What Yellen Must Know but Can’t Say

Keith Fitz-Gerald Aug 31, 2016

Policy wonks billed Fed Chair Janet Yellen’s recent remarks from Jackson Hole, Wyoming as “one of the single most important speeches” she’ll give all year.

Traders yawned because they already know the answer to the one question that no politician dares to ask.

Now you will, too.

An Insult to Every Investor

I delivered a keynote speech several years ago in Bermuda to a gathering of reinsurance executives, corporate officers, and prominent financiers responsible for hundreds of billions of dollars around the world.

And, as part of that, I spoke about both the 2008-2009 financial crisis and the opportunities it would create – things we’re still tracking profitably today.

Shortly after I’d finished, I received one of the bluntest questions in a long time from deep within the room well beyond the stage lights:

“Does any nation really need a Fed?”

You may be wondering the same thing now following Janet Yellen’s most recent remarks in Jackson Hole.

The answer is still “no.”

The Fed is an abomination, and the American Federal Reserve in particular is an insult to every investor who believes in capitalism, in economic progress, and political freedom.

The individual depositors – meaning you and me – who were the intended protected class when the Fed was formed in 1913, are nothing more than financial cannon fodder today. Now it’s the big banks and crony capitalists in Washington who have become the protected few.

Honestly, I didn’t always think this way. Like many people, I once took the Federal Reserve for granted and implicitly assumed that it acted in our country’s best interest. But then the financial crisis hit and forced me to re-evaluate. Sitting down in Singapore with legendary investor Jim Rogers, a staunch Fed critic, in 2008 solidified my thinking.

The Fed Had a Beginning – It Can Have an End

A lot of people believe that the Fed has always been a part of our system. In fact, it’s just over 100 years old – formed in 1913 in an effort to prevent banking failures. What’s more, it’s actually our third Fed.

At the time, the United States had just gone through the vicious bank panic of 1907. That crisis was significant because it saw the failure of Knickerbocker Trust, which sought, but failed, to receive financial support from its peers. Unable to obtain liquidity from any source, Knickerbocker Trust collapsed.

This affected public psychology deeply because Knickerbocker’s peers didn’t just choose to not rescue Knickerbocker, but also suspended payments to each other. This would be like JPMorgan refusing to trade with Citi who, in turn, refused to do business with Wells Fargo – and so on.

This boomeranged through the system and came to roost at the retail level when the public figured out that they didn’t have access to their money, especially in “specie,” meaning in gold. Bank runs and closures became the norm.

The New York Stock Exchange fell 50% before financier J.P. Morgan famously locked banking executives in his personal library and formulated a liquidity injection that ultimately calmed everything down.

Loath to waste a good crisis, legislators stepped up to the plate by agitating for centralized banking as a means of restoring public confidence while providing the banking system with a source of liquidity that would prevent their wholesale collapse.

And they got it a few years later… in spades.

What’s really interesting to me looking back through today’s lens is how sophisticated the machinery of the time was. Powerful public and private figures worked together, often in great secrecy like they did at Jekyll Island, Georgia, to build the framework for the Fed. The Wall Street Journal published a 14-part series highlighting the need for a central bank. Citizen groups and trade organizations piled on all in the name of public good which ought to sound hauntingly familiar given today’s headlines.

And voilà… the Fed was born under the guise of a politically independent institution that would stabilize the financial system, protect the monetary supply against inflation, and maintain credit as needed by injecting stimulus when the economy flagged and withdrawing it when things were overheated.

In the terminology of the day, this was viewed as giving elasticity to the dollar which would, in turn, establish more effective control over the banking system.

None other than the office of the Comptroller of the Currency itself observed that the Fed would supply a circulating medium that is “absolutely safe.” What irony.

Fast forward to today.

Every 1913 dollar is now just barely worth US$0.04 cents. Goods and services that cost a buck back then now will set you back $24.31, according to the US Inflation Calculator using CPI data. Where’s the stability in that?

If that’s not practical enough, consider wages.

According to the U.S. Census Bureau, the median income of male workers in 2010 was $32,137 while the median income of male workers in 1968 was $5,980. On the surface, this isn’t too shabby. It’s a 437.4% increase over 42 years – or an average income gain of 10.41% a year, over the same time period.

