Why This System is Doomed

The Fed is making huge mistakes. But they're popular mistakes...

A SYSTEM is doomed when more people have an interest in continuing a mistake than in correcting it, writes Daily Reckoning founder Bill Bonner.

The Federal Reserve, in our view, is making a colossal error. It believes it can fix the US economy as though it were repairing a garbage disposal. Just get out the tools and go to work!

That's how Paul Krugman describes it. He thinks the economy is a machine...and economists are mechanics. And if the economy isn't running right, it's only because the economists haven't fixed it properly.

So, we are supposed to believe, the Federal Reserve is jauntily tinkering, using the tools of ZIRP and QE to make the economy run better.

This is a huge mistake...but not an unpopular one. It makes it possible for the feds to finance huge deficits and pass out $100 bills all over town.

The money goes to people who vote...write opinion articles for The Wall Street Journal... and hire lobbyists. The longer the situation goes on, the more zombies there are...and the harder they are to stop.

As the money flows, the organizations that get it are corrupted by it. The Associated Press reports on a zombie feeding frenzy by the military:

'The Pentagon has been paying hundreds of millions of tax Dollars a year to people and companies that don't deserve it, but its financial management shortcomings are so severe that it's made little progress in halting the errors or even measuring their magnitude, according to a report released by a Senate committee Thursday.

'Although the Defense Department reported making over $1.1 billion in overpayments in fiscal year 2011 to military personnel and retirees, civilian defense workers, contractors, and others, investigators from the Government Accountability Office said that figure is not credible due to missing invoices and other flawed paperwork, as well as errors in arithmetic.

'The U S Army Corps of Engineers, for example, has spent $256,000 since 2009 on an automated overpayment-detection program that has recovered just one improper payment of $20.79, GAO said.'

To be even handed with Pentagon accountants, wasting a billion Dollars or two out of a $700 billion budget doesn't seem so bad. But as Everett Dirksen once put it, 'A billion here, a billion there...pretty soon you're talking about real money.'

Another recent article told us that there were more Pentagon contractors in Afghanistan than soldiers. The grunts might have all sorts of misbegotten and inappropriate motivations. But the contractors are clearly in it for a simple reason: money.

And from Defense News, we find that, as the wars wind down, the Pentagon continues to wind up:

'The size of the Pentagon's vast oversight organizations grew by more than 15% from 2010- 2012, despite efforts to pare down the US Defense Department's bureaucracy, a Defense News analysis has found.

'On August 9, 2010, then-Defense Secretary Robert Gates said the Pentagon needed to cut staff sizes. He made this task part of his efficiencies initiative – an effort to save hundreds of billions of Dollars through better business practices. The military services' incentive for accomplishing these tasks was that they would be able to get back some of that money to reinvest in other priorities.

'But almost three years later, staff sizes within OSD, the Joint Staff and COCOMs have grown, prompting a new round of calls from senior Pentagon officials and defense observers to truncate the so-called "fourth estate."

'The Joint Staff, for example, grew from 1,286 people in 2010 to 4,244 people in 2012, a 230% increase.

'"The problem is the bureaucracy is more resilient than even the most powerful secretary," said Arnold Punaro, a retired Marine Corps major general, consultant and member of the Defense Business Board.'

Defense secretaries come and go. Zombies just keep coming.