The Gains & Pains newsletter recently published a brief article on Quantitative Easing (QE). In broad strokes, the article explained that although QE had failed to cause a positive change in the Japanese, US and EU economies, China was nevertheless trying to use QE to save the Chinese economy from its current recession and/or depression.
The following text is from that article and is sometimes verbatim and sometimes paraphrased by me:
“It wasn’t until late 2014 when the Japanese economy truly became completely and utterly broken. That’s when the Bank of Japan decided to increase its already far-too-big QE program, not because doing so would benefit the country, but because it would bring economists’ forecast in line with governor Kuroda’s intended inflation numbers.
“The Central Banks were forcing reality to match Central Bankers’ theories and forecasts. If reality didn’t react as intended, it wasn’t because the theories were misguided . . . it was because Central Bankers simply hadn’t yet printed enough new fiat yen.”
By “reality,” the article refers to the Japanese people. When the “reality” (people) “didn’t react” to government fiscal stimulus (more currency in circulation) “as intended” (as trained by the government to react), the government would simply increase the magnitude of the stimulation (amount of currency in circulation) in order to cause the intended result.
The Japanese government refused to admit that their economic theory (that the Japanese people would react as trained in predictable ways to government’s fiscal stimulus) was flawed or failing. Instead, government leaders insisted that the people simply needed a bigger dose of stimulation to cause them to react predictably.
From this perspective, note that the subject of economics is not a “science,” per se, that we study in order to learn, but is instead a mechanism of control. If the Bank of Japan (BOJ) raises interest rates, the Japanese people will save more, spend less and the economy will slow. If the BOJ lowers interest rates, people will save less, spend more, and the economy will speed up. If the BOJ increases the currency supply (QE), the Japanese will spend more, save less and the economy should accelerate. If the BOJ diminishes the currency supply, people will spend less and the economy should slow.
It’s simple. If the BOJ (or any other central bank) provides the proper stimulus, the people (a/k/a the “markets” and/or the “economy”) will react like a bunch of trained monkeys and do whatever “tricks” they’ve been taught to perform.
Except there’s a problem. The BOJ supplied the “stimulus” (lower interest rates and increased currency supply) for over 20 years and the Japanese “monkeys” haven’t responded as trained and expected.
Economists insisted that the problem was the magnitude of the stimulation. All they had to do was lower the interest rates from 2% to 0.25% and double the currency supply, and the monkeys would react as trained. All the economists needed to control the “monkeys” was to to increase the magnitude of stimulus.
‘Cept for that one thing. Again, after 20 years of increasing BOJ stimulation, the monkeys still aren’t reacting as trained, conditioned and expected.
“In January 2015, the Swiss National Bank lost control . . . losing a sum of money worth somewhere between 10% and 15% of Swiss GDP in a single day, and showing, once and for all, that there are problems so big that even the ability to print money can’t fix them.”
In other words, economists are beginning to recognize that the “monkeys” failure to respond predictably to government stimulus will not be solved by simply increasing the magnitude of the stimulus. That means:
1) Conventional economic stimulation is no longer a reliable means of control; and,
2) The government and/or central banks are no longer in control.
“This process is now accelerating. China’s credit system is crumbling. The Mainstream Media don’t mention it, but the People’s Bank of China is spending as much as $29 billion PER DAY defending its financial markets.“
I don’t know what China’s total, monthly QE is—but $29 billion per day implies something like $900 billion per month. That’s in the neighborhood of ten times the $80 billion per month that US spent on QE3. We can infer that China is currently spending somewhere between five and ten times as much on its QE as the US spent on QE3.
QE failed to stimulate the Japanese, US and Swiss economies. It is currently failing to stimulate the EU’s economy. What are the chances that QE will work to revive the Chinese economy?
Will the Chinese “monkeys” react any more predictably to Chinese QE than the Japanese, American and European “monkeys” have reacted to QE?
If none of the “monkeys” are reacting predictably to economic stimulation, then something has happened to render the “monkey” immune to conventional stimulation and strip the governments’ and central banks’ their former control.
• I remember back in the 1950s when the powers of Pavlovian conditioning were first widely exposed to the American public. Those powers seemed scary. If Dr. Pavlov (a communist!!) could condition dogs to salivate by simply ringing a bell, what evil control could his theories impose on ordinary Americans?
Soon, we’d all be “brainwashed” into functioning like mindless robots by the dreaded “cummunists”.
Or, worse, we’d soon all be brainwashed into functioning like mindless robots by evil forces within our own government! Ohh, the horror! The horror!
But the problem with brainwashing and other forms of deceptive mental conditioning is that it must be constant and ongoing. If Dr. Pavlov stopped the conditioning, the dogs stopped salivating.
I.e., Pavlov rang gave his dogs some food and the dogs naturally salivated. Then Pavlov started to ring a bell just before he gave more food to the dogs. The dogs naturally salivated because of the food. Pavlov rang the bell again, and gave the dogs more food. The dogs salivated. After a while the dogs began to associate the the ringing of the bell with the arrival of food and therefore began to salivate at the ringing of the bell, even if there was no food. Thanks to Pavlovian conditioning, the dogs could be deceived into salivating by the mere (inexpensive) ringing of a bell and without incurring the cost of actually feeding the dogs.
