Guest Post by Steve Saville
US money pumping by decade and Fed chairman
A large increase in the money supply will always lead to large increases in prices somewhere in the economy. However, monetary inflation affects different prices in different ways at different times, so the pertinent question is: which prices? The answer to this question is important from the perspective of almost everyone and is always obvious with the benefit of hindsight, but it is often difficult to determine ahead of time. Also, depending on which prices are affected the inflation will sometimes be widely perceived as a problem and at other times be widely perceived as a benefit or a non-issue.
As we manage the breakout in the Semiconductors, the recovery in the fallen momentum items and a general return to a market melt up scenario, let’s again thank policy making for the global – not just US – stock market party. The ECB cuts rates; click graphic for full MarketWatch story…
“The European Central Bank reduced interest rates Thursday and installed a negative rate on bank deposits for the first time in its history, as officials scramble to keep ultralow inflation from gaining traction and derailing the euro zone’s fragile recovery.”
“Ultra low inflation”? Should that not be something desirable? Well, as in the US, not in the Age of Inflation onDemand. These creeps have got market participants so brainwashed as to believe that there is such a thing as low inflation (read: deflationary pressure) being bad. It is only bad because decades of levering up inflation have made it bad.
At the risk of sounding like a socialist, a theme one might sense in my writing about Fed policy and its slam dunk for asset owners, let me just say that I obviously agree with Thomas Piketty in his now widely known assertion that this policy benefits the few, the asset owners and to put it in highly technical terms, screw everybody else.
[Video removed due to technical glitch; it can be seen at the link below]
Fed-induced wealth effect raw deal for 99% –Piketty
I would add as usual note that it was Fed policy that created the hazards that became the ‘Great Recession’ and would-be ‘Depression 2.0′ that “The Hero” saved us from. This little tidbit always seems to get left out of public debates on the subject, including the video above.
The Fed built the distortions that broke the system and the Fed is coming with the solutions that will break it again, in one way or another and in at one time or another.
Well, Loretta Mester looks a little hawkish anyway.
She also looks a little like…
To which I’d refer back to my first public article ever written back in the quaint days of Alan Greenspan’s trail blazing foray into financial market experimentation. FrankenMarket Lives. Pardon the Hyperinflation reference. It was the first thing I ever wrote! Young(er) and more naive.
Anyway, it all comes back around and makes sense if you give it enough time.
Read A New Hawk at the Fed? and decide for yourself.
So Janet Yellen is giving the old Knute Rockne routine to the graduates at NYU.
Yellen tells graduates: Show grit like Bernanke
“We’re going inside ‘em… we’re going outside ‘em… and when we get ‘em on the run once, we’re gonna keep ‘em on the run!”
“My predecessor at the Fed, Chairman Ben Bernanke, demonstrated such courage, especially in his response to the threat of the financial crisis. To stabilize the financial system and restore economic growth, he took courageous actions that were unprecedented in ambition and scope.”
It takes a lot of courage to double down on the same stuff that created the financial crisis to begin with. Putting out fire with gasoline… yes, that takes courage.
“But he stood up for what he believed was right and necessary.”
What, like policy-induced booms and busts rolling on and on and on? Okay, so we’re on a boom and Bernanke is a hero currently. What does that have to do with these kids’ futures? He stood up for the here and now and did a great job in bailing out the people who wrecked the system (and asset owners in general) at the expense of Grandma and other savers.
“But his grit and willingness to take a stand were just as important. I hope you never are confronted by challenges this great, but you too will face moments in life when standing up for what you believe can make all the difference.”
He did have a lot of balls, I grant you.
Yes our economy is built on such a sound foundation that we dare not even think of implementing a moderation of ZIRP, Grandma be damned. Let her jump into the risk pool with everyone else. QE tapering is next to nothing without a ZIRP phase out.
“The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run” –FOMC
These people apparently know the paradox of their own policy in that it tends to bring about liquidations because everything has been built after all, on the will of man (and woman), not on productive endeavor, savings and real investment.
Yellen: Fed’s ‘extraordinary aid to last for some time
Yellen also provided three real-life examples of people impacted by the jobs crisis, and emphasized that “although we work through financial markets, our goal is to help Main Street, not Wall Street.”
Oh really? So what, you plan to back this up by employing more of the policy (ZIRP) that has benefited Wall Street so well over the last 5+ years, at the tragic expense of Grandma? Taper? Why, tapering is another positive for Wall Street. At least the investment and commercial banks. Hold ZIRP + Taper QE = Theoretical Carry Trade Spread. Janet, please; do you think we are simpletons?
There is a lot of talk now about a flattening of the yield curve. This talk has been among the most intense right here at the website you are reading at this moment. A flattening curve is commonly viewed as bad for gold, and according to Mark Hulbert, is an indicator of a coming recession.
Why you should care about the yield curve
But is the curve really flattening or is this all hype based on Janet Yellen’s press conference comments? Here is a chart the likes of which we have been using in NFTRH for many months now, the 30 year vs. the 5 year yield.
MarketWatch shows a similar chart in its article…
MarketWatch has a nice article clearly laying out the ways that Grandma’s savings are compromised by monetary policy designed to bail out borrowers and reward speculators at the expense of people just trying to live by the old rules.
How the Fed is hurting seniors
Let’s be honest and call ZIRP what it is; an immoral manifestation of modern finance that rewards banks, inside players and speculators that jump on board for the ride. This is why I have to laugh (or cry) every time some bull wise guy tries to legitimize the bullish atmosphere as being something normal or moral.
It is not. It was created by decree of man to the enrichment of some and the detriment of many. Other than that I have no strong opinions on the matter.
Everyone expects Janet Yellen to be a rolling over, inflationist stooge just like they did Ben Bernanke. Bernanke came on board after Alan Greenspan had taken the Fed Funds rate up to around 5% if I remember correctly. Inflationists and gold bugs thought they had it in the bag when ‘Helicopter Ben’ assumed control.
Indeed, Bernanke did what he was supposed to do (per the ‘Helicopter ‘Ben’ script) as systemic stresses began to gather in 2007, addressing that pesky Funds rate, culminating in December, 2008′s official ZIRP (zero interest rate policy). Here again is the chart showing the S&P 500′s ‘Hump #3′ attended by this most beneficial monetary policy.
As noted again and again, the much trumpeted ‘taper’ of QE is not only not a negative for the economy, we have made a strong case that its mechanics are actually a positive, in the near term at least. But putting ZIRP on the table would be a whole different ball of wax.
- We want more inflation; it’s better for the economy
- Taper continues as expected, it’s a non issue [my view]
- We don’t dare mess with ZIRP…
The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Full statement from FOMC