STAFF NEWS & ANALYSIS
Monetary Mavens Talk, Talk, Talk
By Staff News & Analysis - July 12, 2013

Fed mulls adjusting its tune to quell jittery markets … Federal Reserve officials are considering moving the goal posts on U.S. monetary policy with a promise to keep interest rates low for longer in the hopes of heading off a troubling rise in markets borrowing costs. Top Fed officials, who have pulled out all the stops to boost the U.S. recovery from recession, have worried for months that investors might drive bond yields up when the time came to reduce the central bank's bond-buying program. Their fears have started to become reality. – Reuters

Dominant Social Theme: We are in charge. There is nothing to fear. We really are.

Free-Market Analysis: So it begins. Having created Frankenstein's monetary monster, those attending to it now gather at the gurney peering down at the misshapen and deadly creature and … palaver.

There is not much else they can do. Their tools are limited or useless and the creature now exists and will surely rise up to further ruin what is left of Western economies, already in tatters from currency over-printing and regulatory mismanagement.

Fed mulls adjusting its tune to quell jittery markets … Federal Reserve officials are considering moving the goal posts on U.S. monetary policy with a promise to keep interest rates low for longer in the hopes of heading off a troubling rise in markets borrowing costs. Top Fed officials, who have pulled out all the stops to boost the U.S. recovery from recession, have worried for months that investors might drive bond yields up when the time came to reduce the central bank's bond-buying program. Their fears have started to become reality. – Reuters

Dominant Social Theme: We are in charge. There is nothing to fear. We really are.

Free-Market Analysis: So it begins. Having created Frankenstein's monetary monster, those attending to it now gather at the gurney peering down at the misshapen and deadly creature and … palaver.

There is not much else they can do. Their tools are limited or useless and the creature now exists and will surely rise up to further ruin what is left of Western economies, already in tatters from currency over-printing and regulatory mismanagement.

But talk they will. And the mainstream media will hang on every word. Central banking, seen from this perspective, is not so much about guiding or salvaging economies as illustrating over and over again that a small group of people have the power to make large decisions.

As George Carlin used to say, "It's a club … and you're not invited!" The point being made, it increasingly seems to us, is that some people have power and others don't. An impression is being made – and the reality is of secondary importance, partially because the reality is that central bankers cannot do what they claim to do.

We've often pointed out with others in the alternative financial media that central banking is a one-way street. Central bank officials can print endless amounts of money-from-nothing but have a good deal of trouble figuring out ways to extract money from the economy without causing a crash.

Considering how shaky the "recovery" is, anything large banks like the Federal Reserve do to "cool" the economy now that securitized assets have been heated back up to sizzling is dubious at best. The risks of deflating animal spirits, and thus the few working parts of the economy, is immense.

And for this reason, Fed officials seem to be unsure of the next moves when it comes to the US's $16 trillion economy. Here's more from the article:

Yields, which move inversely to the price of Treasury debt, began to climb sharply in May with signs of stronger jobs growth and signals from the Fed that it could begin to scale back its bond purchases, known as quantitative easing, as soon as September.

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With yields rising, some Fed officials warmed to the idea of anchoring borrowing costs more firmly by pledging to keep overnight rates near zero well after the jobless rate falls below 6.5 percent, the Fed's current threshold for considering tighter monetary policy.

Unemployment stood at 7.6 percent in June. Fed Chairman Ben Bernanke raised the prospect of a lower threshold for the jobless rate last month, but the message was lost in the din created when he said the central bank's policy-setting Federal Open Market Committee planned to halt the bond purchases by mid-2014 – a comment that sent bond yields soaring.

… The current promise, and Kocherlakota's proposal for a lower threshold, come with an important safeguard: if inflation threatens to rise above 2.5 percent, the Fed says, rates could go up even if unemployment is still high.

We can see from this just how basic monetary discussions really are. The thrust of central banking coverage is one that emphasizes high finance, complicated terminology and impressive circumstances. The reality is that the tools are very limited and the choices are, well … simplistic.

Either a central bank prints money or it doesn't. Either it sets interest rates high or low. Officials can choose various targets but essentially, "targeting" doesn't change the basic mechanism: more money or less, higher interest rates or lower ones.

It's very simple and the amount of time, energy and mainstream media coverage lavished on these rudimentary – and primitive – decisions is incredible. Actually, it's more like an elaborate dance, a dominant social theme full of sound and fury but signifying … not very much.

The reason the significance is small has to do, again, with the latitude that central banks actually have once officials do the one thing they CAN do – which is print money.

Once the money is in the system, or at least has a chance of circulating, the rest is predictable. There will be talks of soft landings but central banks have printed so many trillions over the past few years that "draining" that money from all the different regions and instruments in which it now resides will surely prove an extremely difficult if not impossible task.

And so Fed officials clarify that they will keep rates "low" – whatever that means – so long as unemployment remains "high."

Well … as we and others have pointed out, official unemployment figures do not in the least represent either the US's actual disastrous unemployment rate nor take into account various black and gray markets that are operative as a result of the US's increasingly invasive and dysfunctional regulatory democracy.

The more we cover these economic discussions, the more it looks like a kind of formal shadow play, in which each segment of the formal monetary, political and media establishment increasingly diverges from reality.

We are now going to be exposed to a long spate of announcements and speculations about whether a handful of men and women can manage the world's largest multi-trillion economy using the most basic and brutal of tools.

And as price-fixing doesn't work, as there are no forward-looking instruments that officials can use and as there is no history of effective intervention in the markets once they have over-heated short of creating another "downturn," we know full well what the outcome will be – either the severest of "recessions" or a continued ascent into dizzyingly stimulated markets, which will also eventually yield a significant downturn.

After Thoughts

But they will talk. And we will be made to listen.

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