However, if you run the numbers the other way using 2010 dollars, a very different picture emerges. You quickly see that median earning male workers actually have less purchasing power today than they did 42 years ago ($32,844 vs. $32,137).

What that means in plain English is that paychecks are going up but people receiving them are able to do less with the money. Take a restaurant cook working full time, for example. According to the National Employment Law Project, he or she earned 8.9% less in 2014 than in 2009. That’s roughly $2,185 per month in 2014, which works out to an average decline of $437 over the same time frame.

That’s roughly what an average American household spends on groceries each month… gone into thin air.

That’s your Federal Reserve at work. It’s robbing America by gradually sucking the life out of the financial system. Over time, it will cause the system to collapse. Just ask anybody in the former Soviet Union. They had a ‘Fed’ and no Soviet bank ever failed per se. However, the state eventually took so much wealth from the people that the entire system broke.

Never Met a Printing Press They Didn’t Love

Legions of spend-it-while-you-can politicians, economists, and self-interested lobbyists don’t see it this way. And neither, perhaps more importantly, does sitting Federal Reserve Chair Janet Yellen or her immediate predecessor, Dr. Ben Bernanke.

Bernanke explicitly said on November 21st, 2002, in remarks to the National Economists Club that, “by increasing the number of dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of the dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.”

In other words, he believed he could create economic value merely by printing money.

Janet Yellen does as well, which is why she’s going to remain “accommodative” even though she knows full well that her policies continue to hollow out the dollar. Like Bernanke, Yellen believes that doing so is the same thing as raising prices by managing inflation.

In fact, inflation is actually defined as the artificial increase in the supply of money and credit. It’s a tax by any other name. So what Bernanke did, and what Yellen is now doing, is artificially taxing the American public by debasing its currency. It’s no wonder that more people have less.

But here’s where it really hits home for me.

When the Federal Reserve was created, it was envisioned as a source of liquidity for the banking system. The presumption was that any specific failure in the banking system subject to the Fed’s oversight would be offset by the available cash from the government because it had centralized the credit risks associated with their lending portfolios.

In today’s environment, credit is diffused globally far beyond the Fed’s reach. What’s more, there’s too much of it and the banking system is now so big that the risks it holds dwarf the Fed’s liquidity capacity.

For example, there are an estimated $600 trillion to $1.5 quadrillion in derivatives products worldwide at the moment. Global gross world product is approximately $79 trillion by comparison.

Contrary to what Bernanke and others who are so tightly involved in the system believe, this crisis was not caused by a lack of liquidity. Rather, it was caused by too much money sloshing around in some sort of unregulated mosh pit with inadequate supervision and inadequate regulatory oversight.

The real villain here is that excess liquidity is leveraged by big banks and trading firms who have run amok for years. This lets big banks buy derivatives for pennies on the dollar, yet exposes them to hundreds of billions in market risk you’re now on the hook for because our leaders have socialized risk under the guise of “too big to fail.”

The key takeaway here – and what causes most people heartburn – is the realization that there isn’t a central bank in the world that can print enough money to guarantee liquidity. Heck, all the central banks in the world together couldn’t do it.

Yet they will continue to try because that’s the only way they keep the illusion going despite the mounting evidence that it doesn’t work.

Printing money and accommodative low interest rate policies are also the only way they keep a handle on their version of risk… to the system. And that brings us full circle.

Success by its very definition includes failure. People forget that the discipline of failure is integral to capitalism. When the Fed creates money out of thin air, the risk of failure does not exist. Without the risk of failure, the big banks know they can place one way bets and not worry about losses because they are literally ‘too big to fail.”

In fact, management and traders are paid to do exactly this. If the monstrous one-way bets pay off, they get up to 50% of the profits. If the bets go bad, the stockholders, the Federal Reserve, and now the public eat the losses.

So they have every incentive to act in their own interests while reinforcing incompetent management, improper risk taking and inefficient operations. Politicians and regulators are incentivized the same way, since the Fed also makes it possible for them to skirt the issue of responsibility.

The Fallacy of Free Money

Which brings me to interest rates.

The Fed spends a good deal of its time (and our money) promoting and maintaining low interest rates. It’s doing so on the assumption that low rates prompt everyone to put money to work by making savings less appealing. But ask Japan how much demand there’s been when money was free. The answer is next to none.

