Yves here. Ilargi at Automatic Earth provided a good rant of something that I had similarly seen as astonishingly cheeky, which was the Fed complaining that volatility is too low. Gee, did how did such clever central bankers manage to miss that they’ve done a superb job of conditioning investors via the Greenspan, Bernanke and now expected Yellen puts? We’ll turn to that shortly.
But I also wanted to highlight an important piece by Ambrose Evans-Pritchard on the idea that QE, which was intended to combat deflation, is actually producing it. This is a pressing concern because the ECB is about to cut its discount rate to below zero in an effort to drive down the euro. Wolfgang Munchau argued back when the Troika was stumbling from crisis to criss that the Eurozone would either need to restructure debts in a serious way or drive the euro to 80 cents on the dollar or lower. So even if a lower euro provides some relief, it’s not clear that can provide enough relief. Major trading partners aren’t going to stand pat if the euro takes a big move.
Evans-Pritchard makes clear that he’s not convinced that QE is deflationary, but regards this as such a high-stakes question as to be worth considering. One thing you’ll notice if you read the article in full (which I strongly encourage) is that the notion that QE might do the opposite of what it is intended to do comes from a range of perspectives, and their ideas don’t converge. Of course, only one argument has to be correct for this to be a major problem, that the world’s major central banks are all-in on a counterproductive strategy. Here are the arguments I found most intriguing:
Stephen Williamson, from the St Louis Fed, picked up the refrain last November in a paper entitled “Liquidity Premia and the Monetary Policy Trap”, arguing that that the Fed’s actions are pulling down the “liquidity premium” on government bonds (by buying so many). This in turn is pulling down inflation. The more the policy fails – he argues – the more the Fed doubles down, thinking it must do more. That too caused a storm.
The theme refuses to go away. India’s central bank chief, Raghuram Rajan, says QE is a beggar-thy-neighbour devaluation policy in thin disguise. The West’s QE caused a flood of hot capital into emerging markets hunting for yield, stoking destructive booms that these countries could not easily control. The result was an interest rate regime that was too lax for the world as a whole, leaving even more economies in a mess than before as they too have to cope with post-bubble hangovers.
The West ignored pleas for restraint at the time, then left these countries to fend for themselves. The lesson they have drawn is to tighten policy, hoard demand, hold down their currencies and keep building up foreign reserves as a safety buffer. The net effect is to perpetuate the “global savings glut” that has starved the world of demand, and that some say is the underlying of the cause of the long slump. “I fear that in a world with weak aggregate demand, we may be engaged in a futile competition for a greater share of it,” he said.
Now to Ilargi on the Fed’s intellectual incoherence.
By Raúl Ilargi Meijer, editor-in-chief of The Automatic Earth. Originally published at Automatic Earth
he Fed itself has stated many times over the past years that it intends to keep interest rates low. And now it starts complaining about low volatility. It looks like Yellen et al want to have their cake and eat it too. Perhaps they should have paid a little more attention to Hyman Minsky. Who long ago wrote – paraphrased – that if and when markets are perceived as being stable, it’s that very perception will make them unstable, because stability, i.e. low volatility, will drive investors into riskier asset purchases. The Fed’s manipulation-induced ultra-low rates have achieved just that, and now they’re surprised?
They are the ones who pushed down rates and threw trillions in QE on top of those low rates, and they had no idea that could create asset bubbles and increase risk-taking? Some of this stuff is simply wanting in credibility. But then, any and all manipulations of markets are poised to end badly, and certainly when the manipulators claim to represent, and function in, a free market.
Now they want more volatility, something that could be achieved by raising rates, especially if it’s done without all the forward guidance, but that would put the housing sector – or the housing bubble really – at risk, as well the “recovery” no-one is yet prepared to let go of. So all the Eccles occupants have left is words. They can try forward misguidance, leave the option open of surprise moves in oder to catch investors off guard. Sort of like a poker game.
