Ruminations, January 6, 2013
Is the Federal Reserve beginning to turn around?
***Is so, it’ll turn with the speed of the proverbial aircraft carrier—slow and ponderous.
Last week, the Fed released the notes from its December 12 Open Market Committee meeting. The notes said, in part: "In considering the outlook for the labor market and the broader economy, a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases. Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted."
What does all this mean? It means that there is no longer unity in Federal Reserve Chairman Ben Bernanke’s program of printing money, called Quantitative Easing (aka QE). Fiscal monetarists, like this column, believe that printing money is a form of currency market manipulation that will in the long run hurt the economy by:
• Failing to create the jobs that are its goal
• Creating inflation
• Contributing to the national debt
• Distorting the market through artificially induced lower interest rates
• Creating economic bubbles in the stock and commodities markets through these artificial low interest rates
• Driving the country further into debt so that when the Fed can no longer control the interest rates, the government’s cost of borrowing will reach new highs
• Creating currency wars with other nations, resulting in a dramatic drop in international trade.
If we read the Fed notes carefully, we find that some people on the Fed think that QE should not go on forever as Bernanke has indicated it might, but that it should end by the end of 2013. Better than that, “One member viewed any additional [current] purchases [are] unwarranted." That means, stop now!
That’s not all. Fed Vice Chairman Janet Yellin, a supporter of Bernanke’s QE program, said this past October: "It is conceivable that accommodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking in the financial system." (Aside: Why do people who work at the Federal Reserve think that their prose must be as impenetrable as Alan Greenspan’s was?) It seems that Yellin is saying that QE could cause economic bubbles in our system.
Even Bernanke believes that the more QE he introduces, the lower the impact it has on jobs but he is still relying on his computer models which show that the long-term effect of QE is positive. (Note that computer models are based on human assumptions and logic but can produce results with many variables faster than humans can. And because we all trust computers, it gives additional credence to Bernanke’s actions to be able to blame them on “computer models” rather than admit that they are the result of his own hunches.)
But is it just the Fed that is questioning its policies? Hardly. Gold investors may have had an uneasy feeling for some time now. As Bernanke continues to print money and keep interest rates low in the hope of creating more jobs, he has created a bubble in commodity markets. But gold futures have fallen in price for six straight weeks. Do gold investors suspect a Fed turnaround, which might deflate the gold bubble? Maybe they do.
If the Fed is finally taking note of the problems that it has introduced and maybe turning it around (albeit with the speed that an aircraft carrier turns), that is the good news. The bad news is that Fed’s policies have created markets that are dependent on the Fed’s program. An editorial in Saturday’s Wall Street Journal noted that stock speculators are no longer concerned about better jobs numbers; they are more concerned about the Fed’s QE program. In other words, they are not investing in a future robust economy but in the economic stock bubble that they hope the Fed will continue to nurture. As a result of the Fed’s prolonged QE policy, speculators now may be hoping for bad jobs numbers because that will, according to Bernanke’s stated policy, cause the Fed to continue QE.
In its efforts to shore up the U.S. economy over the past five years, the Fed has taken some extraordinary steps – maybe too many. The problem lies with the Full Employment Act of 1946 (and later amended), which requires the Fed to both stabilize the money supply and to promote employment. When Paul Volcker became Fed Chief in 1979, he inherited high inflation, interest and unemployment rates and deduced that a stable currency was doable and desirable; he concentrated on that even when unemployment soared to over 10 percent. Volcker proved to be right.
Getting the ship of state back to where Volcker had it would be an enormous achievement – especially for Ben Bernanke, whom some see as being intent on running it aground.
Quote without comment
Economist John Maynard Keynes, writing in The General Theory of Employment, Interest and Money, 1935: ”Too large a proportion of recent ‘mathematical’ economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.”