The fundamental idea and threat behind Pavlovian conditioning is that it’s possible to condition, brainwash and train both dogs and people to act on behalf of their masters without reward. Pavlov could ring the bell (which cost almost nothing) and the dogs would do their “job” (salivate) without receiving the “reward” of food. In theory, the properly-conditioned dog (or man) would “just follow orders” without being paid. Working without being paid is the fundamental idea behind slavery.
The great fear was that, by means of teaching people to associate something they wanted (food, sex or money, for example) with patriotic jargon, songs, images or individuals (Big Brother!), our government could “brainwash” We the People into obeying unethical, immoral and even evil American politicians and rulers—without receiving or even expecting any reasonable payment for our obedience. Pavlov’s dogs and Big Brother’s subjects could be deceived into performing “tricks” (working) without receiving any “treats” (adequate compensation).
But again, Pavlovian conditioning has a problem. It’s impermanent. Yes, the dogs can be made to salivate whenever the dinner bell rings—but only for a while. Sooner or later the dogs realize that the bell is no longer associated with the delivery of dinner. When that happens the dogs not only stop salivating, they stop barking at the bell, and won’t even wake up from their naps with the bell rings. The dogs may come to regard the bell as a damned nuisance and even start wondering how Dr. Pavlov might taste.
• Pavlov could condition his dogs to salivate when he rang the dinner bell, but only so long as he also kept delivering the dinners. Once Pavlov stopped delivering dinners, the dogs lost their previous conditioning.
As former subjects of the now-demised Soviet Union used to say, “They (the Soviet government) pretend to pay us; we pretend to work.” The “dogs” of the Soviet Union had learned to ignore the Soviet dinner bells because they’d learned that the bell was no longer associated with food. If Pavlov’s dogs weren’t being fed, they refused to salivate. If the Soviet Union’s “dogs” weren’t being paid, they wouldn’t actually work.
“Brainwashing” is a temporary phenomenon that’s ultimately based on the dogs’ “confidence” that whenever the bell rings, dinner is sure to follow. Confidence is a function of training dogs or people to associate one thing with another. If food appears every time the bell rings, the dogs will salivate at the sound of the bell, even if no food appears. But, once the bells trick the dogs enough times into salivating without a food reward, the dogs lose confidence in the relationship between the bell and food and therefore stop salivating. Once the dogs lose confidence in the relationship between the ringing of the bell and the arrival of dinner, the brainwashing/conditioning fails.
Q: Incidentally, what does the Federal Reserve and national government claim is the most important ingredient to maintaining our debt-based monetary system?
A: Public confidence.
Curious coincidence, hmm? Pavlovian conditioning relies on the dogs’ confidence in the association between the bell and food, and the value of the fiat dollar depends on the people’s confidence that our paper dollars can pay our debts.
• What’s Pavlovian brainwashing have to do with Janet Yellen and the Federal Reserve?
Let’s briefly consider the history of American money and currency.
In the beginning, there was Article I Section 10 Clause 1 of the Constitution of the United States which declared, in part, that “No State shall . . . make any Thing but gold and silver Coin a Tender in Payment of Debts”.
Our money was gold and silver coin (physical gold and silver). While individuals could privately agree to transact their business with barter or paper bank notes, the governments of the States of the Union could not force their people to accept paper “dollars” by declaring them to be a “legal tender”.
Sadly, in what may be the Constitution’s single greatest flaw, the Constitution prohibited the States of the Union from compelling people to accept some form of paper currency, but it neglected to expressly impose a similar prohibition on the territories, federal districts (like Washington DC) or the federal government. Eventually, the federal government did what the State governments were prohibited from doing—mandate that Federal Reserve Notes (paper dollars) were a “legal tender for all debts, public and private”.
But, initially, only gold and silver could be used as money. From a Pavlovian perspective, people naturally associated physical gold (or silver) with the payment of debts much the same as Pavlov’s dogs naturally associated food with salivating. When people sold property, goods or services and received gold in return, they “salivated” in that they marked their bills “Paid in Full”.
Later, private banks and the federal government issued their own gold and silver certificates. These paper certificates were redeemable in gold or silver. Despite advertising to the contrary, these gold and silver certificates weren’t really as “good as gold” because they had to take the extra step of going to a bank to redeem the certificate for gold or silver. Only when they received physical gold or silver coins, were they truly “paid in full”. Nevertheless, a person selling something could accept a gold or silver certificate and be confident that that certificate could be later redeemed for gold or silver at a bank.
The introduction of paper currency into the buyer and seller relationship was something like Dr. Pavlov introducing a bell into the food-causes-dogs-to-salivate phenomenon. The dogs didn’t salivate unless there was food—but they began to notice that every time the bell rang, food followed.
Similarly, sellers began to notice that every time they made a sale, they weren’t instantly paid with gold, but they kept hearing the rustle of paper gold certificates.
