The Back-Pedaling Brigade Returns—–More Central Banking Lunacy


US Rate Hike: The Back-Pedaling Brigade

Last week’s payrolls report was “stronger than expected”, which should actually be fairly meaningless, given how many times it will be revised and considering that it is a lagging economic indicator. However, in light of the Fed’s absurd employment mandate, it does slightly increase the chances of a token rate hike at some point this year.


Christine-Lagarde-EU-IMFIMF chief Lagarde – a political operator and bureaucrat since 2005, thinks monetary policy should remain as loose as possible. No-one seems to really know why.

Photo credit: Reuters


To this it should be noted that whether the Federal Funds rate is or isn’t 25 basis points higher shouldn’t make much difference either, but it would certainly have some symbolic significance if the Fed were to move away from its current zero interest rate policy. In the meantime, the broad US money supply TMS-2 has most recently recorded an approx. 7.8% year-on-year growth rate, which remains a historically very high level. Only in the context of the ever wilder oscillations since the Nasdaq bubble blow-out in 2000 can it be considered a “middling” rate of money supply growth:


1-TMS-2The broad US money supply aggregate TMS-2 (true money supply) is growing at 7.8% y/y at last count – click to enlarge.


Given that the Fed has stopped “QE” and its balance sheet growth has turned slightly negative, current money supply growth is the result of credit creation by commercial banks – especially industrial and commercial loans are essentially back at typical boom growth rates. Most recently they clocked in at a rate of 12.45% annualized.

US corporations are essentially drowning in debt these days. Bank loans to companies have increased to new all time highs more than 20% above the previous peak attained in 2008 (which in turn was an extreme caused by the panicky drawing down of available credit lines), while over the past three years immense amounts (approx. $3 trillion worth) of junk debt and leveraged loans have been issued in addition to this. To argue that monetary policy should stay loose seems absurd under such circumstances, even of one accepts (which we don’t) the mainstream premise that money and credit should be subject to central planning by a bunch of bureaucrats.


2-C and I loansCommercial and industrial loans are at a record high and are currently growing at a boom-like rate of 12.45% annualized – click to enlarge.


And yet, the IMF let it be known last week that the Federal Reserve should postpone rate hikes. The arguments forwarded in favor of this are nothing new, but they are no less bizarre for that.


The U.S. Federal Reserve should delay a rate hike until the first half of 2016 until there are signs of a pickup in wages and inflation, the International Monetary Fund said in its annual assessment of the economy on Thursday.

The fund’s report comes amid signs that some rate setters at the U.S. central bank are also pushing for rate hikes to be delayed until there are clearer signs of a sustained recovery. U.S. data has been mixed and the economy shrank 0.7 percent in the first quarter.

“Based on the mission’s macroeconomic forecast, and barring upside surprises to growth and inflation, this would put lift-off into the first half of 2016,” the fund said.

Fed chair Janet Yellen has insisted the economy remains on track and that a rate rise this year is on the cards, although others including Fed governor Lael Brainard, viewed as a centrist on the rate-setting committee, have raised concerns over growth.

The fund forecast that the Fed’s favored measure of inflation, the personal consumption expenditures (PCE) reading, would hit the central bank’s 2 percent target only in mid-2017.

“A later lift-off could imply a faster pace of rate increases following lift-off and may create a modest overshooting of inflation above the Fed’s medium-term goal (perhaps up toward 2.5 percent),” the Fund said.

“However, deferring rate increases would provide valuable insurance against the risk of disinflation, policy reversal, and ending back at zero policy rates.”


Several Fed governors were essentially taking a similar line, such as the above mentioned new Fed board member Lael Brainard and veteran member Daniel Tarullo, both of whom appear to be getting worried about the storyline that recent US economic weakness is “transitory”. We will refrain from looking up what Messrs. Charles Evans and Eric Rosengren are currently saying, as it is nigh certain that their tune remains unchanged.

The argument that the central bank should “fight disinflation” (i.e., prices that are still rising, but allegedly not rising fast enough!), that “disinflation” represents a “risk” and that the central bank will be able to “fine-tune” the eventually ensuing inflation rate and thus need not fear an overshoot, is a bunch of hooey, and that is putting it very politely.

First of all, there is neither a sound theoretical argument nor any empirical evidence in favor of the argument that slowly rising or even falling prices of consumer goods should be feared. Consumers themselves obviously prefer lower over higher prices, and if certain industries had not proved to be able to massively lower the prices of their products in spite of the inflationism of central banks, general living standards would still be stuck at the levels of a century ago.