The trillion-dollar problem is the economic assumption presumes that savings are there in the first place. In reality, America and other ‘Fed’ nations are flat broke. There is no savings pool to draw upon, which means the foregone assumption they’re operating under is a bust.

And where there are savings?

Tiny Raiffeisenbank Gmund in Germany’s Bavarian Alps has started charging individual depositors in an effort to pass on the ECB’s negative interest rates calling it a “solidarity contribution.” Don’t think for a minute that won’t happen here eventually.

At some point, people who do not have cash cannot pay for the goods and services they need – no matter how much liquidity is in the system.

International capital markets actually exacerbate the problem because other governments and major trading firms purchase that very same excess liquidity which they, in turn, then begin using as collateral for their own expansion.

Former Congressman Ron Paul, a staunch Fed opponent, summed it up much more eloquently than I ever could in his 2009 book, End the Fed, noting that ‘those who suffer [rarely] see the connection between Federal Reserve monetary policy and the suffering that comes as a consequence of financing big government and big banking.’

Under the circumstances, is it any wonder that almost every currency in recorded history that is controlled by a central bank has failed or is failing?


Low interest rate policies have forced millions of investors seeking income into the stock market for higher returns which, by implication, come with higher risks. That drives up stock prices and makes for great headlines but does little for the economy.

Fed policy wonks believe they can set interest rates effectively when that’s something the markets do with real money – not out-of-date and badly broken financial models.

The Fed was formed to backstop solvent banks and their depositors as a lender of last resort. It was not intended to provide liquidity for the global economy and legions of functionally bankrupt institutions.

Rock solid banks don’t need the Fed.

Money will always flow to where it is treated best. Banks will not make loans to terrible borrowers and it doesn’t matter whether we are talking about individuals, companies, or even countries. Try as it might, the Fed will never be able to change this.

To think otherwise is naïve because money is not a resource. The resources are what you do with it and that’s an economic function best left up to real businesses creating real products and employing real people – which is why I concentrate on them here in Total Wealth and in our sister services, The Money Map Report and High Velocity Profits.

If you’re reflexively balking at what I’ve said today, I understand. Many people do simply because it’s not easy to see something you been led to believe is critical to our way of life get called out so harshly.

That’s okay; Copernicus was damned for saying the earth was round, too.

There isn’t a government in recorded history that has ever spent its way out of a crisis caused by too much money in the first place. However, there are plenty of governments that have taxed themselves into oblivion for having tried.

And traders know it.

Which is why the game continues for as long as central bankers and their cronies think they can win.

Invest accordingly or get left far behind.

I’ll be with you every step of the way.

Until next time,


26 Responses to What Yellen Must Know but Can’t Say

  1. Pat Balvanz says:

    Thanks for the heads up about the Fed. It makes my head swim. One tiny comment about the roundness of the earth. It was discovered and proven by Eretosthenes. Copernicus discovered that the earth revolved around the sun and not the other way around. And yes, he was roundly criticized for his foolish notion. Carry on!

    • Keith says:

      You’re welcome and thank YOU. I’d forgotten about Eratosthenes!

      Best regards and thanks for being a member of the Total Wealth Family, Keith 🙂

  2. Paul Nichols says:

    This was an exceptional article (“What Yellen must know, but can’t say”) and one that should be read by all Americans.

    It should resonate with anyone who half way is watching the daily news (not the political contest) and our economy..

    Further, it occurs that somewhere along the way our great American Capitalistic system has been hijacked and now is in danger of total extinction.

    The irony of all this is that the central planners of America (like those in the Soviet Union before them) fail to understand what is virtually before their eyes…that there is no substitute for a free market economy when it comes to moving masses of population from poverty to middle class.

    Contrary to the current company line that Capitalism doesn’t work anymore, the real fact of the matter is that Capitalism, allowed to manifest in free markets does work, always has and always will and if one would just open ones eyes and look around one could see that the standard of life envied by the world, was achieved without central planning. Further, it should become obvious that the problems we are experiencing today are the direct result of central plannings object failures, which have no association with free market capitalism.

    Once again, truly great article.

    • Keith says:

      Thanks very much, Paul.

      I also appreciate your thoughtful and clearly reasoned response. It’s sharing like this that makes Total Wealth such a great place to be for all of us – myself included!