The problem with that is no-one would believe that Yellen is a better poker player than even the average investor. Another problem is such intentional insecurity would hit the housing market, and stocks, anyway. You can coerce the most gullible American into buying a property if (s)he thinks rates will remain low, but not if you take away that belief.
The essence of what Minsky said is deceptively simple, and perhaps that’s why it’s so poorly understood: it’s not possible to “create” a stable market, because the very moment you try, you create its opposite, instability. Minsky’s financial instability hypothesis is quite clear, and frankly, if you don’t believe him you should first prove him wrong before trying to do what he says can’t be done anyway. If you feel you need to provide forward guidance because markets are weak and you think they’ll strengthen if you say you’ll keep rates at a certain level, you need to realize that the stability you’ve trying to convey will of necessity be self destructive.
Markets need uncertainty to be able to function properly. That’s what Minsky said. And trying to take away that uncertainty with forward guidance and trillions of dollars is a move that cannot end well. Markets are populated with people, and if you take uncertainty out of people’s individual lives, there’s no telling what they’ll do either, other than it’s certain they’ll increase the risks they take. And why not, if they think nothing can happen to them? If you’re young and feel invincible, why not down 20 shots of tequila in an hour or jump off a cliff? It’s a matter of risk assessment.
But we don’t need to get into psychology here, it’s very easy to see why Minsky was dead on. And it’s equally easy to understand why what follows from that is that the Fed, or any central bank or government, should stay away from manipulating the free markets they so favor but which are no longer free the moment the manipulation starts. If and when investors, be they pension fund managers or just people looking to buy their first home, are barred though central bank manipulation from discovering what an asset, any asset, is actually worth, and that’s where we find ourselves at the moment, a world of uncertainty is waiting for us. There is no other option.
We live in a control economy today, and we have no reasons to do that other than the Fed seeking to protect their banker friends from revealing their losses and their balance sheets. Because that’s what at stake here: if Yellen takes her fingers of the keyboard, and so does the Treasury, we’ll see a truth finding process that will wipe out some of the big players, and lots of small ones, like recent mortgage borrowers who‘ve bought in on artificially elevated price levels.
That will be hurtful, but we should understand that it’s inevitable that one day the truth shall be told. Maybe not about who shot JFK, but certainly about what your home is truly worth. The longer we postpone that day, the poorer our poor will be and the more of us will be among the poor. And that in turn will tear our societies apart, which won’t benefit anyone, not even those who escaped with the loot. Tell me again, what other purpose does the Fed serve but manipulating markets?
I don’t see any, and if I’m right, and so is Minsky – and he is – , we have ourselves a situation on our hands. I am certain there are people inside the Fed who have read, and understood, Minsky’s financial instability hypothesis. What kind of light does that shine on them, as they continue to be accessories to current policies?
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” I am certain there are people inside the Fed who have read, and understood, Minsky’s financial instability hypothesis. What kind of light does that shine on them, as they continue to be accessories to current policies?”
Once you are riding a tiger, you may never be able to dismount.
The privately owned Federal Reserve knows exactly the consequences of its QE policy and it is working famously … the rich get richer and the bottom 99% get poorer. All of the authors that anguish over Fed policy are either fools, in denial or in fear of their livelihoods.
Hasn’t it been obvious that the banksters control both the Fed, the Justice Department and every financial regulatory agency ? The Fed has allowed bubble after bubble allowing Ponzi profits for the TBTF banks. Those TBTF banks are now even larger than they were in 2007 before the crisis.
QE is the plan … the last big ripoff before the next, even worse, financial crisis. As the world heads towards financial ruin and famine due to resource constraints the wealthy of the world have never been in a better position; monopoly rents, media control, control of governance and a police state that Hitler would envy.
“Did crude oil production actually peak in 2005?”
“”Wait a minute,” you must be saying. “Haven’t we been hearing from the oil industry and from government and international agencies that worldwide oil production has been increasing in the last several years?” The answer, of course, is yes. But, the deeper question is whether this assertion is actually correct.”
http://www.resilience.org/stories/2014-04-13/did-crude-oil-production-actually-peak-in-2005
The ECB stated they wanted to follow the Denmark model of negative rates, or charge, so as to try to force the banks to lend. The banks here in the euro zone are too risk averse to do any lending, even with negative rates.
