The Fed Is Insolvent
Alright, before you get pissed at me for daring to use that headline (I hear you already "But JDA! How can they be insolvent if they have the magic money machine?") I'm not talking about actual money - if we even know what that is anymore - but instead referring to the limited amount of political capital the Fed had to gamble. No one can argue that they've burnt it out and they themselves know it. Why else would they start being so painfully transparent by pushing additional asset purchases "on a need-be basis" and suddenly be so up front about their inflationary goals?
Said NY Fed President William Dudley last week:
Further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long.Did you read that? They are definitely buying more stuff. We know the employment outcome sucks but inflation? It's low, what's the problem? They should be thrilled about that considering all the fake made-up money they've got floating around out there. Yeah, I know, I am not telling you anything new nor saying anything that hasn't already been said before.
Obviously he means inflation is not high enough and obviously that is because the fake made-up money is really just a debit to banks credited on the Fed's unlimited blip supply. It is not real money until it hits the open air and so long as it is being shuffled from banks to the Fed and back, it isn't actually money. Sure it's money and sure it's really being used to fund the operations of the U.S. government (but banks get credit for the Fed's easy money on their balance sheets because they technically hold the Treasurys that handed the money over to the government) but technically it is not money. It becomes money if the banks turn around and lend it to you, useless little broke American, and you in turn go out and debit someone else's account for a big screen TV, home repairs, Alpo, whatever.
The Fed seems entirely capable of manufacturing an unlimited number of blips to satisfy the demand for cheap easy money but no amount of blips can restore their bankrupt political capital account and, in fact, too many blips could end up putting them in negative territory. It is one thing for the Fed to be accosted constantly by nagging bloggers, it is quite another for the world at large to lose its faith in the U.S. dollar and our ability to restrain ourselves.
I find it interesting that they are so open about their objective at this point: to raise inflation to a satisfactory level that could, in the end, risk fulfillment of the "price stability" half of their alleged dual mandate. We all knew they were up for whatever it takes but it is interesting to watch them be so transparent about it. I mean this is the Fed we're talking about.
In my humble opinion, it's because they have finally come to terms with the fact that they are fucked.
Maybe that's why NY Fed wanted to get the hell out of that AIG mess and pass it all off to the taxpayer. It's not like Tim Geithner tried to stop them.
Let's bring back Ben Bernanke and his helicopter cash drop for an important lesson in why these guys have absolutely no idea what they are doing:
So, is deflation a threat to the economic health of the United States? Not to leave you in suspense, I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small, for two principal reasons. The first is the resilience and structural stability of the U.S. economy itself. Over the years, the U.S. economy has shown a remarkable ability to absorb shocks of all kinds, to recover, and to continue to grow. Flexible and efficient markets for labor and capital, an entrepreneurial tradition, and a general willingness to tolerate and even embrace technological and economic change all contribute to this resiliency. A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape. Also helpful is that inflation has recently been not only low but quite stable, with one result being that inflation expectations seem well anchored. For example, according to the University of Michigan survey that underlies the index of consumer sentiment, the median expected rate of inflation during the next five to ten years among those interviewed was 2.9 percent in October 2002, as compared with 2.7 percent a year earlier and 3.0 percent two years earlier--a stable record indeed.Anyone else find it strange that for as well-regulated and sound our banking system is supposed to be, the Fed supposedly stopped counting M3 some time ago and inflation is more of a "feeling" than a factual number? Don't they keep track of how many bills are spit out of the printer and reconcile that with how many billions the banks are making up in loans? It really should not be that complicated but of course it has to be because if they knew then (God forbid) so would we. Suddenly those FRNs in your wallet would seem a whole lot more pathetic than they do now, being of some intrinsic value based on your spiritual connection to what they are worth. That's the problem with a faith-based monetary system run by a bunch of godless pig idiots who don't have any clue what they are doing. Certain not so bad Fed asshats excluded.
We are gradually conditioned, over our lifetimes, to accept inflation and even look fondly at it. We joke about "when I was your age, that cost a nickel..." and get nostalgic for prices that have been long gone 10 or 20 years. I've watched a candy bar go from 50 cents to almost $1 in my life and I'm not even 30 yet, anyone else see an issue with being complacent about that? The tooth fairy used to leave me a few quarters, now I'm shelling out $5 a pop.
But with inflation expectations low, the Fed is hard at work trying to brew some up hoping you won't notice (that's the "slack" they're always talking about). It's the only prescription for this deflation that grabs Bernanke in his nightmares. Surely the Fed is not so narcissistic to think they can actually pull it off without A) us noticing and B) destroying the dollar in the process.
Something's got to give. They don't have politics on their side and, if I am not mistaken, they burned up the last of their political capital trying to save their own asses ahead of financial reform. Whoops.
I haven't seen how they are accounting for what political capital they have remaining but I imagine that has to be a huge motivator for each and every Fed decision maker right now. That can't be easy to live with.