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Let's take
a look at the monetary scorecard and a few ancillary measures to see how Ben and His Merry Pranksters
are doing.
While GDP remains very sluggish, growing at less
than 2 percent rates, the money supply
growth is pegged around 10 percent in M2,
with the broadest short term measure MZM hanging in just below that.
CPI remains elevated, and
some say and probably correctly understated, with CPI Urban running at 5 percent year over year, which is rather
high given all the fundamental
metrics of the economy.
Most surprisingly the 10 Year
Bond continues to hit new lows as people pile into all Treasuries across the curve.
As you may recall, the purpose of Operation Twist, or QE2ish, is
to LOWER the yields of the long end of the curve. And especially with the winds of global financial crisis at their backs,
the Fed has certainly done
this if one bothers to
look at the Ten Year Note Yield chart below, with a big hand from the little lady (Merkel).
Yes rates tend to go up a bit during
the Fed operations, as the wiseguys
front run and game the Fed's purchases, but they always come down sharply soon afterwards. These are just a few of the many ways that the Fed is quietly passing enormous sums of money to their member banks.
At some point interest rates may have to start increasing again, as the Fed will have to
deal with inflation. But it
won't be by using QE, quite the contrary. To raise rates the
Fed must reverse QE, and gently drain from the system as the economy begins to create its own sustainable
growth. That has not happened
yet, as is clear from various
measures like the Velocity of Money.
So, is the Fed 'successful?'
In its purely monetary objectives yes, but
not at the end of the day,
because the primary measure of their success, besides keeping the markets liquid, is to stimulate the real economy.
Benny is in trouble here.
With GDP growing at near recession
real rates, and even the long end of the curve priced at NEGATIVE real interest rates
depending on how one measures
inflation, he is caught in a liquidity trap.
A liquidity
trap is a situation described in Keynesian economics in which injections of cash into
the private banking
system by a central bank fail
to stimulate economic growth. A liquidity trap is caused
when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in
the monetary base that fail to translate into
fluctuations in general price
levels.
The problem is
not interest rates, but a more anomalous
situation such as war, in
this case a class war and
a currency war. Demand will not pick up until the median wage rises
faster relative to overall
economic growth, and
global trade becomes equitable and orderly. And of
course, when the money flow is
not being continually hijacked and taxed by an outsized and predatory financial system that does not allocate so much as confiscate
wealth through fees, frauds, and the mispricing of risk.
Contrary to election year rhetoric, the growth of government spending has been flat under
Obama. The deficits have ballooned
because the revenues (taxes etc)
collected by the government
have been shrinking due to economic
contraction, the Bush tax cuts,
etc.
Bernake can only do so much
with his monetary hat on. The Fed and Treasury need to get behind financial
reform, and restructuring
the American economy to stimulate
the median wages and
jobs, and stop promoting activity
that is little more than wealth transferal from the bottom 95 percent to
the top.
That is not likely to happen before the end of the year.
I am not a 'fan' of Bernanke,
even when he was first appointed to George W. Bush's
Council of Economic Advisors
in 2002. I thought Obama
made a tactical error in reappointing him in 2010, probably to keep from roiling
the markets. Besides,
Obama himself is more a moderate Republican, in the manner
of Herbert Hoover, than a real progressive like Roosevelt, and he is certainly no hard core Keynesian or socialist, no more so than Richard Nixon.
I am concerned that the continuing deadlock in Washington, fostered
to a large extent by a Republican policy bloc that refuses to
compromise, will prompt Bernanke
to pull something even
more 'unconventional' from
his bag of tricks. That might
not be pretty.
Do I really need to say it again?
The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be
any sustained growth and recovery.
 
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