The same thing happened in Japan, for different reasons. The banks were so deposit-rich that the rates that were “competitive” for lending resulted in way too low returns for risk. So they were awash with cash but not lending.
A big barrier in the US which NO ONE discusses is how bank consolidation and the resulting move to score-based lending has killed small business loans. Banks no longer have 2 year credit training programs, which among other things, created skilled banker who would run local branches and have the discretion to make small business loans based on their ability to assess the venture and owner and their advantage knowledge of the local economy. You can push all the money you want through the banks, but if they have discarded the apparatus to get loans to the people who hired people (overwhelmingly small businesses) the idea that giving banks cheap money in the hope they’ll lend to the real economy is obviously dopey.
And that’s before you get to the fact that businesses won’t borrow (assuming they are not run by excessive optimists) unless they see real growth opportunities, and lack of demand means that’s going to be spotty at best.
Banks can always be compelled to lend, but can the world take more debt? Can consumers with no income make debt payments? I think they’re focusing on the wrong side of the transaction. At this point consumers need a bailout.
Yves,
Wouldn’t lending into a deflation be increased risk?
Since the underlying asset (if real and not just notional) would be likely to decline in price. (c.f. current housing boomlet, where lenders are not relaxing their loan policies.) Though contra, the bank would have a paper asset, the loan, which would be higher in value so if, and that is a big if, they can compel payment at 100% on the principal of the loan (by for instance trading it into the Fed’s QE) they don’t care that the underlying asset is impaired.
So bank lending in a period of QE backstop is actually passing on the asset impairment to the Fed’s balance sheet. But the Fed has bigger guns to compel repayment at face value of loans. Hmmm.
“can the world take more debt?”
Bank loans create debt and money at the same time. That is how most of our money comes into existence. Now, there may be better ways to create money, but that is the system we have now. The world needs more money, which means it needs more debt.
Households are burdened with debt, so gov’ts should take on more debt. And they should spend money so that households can get it and pay down their debt burden.
This reads as if Minsky was some kind of laissez-faire free marketeer. Not the case at all. Minsky would certainly agree that one “can” create a stable market. He argues though that as the institutional and societal memory of past financial crises fade, the pressure to deregulate and relax credit standards leads to the gradual reappearance of instability, not as a result of interference with the market but purely as a result of fallible human decision-making.
I think that’s right. Minsky believed government had two important roles: holding off the final speculative phase of financial market fuckery as long as possible through regulation and holding a shield between it and the real economy when the former inevitably blows up. Our government failed on both counts.
Yeah, I could hardly read the article because of that.
“the Fed, or any central bank or government, should stay away from manipulating the free markets they so favor but which are no longer free the moment the manipulation starts”
Yeah, that’s trouble, isn’t it? Re-reading The New Industrial State tells me that mega-industry, as it once existed, couldn’t use free markets and had to suppress them, or (at the most benign) side-step them.
For a fairly good reason (to concoct a just-so explanation story.) If you’ve spent five years inventing (say) the first mini-van, and bring it to market with $billions of investment and hundreds of thousands of jobs on the line, you can’t afford to have the market say “Meh. We’d rather not buy them.” You can’t tolerate a particular grade of steel that makes cylinder heads that don’t crack having tripled in price in the meantime. There are any number of ways that market uncertainty could ruin everything. Mega-industries had various ways.. futures hedging, vertical integration, forward contracts, even raw financial power to deal with such problems.
So government intervention was not the only un-free thing about markets.
In 1937 a Yale law professor, Thurman Arnold, wrote a book called The Folklore of Capitalism. It could have been written 70 years later and stayed topical, barring a few proper nouns. One interesting piece of folklore he describes is the belief that there’s any difference in nature between governments and mega-corporations. Both operate on similar scales. Both exercise control over similar numbers of human lives. One kind is required to have a public purpose and the other kind is not.
