It is a mad, mad, world

4/25/2013

Analysts are finding a reason to cheer the competitive devaluation QE of the major economies. The report even suggests that Japan's actions will now pave the way for more QE by the Fed, as we have entered a virtuous cycle where stocks can't go down. The central banks having once argued that they can't tell a bubble and therefore should not asset target, are sure acting differently now. The markets are convinced that the world's central banks can just keep increasing their monetization without consequence.
We have a Fed fairy that grants our wishes and keeps us safe.
The Fed is our Tinker Bell, the market is Peter Pan. and we live in Neverland.
A world without limits. Imagine that. No need to worry about inequality, or demographics, or collateral, or over capacity, or structural unemployment. A world without tradeoffs.
Like Peter Pan, the world and its policy makers remain in a state of perpetual arrested development.
Sleep well.

8 Comments

Brent Buckner

4/25/2013 11:49:43 pm

You write: " The central banks having once argued that they can't tell a bubble and therefore should not asset target, are sure acting differently now."

Inflation is running below stated targets (in Japan and the U.S.), so an alternative view is that central banks aren't targeting asset prices, rather that they're implementing the Bernanke 2002 speech playbook for achieving monetary easing at the ZLB in order to target inflation.

Karl

4/26/2013 03:59:05 am

I think your point justifies the earlier rounds of QE. The Fed crossed the Rubicon last fall when it doubled its purchases of QE. The Fed is currently purchasing 85 B/month and this is equivalent to the monthly $US budget deficit.
Claiming this was done for inflation purposes (remember the Fed's rosy forecasts) is not consistent with the data or even the Fed speak. They officaly claim it is to support employment but as highlighted (at least they will begin to withdraw when employment reaches a certain level) on these pages they haven't generated employment and this is acknowleged by the Minnesota Fed Govenor. So not for inflation, not for employment - what for then? Propping up the asset market so as to prevent a recession. They can only be said to be trying to prevent deflation through preventing a recession but that is too cute by a half.

Brent Buckner

4/26/2013 05:38:43 am

Headline PCE inflation rate in fall 2012 was below the Fed's stated medium-term target of 2% (and continues to be below):
c.f. http://www.advisorperspectives.com/dshort/updates/PCE-Price-Index.php

Doing more of the same when it hasn't worked before isn't inconsistent, although it is in keeping with one definition of insanity.

Brent Buckner

4/26/2013 07:51:22 am

You wrote:
"So not for inflation, not for employment - what for then?"

According to Yellen, right now for both!
c.f. http://www.bloomberg.com/news/2013-04-04/yellen-favors-adjusting-85-billion-qe-pace-as-outlook-changes.html

Karl

4/27/2013 01:12:47 am

"Headline PCE inflation rate in fall 2012 was below the Fed's stated medium-term target of 2%"

Pre-2009 Inflation targets were bases on ranges such as 1-3% or 0-4%

Zerohedge on the job markets post 2009
http://www.zerohedge.com/news/2013-04-05/young-vs-old-tale-two-us-job-markets
http://www.zerohedge.com/news/2013-04-05/real-march-unemployment-rate-116
Dalla Fed President
“We are blessed at the Fed with sophisticated econometric models and superb analysts. … The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course.”
http://www.economicpresence.com/4/post/2012/09/frd-dallas-president-sums-up-his-opinion-of-fed-modelling.html
President of Richmond Fed
Fed policy has inappropriately crossed the line from Monetary to Fiscal policy.
The Fed has reached the limits of what it can do for employment.
http://www.economicpresence.com/4/post/2012/08/jeffrey-lacker-president-of-the-federal-reserve-bank-of-richmond.html
Minnesota Fed says Moneatary policy reached its limits for Unemployment
"The head of the Minneapolis Fed, Narayana Kocherlakota, said the economy may be closer to maximum employment than the data indicate. If that’s so, well, to be blunt, that stinks. The labor force is barely growing, millions have just given up and quit looking for work, and wages are stagnant compared to inflation.

Brent Buckner

4/27/2013 02:00:47 am

Yes, there's a variety of stated opinions of Fed members.

Yes, in discussing whether or not the Fed's actions of fall 2012 were consistent with being directed toward its inflation target I used the stated inflation target as was then current; I acknowledge that there were previous different stated inflation targets.

Karl

4/27/2013 02:49:20 am

Somehow missed the formal change in policy. Happened just as I came back from Brazil. My thoughts as I now reflect on it are that this seems like a target set with the express purpose of justifying more QE. (A non existent problem in search of a solution.) Stable inflation over 1% does not seem to be a problem in a low growth situation.
From the Economist:
“Lost in this blizzard of outside advice is the fact that the Fed actually has a new framework of its own. In January it declared that henceforth its long-run target for inflation was 2%. Previously Fed members only stated their long-run preference, which ranged from 1.5% to 2%.”

Karl

4/27/2013 01:50:05 am

The more likely behaviour of QE is to create financial repression and prop up assets prices for an insolvent global financial system. This of course cannot be expressed because the jig would be up and it is not politically acceptable to steal from savers to help rich bankers.
This policy comes at great cost as others are pointing out as it increases the likelihood of a violent and lasting reversal that will be beyond the central banks’ ability to manage.
"Here's the Guardian's prediction with regard to Carney:
He and many others in central bank circles know that most of the Britain's banks are very highly leveraged. That without the support of the Bank of England's quantitative easing programme, and its very low lending rates – all effectively backed by British taxpayers – Britain's banks would effectively be insolvent.
And so Carney will continue with quantitative easing – which has provided British banks with the liquidity needed to indulge in speculative activity both at home and abroad, speculative activity that bears a scary resemblance to that undertaken before the crisis."
http://www.economicpresence.com/4/post/2012/12/matt-taibbi-gives-his-perspective-on-carney-going-to-boe.html
Of course this plan comes at great cost
"We look at the recovery in the credit aggregates and find all that is happening is that US corporates are once again engaging in their bad old destructive practices. For despite all the talk of cash rich US corporates, that has not stopped them returning to the credit markets to leverage up their balance sheets even more– spending the proceeds, almost dollar for dollar on equity buybacks .
http://www.economicpresence.com/4/post/2013/01/corporates-lever-up-is-the-fed-the-pied-piper.html
FT Quotes Artemis. Artemis articulates my analysis of how risks have changed in the global economy.
"In addition by keeping interest rates artificially low the Fed is creating a large funding gap for pension systems and other programs leading up to what could be a demographic time bomb. It is very hard to justify the risk to reward payoff of this monetary experiment. The defense of quantitative easing rests largely on an assessment of what would have happened to the economy absent its support. Nonetheless we should fear the law of unintended consequences because it takes a very small shift in perception to result in uncontrollable socio-economic change. We may get higher asset prices today but at the expense of inflation, class warfare, social unrest or something even worse tomorrow."
http://www.economicpresence.com/4/post/2012/10/the-fed-is-the-market-and-we-are-living-in-the-matrix.html

It is a mad, mad, world

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