Just the regular kind…
OK, so it’s been a momentous month. We’ve had an election and we’ve had The Fed actions. The election has been pretty well covered everywhere, so I’ll just mention that this was a pretty good outcome everywhere other than California (where, one supposes, we can demonstrate just how horridly badly the Social-Dimocrat policies fail to bring prosperity…)
But just after the election the market stayed flat.
That’s because the outcome was predicted days (weeks?) in advance by markets.
But the next day, they were rocking… Because The Fed announced “QE-2” was sailing to the tune of about $600 Billion of asset purchases. Quantitative Easing is when the government issues a boat load of bonds (that normally would suck cash out of the currency markets as folks bought them) and they are bought by The Fed (who can wish up cash on a whim by twiddling computer bits). Thus no cash is withdrawn from anyone.
But wait, there’s more… as The Federal Government spends that cash, it is put INTO the economy. So, in essence, when The Fed (Federal Reserve Bank) buys US Govt bonds, it “monetizes the debt” and make more cash. $600 Billion more in this case.
More supply of cash generally means it is worth less. In severe economic down turns, the ‘velocity of money’ drops, so more cash can just make up for the change of velocity; but it’s a dangerous game to play. We could suddenly just decide to go spend more and increase velocity overnight. (As I have just done. I’ve got somewhere over $1,000 on the Amex right now and rising fast, as part of this trip, that would not have existed 2 months ago…) So we have a very large Fed Elephant dancing the Cash Tango with the public…
“I have rejected any notion that we are going to raise inflation to a super-normal level in order to have effects on the economy,” Bernanke said. “Our credibility must be maintained,” and “it’s critical for us to maintain inflation at an appropriate level,” he said.
“Our purpose is to provide additional stimulus to help the economy recover and to avoid potentially additional disinflation which I think we all agree would be a worse outcome,” Bernanke said.
The “disinflation” in question is the failure of your home price to rise and of your salary (if you still have one) to rise too. It’s not talking about your rapidly rising gasoline prices, food prices, utility prices, imported goods prices, ….
So the bottom line is that they WANT inflation of 1.7%-2% and they don’t have it yet.
The Fed’s preferred gauge for consumer prices, which excludes food and energy costs, rose 1.2 percent in September from a year earlier, the slowest pace since 2001. Fed policy makers have a long-run goal of 1.7 percent to 2 percent inflation that they see as consistent with achieving legislative mandates for maximum employment and stable prices.
Gee, only 1.2%. So it will take more than one lifetime to make any currency you hold completely worthless. Better to have 2% where the value can inflate away in time for you to notice before you die.
(Yes, DIS-flation can be a killer to an economy. But I’d rather have a target of 0%-1% than a target of about 2%…)
Mr. Bernanke’s Crucifix
He’s set himself the goal of averting the Second Great Depression. But he’s been trying to do it while carrying the cross of Fanny and Freddy on his back. Barney Frank and the Dimocrats have so buggered the housing and mortgage markets (and from them, the entire banking industry) that we’ve gone to near financial meltdown globally, leading to his Crucifix (and no, it was NOT just regulatory issues… the CRA was a root cause.) All those $Trillions of bad mortgage paper. Issued at the demand of the CRA (which said, in essence, issue bad mortgages or lose your banking license) and then repackaged and sausage stuffed via the government mandated vehicles of Fanny and Freddy (among others).
So he’s got to sop up that bad paper, but it’s a very heavy cross to bear. The collapse of those prices is the “disinflation” he’s trying to end. Yet the bad debts are piled high and wide.
Of necessity, the ‘easy money’ policy will cause other prices to rise apace (thus the rise of gold and other metals prices once the added ‘quantitative easing’ was announced). We’re blowing loads of hot air into everything in an attempt to keep the housing bubble from leaking flat too much now that it’s burst. The effects will not be uniform.
Similar to metals, stocks rose the following day. They are seen as a ‘real asset’, so expected to ‘hold value’ in the face of a cheapening currency. But perhaps not as well as some other assets. Oil, too, rose.
So The Fed is betting that in the end, it will all work out to a happy ending:
Damning With Faint Praise
Not exactly a ringing endorsement:
Former Minneapolis Fed President Gary Stern said he would have supported the Fed’s asset purchases.
“I would have voted in favor of it mainly because I think it’s worth a try and might have marginally positive effects on the rate of growth of the economy and unemployment,” Stern said Nov. 5 in a Bloomberg Radio interview at the conference. He retired from the Fed in 2009.
Reminds me of that other phrase of hope you can believe in “This time for sure!”…
Then, in the end, we also have the Obamanation spending at a horrific rate (all that new cash from The Fed QE and then some, er, and then a lot, er, and then a gigantic amount… words fail me…) all the time bemoaning their shortage of money and the need to hike taxes horrifically to make up for the budget shortfall. “Tax beatings will continue until morale improves”.
So what the QE giveth, the Tax Man taketh away.
Faced with expectations of looming inflation, uncertain government policies, certainty of tax escalation, and governments (at all levels) showing all the wisdom of a high school kid with a new credit card and an invitation to a Frat Party – if they buy some booze; individuals and companies are sitting on their cash much more than usual. Adding to the ‘low velocity’ burden on Bernanke’s Crucifix…
He’s trying desperately to get the velocity of money back up, but the rest of the government is doing all the things that cause the velocity of money to drop. Oh, and spending in a crazed manner to make up for it.
This we call “monetary and fiscal policy”.