A small quibble – ” You can’t tolerate a particular grade of steel that makes cylinder heads that don’t crack having tripled in price in the meantime.” The only automobile cylinder heads I know of are made of cast iron or aluminum not steel but I got the point anyway.
We’ve seen what happens when the monetary authorities try to reduce QE and keep interest rates up, in Europe. The economy just does even worse and at least twice was about to crash before the ECB eased up again. Bernanke, Yellen, and the majorities on the Fed Board have understood their limitations and been asking for fiscal stimulus all along, but they can’t make Congress do it. They’re doing as well as they can in a very bad situation.
In general this recent era of extended liquidity traps – going back to the early ’90s in Japan – has made it clear than monetary policy is a mechanism for fine-tuning and can’t fix fundamental problems like chronic bad debt and excess income inequality. All they can do is prevent a crash and hope the political system comes to its senses, which hasn’t been happening.
Then the Fed should have the courage of their convictions: they should lose the Messiah Complex, frankly admit that they can’t solve the jobs problem, and stop trying.
As things stand, they are serial bubble blowers and plutocrat poodles.
It is mind-boggling that we are well on our way to the third Fed-induced asset bubble in 15 years. It makes even left-leaning people like myself begin to think they should have their powers and responsibilities dramatically curtailed.
They have to find a way to admit it which won’t invalidate their lives’ work and cost them “respectability”. These aren’t scientists; they’re insecure, easily offended, intellectually defensive and stubborn to a fault. And on top of that, they are ideologically opposed to the admission, because if the central bank can’t control the money supply (and it can’t as the Bank of England admitted a couple of months ago) then the only other answer is fiscal policy which is a major no-no. That would create moral hazard among the lower orders.
I largely agree
Your comment is the key to our current rather tragic situation. We have only the Fed to run macroeconomic policy. The country is very deeply divided politically, culturally and also in terms of class. For a variety of reasons democracy and civil liberties are hanging by a thread and the very rich don’t care much for their country or any country but rather for their own kind throughout the world. Therefore there is absolutely no chance that anything positive can come out of Washington which now only mainly responds to the voices of the rich and powerful. The institutions that could have brought us some cultural cohesion and been a check on the corruption in Washington and in the corporate are no longer able to do the job–I mainly blame the mainstream media here that provides (other than sports scores) PR, propaganda, misinformation/misdirection and entertainment.
My guess is Yellen et. al. know very well they’re f-cked no matter what they do and are just trying to avoid disaster in the hopes things will somehow work out–what else can they do considering the pressures on them. Remember, the don’t have the ability to mess with the big shots on Wall Street who can marshal not only their own little private armies of operatives but have major influence in the intel community which, in fact, originally grew out (at least the CIA) of the Wall Street milieu.
They could fix the problem, and they always could. Problem is they won’t, because they’re self-interested and that means not giving away money to the private sector. Private banks are not particularly well suited for public policy decisions.
R Foreman – “…because they’re self-interested.” Why do so many have a problem getting this? They make out that the Fed somehow makes “mistakes”, or “just can’t see”. WHAT? They see fine. What they see and want is to bail out their bosses, the bankers.
Banger – “…the pressures on them.” Yeah, right! Come on, open your eyes. They’re doing exactly what they’ve wanted to do all along. They don’t work for you!
I think you give far too much credit to the Fed in assuming they have good intentions but just can’t implement what they really want. The reality is that the Fed chief has enormous sway over fiscal policy. Because he/she is one of the few respected public economic officials, he/she can drive congressional action with the power of her statements.
Recall when Alan Greenspan had no compunctions “recommending” to the Clinton administration that he use the budget surpluses to pay down govt debt rather than increase spending. Similarly, his hypocritical 180-degree turn around gave George Bush the political cover to use the budget surpluses to cut taxes.
Similarly, the very fact that the ECB can condition their bailouts on dramatic governmental reforms of a nature that usually require bloody revolution to implement shows the power of central bankers to broadly influence public policy far outside their nominal monetary realm.
