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.”



(emphasis added)

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:







Total credit market debt owed

US: total credit market debt owed. What deleveraging? – click to enlarge.



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.



laughter, FOMC

FOMC meetings laughter count (as the transcripts are only issued with a 5 year lag, no current chart is available; chart via Economic Policy Journal) – click to enlarge.



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.


(emphasis added)

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.




Charts by St. Louis Fed, Economic Policy Journal



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