San Francisco Fed Chief Sees no Danger
John Williams, president of the San Francisco Fed, yet another noted dove, thinks nothing can go wrong by printing gobs of money. There is no inflation, and there never will be. They have the 'tools' to avert it. Never mind the explosion of the money supply over the past four years – it is all good.
The nuclear bomb aftermath imagery Reuters used in its headline is actually quite apt.
„The U.S. Federal Reserve's unconventional monetary policies have lowered borrowing costs and boosted growth without creating unwanted inflation, a top Fed official said on Monday, predicting the Fed's latest round of asset-buying will exceed $600 billion.
The Fed will want to see sustained jobs gains and a consistent drop in the unemployment rate before it stops buying assets, making it likely the purchases will continue until "well into next year," John Williams, president of the San Francisco Federal Reserve Bank, told reporters after a lecture at the University of California, Irvine.
The U.S. central bank's prior round of quantitative easing totaled $600 billion; its first one was about $1.7 trillion.
The Fed began its third round of quantitative easing, known as QE3, in September, beginning with $40 billion a month in mortgage-backed securities and promising to continue or expand the purchases if the labor market does not improve substantially.
Although asset-buying and other non-traditional monetary policies pose potential risks, "the available evidence suggests they have been effective in stimulating growth without creating an undesirable rise in inflation," Williams said at the lecture. "We are not seeing signs of rising inflation on the horizon."
The policies also have not stimulated excessive risk-taking, he said.”
They have not stimulated what? This is a joke, right?
We are struck by the continued refusal by Fed officials to even think for a second about the long range effects of their policies. They see nothing untoward on the 'horizon' because their horizon probably ends at the edge of their dinner plates. One feels fatally reminded of the many premature victory laps, the self-congratulory back-patting and the growing incidence of laughter at FOMC meetings during 2004-2006.
At the time it was also held that the 'great effort' by the monetary bureaucrats to help pump up the money supply by cutting rates to the bone after the Nasdaq bubble had expired had been responsible for producing a sound recovery. In reality it had only produced yet another bubble, this time one so egregious it almost proved fatal for the banking system, which to this day survives mainly by dint of clinging to well over a trillion dollars in excess reserves the Fed has created from thin air.
The Mythical 'Exit'
Williams also relayed what the eventual 'exit' strategy would look like (ha!):
“Once it comes time to exit its super-easy monetary policy, the Fed will target a "soft landing," raising rates and then selling the assets it has accumulated in its bid to push borrowing costs lower, Williams said.”
The hubris of these guys is jaw-dropping. Hello? What happened to the 'soft landing' in 2008? Guess what, in the run-up to that soft crash landing, the Fed also tightened policy 'gradually'. That's all it took to produce a truly spectacular demise of the faux recovery/echo bubble which it had engineered after the Nasdaq crash.
If the Fed one day begins to sell the assets it has accumulated in the course of 'QE', then there is a good chance that the money supply will actually decline, unless the commercial banks decide to simultaneously engage in a very determined credit expansion. This is not likely to happen anytime soon, given the sorry state of the banks, which is largely masked by dodgy, if these days legal, accounting practices (anyone remember 'mark to market'?). The extra cash assets they now have lying around at the Fed in the form of excess reserves are mainly a buffer for the next crisis. Let us not forget, there has been exactly zero debt deleveraging on an economy-wide basis so far. On the contrary, total credit market debt owed is right at a new record high. Households have defaulted on a lot of mortgage debt, but otherwise there is no sign of 'deleveraging' whatsoever. Corporations have record high debt, while the government's debt has basically gone off the charts.
Total credit market debt owed is at a new record high. There has been no 'deleveraging' at all – not yet, anyway.
Does anyone seriously believe the Fed will ever sell the assets it has bought and deliberately shrink the money supply? A certain bridge in Brooklyn comes to mind. The Fed won't let the debtberg implode voluntarily. The proof is in the pudding: so far it has all been a mad dash of the 'flight forward' sort.
The severity of the eventual 'undue fallout' to borrow the Reuters terminology cannot be ascertained just yet. It will likely arrive with a considerable lag, but when the time comes, it will probably once again do so with a bang. Those who actually do ponder the long-range effects of massive monetary pumping won't be surprised. Perhaps the Fed should order a few apologias to be drawn up in advance. The last batch was pretty lame as it were (we were invited to pick between 'stupid Asian savers are saving too much' and 'most regulated sector of the economy was not regulated enough'). Maybe they can think of something better next time, but we're not holding our breath.
In the meantime, money printing continues to undermine the economy. Wealth cannot be generated by increasing the money supply – all that can be achieved by this is an ephemeral improvement in the 'data' even while scarce capital continues to be malinvested and consumed.