The truth is that since at least the Volcker area, the main goal of the Fed has been to coddle the FiRE industries and crush labor. And they have used both their hard and soft powers to implement their view. And they’ve been stunningly successful in achieving their goals.
P.S. I’m being generous by only talking about the Fed since Volcker. The truth is the Fed was *created* as a way to diffuse anger in the rest of the country over the control that NYC bankers like JP Morgan had on the country’s economic policies. By creating regional Feds, TPTB were able to convince the rest of the country they’d have more influence, but the true power has always resided with the NY Fed and the Board of Governors in DC. The rest mainly put out dry papers that gather dust and make speeches that no one listens to.
“The reality is that the Fed chief has enormous sway over fiscal policy. Because he/she is one of the few respected public economic officials, he/she can drive congressional action with the power of her statements.”
Not since 2010.
I have not seen evidence that higher interest rates have played any significant role in the EMU’s troubles, certainly nothing compared to the harm done by a four-year policy of net financial asset destruction. The way to prevent a crash is to firewall the real economy via fiscal policies rather than focus obsessively on bank liabilities.
The north bound journey of the stock market across the world is reminiscent of 2000 and 2007. As then we do not know when it will pop. Till then as Prince said the music is playing, louder by the minute. Only dance near the exit as a matter of caution…
‘Markets need uncertainty to be able to function properly. That’s what Minsky said. And trying to take away that uncertainty with forward guidance and trillions of dollars is a move that cannot end well.’
A couple of days ago, curlydan posted an animation of the yield curve:
http://stockcharts.com/freecharts/yieldcurve.php
Longer maturities (2 yrs and up) flop around as markets do, but the short end (3 mo T-bills) is pegged by the Fed. Not only pegged, but in a highly unnatural way: prior to 1913, short rates went UP during crises, rather than plunging as the Fed panics. Freezing short rates at zero for five years has produced a hypertrophied Bubble III, while keeping alive brain-dead relics such as Citibank and General Motors.
Utterly non-random stair steps in short rates, produced by official manipulation, feed longer, more volatile business cycles, with financial crises of escalating size.
Theorem: Federal Reserve intervention is value subtraction. We would all be richer and happier if the PhD morons simply declared victory and went home.
We don’t have a “savings glut”. we have a “debt glut” and borrowers are tapped out and the lenders know it. The masters of the universe having bid up asset prices and debt levels are circling in for the kill by raising interest rates. The rational shilled by the likes of Raghuram Rajan is thinly disguised version of free market ideology, austerity fundamentalism, chicago crash and burn, winner takes all economics. The money supply is managed either by deficit spending by governments or by credit creation by private banks and as a result government deficit spending equals private sector savings and bank credit creation equals private sector debt. The central bankers have effectively neutered fiscal policy as a tool in Europe and have a ideological stranglehold on the rest of the western world. The fed discount rate is not set by the market, it is a rate set by central bankers in response to political influence. It is time to recognize that management of economies by the central bankers has been a complete failure. Interest rates should be set a permanent low value as it should be recognized that bank credit does not come from savings and that high interest rates reward idle money and extract value from the real economy. It is time to let democratically elected governments do the important work of managing their economies. We need to stop demonizing inflation and revitalize the concepts of usury and demurrage.
Great comment.
“We need to stop demonizing inflation and revitalize the concepts of usury and demurrage.”
Say what?
QE can neither cure deflation nor cause it. It is simply an accounting entry, and any hope that there will be a cascade effect (where increasing more speculative invents result) is cut off right up front by liquidity/risk preferences and paying interest on reserves.
I suspect the fear that QE might cause deflation is simply that there was an expectation that it would prevent it but it didn’t. If it isn’t doing the first, it must be doing the second, or so the thinking is going. That it might be doing nothing at all cannot be accepted under monetarist thinking, and Lord knows they can’t let any MMT slip in to their cozy abodes.
