My email box pretty much exploded today as the metals rally and divergence from stocks woke up the audience. And the action in my own accounts tended to be diverting, and not unhappily so. Sorry if I have been slow in getting back to you all, and in answering your questions.
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.
