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.”


(emphasis added)

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



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5 Responses to “‘No Undue Fallout’ from Money Printing”

  • numeflua:


    Can the monetary base shrink? If so, how?

  • Mark Humphrey:

    The Fed people are addicted to their view of the world, and their role in it. They’ll never grasp sound economics, because they’re not interested in ideas. What they care about is their place in the world, fitting comfortably into the social-political nexus through which they flourish.

    They will go down in history (perhaps far in the future) as the American Kamikazi Bankers.

  • Rusty Brown:

    No, the proof is not “in the pudding”. That makes no sense. It’s in the “eating”.

    “The proof of the pudding is in the eating.”

  • therooster:

    It’s when the market starts to perceive the floating USD as a real-time measure for real-time gold-as-money that we will emerge from our mess. Old habits are slow to change and too many of us exclusively think of the USD as a currency, only. It’s more ! The dollar only acts as a currency within the debt-currency paradigm, but within the real-time gold-as-money paradigm, the dollar (USD/oz) is part of a very useful and dynamic measuring tool that allows gold weight to be used as a real-time currency (floating) on the basis that we still price economic things in fiat currency. Based on the understanding of the above, Bretton Woods, in its creation and its closing, should make much more sense now.

    The USD’s role as a currency is but a stop-gap measure in gold’s monetary journey from gold with fixed value to real-time floating gold. The development of the real-time measure (debt-dollar as a currency) has been a “necessary evil” in “the script”. QE to infinity is part of that same script in order to move the market over. The elite are relegated to the role of simply carrying the stick until the market awakens. The actual market implementation of real-time gold-as-money must be perpetuated from the grass roots of the market, bottom-up. Follow “the script”.

  • Pater, I think this will end up in the “You can’t make this stuff up” bin. Where did they get these guys? Out of the Ivy League political science departments?

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