By way of explanation: In MMT thinking, a federal bond is simply low liquidity currency with a temporary interest subsidy, while currency is simply a federal bond that doesn’t pay interest. Hence QE, which converts federal bonds to currency is merely and asset (or debt) swap, and as such, from a macro perspective at least, it’s a bookkeeping entry. (Especially since the bond interest is replaced by the reserve interest.)
I basically agree. It can be reduced to the useful monetary equation of M*V=P*Q where M=monetary base, V=velocity of money, P=price of all things, Q=quantity of all things purchased. While central bankers pump M up as much as possible, V is further beyond their control and starts to tank, leaving P relatively unchanged.
In line with the name of Ilargi’s blog, the “automatic Earth” wants bad debt to be written off, wants a little deflation, and wants a little higher interest rates to compensate for lending risk. The Fed’s is trying vainly to prevent this inexorable process from happening and may have forestalled it but only builds pressure for these forces to explode in later years. In Man vs Nature, Nature always wins in the long run.
It’s amusing that Pritchard, long a QE advocate, is starting at least to acknowledge QE may not be a solution.
You are talking nonsense. In the absence of inflation with a wee bit of deflation as you suggest there is absolutely no risk to lenders when they lend to governments for deficit spending and following from that the risk free rate of lending should be zero or close to zero. There is also no inexorable law that says that governments must borrow from the markets to finance deficit spending and indeed that is what makes Qe possible. Likewise there is no inexorable law that says that savers should be rewarded for saving. It should be obvious to all in light of the financial meltdown that there are no natural forces only political forces at work in the market and the economy is not a morality play. Political forces determines who benefits from the current interest rate arrangement. With record high levels of private and public sector debt, higher interest rates are neither inevitable or desirable unless you are a vulture fund looking to buy up distressed public or private assets. Let’s just say no to more institutionalized thievery.
“”The essence of what Minsky said is deceptively simple, and perhaps that’s why it’s so poorly understood: it’s not possible to “create” a stable market, because the very moment you try, you create its opposite, instability.””
Really? “the very moment you try”?
Where did he say that?
Or, perhaps that is merely slang for ‘the essence’.
My reading of what Minsky said was more related to the regulatory cycle….which are more like decades-long or generational changes, as opposed to something that reverses itself at the moment of opposite effort.
In good times…..stability….. we deregulate……opening new avenues for risky financial investment, which avenues are soon crowded with mal-investment …………usually bubbles…..which bring about…..instability………leading to a new cycle of regulation, searching again for stability.
It seems more like free financial-capital markets are inherently stability-cyclical with financial regulatory changes determining the current direction of the cycle.
Un fortunately, we never really got a re-regulation cycle after 2008, the interim calming of investor’s vigor for risk was driven by the temporary reduction in financial assets due to household and business debt-reduction.
That all took place, and was driven by, the demand side of finance.
Guv policy had less than nothing to do with it.
And that lack of Guv policy has indeed today restored the vigor to the speculative investing sector.
So, it was not the effort of the regulators to create a more stable financial market that leads to greater brittleness and potential destruction of finance today, it was rather the largely Bail-the-banks-out mentality at the Fed that has done so.
Yes, QE is indeed the core of that initiative which results in even BIGGER banks getting even DEEPER in the potential doo-doo, and it seems we are entering a second phase of financial instability, without having gone through the theoretical Minsky “stability” phase, I believe this is mainly because the Summers-induced alphabet-soup brand of Ponzi finance was a generation advanced of Minsky’s concerns.
And also, of course, because, as readers have said, if what the bankers need are bubbles, then bubbles they will have.
“We live in a control economy today…”
“What kind of light does that shine on them, as they continue to be accessories to current policies?”
I’d say the first quote answers the question. The political leadership of the US has decided to embrace crony capitalism. The Fed, the legal system, academia, healthcare, journalism – basically everyone is doing their part as an accessory to current policies.
