Shooting Monetary Blanks

Severe storms in the Midwest and South are flooding out levees and riverbanks at a rate not seen in 74 years.  From what we gather, if levels rise much higher at the confluence of the Ohio and Mississippi rivers the Feds will blow up a levee to disperse the flood waters onto open farmland before it washes out downstream towns.

Similarly, in the world of money the Feds have released a flood of money also not seen in 74 years.  At the confluence of unemployment and inflation, if money flows rise much higher, the Feds will blow up the dollar bringing the world as we’ve always known it to an end.

On Wednesday Federal Reserve Chairman Ben Bernanke stepped up to the microphone and confirmed that he’s certifiably and demonstrably insane.  What we mean is Bernanke confirmed he’ll continue with the madman policies he’s been pursuing…

“Federal Reserve Chairman Ben Bernanke signaled on Wednesday that the U.S. central bank is in no rush to scale back its support for the economy with the labor market still in a ‘very, very deep hole,’ reported Reuters.

“The central bank’s policy-setting committee said after a two-day meeting it will complete the purchase of $600 billion in bonds in June to support the economy’s recovery, and said it would keep its balance sheet, currently at $2.67 trillion, steady for a time to ensure its support does not fade.

“It also repeated it plans to keep overnight interest rates, which it has held near zero since December 2008, extraordinarily low for ‘an extended period.’”

A Big Fat Goose Egg

If you don’t remember, in late 2008, after the financial market’s frosted over like the Alaskan tundra, Bernanke and his pals at the Treasury put into practice ideas that, just the thought of, would have made Alan Greenspan soil his pantaloons…

Unconventional measures like TARP, CPFF, MMIFF, TAF were employed to bailout the big banks, rinse toxic asset backed securities from their balance sheets, and reliquefy the credit market with phony money.  Bernanke also doubled the size of the Federal Reserve’s balance sheet in a year and a half…accomplishing what it took numerous other Fed Chairman and 95 years to achieve.  But that wasn’t all…

Bernanke employed quantitative easing policies to artificially suppress mortgage rates and place a false bottom under the housing market.  And when that didn’t work he martingaled down with QE2 like he was playing a game of roulette.

Yet for all their efforts, the Feds scored a big fat goose egg…with a debt explosion to boot.  Unemployment, economic growth, commerce – they hardly thawed. GDP for the first quarter of the year was just reported at 1.8 percent; when you factor in inflation, growth is cancelled out and then some.

In most professions, royal failings of this magnitude would be cause for pause and, perhaps, a change of direction.  To the contrary, the Federal Reserve goes deeper with earnest determination.

Shooting Monetary Blanks

Now the Federal Reserve is losing believers.  International currency markets appear to have seen enough.  During the press conference Wednesday the dollar index fell to a three year low and gold hit a new record high of $1,530 per ounce.

Nonetheless, the Federal Reserve will go about trying to save the economy by ruining the dollar.  It’s what they were trained to do.  Milton Freidman told them when the economy sputters, a little easy credit, via the lowering of the federal funds rate, is what’s needed to grease the gears and lube up the cranks to get things revving again.  Once the economy’s racing back down the road, rates can be gradually raised to balance things out.

For the last 30 years the Federal Reserve’s implemented Freidman’s theory with excellence.  The U.S. economy enjoyed boom after boom after boom.  However, several unwelcomed things have happened along the way.

With each interest rate cycle, the busts are more frequent and destructive and the booms are ever more lethargic.  True economic growth based on capital investment and production was exchanged for bubble based asset price increases and credit based consumption.

After all these years of easy credit the once sure fire bullet of monetary finagling seems to have lost its magic.  When the magic bullet was needed most the Fed fired off a blank.  Instead of a booming economy, public and private debt exploded.  After that they fired off another.

Sincerely,

MN Gordon
for Economic Prism

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