Over time, Pavlov’s dogs became confident that every time the bell rang, dinner would be served. As a result, the dogs started to salivate when the bell rang—even when there was no dinner.
Similarly, based on the habitual use of paper gold certificates, people became confident in the belief that a sale was completed whenever they received a mere paper gold certificate rather than physical gold. Just as the dogs would salivate whenever they heard the bell ring, sellers would salivate (mark their bills “Paid In Full”) whenever they received a paper certificate instead of physical gold.
After sufficient conditioning, Dr. Pavlov could ring his bell without supplying dinner and his dogs would still salivate.
After several decades of conditioning Americans to associate paper gold certificates with payments, the US government and Federal Reserve could continue to issue paper dollars without having to redeem them by providing actual payments (physical gold).
Just as Pavlov’s dogs kept salivating whenever they heard the bell, the American people kept marking their bills “Paid In Full” whenever they received paper dollars. Just as Pavlov’s dogs were conditioned to associate the sound of a bell with dinner, Americans have been conditioned, trained, brainwashed to mistakenly think that paper and digital dollars are a form of payment.
The dogs were deceived by Pavolov’s conditioning. Americans have been deceived by the Fed’s conditioning.
• However, just as Pavlov’s dogs eventually realized that the bell no longer signaled the arrival of dinner, Americans are beginning to sense that paper currency does not constitute a payment. Americans are beginning to understand that paper dollars are a trick. They know that because their standard of living hasn’t improved in nearly 40 years. They know that because, in my lifetime, America has fallen from the status of world’s richest creditor-nation to that of the world’s biggest debtor.
Result? Americans are losing confidence in their “masters” in the Federal Reserve and national government.
It used to be that if the Fed “rang the bell” by lowering interest rates, the American dogs” would instantly “salivate” by borrowing more currency, spending it and stimulating the economy. It used to be that if the Fed “rang the bell” by increasing the currency supply, American “dogs” would instantly “salivate” by spending more, raising prices and stimulating the economy.
But now, after 40 years of receiving no “dinner” (an increase in our standard of living) after the Fed repeatedly “rang its bells,” the American “dogs” are starting to ignore the Fed’s bells, whistles, smoke and mirrors.
Result? The Fed has lost control of the American people and thus, of the US economy. The Fed rings its bells (QE) like the Hunchback of Notre Dame—but nobody seems to care.
• Q: How can the Fed and government regain control?
A: They’ll have to start serving “dinner” again whenever they ring the bell. If they tinker with the economy, the public must see a real benefit. If the public sees their standard of living beginning to rise, they’ll again start “salivating” whenever the Fed rings a bell. The Fed will regain control and might even be able to save the economy.
But there’s a problem.
The Fed and government have: 1) shipped many of our industries, factories and productive jobs to third-world nations; 2) allowed illegal aliens to enter this country and take some of the remaining jobs at lower wages; and 3) have already gone so deeply into debt that they can’t go much deeper.
Result? The Fed and feds can’t afford to buy any more “dinners” to go along with their “bells”. They can no longer afford to “re-condition” or “re-brainwash” the American “dogs” into “salivating” whenever the Fed “rings” one of their economic “bells”.
Result? Unless the Fed can devise an economic strategy that increases the standard of living for the majority of Americans and not just the top 1%, the Fed and feds are no longer in real control of the US economy.
• What will happen when all of the “dogs” realize that the economic bells are just a scam, remains to be seen—but chaos beckons.
The American “dogs” are tired of the Fed’s bells.
The Fed needs a new gimmick.
Maybe they could change from the “bells” made from intrinsically-worthless petro-dollars to the “horns” that sound when the Fed subscribes to the intrinsically-worthless Special Drawing Rights (SDRs) issued by the IMF.
Whatdya think? Will America’s “dogs” reject the Fed’s petro-dollar “bells” but fall for the Fed’s new SDR-based “horns”?
Or will the “dogs” reject the “bells,” “horns” or whatever else the Fed sounds? Will the Fed begin to fear turning its back on the underfed “dogs”? Will those hungry “dogs” begin to think that the Fed and governmental “masters” just might be “What’s for dinner”?
And there is one more problem. The American people are not only beginning to reject the conditioning that causes them to “salivate” at the sight of a new $100 bill—they’re also beginning to realize that the fundamental idea behind Pavlovian conditioning is to train the dogs and people to act/work for nothing. Pavlov rang a bell, and the dogs salivated for nothing (no food). The Federal Reserve issued a stack of paper dollars and the American people worked for nothing (they weren’t paid by the Federal Reserves and/or national government).
The American people—and even people of the world—are beginning to sense that “working for nothing” (working without being actually paid) is the essence of slavery. Thus, the essential purpose behind Pavlov’s bells and the Federal Reserve’s paper dollars is to implement slavery
Dogs don’t mind slavery. People do. It just might be that some people are consciously refusing to be “stimulated” by low interest rates and an increased money supply. It just might be that some people are rejecting the Fed’s stimulus because they’d rather be poor than be slaves.
• Fiat dollars are the Fed’s equivalent to Dr. Pavlov’s bells.
You’ve been conditioned, “Fido”.
Wanna split a Milkbone?