The Road to Stagflation

[boedicca]

This is one of the better analyses I've read lately on our current economic woes, and where they are leading. Given the dismal monetary mess the Fed has gotten us into, the likely outcome is 70s style stagflation.

Recommended reading.

...What can the Fed do? They can’t lower the federal funds rate because it's already as low as it can go. And this hasn’t worked anyway.

This is what the big change in Fed policy was all about.

There was a huge internal fight at the Fed between the anti-deflationists and the anti-inflationists, and the anti-deflationists won. The Fed decided they'd fight deflation through quantitative easing (QE).

With QE -- another tool the Fed has to increase money supply -- the Fed buys Treasury debt (bills, notes, and bonds) from its primary dealers and prints money to pay for it. This puts money directly into the economy.

It’s not as if this is something new. From last year through April of this year, the Fed bought $1.25 trillion of debt issued by Fannie Mae and Freddie Mac. They also bought about $700 million of Treasury debt. This put $2 trillion of new money into the economy. This apparently wasn’t enough.

The second important thing they announced is that they'll replace their Fannie/Freddie paper with Treasury debt. This seems harmless at first because the Fed isn't increasing its total debt holdings -- yet.

They announced this with a seemingly innocuous statement: that they'd keep their current level of debt at about $2 trillion. In Fed-speak this means they're clearly worried about the sinking economy, and that they'll print as much fiat money as they think is necessary to increase the money supply to induce inflation.

In economic terms, buying Treasury debt is called “monetizing” debt. In plain English it means that the government prints money to pay for its debts. This policy has been the downfall of many governments who destroy their currency through hyperinflation.

As soon as unemployment starts to go up again, and I believe it will, the politicians will be all over the Fed to “do something.” That "something" will be massive QE. I'm quite sure that the Fed hasn't figured out how much QE they'll need, and that they're unsure of its impact on the economy.

I have a pretty good idea of where it will all end up. Since they're not dealing with the underlying problems, this papering over of the problems will lead to inflation and economic stagnation, a phenomenon we saw in the 1970s called “stagflation."

The Road to Stagflation: Fed Thinks Money Printing Will Fight Deflation, Unemployment | Markets | Minyanville.com

 

[Neubarth]

Almost everything posted above is a lie. I can not believe that people make up all of this crazy shit. Nobody in his right mind would ever believe it.

 

[Paulie]

Almost everything posted above is a lie. I can not believe that people make up all of this crazy shit. Nobody in his right mind would ever believe it.

Do you need to be reminded ONCE-A-FUCKING-GAIN that when the phrase "print money" is used that it isn't literally meant to mean that the Fed itself is printing money?

The Fed has the lone authority to create new money. Whether they enter money electronically onto their balance sheet out of thin air, or they have the BEP print it up, they are still creating new money.

Just shut the fuck up, because everyone here who knows dick about economics knows that you're a fucking dumbass when it comes to the Fed.

Seriously...SHUT THE FUCK UP.

 

[8537]

The Fed has the lone authority to create new money. Whether they enter money electronically onto their balance sheet out of thin air, or they have the BEP print it up, they are still creating new money.
.

Unless they loan that money into circulation the impact is zero. In an extremely low-velocity environment such as now, that money is having very little impact and it can be taken out of circulation quite quickly as needed.

 

[Paulie]

The Fed has the lone authority to create new money. Whether they enter money electronically onto their balance sheet out of thin air, or they have the BEP print it up, they are still creating new money.
.

Unless they loan that money into circulation the impact is zero. In an extremely low-velocity environment such as now, that money is having very little impact and it can be taken out of circulation quite quickly as needed.

This isn't what's being argued though. Neubarth loves to be contentious in these arguments about the Fed. He argues semantics over the issue of where new money comes from.

I know Fed policy very well. It's Neubarth here who needs the education.

 

[8537]

The Fed has the lone authority to create new money. Whether they enter money electronically onto their balance sheet out of thin air, or they have the BEP print it up, they are still creating new money.
.

Unless they loan that money into circulation the impact is zero. In an extremely low-velocity environment such as now, that money is having very little impact and it can be taken out of circulation quite quickly as needed.

This isn't what's being argued though. Neubarth loves to be contentious in these arguments about the Fed. He argues semantics over the issue of where new money comes from.

I know Fed policy very well. It's Neubarth here who needs the education.

Then what, exactly, are you attempting to argue? It's hard to envision stagflation while the Fed is still paying on deposits.

 

[Paulie]

Unless they loan that money into circulation the impact is zero. In an extremely low-velocity environment such as now, that money is having very little impact and it can be taken out of circulation quite quickly as needed.

This isn't what's being argued though. Neubarth loves to be contentious in these arguments about the Fed. He argues semantics over the issue of where new money comes from.

I know Fed policy very well. It's Neubarth here who needs the education.

Then what, exactly, are you attempting to argue? It's hard to envision stagflation while the Fed is still paying on deposits.

I never even opened up discussion about the affects of monetary policy.

I merely said that the Fed has the lone authority to create new money. Neubarth doesn't seem to think so, simply because people use a generic phrase like "print money" and it isn't specifically the Fed itself that does the printing.

The BEP prints at the behest of the Fed. And the Fed can create any new amount of money it wants electronically and use it for purchasing debt instruments, securities, etc.

