There They Go Again

I haven’t written much lately about The Economy. And that is a failure to prioritize, as he is the second most important American in history. The Economy has (capriciously, one must concede) modified what this country produces and who draws assistance for not producing it. One feature that was previously of grave concern to The Economy was the government’s bond purchase program called Quantitative Easing. That’s always been a formidable sounding name. Evoking images of plucky 4SD prodigies poring over abstruse datasets. Tuning economic models to the exquisite precision of a Patek Philippe. Uncovering the encrypted key to turn the impenetrable lock. Allowing The Economy to slip its surly bonds and soar untrammeled into the starlit night.

Though a perhaps less inspirational scene is the more accurate.

The Economy sucks, so we’ll print an avalanche of money to paper it over.

How much do we print?

How the fuck should I know? Just do it. We’ll figure it out later.

Some four and a half trillion subsequent, QE got “tapered.” Kind of like America’s founding stock…tapered. Though before progressing on to the QE news that now has most of you quivering like a housecat, I wanted to point out a fact that the Federal Reserve will not: money printing is a tax. Inflation is a tax. The truth is the government could operate exclusively through QE financing and defenistrate the antiquated tax regime entirely. It’s always surprised me that Krugman hasn’t suggested exactly that. Though I’m sure even the more obtuse of the herd might start noticing the outline of an abattoir in that scenario. But it is technically feasible. And if it were, do you think you’re getting those ten naval carrier groups protecting our freedoms for free? Unfortunately no. You’re still out the tab; only the form of payment is altered.

And at least one Fed president says the public has a delinquent balance.

Reuters) – The Federal Reserve should consider restarting its controversial bond-buying stimulus if inflation does not start moving back to 2 percent once downward pressure from the recent drop in oil prices dissipates, a top Fed official said on Tuesday.

(Minneapolis Fed President Narayana) Kocherlakota’s view is likely in the minority at the Fed, which stopped its bond-buying program last October after the U.S. unemployment rate dropped faster than expected. Most Fed officials now believe it is only a matter of time before inflation, which is running well below the Fed’s target, will improve as well.

Kocherlakota said Tuesday that it is a mistake to assume that just because the real economy is healing, inflation will automatically return to healthy levels. [The Economy needs a healthy improving inflation. Don’t you?]

Bond-market investors, he said, are flagging their worries about simultaneous low growth and low inflation by driving yields down. The Fed needs to take action to turn those expectations around, he said, or risk losing its credibility

Yes, the Fed losing its credibility, that’s concerning. Certaintly a calamity most Americans would sacrifice to avoid. Though I almost have this flitting sense that it has already fled its confines. Below you’ll find a list of statements from past and present Fed chairmen. Like inflation, they seem to have targeted credibility at two percent. Of their achieving this, I am quite optimistic.

I made a mistake in presuming that the self-interest of organizations, specifically banks, is such that they were best capable of protecting shareholders and equity he land passed by Congress, not my own predilections.
–Alan Greenspan, October 2008

The bottom line for housing is that the concerns we used to hear about the possibility of a devastating collapse—one that might be big enough to cause a recession in the U.S. economy—while not fully allayed have diminished. Moreover, while the future for housing activity remains uncertain, I think there is a reasonable chance that housing is in the process of stabilizing, which would mean that it would put a considerably smaller drag on the economy going forward.
–Janet Yellen, February, 2007

To sum up the story on the outlook for real GDP growth, my own view is that, under appropriate monetary policy, the economy is still likely to achieve a relatively smooth adjustment path, with real GDP growth gradually returning to its roughly 2½ percent trend over the next year or so, and the unemployment rate rising only very gradually to just above its 4¾ percent sustainable level.
–Janet Yellen, December, 2007

For my own part, I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s. I didn’t see any of that coming until it happened.
–Janet Yellen, 2010

House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.
–Ben Bernanke, October 2005

Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.
–Ben Bernanke, February 2006

The Federal Reserve is not currently forecasting a recession.
–Ben Bernanke, January 2008

At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.
–Ben Bernanke, March 2007

It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.
–Ben Bernanke, October 2007

With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.
–Ben Bernanke, November 2005

The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.
–Ben Bernanke, June 2008


9 thoughts on “There They Go Again

  1. inflation will automatically return to healthy levels.