      Best regards and thanks for being a member of the Total Wealth Family, Keith 🙂

  3. Steve Rison says:

    Thank you so much for your easy-to-understand history of the Fed, and how it went wrong. Not many can explain it without resorting to all the banker terminology that makes it hard to grasp for us non-economist types. But you have succeeded in that very well. The whole population of the country needs to hear it. But even if they did, I fear there is too much complacency to demand change.

    • Keith says:

      Thank you Steve. I tried very hard to avoid Fed-speak as I wrote and am thrilled that came through in plain English.

      Best regards and thanks for being a member of the Total Wealth Family, Keith 🙂

  4. Bob Krone says:


    I have been preaching these facts for decades. Your power with words is awesome!

    • Keith says:

      You are very kind, Bob and I appreciate the compliment tremendously.

      Best regards and thanks for being a member of the Total Wealth Family, Keith 🙂

  5. W. Paul Lenz says:

    Very good and solid article – my way of thinking exactly, so much – without a single degree in financial artistry!
    Every “Hausfrau” know instingtively, that when money is tight you will not get your budget under control – by
    spending more! Yet, why are all the worlds Federal Reserve Banks doing the opposide? Despite that their recipients,
    of cheap money, read (local Banks) are not lending, or spending any of their illiget received gains for any worthwhile purposes. Lets take banking back to the days, that – when you open a savings account, you going to earn some points for interest and the Banks activities should be limited to making small loans, like for cars and mortgages and the likes.
    There are no genuine needs for institutions like Goldman-Sachs, AIG or any of the myriad of Hedgefonds for they are not producing anythings, nothing, nada -zilch! We don’t need them and we don’t need a Federal Reserve, anywhere. And lastly, let’s make anyone responsible for monies lost in dubious transactions and start putting the guilty in Jail. Who is the government – saying, we are bailing them out Why and with whos money, the government doesn’t have any own money, aside – from the monies collected from their taxpayers! Lets end the financial charades for ever!

    • Keith says:

      Hello Paul.

      I love the idea and think limiting banking to actual banking would go a long way towards restoring the system.

      Best regards and thanks for being a member of the Total Wealth Family, Keith 🙂

  6. Max R says:

    A truly superb and objective article dear Keith. The fact is that the Fed won´t autodestroy itself so the question is what would be needed to do the job, how such a trascendental task could be successfully planned and completed and who would have the power needed to get it done? Best regards,

    • Keith says:

      Thanks very much for the kind words, Max.

      Your comment got me thinking…I supposed the power ultimately rests with us – the people. Whether or not “we” have the guts to do what’s needed remains to be seen. I hope we act before the choice gets made for us.

      Best regards and thanks for being a member of the Total Wealth Family, Keith 🙂

  7. Wayne Masuda says:

    Zero Hedge had an article with all the Debt to GDP’s of many countries.
    Japan had 400% Debt to GDP, the US had 233% Debt to GDP, China had 233% Debt to GDP,
    a lot of the European countries had 120 to 300% Debt to GDP.
    Then I read an article in Business Insider where Paul Singer said most countries have irresponsibly
    high Debt to GDP but Israel has a low Debt to GDP. And I looked Israel’s Debt to GDP
    and it is only 1.8% Debt to GDP!!

    • Keith says:

      Hello Wayne and that’s a great observation.

      Singapore is the other standout here and, as far as I’m concerned, at the head of the class when it comes to fiscal responsibility. Of course, nobody ever when “broke” on accrual accounting…sigh.

      Best regards and thanks for being a member of the Total Wealth Family, Keith 🙂

  8. Will Stirrup says:

    Well, said Keith…

    I have been saying as much on my blog for over three years, though perhaps not quite so eloquently.

    The answer would seem to be to invest in parts of the economy, that will respond positively to all this monetary stimulus, and that over time will redress some of the financial risks. For me, that is the commodity space in general, and precious metals in particular. Every time a Central Bank or other monetary authority has outspent its ability to pay, the price is paid for commodities – things that can’t be conjured up out of printing presses. It usually takes a few years, but eventually their prices catch up, and the producers of these products get a major uplift.