 

[Paulie]

He'll come in here and tell you I'm lying, even though there's a plethora of documentation on this board that proves otherwise.

When he's caught looking like an idiot, everyone's a liar. That's his thing.

 

[8537]

This isn't what's being argued though. Neubarth loves to be contentious in these arguments about the Fed. He argues semantics over the issue of where new money comes from.

I know Fed policy very well. It's Neubarth here who needs the education.

Then what, exactly, are you attempting to argue? It's hard to envision stagflation while the Fed is still paying on deposits.

I never even opened up discussion about the affects of monetary policy.

The article you presented in the OP is a few hundred words about monetary policy, yes? Perhaps I'm confusing the intent of the OP.

OOPS! Now I see...You didn't post the first story. My apologies - I was working under the assumption you posted the article.

 

[Paulie]

I do however, think it's a bit naive to assume the Fed will have a quick and efficient exit strategy.

History proves otherwise.

 

[8537]

I do however, think it's a bit naive to assume the Fed will have a quick and efficient exit strategy.

History proves otherwise.

What history proves otherwise? After they dispensed with pegging the MS, when have they been unable to mop up excesses?

Member banks have no shortage of purchasable assets at the moment.

 

[Paulie]

I do however, think it's a bit naive to assume the Fed will have a quick and efficient exit strategy.

History proves otherwise.

What history proves otherwise? After they dispensed with pegging the MS, when have they been unable to mop up excesses?

Member banks have no shortage of purchasable assets at the moment.

I assume by member banks you mean the 12 regional Fed banks. Although I typically think of a random financial institution like, say, Citi for example, when I think of a member bank. I don't really want to think of us purchasing any more assets from any more member banks, we've purchased enough. I'll assume you mean the ones we've already purchased that are on the Fed balance sheet. Yes, it would be nice to see some of them purchased by the private sector. But that's the whole crux of the matter. When will the Fed begin selling with any significance, and will they do it significantly enough to control the future inflation potential.

Simply going back to the dot-com bubble tells us that they won't. They left interest rates too low for too long, and everyone and their mother leveraged up. Leading into the '08 crash, we saw a pretty weak dollar and some pretty bad inflation. $145 oil, wheat skyrocketed, etc.

That was a MUCH less complex scenario than the one they currently face. The Fed's balance sheet has never been this large.

 

[8537]

Interesting discussion, Paulie, Thanks.

I do however, think it's a bit naive to assume the Fed will have a quick and efficient exit strategy.

History proves otherwise.

What history proves otherwise? After they dispensed with pegging the MS, when have they been unable to mop up excesses?

Member banks have no shortage of purchasable assets at the moment.

I assume by member banks you mean the 12 regional Fed banks.

No, I was referring to the ownership banks - nationally chartered commercial institutions. BUT I probably caused some confusion by getting the "buy" and "sell" backwards. That should have read that the Fed has no shortage of purchasable assets to SELL to the member banks at the moment (and those will be worth more at a later date). Undue confusion caused by moi!

I'll assume you mean the ones we've already purchased that are on the Fed balance sheet. Yes, it would be nice to see some of them purchased by the private sector. But that's the whole crux of the matter. When will the Fed begin selling with any significance, and will they do it significantly enough to control the future inflation potential.

I was referring to the assets on the books of the nationally chartered banks (and, in the current timeframe, any other financial institution that has access to the discount window(s). The Fed is holding trillions in assets that those banks can purchase once the dust settles.

Simply going back to the dot-com bubble tells us that they won't. They left interest rates too low for too long, and everyone and their mother leveraged up. Leading into the '08 crash, we saw a pretty weak dollar and some pretty bad inflation. $145 oil, wheat skyrocketed, etc.

Skyrocketing prices in one or two asset classes isn't inflation. It's a sector price increase. But the money supplies that the Fed controls remained fairly tame. the MB moved only incrementally. The Fed can't be held accountable for the decisions by the Treasury and the SEC to cut net reserve rules in half, for example, and they can't control the speculative nature of financial firms.

That was a MUCH less complex scenario than the one they currently face. The Fed's balance sheet has never been this large.

Indeed, the fed's balance sheet has never been this large. I've heard a lot of talk about the dangers of such a large balance sheet. However, with all due respect I've yet to hear a legitimate explanation of the problem with an inflated Fed balance sheet - especially when one considers the consequences of the Fed NOT having an inflated balance sheet right now.

 

[loosecannon]

This is one of the better analyses I've read lately on our current economic woes, and where they are leading. Given the dismal monetary mess the Fed has gotten us into, the likely outcome is 70s style stagflation.

Stagdeflation. As if either stagflation, deflation or inflation actually had any real definition or meaning......

It is so sad to see smart people actually believing in fictional constructs as if they were real.

BTW Thomas Edison, Ghandi, Marconi, Isaac Newton all shared one thing in common. They were all frauds taking credit for other people's genius.

Meanwhile King Arthur and the Knights of the round table and Camelot are fictions.

And Lady Godiva never did the singular thing that made her famous.

Mark Juddery: The 8 Most Overrated People In History: You'll Never Believe Who Made The List (PHOTOS)

The narrative is almost always bullshit. No matter who "catapults the propaganda".

Everything that you believe is wrong.

So believe nothing, and become rational.