Here We Go Again
Yesterday Fed vice chair Janet Yellen delivered a 'see no evil' speech, perfectly aligned with the Greenspan-Bernanke theory of central bank interventionism, which holds that central banks are not responsible for bubbles, cannot do anything against them, and that lastly, there are no bubbles anyway. Even if they are so glaringly obvious that aunt Emma and her blind dog can spot them.
In a brief summary of the speech's most important points, Marketwatch reports:
“Some investors are "reaching for yield" but there are no indications that these actions threaten the country's financial markets, said Federal Reserve Vice Chairman Janet Yellen on Tuesday. "I don't see pervasive evidence of rapid credit growth, a marked build up in leverage, or significant asset bubbles that would threaten financial stability," Yellen said in remarks at an International Monetary Fund panel on the financial crisis and monetary policy.
The Fed vice chair, who is a leading candidate to replace Fed Chairman Ben Bernanke if he leaves office when his term ends early next year, said the Fed continues to monitor developments closely. Yellen said she would rather address any potential bubbles with bank supervisory rules rather than with monetary policy, which she called a "blunt tool" for addressing stability concerns. Yellen said one lesson of the financial crisis for the Fed has been a greater focus on financial stability. Despite a lot of work, vulnerabilities still remain, Yellen said. "Thus we are prepared to use any of our instruments as appropriate to address any stability concerns," Yellen said.”
Right on – record issuance of junk bonds, the return of 'toggle' bonds ('payment in kind' bonds), soaring sub-prime car loans, near record high margin debt and the explosion in student debt – no signs of a credit bubble anywhere! It's all good! Meanwhile, the often talked about 'beautiful deleveraging' of the US economy currently looks like this:
It is the first 'deleveraging era' we have seen in which total credit market debt somehow manages to reach one new all time high after another.
As to Mrs. Yellen's failure to spot a credit bubble or any dangers in the current overextended market environment: that is par for the course. When was the last time a Fed bureaucrat spotted any dangers from Fed policy induced bubbles in real time? That has of course never happened. On the contrary, the more often one hears them give self-congratulatory speeches and the higher the incidence of laughter at FOMC meetings, the more dangerous the economic situation tends to be.
So we shouldn't be concerned about the current 'reaching for yield' episode. What then should we be concerned about? Hold on to your hat.
Not Enough 'Inflation'
We reported yesterday in an article on gold that ECB board member Benoit Coeure is getting worried about the ECB's nonsensical 2% annual 'inflation target' being undershot.
It turns out he's not the only one. Fed board members are also busy looking for new reasons to extend and expand their money printing program (we previously remarked on how such new justifications for more money printing have begun to be released in trial balloon fashion by e.g. Narayana Kocherlakota of the Minneapolis Fed).
The latest example is provided by 'sometimes hawk' John Bullard (the 'sometimes hawk' who has gone along with every expansion of the Fed's monetary pumping to date without demur). According to him, there is also 'not enough inflation' in the US. You couldn't make this up.
“Inflation might be too low and the Federal Reserve may need to respond, said James Bullard, the president of the St. Louis Fed Bank on Wednesday.
“Inflation is running very low,” as measured by the personal consumption expenditures prices index, Bullard said in a question-and-answer period after a speech at the Levy Economics Institute of Bard College.
“I’m getting concerned about that,” Bullard said, according to Dow Jones Newswires.
Bullard’s comments suggest a growing risk of deflation, a general decline in prices.
The implication is that the Fed will continue its easy-policy stance, and perhaps augment it with other steps, said Michael Moran, chief U.S. economist at Daiwa Securities America Inc. The Fed’s bond buying has been successful at keeping deflation at bay. It is designed to push down interest rates and boost asset prices, sparking demand that prevents prices from falling. The asset purchases also influences inflation expectations, Moran said.
Bullard didn’t suggest any move to a more-stimulative policy. But he said the low inflation rate gives the Fed “room to maneuver,” a suggestion that there is no need to hurry to slow down the Fed’s asset purchases.
Recall that we have said several times that there was not a snowball's chance in hell that there would be an 'exit' from 'QE Infinity'. In fact, although everybody agrees that the US banking system is somehow in 'great shape' all of a sudden, this is actually not true (more color on this in an upcoming post). In reality, the banks continue to sit on a huge mountain of legacy assets from the housing bubble that are now the subject of various 'extend and pretend' measures and can be easily glossed over via the new accounting rules introduced in 1009 (no more mark to market). Their profits are largely a chimera, as loan loss reserves are lowered.
The Fed of course doesn't tell us this, but we believe that it continues to be a major reason for the almost desperate monetization exercises. The goal is clearly to push the prices of collateral up again, so as to extricate both borrowers and bankers from the negative equity time bomb. No wonder then that Bullard worries about there not being 'enough inflation'. If you want to inflate away the real value of a huge debtberg, then a refusal of prices to climb fast enough must of course be of concern.
However, it is still strikingly absurd to make such claims about inflation being 'too low' in the face of the fact that the US broad true money supply TMS-2 has increased by nearly 80% since the 2008 crisis and has more than tripled (up 208%) since the year 2000. Apparently the Fed's movers and shakers are convinced that no negative long term consequences need to be expected from this astonishing pace of monetary inflation. Not even the evidence provided by the boom-bust sequences of recent years seems to have led to any soul-searching on the issue. Their recipe has been the same throughout this period and it remains the same: if there is a perceived 'problem', crank up the printing press. If the problem doesn't go away, crank it up more.