    Over the last 8 months, the price of Gold, Silver and other commodities has begun to show the effects of the currency inflation. Junior miners of Gold (those in production and still solvent) and Silver, has risen – in some cases spectacularly. This I believe is the third leg of this major commodity bull, that began in 2001, and will take on average 18 years to complete – (According to Bob Beckman, who wrote about such things in his 1983 book – “The Upwave”)

    The full cycle (the Kondratiev wave) averages out at 54 years, but I suspect the length of the wave has much to do with the reproduction cycle of we humans, and would appear to be 2 generations – just long enough for those young adults, to make the same mistakes of their great-grandparents.

    • Keith says:

      Right back at you and, of course, thank you Will!

      Not many people know the Kondratiev Wave covers roughly 2 generations nor do they make the connection you did. Living memory, as my great grandfather used to say, always seems to run out when the propensity to make mistakes is highest.

      Way to go!

      Best regards and thanks for being a member of the Total Wealth Family, Keith 🙂

  9. andrás keleti says:

    Cheap money will bury us all. Said Montague Norman boechief, instigator of central bank cooperation for permanent inflation.

    • Keith says:

      Excellent point Andras.

      If I recall my history correctly, Norman also beleived in gold as a societal foundation because it would limit the power of central banks which (inevitably) are tempted to finance government which, in turn, debases money.

      Best regards and thanks for being a member of the Total Wealth Family, Keith 🙂

  10. James Timmons says:

    I would like your opinion on whether the Fed could be effective if given some more realistic limits. For example, a mandate that interest rates never go below 3%, a mandate to act to control inflation if and only if it exceeds 10%, and a mandate otherwise to act to maintain full employment. (These are off the top of my head: I am not married to any specific proposal.) I suspect that the double bind of dual and contrary mandates may be a major cause for the Fed’s schizoid behavior. We give them two shirts: when they wear the green one, we ask them why they don’t like the yellow one.

    • Keith says:

      Hello James.

      Let me give that some thought to answer effectively. I think you’re on to something regarding the notion of contrary mandates.

      Best regards and thanks for being a member of the Total Wealth Family, Keith 🙂

  11. bob hayden says:

    Prior to the US bi-centennial celebration a friend of mine went to Arthur Burns, then Fed Chairman with a proposal to pay off the national debt as a birthday present to the country. Ole Arthur sent her packing with a stack of books on why having debt is good for the economy. She persisted with her network of conservative friends within the Republican Party as she was the Chair of the National Republican Women’s group. In a few days a call came from one of the President’s key advisors in the White House with a message to lay off the national debt issue. The call didn’t failed to move my friend who continued to talk up the idea of paying off the national debt which at the time was less than a trillion $. A few days later another call came from the White House with an announcement that my friend had been appointed to a position within the UN delegation in Paris. When she checked it was learned that it was a do-nothing appointment with just enough budget to keep her out of the country.

    • Keith says:


      Now that’s a story – I’d love to learn more someday and hope we have the opportunity to compare notes. Reminds me of the time I wrote to the White House to confirm the existence of Executive Order 12631 signed on March 18th 1988 only to get a response…what “Working Group on Financial Markets?” a.k.a. the Plunge Protection Team.


      Best regards and thanks for being a member of the Total Wealth Family, Keith 🙂

  12. Lee Crain says:

    The only purpose of the Fed today is to protect the status quo for those that have the big money.

    In that context, everything the Fed does and doesn’t do makes perfect sense.

  13. Edward Sansom says:

    Great input. I am 75% in cash. Never done that before while investing for 60 years. Bought gold for first time. Always believed people with large portfolios should invest for common good and gold produces nothing. I was always told not to bet the ranch. Now I thinking about buying several. Looking forward to a 40 to 60% crash. The head of one of the brokerages I deal with told me last week that in 50 years had only met two guys who stayed calm in a crash. You seem to enjoy them.You better believe it – bargain basement time. Two economists accused me of being a speculator. I replied hell no but where would markets go without guys like me having the guts to buy. Fools rush in where angels fear to tread so I must be crazy. At least that is what my wife thinks. Why invest in stock market at your age? Take it easy.
    Verbose as always. All the best.

    All the best.

    • Keith says:

      Thanks for the kind words, Edward.

      You clearly speak from the voice of experience and I get the feeling that we’d have a fabulous discussion over dinner some time.

      “Fools rush in where angels fear to tread”….I love it.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

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