Who could possibly afford a smart phone if such goods were inflating in price by 2% per year? In fact, smart phones wouldn’t even exist if that were the case. At best, there would be the clunky car phones of yore, which only a tiny elite of rich (or state-funded) people could possibly afford.



first-motorola-car-phoneThe first car phone sold by Motorola – a clunky device by today’s standards, and in its time the sole preserve of the rich.

Image credit: Motorola


AutotelefonKofferraum_picture2A part of the electronics required for the very first car phone.

Photo credit: Bell Telephone Company


The reality is that declining prices of consumer goods are a hallmark of economic progress. It follows from this that central banks are actively working on fulfilling what appears to be standard government policy with respect to the future. As Bill Bonner has put it: governments are looking toward the future to prevent it from happening.

On the rare occasions when serious empirical studies into the alleged evils of declining prices are undertaken, no evidence that deflation is somehow “bad” can be found – in fact, the exact opposite is true. Real economic growth in the US has never been stronger or more equitable than in the five decades preceding the establishment of the Federal Reserve – prices were mildly declining throughout this period. In fact, not even economist in the employ of the engine of inflation itself – the Federal Reserve – have been able to dig up any such evidence (see this study, pdf).

Clearly, economic laws cannot be deduced from statistical evidence, due to the unique contingent circumstances characterizing every slice of economic history. Nevertheless, it shouldn’t be too big a surprise that the historical evidence seemingly confirms what economic logic is already telling us loud and clear. In short, the current main goal of monetary policy makes no sense whatsoever if economic progress is indeed its goal. One must conclude that either the true goal is a different one (since evidently, a few beneficiaries of the inflationary policy do exist), or that the theories on which the monetary bureaucrats base their policies are deeply flawed. We would say it is a mixture of both.


Monetary Lunacy Breaks Out In Even Grander Style

We had a good laugh last week when it was reported that Haruhiko Kuroda seems to base the BoJ’s mad-cap money printing agenda on a fairy tale. This is actually quite fitting, since the underlying theory qualifies as a fairy tale as well. As William Pesek reports at Bloomberg:


“There are plenty of people in Asia who believe Haruhiko Kuroda, governor of the Bank of Japan, lives in Neverland. […] But it was still surprising to hear Kuroda admit on Wednesday that his policies are guided by imagination — specifically, the Japanese public’s willingness to imagine they’re working. “I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it,’” he said  at a BOJ-hosted conference.”


(emphasis added)

We would actually argue that the very moment the Japanese public does begin to believe Mr. Kuroda’s policies are “working”, it will be lights out for Japan’s currency system. It is mainly because people still believe these policies are temporary and not to be taken too seriously that the yen remains a viable medium of exchange. One can thus only read about Mr. Kuroda’s other monetary policy-related metaphors with a certain degree of anticipatory trepidation:


In order to escape from deflationary equilibrium, tremendous velocity is needed, just like when a spacecraft moves away from Earth’s strong gravitation,” he said in February. “It requires greater power than that of a satellite that moves in a stable orbit.”


(emphasis added)

Good grief. There are many reasons why Japan’s economy is a bit sclerotic. Falling prices or prices that aren’t increasing “fast enough” aren’t among them, regardless of how many times this nonsense keeps being repeated by the coterie of inbred usual suspects (inbred in the sense that all of them have obtained their wisdom from the same universities and teachers).


kuroda inspirationHaruhiko Kuroda and his inspiration


However, assorted armchair planners still manage to outdo even Mr. Kuroda and his musings. Under the heading “Monetary Policy for the Next Recession” a certain Clive Crook argues in a Bloomberg editorial that central bankers should dig up that old stalwart of hoary inflationism known as “helicopter money”. First we are advised that “QE” is working, but only sort of. Actually, it’s not really working.


“But QE isn’t unconventional any longer. It mostly worked, the evidence suggests. The world avoided another Great Depression. Yet even in the U.S., this is a seriously sub-par recovery; growth in Europe and Japan has been worse still. Now imagine a big new financial shock. It’s quite possible that all three economies would fall back into recession. What then?”


(emphasis added)

No-one will ever be able to prove that “the world avoided another Great Depression”, since we cannot go back in time and choose a different path. We would however point out that people in some parts of the world (such as in Greece, Cyprus, Portugal, etc.) would in any case beg to disagree with this assertion. What Mr. Crook – and countless others – seem unable to grasp is that the recovery isn’t so tepid in spite of monetary pumping, but because of it.