Chart via: St. Louis Federal Reserve Research
Emigrate While You Can... Learn More
Dear readers - we want to once again thank all of you who have supported us with donations.
To donate Bitcoins, use this address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Thank you for your support!
5 Responses to “‘No Undue Fallout’ from Money Printing”
Most read in the last 20 days:
- Gold and Gold Stocks – It Gets Even More Interesting
Technical Backdrop If only we could get a dime for every bearish article on gold that has been published over the past two weeks...but one can't have everything. When a market is down 83% like the HUI gold mining index is, we are generally more interested in trying to find out when it might turn around, since it is a good bet that it is “oversold”. Of course, it if makes it to 90% down, it will still be a harrowing experience in the short term. We like these catastrophes because...
- The Greatest Racket of All Time
The Successes of the Global War on Terror One would think that the so-called “Global War on Terror”, which has been given fresh impetus by the Paris attacks, must be going swimmingly. What else could explain the great enthusiasm with which it is pursued? It may be recalled that it started in earnest after the WTC attack – also a declaration of war, as it was put at the time. As is often the case when Islamist fundamentalists strike, the actual attackers immolated themselves on...
- The Long, Cold Winter Ahead
Not Immune Cold winds of deflation gust across the autumn economic landscape. Global trade languishes and commodities rust away like abandoned scrap metal with a visible dusting of frost. The economic optimism that embellished markets heading into 2015 have cooled as the year moves through its final stretch. Photo credit: David Byrne If you recall, the popular storyline since late last year has been that the U.S. economy is moderately improving while the...
- How Do People Destroy Their Capital?
There is no Santa Claus I have written previously about the interest rate, which is falling under the planning of the Federal Reserve. The flip side of falling interest rates is the rising price of bonds. Bonds are in an endless, ferocious bull market. Why do I call it ferocious? Perhaps voracious is a better word, as it is gobbling up capital like the Cookie Monster jamming tollhouses into his maw. There are several mechanisms by which this occurs, let’s look at one...
- Junk Bonds Under Pressure
While the Stock Market is Partying ... There are seemingly always “good reasons” why troubles in a sector of the credit markets are supposed to be ignored – or so people are telling us, every single time. Readers may recall how the developing problems in the sub-prime sector of the mortgage credit market were greeted by officials and countless market observers in the beginning in 2007. Photo credit: Getty Images At first it was assumed that the most highly...
- The Plane Incident in Syria
A Strange Event The topic of the SU-24 Russian plane shot down by Turkey over the weekend in Syria has been discussed all over the media ad nauseam by now, but we want to add a few observations and suggestions of our own. Some have perhaps not received the attention they possibly deserve. Image of Russian jet shortly after it was hit by a Turkish missile. Luckily someone was promptly at hand to make a qualitatively acceptable video of the incident. As is well known, cameramen...
- Angry Belgian Muslims and the Price of Welfare Statism
Ill-Tempered Mohammedans in the Socialist Paradise In the wake of recent revelations about the identities of the morons involved in the horrific Paris attacks (happily, most of them shuffled off the mortal coil as well, thereby improving the aggregate degree of moral clarity and intelligence in the world), a friend pointed us to an article at Unz Review that asks: “Why Does Belgium Have Such Angry Muslims?” Our instinctive, immediate reaction was to argue that the bland, boring...
- Can Investors Trust the New Gold Fixing?
Statistical Analysis of the New Gold Fixing Since 20 March 2015 a new gold price fixing organized by the London Bullion Market Association has been in operation. It has replaced the previous price determination process, which was in place for more than a century and became subject to criticism as it was highly vulnerable to manipulation. Has manipulation now ceased? Gold fixing at N.M. Rothchild and Sons offices in London. The first fixing took place there on 12 September...
- Giant “Green Energy” Boondoggle Flops in Spain
$29 billion Vaporized As is well-known, Spain is one of the countries in the euro area's periphery that has been thoroughly bankrupted by its decision to join the euro area and enjoy an artificial credit expansion-induced boom as its interest rates initially collapsed. This was aided and abetted by the ECB, which sat idly by as the euro area's true money supply exploded into the blue yonder with annualized growth rates ranging from 6% to 18% during the boom years. Tower at...
- US Money Supply Growth Finally Begins to Crack
Breaking Below the Shelf In our recent missive on junk bonds, we inter alia discussed the fact that the growth rate of the narrow money supply aggregate M1 had declined rather noticeably from its peak in 2011. Here is a link to the chart. As we wrote: “We also have confirmation of a tightening monetary backdrop from the narrow money supply aggregate M1, the annualized growth rate of which has been immersed in a relentless downtrend since peaking at nearly 25% in 2011....