We’ve got enough empirical evidence by now that even armchair quarterbacks like us can tell the Fed really has no clue to what they are doing.** If this were just a football game, the owner would have fired the head coach some time ago. The really disturbing part is the Fed chooses to ignore all evidence and sticks with their cartoon econ model of what the Fed should be doing.
I think if Minsky were still alive, he too would have updated what he had to say about instability. Anyone that knows anything about control theory, will tell you if you want stability you can have it – the way to get it is with safety margin. Same holds true of any engineering design. If you are making parts for airplanes, you use lots of safety margin. If you are making coffee pots, you can develop fancy math models to determine where the “edge” is that failure occurs, then design coffee pots just this side of the “edge”. If something goes wrong, just after the warranty period ends, you get to sell another coffee pot. So we can choose with way we want to do it for the global economy. I say do it like airplane parts.
Additionally, you can make a world where you walk down the street and see three buildings. A church, a supermarket and a casino. You can pick which one you enter and have some idea what to expect once inside. Or you can have one building and it has three entrances. These are labeled church, supermarket and casino. The Fed says the second choice is the way out of a recession. I think we have a right to say that’s not the world we want.
** assuming they are genuine in their desire to implement policies that benefit the greater good.
The difference with control theory is that your mechanical and electronic components are only rarely trying to game the system for profit. It’s the difference between Taleb’s Mediocristan where the mechanical and electrical systems live (and which Taleb seems to disparage just a little bit,) and the financial trading, made-up system, fat-tailed world where Taleb prefers to live.
It’s sure harder to do with crooked people, but some “safety factor” things are higher “capital ratios”, Glass Steagall separations in finance and banking, and prosecution and jail time helps a lot with moral hazard.
Nothing new here either, but we have to update the list as new abuses occur.
It’s almost a question of belated timing. Demand is skeptical but once it reaches a certain level it is there, and the momentum for the economy goes forward until it goes beyond the value/price of the thing in demand. Demand is a psychic phenomenon – that’s really the amazing part. Oops, gotta hunker down now for a while. So the Fed is now the ersatz Federal Hunker Down not because we have lost our psychic abilities but because the world now turns so much faster we need to keep it in check.
“low volatility, will drive investors into riskier asset purchases”
Welcome to the low yield desert, enjoy chasing those mirages.
Just write down the f%^&ing debt, force the banks to eat the bad loans they made and restructure the banking system so it’s not a huge parasite. Then let the business cycle run it’s course and get Central Banks out of the way.
That is the only way out of this, I’m afraid.
Why would anyone seriously think you couldn’t engineer a little thing like a faux-economy.When the powers that be, is the same community, in either party who has for this entire century, been perpetrating a continuous crime.Where does it stop?..no where.
This whole century has been foisted upon us.
An uncomfortable fact that no one wants to remember, does not go away.Just because it is outside of what everyone is thinking about, its implications are intertwined with everything we are talking about.
In point of fact.
Look at the
2012 documentary by the group architects and engineers for 9-11 truth.
AE911Truth explosive evidence, experts speak out.
In that hour long video, widely available…. the court of physical evidence proves that the trade towers were blown up. Like they say, tower 7, is the smoking gun.
so with that, the implications:
9-11 was not a surprise.,You can’t wire a building and have a supposed unrelated group act in concert,giving the pretext for the downing of the towers.
So, given the depth and varying reasons people knew something was going on back then, which have been shown to be true….. all the …no other options to usher in a new era of American hegemony…. and all that.
What was done, from the days during the Clinton administration that these terrorists were being protected by the fbi and justice dept…. to be used when ready.Thru the days of the bush administration when the acts were actually commited(and if we were taking bets, I would say that flight 93 was taken over by the passengers,which foiled the plan as that plane was probably the one that was supposed to fly into tower 7, which is why they wired tower 7.But when the people regained control, that is why that plane was shot down over penn.but the big plan needed to go forth, and building 7 couldn’t be left to be standing,with all that wiring and thermite and explosives in place. But as a non conspirator, that is just a hunch)
But the deed was done,
from there, wars were started… the global footprint of the American and nato military machine was re-arranged.. all according to the infamous “cheney energy task force overprint of the world energy supply and distribution channels.
wars that have ruined the lives of millions of people. While these same establishments have blown bubbles, rigged economic data, launched a war on freedom,and then let the shebang blow….. only to then rifle thru the peoples capacity to support financial networks,giving themselves another bone…. while the people suffer.