Ok, so what should be done if the working/not really working policy fails completely? Well, we need “helicopter money”, but we should rename it so it doesn’t sound quite as crazy as it actually is:


Sooner rather than later, attention therefore needs to turn to a new kind of unconventional monetary policy: helicopter money. One thing’s for sure: The idea needs a blander name. Milton Friedman, who argued that central banks could always defeat deflation by printing dollars and dropping them from helicopters, did nothing to make the idea acceptable. Put it that way and most people think the notion is crazy.

How about “QE for the people” instead? It has a nice populist ring to it — suggesting a convergence of financial excess and the Communist Manifesto. The problem is, it isn’t bland. It sounds even bolder than helicopter money. “Overt monetary financing” is closer to what’s required, but something even duller would be better. Whatever you call it, the idea is far from crazy. Lately, more economists have been advocating it, and they’re right.

The logic is simple. If central banks need to expand demand — and interest rates can’t be cut any further — let them send a check to every citizen. Much of this money would be spent, boosting demand just as Friedman said. Nobody, so far as I’m aware, is arguing that it wouldn’t be effective.”


(emphasis added)

This one really has everything. The term becomes more acceptable if it somehow merges financial excess with the Communist manifesto (yikes!), there’s the logical fallacy known as the “appeal to authority” (ranging from Milton Friedman to unnamed economists who are advocating in favor of this lunacy more recently), and the plainly false assertion that “no-one would dispute the policy’s effectiveness”.

Could anything go wrong? Are there any objections? Put down your coffee before you read through the list if objections Crook believes to be the “only ones”. Actually, he believes there are only two, and one of them isn’t valid anyway:


What, then, is the objection?

One concern is that if a central bank starts giving out money, it will create liabilities with no corresponding assets — thus depleting its equity. Compare with QE: This also creates liabilities in the form of money, but the central bank gets assets (the securities it buys) in return. Does it matter that the central bank’s equity is reduced? No.


The only non-trivial economic objection to overt monetary financing is that the central bank, having increased the supply of money, might find it difficult to control interest rates later. When inflation starts rising and the time comes for the central bank to tighten monetary policy, will it be able to?

Again, this concern, if valid, applies to QE as well. Central banks have explained why QE doesn’t cause them to lose control of interest rates.”


(emphasis added)

As it were, we agree with him that an entity that can print money cannot go bust, but if it begins to create liabilities without at least holding offsetting assets, it would very likely hasten the breakdown of the underlying currency system, so there is at least this small objection (not that the system is really worth saving, but this would be a highly unpleasant affair nonetheless). We already discussed this problem in the context of the notion that central banks should simply “cancel” the debt they have monetized (see: “Armchair Planners Plotting Monetary Conflagration” for details).

As to the second, allegedly “only” real economic objection, how naïve can one possibly be? Central bankers have “explained” how they will keep everything under control? Are those the same central bankers who presided over the Great Depression, the series of inflationary recessions of the 1970s, and the series of giant bubbles and financial and economic crashes of the past few decades? The same central bankers whose policies have actively contributed to the extant credit and money supply exploding into the blue yonder over the past four or five decades? The same ones who were fantasizing about the “Great Moderation” just before it blew up into their faces and who couldn’t recognize a bubble if it bit them in their collective behind? Or is he referring to some other batch of bureaucrats with better central planning abilities? Just asking, Clive!

Of course, the belief that these paragons of cluelessness will somehow get it just right this time is widespread. Mind, this is not to say that their cluelessness is necessarily a sign of a lack of intelligence or a lack of education. The problem is simply the fact that central planning of the economy is literally impossible. As we have noted before, central bankers are subject to a variety of the socialist calculation problem. Even if their motives were entirely pure and they had a thousand times more information at their fingertips than they actually have, it would still be literally impossible for them to do what they claim to be able to do. It is in a way fitting that Crook manages to mention the Communist manifesto in his screed.

For the sake of completeness, Crook also discusses a “political objection” (the fact that the so-called “independence” of central banks may be questioned), which we won’t discuss further here. Read his article if you want a good laugh, or, as the case may be, if you want to be terrified out of your socks. After all, this crass nonsense is actually seriously discussed by a number of well-known economists.



We have no idea what needs to happen to finally discredit the policy of incessant money printing. Probably nothing short of a total systemic collapse will do. Obviously, people have yet to learn a thing from what has happened thus far. If three major bubbles and two major busts over the past 20 odd years couldn’t do it, what can? We confess we are at a loss for an answer – in fact, not even a complete collapse of the currency system may suffice, since it would in all likelihood be blamed on what’s left of the market economy.


Charts by: St. Louis Federal Reserve Research