Risk of 1937 relapse as Fed gives up fight against deflation … The US Federal Reserve has jumped the gun. It has mishandled its exit strategy from quantitative easing, triggering a global bond rout that it did not anticipate, and is struggling to control. That the Fed should tighten even as it cut its own growth and inflation forecasts for this year is a bizarre state of affairs … It has set off an emerging market shock and risks "blowback" from a fresh spasm of the eurozone debt crisis, and it is letting all this happen at the same time, before the US economy is safely out of the woods. It has violated its own counter-deflation strategy, tightening monetary policy even though core PCE inflation has fallen to the lowest levels in living memory and below levels deemed dangerous enough in the past to warrant a blast of emergency stimulus. It is doing so even though the revival of bank lending has faded. – UK Telegraph
Dominant Social Theme: Why, oh, why don't central bankers ever get it right?
Free-Market Analysis: This article, brilliantly written as usual, misses the point. The question that should be asked is not why the Federal Reserve is doing something stupid. (That's a given.) The question that should be asked is why a small group of (mostly) men is in charge of monetary policy for hundreds of millions.
What happened to the Invisible Hand of the market that Adam Smith wrote about so eloquently? If you asked Ben Bernanke or any of his fellow monetary mavens about Adam Smith and the Invisible Hand, they would probably quickly reply that it is an unimpeachable concept – that the discipline of the market that the Invisible Hand represents is necessary to prosperity.
And then they will hold another convocation in a tiny room to fix the price and volume of money for billions. And the mainstream media, even the financial media, will report on this nonsense as if it is sensible. They will ignore the cognitive dissonance and celebrate the process.
The entire pivot by the Federal Open Market Committee is mystifying, almost amateurish, and risks repeating the errors made by the Bank of Japan a decade ago, and perhaps repeating a mini-1937 when the Fed lost its nerve and tipped the US economy into a second leg of the Great Depression. "It's all about tighter policy," was the lonely lament by St Louis Fed chief James Bullard.
The Fed seems to be acting in the belief that the US economy will shake off this year's fiscal tightening – 2pc to 3pc of GDP – and that a housing recovery is now entrenched. The sharp fall of Wall Street's homebuilders index would suggest caution. Unlike the surging Case-Shiller index of house prices, it looks forward, not three months backwards.
The Fed could have kept policy steady, welcoming the shake-out in frothy markets over the past month as a useful "fire-drill" for future QE exit, without pushing its point too far. It chose to escalate. It raised the unemployment target from 6.5pc to 7pc. It concocted feeble excuses to explain why it was ignoring a plunge in 10-year TIPS that serve as a proxy of long-term inflation worries.
While still pretending that the pace of QE exit would be dictated by the health of the economy, it in fact set a date that disregards the economy. "Policy actions should be undertaken to meet policy objectives, not calendar objectives," said Mr Bullard acidly in his dissent. That the Fed should tighten even as it cut its own growth and inflation forecasts for this year is a bizarre state of affairs.
"A more prudent approach would be to wait for more tangible signs that the economy was strengthening before making such an announcement."
No, a more prudent approach would be to do away with this charade of central planning.
Like many in the alternative media, we've often warned that central banks can only do one thing well: print money and create bubbles. The idea that they can create "soft landings" that anticipate the damage these bubbles do is fairly ridiculous.
Even Tall Paul Volcker almost collapsed the world's economy back in the early 1980s when he tried to wring price inflation out of the dollar. The result was a two-year "recession" that came at the end of a decade of volatility and predictable monetary mismanagement.
In the 1970s, price inflation cost tens of millions their pensions, houses, lifestyles, etc. The trauma was deepened by Volcker's early 1980s cure. But it will surely be far worse in the 2000s. In the 1970s, billions were artificially injected in Western economies. In the 2000s, trillions have been injected.
There is no way this can end well. There is no way Fed bankers can tame the monetary monster they have created. They will handle it "amateurishly" because there is no alternative. No man or group of men should be responsible for the wealth and continued prosperity of billions.
Of course, we are told it is for our own good and that, too, is evidently and obviously a falsehood. Central banking has been the cause, not the cure, of manifold monetary disasters in the 20th century and now the 21st. Only a handful have grown vastly wealthier – those who control the system, in our view.
Can this be a coincidence?
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