The stock market seems to like the Fed’s promise to continue stimulating the economy. There are forecasts that the economy will weaken in the near future – and the Fed believes it needs to keep interest rates at zero to keep the economy afloat.
I win no popularity awards for being a curmudgeon, but I can’t help but point out the damage the Fed is doing.
The best analogy I have seen lately has to do with drugs or pain medicines. The drug analogy helps us to understand the predicament.
Surely pain medicine has its place. We need pain medicine to get us through bouts of intense pain. This pain might come as a direct result of an injury or it might be the expected result of a successful surgery. Whatever its purpose, the medicine is meant to be highly effective and temporary. The bruise or the surgery’s incisions will heal.
The problem comes when the pain goes away but the patient gets addicted to the drug. It might be a mental or a physical addiction but that does not matter. It is real. One needs to keep taking the drug. At some point the addiction will become damaging and something must be done. At some point the drug will have to be withdrawn. This process will be incredibly painful. The wise doctor will help one with the withdrawal, but much depends on the behavior of the patient. Some would rather experience the addiction than the withdrawal.
Larry, you are not a medical doctor. What’s up?
What’s up is that the Fed has just told its patient that it will continue the stimulus. As it injects more and more money into the economy creating imbalances everywhere (I hope you weren’t planning to live your retirement on your interest income), it says nothing about when or if it is going to reverse operations -- and withdraw the money.
But the Fed doesn’t know how to do that. It has zero experience with withdrawing mountains of money. Note that even after the previous recession, it never withdrew the money. The money is sitting as excess reserves in banks doing nothing – doing nothing but waiting to explode like a typhoon at some point down the road. Notice – the Fed spewed trillions into the financial system and it has done nothing to withdraw it.
So if it didn’t do that in all those years since the last recession ended, how can we expect the Fed to withdraw another tranche of trillions of dollars of money? Call it a typhoon or an avalanche. They have no clue what to do.
Doctor, give that man a shot. He just got hit by a bus. Doctor says, okay, but I have no idea how to save him from his injuries. What do I do when the shot wears off? We don’t care. Just give him the shot and then we will pray.
I sound pretty cruel. But the Fed is no different than the doctor. The Covid has caused the problem in the economy. The Covid could go on for many years. Meanwhile the Fed administers more and more pain medicine today with no plan for tomorrow.
Why don’t they do today what might be sustainable in the future? Funding unsustainable increases in the national debt is not thinking about the future. The Fed sadly is adding to our miseries – only we don’t see the typhoon yet.
In 1790 give or take some time Hamilton's just finished a script program to generate funds for the version of the FED....the U.S Bank. They sold out in one hour but the promise of a return put a burden on the new Bank. The value of the newly created "dollar" dropped and debt to the Bank increaed. That was a self created problem. Similar?
ReplyDeleteUS monetary history is not so simple so its hard to comment on what you say. In general, yes, the trouble comes with a paper currency that has no real backing. See this link for more history https://www.businessinsider.com/the-history-of-american-money-2016-6#9-national-bank-notes-91863-1935-9
DeleteDear LSD. Seemz the Fed’s increase in its balance sheet has kept the economy afloat during the CV-19 crisis and allowed a gradual return to economic growth by maintaining general liquidity. Sorta like greasing the wheels after they’ve suddenly frozen up. Low interest rates resulting from the balance sheet balloon benefited car and home sales and re-fis and helped lower debt service for individuals, corporations, and last but not least our feckless Uncle Sam. Stock markets also have benefited (I’m shure your 401k piglet bank is help’n keep your stash of Jack at record levels :).
ReplyDeleteTwue, unka Fed steered into uncharted seas while keeping the economy afloat and is unshure how to git back on a “normalized” course via on the QT (quant tightening)—as you say. But letz say unka Fed “normalizes” its balloonish balance sheet, interest rates and debt service increase, home sales/re-fis crumble, the markets do a deep dive into my ‘hood, and Home Depot stock fallz back to $180? You wouldn’t wanna that to a happ’n would ya?
Assuming you wouldn’t . . . wutz yer prescription for gitt’n the patient off the pain pillz?
Thanks Tuna. Much of what you say is not fact -- but extrapolation. While it is true that Congress and Trump have used fiscal policy to stimulate the economy, the issue of monetary policy is separate. If federal and state legislation had occurred without the Fed dumping money, I am guessing we would have gotten pretty much the same effect. What's different this time is that interest rates were already low and the problem with the economy was NOT too little money. The problem with the economy is Covid and government shutdowns. Most of the money the Fed added is simply sitting in banks as excess reserves. Seems innocuous enough for now. But if the economy does begin to normalize then all that money could be a major factor for too much stimulus.
DeleteSo, wutz yer prescription for gitt’n the patient off the pain pillz?
DeleteLet them drink Jack! :-)
DeleteStart reversing the engines. The Fed should begin mopping up money from the banking system. They do that by selling government bonds. Some would worry that process would cause interest rates to rise but I doubt it. Interest rates rise when people think the demand for money is greater than supply. Right now the supply is huge. It would take a very long time before people think supply of money is small enough to cause problems. Credit is tiny now because of Covid -- Covid means people cannot buy things. There is plenty of money out there -- we would not miss it if it fell by a couple trillion. Case closed.
DeleteDear LSD. Sorry to not to raise a glass to your case of JD closed but current econ data on retail/home/auto sales don’t square with your saying ‘Covid means people cannot buy things.”: Folkz they be a buying all sortz of stuff. Shure, unka Fed can slowly deflate its balloon but at wut pace to avoid a stock-0-market deep dive to depth (and yer stash of JD) . . . this patient patient wantz to know when you think it’s OK to pull back the pain-kill’n candy ‘n at wut pace. R we hav’n fun, yet?
Tuna, shutdowns mean you can't buy things. When real GDP fell by 33% that was the result of closed stores. Yes, they bought some things but the point is that the economy performed poorly not because of too little money -- it was the result of covid and covid shutdowns. The Fed is its own enemy. It loves it when folks think the Fed is saving their butt. But in this case it is an illusion. Pull out the money! I'm having fun. How about you?
DeleteGobz-0-fun!
DeleteIsn't the Fed policy really fiscal policy, in the sense not of keysnian policy but of how we finance spending? We wanted to give away a trillion dollars, so we're printing money to do it, rather than sell more debt.
ReplyDeleteWhen the government has a deficit it sells bonds. The deficit is fiscal policy. Depending on what the Fed does next, there might be additional impacts. If the Fed waits in the wings, then nothing much else happens though interest rates might rise. If the Fed engages in open market purchases of bonds in the market, then it injects money into the system. This is monetary policy induced by a fiscal event. I hope that helps...
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