All the while lying about everything, and instead of trying to do anything pro-active that could help mankind, like clean energy,or universal healthcare or economic stability..they are creating a police state, to allow the ashes of the old world the possibility to consume the new..
And people ask if the feds policies are really working out……
WHAT?
“Some of this stuff is simply wanting in credibility.”
Virtually anything economists say is wanting in credibility. As the old joke goes, “if you ask four economists a question about any aspect of the economy, you will get four different answers — five, if one is from Harvard.” Unfortunately, that’s no joke.
The author of this article sounds like an ‘austrian’ (i.e. a nutcase), who has read a small part of the wikipedia entry on Minsky.
“It is mind-boggling that we are well on our way to the third Fed-induced asset bubble in 15 years. It makes even left-leaning people like myself begin to think they should have their powers and responsibilities dramatically curtailed.”
That describes me. I have become something of a hard-money socialist.
First, here is my understanding of monetary policy – rates, money supply, QE, devaluation it really does not matter. They all work roughly in a similar manner when it comes to inflation.
1) The central bank eases (through any of above measures) and it has a short run effect of raising inflation expectations trhough depreciating the currency, raising local currency denominated commodity prices and can be seen in the break even inflation measures of linkers.
2) This also has the effect of raising prices of all real assets – stocks, real estate, commodities, gold etc. However, this is a one time price change NOT as the central bank hopes a persistent change in ongoing changes in prices (inflation). The central bank can not manufacture persistent inflation outside of these areas without external help. Hyperinflation is usually in war torn countries (reduction in potential output OR massive fiscal spending). To see this, consider the price of stocks or other real assets. The long term value is determined by ability of the economy to produce profits, rents on land etc etc. That is dependent upon productivity growth etc. The central bank can not change the long term value. All it does is to borrow returns from the future into the present and front loads it. It can not raise the return stream on any real asset permanently. It is the same for the prices of goods. Relative changes do not matter.
3) The longer term effects of lower rates, QE, deval etc come into play – lowering interest income tranfered from government to private sector (on govt bonds) and the lowered purchasing power of income (higher commodity prices and import prices). Lower income and a higher tax EQUAL depressed economy. This is the channel that brings about lower inflation rates.
4) In the extreme, the central bank’s ability to lower real rates (or raise expected inflation is limited). Real rates in US/UK under QE went down to -1% to -2% ranges for longer term securities. This is via people bidding up prices of linkers in the initial phase of the monetary easing. Linkers are real assets like stocks. But they can not just keep going lower in yield. The people who are buying linkers at negative rates get made whole by actual inflation. But if inflation actually happens, nominal yields go up, which drags up real yields toward zero. And if inflation does not appear (as has been the case in Japan, US etc), then the investors in linkers will sell that non-performing asset – raising real yields. Counterintuitive but that is exactly what happened. Absence of actual inflation raised real yields.
5) I contend the process works in reverse as well. Tightening policy will first raise currency, lower commodity prices in local currency and lower expected inflation, hit real asset prices. But in the longer run, higher interest income and lower commodity prices are good for growth (story of 2013 in the US). This should be positive for wages etc that form the backbone for inflation in the long term. However, again, there is a limit to the process on the up side as well. Limited by output gaps (just as on the downside); potential growth of the economy, productivity, fiscal policy etc etc.
So I contend that YES, lower rates in the long run lower inflation and vice versa but there are limits to what will happen on both sides. The limits to lower inflation have been commented on by Krugman and others (although he has his own story to fit the data). There are surely limits on the upside as well. Raising rates to 20% will not raise inflation to 20% on its own – it is absurd – but then so is the opposite that cutting rates to -20% will somehow raise inflation.