Lastly, it is utterly bizarre that a member of an organization that has been presented as an 'inflation fighter' in decades of propaganda is suddenly telling us that even more inflation is now needed.
Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
2 Responses to “Central Bankers Concerned About ‘Too Low Inflation’”
Most read in the last 20 days:
- A Historic Rally in Gold Stocks – and Most Investors Missed It
Buy Low, Sell High? It is an old truism and everybody has surely heard it more than once. If you want to make money in the stock market, you're supposed to buy low and sell high. Simple, right? Successful stock market investing in two simple steps Photo via slideshare.net As Bill Bonner once related, this is how a stock market advisor in Germany explained the process to him: Thirty years ago, at an investment conference, there was a scalawag analyst...
- Gold Stocks Break Out
No Correction Yet Late last week the HUI Index broke out to new highs for the move, and so did the XAU (albeit barely, so it did not really confirm the HUI's breakout as of Friday). Given that gold itself has not yet broken out to a new high for the move, it would normally be expected to do so, as Jordan Roy-Byrne argues here. Photo via Museo del Oro / Bogota The chart below shows the situation as of Friday (HUI, HUI-gold ratio and gold): The HUI and...
- Why is the Stock Market so Strong?
Dismal Earnings, Extreme Valuations The current earnings season hasn't been very good so far. Companies continue to “beat expectations” of course, but this is just a silly game. The stock market's valuation is already between the highest and third highest in history depending on how it is measured. Photo credit: Kjetil Ree Corporate earnings are clearly weakening, and yet, the market keeps climbing. The rally is a bit of a “all of worry” type of...
- Weekly Resistance Levels in the HUI
Options Expiration Ante Portas - Just as a Resistance Level is Reached After we had penned our little missive on the breakout in gold stocks on Monday, it dawned on us that an options expiration takes place this week. Normally, gold stocks decline into the expiration date. Don't hold us to this, but the last time we remember call writers being forced to delta-hedge their way out of trouble in gold and silver stocks right at the end of an expiration week was sometime in 2006. Given...
- The Yen and the Stock Market
The Yen Breaks Out A few days ago we discussed the yen's trend change and what appeared at the time to be an imminent breakout. This breakout has now actually occurred, and looks quite convincing to us. If a pullback to the former resistance (now support) area highlighted below should occur, it should probably be bought. This may not happen, but given that Kuroda-san is probably not happy with this move, we expect him to act to counter it, which could induce...
- Cultural Marxism and the Birth of Modern Thought-Crime
What the Establishment Wants, the Establishment Gets If a person has no philosophical thoughts, certain questions will never cross his mind. As a young man, there were many issues and ideas that never concerned me as they do today. There is one question, however, which has intrigued me for the longest time, and it still fascinates me as intensely as it did back then: Does spirit precede matter or is it the other way around? In other words, does human consciousness create what we...
- China – A Reversal of Urbanization?
Economic and Demographic Changes We have discussed China's debt and malinvestment problems in these pages extensively in the past (most recently we have looked at various efforts to keep the yuan propped up). In a way, China is like the proverbial “watched pot” that never boils though. Its problems are all well known, and we have little doubt that they will increasingly find expression. China's credit bubble is one of the many dangers hanging over the global economy's head, so to...
- State of Fear - Corruption in High Places
Mr. X and his Mysterious Benefactors As the Australian Broadcasting Corporation (ABC) reports, a money-laundering alarm was triggered at AmBank in Malaysia, a bank part-owned by one of Australia's “big four” banks, ANZ. What had triggered the alarm? Money had poured into the personal account of one of the bank's customers, a certain Mr. X, in truly staggering amounts. A recent photograph of Mr. X. Photo credit; Peter Foley / Bloomberg via Getty...
- Why All Central Planning Is Doomed to Fail
Positivist Delusions [ed. note: this article was originally published on March 5 2013 – Bill Bonner was on his way to his ranch in Argentina, so here is a classic from the archives] We’re still thinking about how so many smart people came to believe things that aren’t true. Krugman, Stiglitz, Friedman, Summers, Bernanke, Yellen – all seem to have a simpleton’s view of how the world works. A bunch of famous people with a simpleton view of how the...
- Russian Aggression Unmasked (Sort Of)
Provocative Fighter Jocks Back in 2014, a Russian jet made headlines when it passed several times close to the USS Donald Cook in the Black Sea. As CBS reported at the time: “A Pentagon spokesperson told CBS Radio that a Russian SU-24 fighter jet made several low altitude, close passes in the vicinity of the USS Donald Cook in international waters of the western Black Sea on April 12. While the jet did not overfly the deck, Col. Steve Warren called the action "provocative and...
- US Economy – Ongoing Distortions
Business under Pressure A recent post by Mish points to the fact that many of the business-related data that have been released in recent months continue to point to growing weakness in many parts of the business sector. We show a few charts illustrating the situation below: A long term chart of total business sales. The recent decline seems congruent with a recession, but many other indicators are not yet confirming a recession - click to enlarge. Wholesale...
- Argentina – The Times, They Are A-Changing
Our Argentine “Ranch Rebellion” Is Over… for Now… BUENOS AIRES, Argentina – Not much action on Wall Street yesterday. The Dow sold off slightly. Gold and oil were up a bit. How about here in Argentina? “Everything has changed. Everything.” Mauricio Macri shortly after his election – indicating that he actually has a plan. Photo credit: Enrique Marcarian / Reuters One of the analysts in our Buenos Aires office explained how the recent...