A Fed insider shattered the glass and pulled the fire alarm this week.
“A strengthening U.S. economy may force the central bank to hike rates ‘sooner rather than later’ to stay ahead of inflation,” Philadelphia Federal Reserve President Charles Plosser said on Tuesday.
Meanwhile, top Fed head Janet Yellen offered the New York University graduating class some commencement words at Yankee Stadium. According to Yellen, success is determined more by grit and passion than sheer ability. As an example, she noted former Fed Chair Ben Bernanke’s grit as the main quality that compelled him to bailout the financial system when it frosted over like the Alaskan tundra a few years back.
In Yellen’s mind, Bernanke’s mass counterfeiting operations were a mass success. As taxpayers, savers, and working stiffs with young children, we find such bosh to be utterly insulting. Like when we heard the condescending line from former Treasury Secretary Timothy Geithner, “We did save the economy, but we lost the country doing it,” we get a sharp pain in our gut.
For we find rewarding recklessness and penalizing modesty through monetary policy to be a giant sham. Yet to this day, it continues…
Fine Art
Most notably, interest rates are still pegged at zero…where they’ve been since ground zero of the credit crisis. In other words, the Fed is still picking the pockets of savers and transferring the capital to the Treasury. Remember, in the academically deluded mind of Yellen, this is all for our own good.
But that’s not all. The Fed’s doing much more than transferring wealth from middle class savers to the Treasury and bankers. The Fed’s also blowing a vast array of bubbles…bubbles that produce their own array of distortions.
The DOW and the S&P 500 are hitting all-time highs. At the same time, 10-Year Treasury yields are below 2.55 percent. The Fed’s own balance sheet has spiked over 400 percent since 2008.
Then there’s fine art. Did you know that last week an anonymous buyer paid $84 million for a painting called Black Fire I? If you’ve never seen this masterpiece, boy oh boy…are you missing out. It’s a half black and half white rectangular canvas with an additional black stripe. No kidding.
Undoubtedly, these are the sorts of things people buy when holding vast amounts of cash becomes as risky as holding a lit match or a ripe tomato. If you don’t get rid of the match quick enough it’ll flame out. Similarly, a ripe tomato can quickly go to rot. Why else would someone spend $84 million for something so rudimentary?
Scientific Management of the Economy is Absurd
Asset prices have inflated beyond comprehension. Plosser, however, is concerned about another type of inflation. His fear is skyrocketing consumer price inflation.
With all the Fed funny money and credit that’s been pumped into the financial system, it’s almost a given this money will eventually make its way into consumer prices. Plosser believes an improvement in the economy will be the catalyst that persuades bankers to make loans. These loans will free up this money from bank balance sheets and flood it into the real economy.
“The way Charles Plosser sees it,” explains Jeffry Bartash, “the Federal Reserve is sitting on a ticking time bomb that could severely damage the economy unless the central bank reacts quickly to defuse the looming threat.”
“The Philadelphia Fed president, viewed as one of the bank’s leading hawks, is worried about some $2.5 trillion in “excess” reserves. That is, loanable funds available to individual or corporate borrowers through the nation’s banks.
“The Fed has created these reserves through unprecedented purchases of U.S. Treasuries and mortgage-backed securities, a strategy known as quantitative easing.
“These reserves are just sitting in the bank system, basically doing nothing. That’s because demand for loans has been unusually weak amid an economic recovery that’s the slowest on record since the Great Depression.
‘“These reserves are not inflationary right now,”’ Plosser said in a meeting Tuesday with reporters in Washington.
“Yet if borrowing begins to surge and those reserves start to pour out of the banking system, Plosser worries, ‘that’s going to put pressure on inflation.’ The result: the Fed could be forced to raise interest rates faster and earlier than it would like and perhaps slam the breaks on the economic recovery.”
This, in a nut shell, is the absurdity of scientific management of an economy through monetary policy.
Sincerely,
MN Gordon
for Economic Prism
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