the laws of supply and demand to regulate the minutiae of daily production and consumption, "policy" itself becomes the invisible hand, directing commerce and industry toward a golden land of perpetual growth and prosperity.

The high priest of this solemn religion meets with his acolytes, and delivers his dictates in cryptic language, each syllable parsed and studied diligently, to release the deep and imponderable meaning contained therein. As mentioned previously, Ben Bernanke will be speaking.

Attacking the System

At the deepest level, the Financial Crisis was caused by Financialism. Greenspan, and his counterparts in Europe, accepted the powers this belief system gave them, and directed policy toward the golden future.

Now the excess supply engendered by this profligate philosophy sits vacant and unused, while the debts supported by these assets threaten to take down the system, bringing production and consumption to a halt.

Coming Out From Behind the Curtain

What if Bernanke does not promise further QE? What else might he discuss? How about "a topic that is not necessarily of immediate concern, but instead looks into the future at emerging issues and trends?"

It would be germane, for example, if he discussed the inherent limitations of monetary policy. Or the proper relationship and coordination between monetary and fiscal policy.

In his typical dry and academic manner, he might point out that supply and demand play a huge role in governing the economy. It is going to take a while to go through the excess housing inventory. For that matter, he might discuss the implications of demographics on the future of the U.S. economy. Senior citizens don't carry their own weight in terms of consumption.

On another front, he could talk about the long term implications of extraordinarily low interest rates for U.S. fiscal policy. Viewed positively, it provides a window of opportunity to move toward sustainability in an orderly fashion. On the minus side, it enables politicians to avoid making hard compromises, and explaining sad truths to their constituents.

Tearing Down the Temples

Ron Paul has advocated getting rid of the Fed. On a realistic basis, Central Banks will always be with us. As such, it is less a question of tearing down the temple than of demystifying the function of monetary policy.

Ben Bernanke does not hold the keys to the golden future. Neither does Mario Draghi. Monetary policy won't get us there. The best it can do is drag future demand forward by encouraging excessive debt. That ends poorly.

The underlying beliefs of Financialism are suspect. Since neo-liberalism came on the scene, we've had increasing wealth and income inequality, increasing debt, and progressively less stability. Maybe it's time to question some of the belief system that has been constructed by over-simplifying Adam Smith's conception of the invisible hand and disregarding all his other writings.

Correcting Fiscal Imbalances

Regrettably, the aura of mystic power attached to monetary policy has permitted our duly elected servants in Washington (and elsewhere, notably Europe) to avoid confronting the reality that fiscal policy must be conducted on a sustainable basis.

We have decisions to make. What do we want from government? What should it be doing for us? How are we to allocate the cost of government among our citizens?

The current answers aren't honest. Ideologists of all persuasions want to direct the spending toward their own interests, while protecting their constituencies from the inconvenience of paying for what government will provide.

Who Will Bear the Destruction of Wealth?

The debate is, who will take the loss? The pile of debt has shifted, somehow, and moved from the banks and consumers to the government. Of course, much of the wealth created by monetary policy was fictitious, and melted under the hot sun of reality.

John Paulson, having acquired immense notional wealth manipulating liabilities referencing fictitious assets, took his spoil and put it into something permanent and tangible -- gold. The instinct is to game the system to the breaking point, then pull out and protect the spoils.

Ultimately, wealth dissipates, whether by wars, insurrections, inflations, confiscations, panics or the profligacy of heirs. In the present instance, it seems that the best policy would be, to destroy wealth in the same proportion for all. Figure it out: those who have nothing, have nothing to lose.

Investment Implications

Short term, it is unwise to bet on Bernanke pulling another silver bullet out of his gunbelt. It would be more prudent to position for a letdown.

Long term, publicly traded U.S. companies, in the aggregate, are in very good shape. Balance sheets are strong: many have excess cash. Labor has little bargaining power, and productivity continues to increase. Technology, in the form of robotics, may pull another rabbit out of the hat. These companies, and those who are lucky enough to hold secure jobs at these privileged entities, will do well enough to keep the economy rolling forward at a measured speed.

The fiscal difficulties of governments, and the political posturing accompanying the development of solutions, will create disruptive interludes in the markets. As such, investors who hold substantial reserves of cash or liquid assets will have periodic opportunities to accumulate ownership of U.S. equities at discount prices. Today's prices are good: in the future, prices may be better.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.