Don't Bet on the Fed Pulling Out Any Time Soon
Jeff Harding at the Daily Capitalist shared a recent Mises.org piece by Dr. Frank Shostak which explains Shostak's views on what will go down once the Fed stops blowing up its balance sheet. And by "go down" I mean "occur," not "normalize" or blow or plunge.
We suggest that the key to boom-bust cycles is the Fed's monetary policy. The so-called economy of Fed experts' models is nothing more than monetary turnover that (once deflated by a dubious price index) is labeled as real economic activity or real gross domestic product. As long as the pace of monetary pumping is accelerating, the so-called real economy follows suit. Once, however, the pace of pumping slows down, the pace of the economy's so-called expansion also declines (after a time lag).
Shostak also suggests that CPI will run closer to 5% by the end of the year, among other things. Harding's thoughts on that? QE 3 is the inevitable answer to any oncoming financial malaise headed straight for us should the Fed really pull out like they've been saying they're going to do.
That light at the end of the tunnel? It's a fucking train, obviously.
The consequence of taking their foot off the money pedal will lead to higher unemployment and I do not think this is politically acceptable to the Fed or to the Administration. I think they will institute a new round of quantitative easing (QE3) because politicians will demand that the Fed “do something.” Which is, of course, the worst thing they could do. It will lead to more “bubble” activities and higher price inflation. See Will Fed Insist on Trying to Ignite Unhelpful Wealth Effect?
I believe the Fed and the Administration will be willing to tolerate a higher level of price inflation and for a much longer period of time, despite the inflation hawks’ warnings. I think this new money stimulus will occur no later than during the start of the presidential election period (January, 2012), and will continue until the winner is sworn in. I think Dr. Bernanke will be fired thereafter.
As I have said before, it's obvious to anyone with half or even a quarter of a brain that quantitative easing, easy money and/or money laundering (pick your poison) is not going to solve our unemployment problem, nor was it ever intended to. That's not the issue.
In my mind, it's actually politically disadvantageous for the Federal Reserve and the Obama administration to continue printing money out of their asses, especially now that the unwashed masses have kind of caught on to the fact that this is all a scam and that they're being screwed. Hard. Daily. From behind. Sans lube. Ouch.
Here's a great bit from the St. Louis Fed on the importance of a central bank in avoiding political influence in tumultuous times. With great power comes...
That is why most governments took steps to tie their own hands and make themselves credible stewards of their nation's economic interests. It became very clear that if elected government officials had direct control of the money supply, then they could cut taxes and print money to pay for goods to win votes. Consequently, promises by elected officials would not be seen as credible. To achieve credibility and avoid this abuse of public power for private gain, the control of the money supply had to be delegated to a nonelected group of individuals. These officials were to run the institution responsible for monetary policy, known as the "central bank." It was important that central bankers be independent of the political process to ensure that they could not be manipulated by elected officials. However, having such great power meant that central bankers had to be accountable to the electorate in some fashion, and accountability required the central bank to behave in a transparent manner. Thus a well-designed central bank needed to be 1) credible, 2) independent, 3) accountable and 4) transparent.
Well let's see... the Fed has negative credibility right now (and can't print up more) and has burnt up most of its political capital fighting to retain its position as #1 debt pusher. Independence? Yeah right, if you believe the Fed is independent, I have a warehouse full of unicorn piss to sell you. As for accountability, we're not sure to whom the Fed would be accountable but it certainly isn't any one of us, the poor assholes who have to use dollars to eat, as that would mean they have some serious 'splainin' to do, Lucy. And while I will reluctantly admit that the Fed has taken some pretty big steps towards transparency, it's going to take more than a few dog and pony press conferences and a website redesign to convince me that they are actually taking steps to improve the communication process. Then again, Philadelphia Fed finally got bold enough to tweet me back so who knows, maybe they are making strides in that area.
Anyway, it remains to be seen how and when the Fed will actually pull out, I'll believe it when I see it. My money's on QE 1,515,735 or however many they get to until we finally get smart and kick 'em to the curb where they belong. If Congress were smart enough, they'd knock nearly a trillion dollars off the national debt just by ending the Fed (all debts null and void, can't owe money to someone who doesn't exist!). But we know we'll never see that in our lifetime.