    How did rising costs of living come to be accepted by all as “healthy,” and the eventuality of more affordable goods as a peril?

  2. Kocherlakota said Tuesday that it is a mistake to assume that just because the real economy is healing, inflation will automatically return to healthy levels. [The Economy needs a healthy improving inflation. Don’t you?]

    Ah yes. Those dreadful sticky wages. All prices should perpetually rise, except the price for labor, which must always perpetually fall in real terms. I’m not privy to the Fed’s personnel manuals, but I’m guessing the wages of central bank employees are damn near Loc-Tite.

    Anyway, with that impressively alien name, I decided to hop over to Wiki and have a look for Herr Kocherlakota:

    Kocherlakota was born in Baltimore, Maryland, to an American mother and an Indian American father, both of whom earned PhDs in statistics from Johns Hopkins University. They taught at the University of Manitoba in Winnipeg, Manitoba, Canada, where Kocherlakota spent most of his childhood.

    Kak – I asked this at Marginal Revolution: if we can ‘quantitatively ease’ (i.e., print money and buy our own debt with it), why don’t we just eliminate taxes and the Fed can print up the money the government needs. The answer I got, as best I can phrase it, was ‘institutional structures are needed to assure optimal outcomes.’ That is how these creatures think, all 130+ IQ points of them.

    The truth is far more ghastly than poor old Joe Sixpack with his flag and his hope in the institutions and his son in the military can ever possibly comprehend: the people at the top of the food chain are being given freshly printed money and buying real goods and services with it; a slow, constant transfer of purchasing power upstream. Strip away all the arcane lingo and formulas, and that is all there is to it.

    Thus, the inexorable, grinding price rise as the early bidders take goods off the market and the new money works its way through the economy, eventually immanentizing into things like groceries at $50/bag. This is ameliorated only by phenomena such as the Saudis suddenly deciding to open the taps, or that part of the real economy still somehow allowed to function and harness productivity gains.

  3. institutional structures are needed to assure optimal outcomes

    I love that explanation. Just precious.

    Tyler Cowan: “Why are you people leaving me buried to my neck in the Mojave Desert?”

    Unpleasured Bean Eaters: “Because institutional structures are needed to assure optimal outcomes. Good day.”

    I agree with your assessment and to expand the notion further, imagine alternate applications of a conjured $4.5 trillion. If there are 150 million taxpayers, each one could have received $30,000 refundable in their return. That may have titillated The Economy.

    Though to buy down interest rates they wanted a massive bond purchase program. So they could have purchased directly from the treasury at issuance. I would have still found it wildly inappropriate, though at least there would have been the cover of bland neutrality. Though even that was discarded.

    The Fed actively chose beneficiaries. It printed money and decided who would and would not receive it. Wall Street, yes. Main Street, no. A great many people from all walks of life took huge losses in the carnage of 2008-2009. How many had those made whole by newly minted fiat? Could Anti-Gnostic have strolled into the regal Atlanta Fed, placed his MBS on the counter, and asked kindly to have it purchased back at par since its market value had dropped to only . 40 on the dollar? My 8-ball says “outlook not so good.”

    And so managements who had chosen poorly and rendered their institutions insolvent as a result were simply healed. By taking dollars out of your pocket and slicing off an end. Thus providing Bernanke with the photo opportunity to stand before anxious executives and proclaim, “We have secured seven-figure bonuses in our time!”

  4. This is an under-remarked topic. 😦 There is still a lot of prosperity out there and it’s hard to argue from the perspective of what is not seen, i.e., an economy supported by real savings instead of the central bank’s false savings.

    One micro-phenomenon that puzzles the hell out of me: oil prices have fallen by around 50% in a two-year period, but oil company executives and commodities brokers aren’t jumping out of windows?

  5. @an economy supported by real savings instead of the central bank’s false savings.

    they’re working on that with negative interest rates. a bank in denmark is offering mortgages with negative interest rates. yes, they are paying you to take out a loan. a loan covered by deposts, i.e. some schmuck’s savings.

    germany offers negative interest bonds. yes, pay to lose money.

    bwaahahaha. “institutional structures are needed to assure optimal outcomes”. indeed.

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