“It is amazing to watch how many Republicans will speak with such conviction against Keynesian fiscal stimulus policies, yet they will fervently promote monetary stimulus policies by the unaccountable Federal Reserve. Their support for near-zero interest rates, quantitative easing, bailouts, and intervention in the housing sector has muddled our message against Obama’s anti-free-market policies.”

It’s worse than you think. Even in Indiana, the Republican dominated legislature rescinded Governor Daniels’ pledge to Amazon concerning the taxation of purchases made through Amazon (in return Amazon opened up 10 distribution centers and administrative offices in Indiana, which created thousands of new jobs). Not only did they vote to tax such purchases, but they also will begin such taxes before Amazon can update their software. The so-called new Right Wing Governor Pence says he will sign the new tax bill.

The GOP is finished as a viable alternative to the Progressives. If one cannot count on Indiana, who can you count on?

Imagine paying 3-4% more on nearly $1,000,000,000,000.
The US and the Fed are boxxed in with no escape. Every 1% increase in rates, at this point = a $160bn a year increase in interest expenses. That’s on top of a structural deficit in the $1Tn range. The only way out is either inflation or high economic growth for a prolonged period of time (5% a year for 3-4 years), which is impossible in the current statutory environment.
So the Fed has no choice but to keep QEing indefinitely and hope for the best.

The Fed does have a choice. They just don’t want to exercise it mainly for political reasons. Although they have a dual mandate, their prime directive is to preserve the confidence in the dollar. They should ignore unemployment for now and focus only on monetary policy. By way of putting off the inevitable, they will end up making the correction that is sure to come that much worse. Ultimately, with QE they are undermining both of their mandates. QE can only be a temporary policy, and we are in our third year, scheduled for at least two more? No bueno!

As soon as Harry Reid lets the Audit the Federal Reserve bill (S. 209) get to the Senate, and it passes I think it will not be long after before people begin demanding its end.

“By way of putting off the inevitable, they will end up making the correction that is sure to come that much worse.”

Yes Sir!
The Crash of 2013?

http://www.federalreserve.gov/monetarypolicy/fomcminutes20121212.htm
The Fed acknowledged that QE causes inflation expectations to rise.
The Fed was divided on the efficacy of QE.
The Fed was not committed to employing QE forever despite its public declarations to that effect.

When the entire financial system began to implode courtesy of the EU, Euro and the last straw, Spain…………..

The Fed launched open-ended, having no definitive timelines, QE 3 in September 2012 and then QE 4 in December 2012. It did push the stock market higher, it did next to nothing for the US economy.

Today, the US economy is contracting sharply again (without the massaged data inflation, real GDP growth would have been -1% last quarter) right as stocks close in on new all-time highs (the S& 500 and Dow) or have already broken to new highs (the Russell 2000).

So, at a time when earnings are falling (despite companies booking profits), the economy is slowing, and stocks are closing in on all-time highs. In plain terms, the stock market has become totally detached from economic realities. There is a term for when asset prices become detached from fundamentals, it’s called “A BUBBLE.”

The Fed. has help cause another bubble and that we’re likely headed for another Crash. And this time around the Fed will be totally out of ammo to stop it. Unlike 2008 which was just a warm-up, this will be the ‘REAL CRISIS’ featuring full-scale systemic failure.

1) Are we a few months, or very likely just a few weeks from the economy taking a massive downturn, potentially taking down the financial system with it?

2) Is the Fed is pumping hundreds of Billions of dollars into financial system right now trying to stop this from happening?

3) Am I right? Wrong? Timing off? Or fairly close?

The Fed does have a choice. They just don’t want to exercise it mainly for political reasons. Although they have a dual mandate, their prime directive is to preserve the confidence in the dollar.

The real, ustated, reason for the creation of the Fed, and every other central bank, is to be the lender of last resort to the soveriegn and to protect the banking sector from liquidity crunches. When push comes to shove the fed will pursue policies to that end, even if doing so causes inflation.

Oh, and how much physical specie do you think we would need to support our current QE policies?

Ah, but “high economic growth” implies a demand for money for expansion, i.e., increasing interest rates, which can only be countered by increasing the money supply.

Economic growth usually leads to greater monetary velocity and a lower demand for money.

The trick to avoiding inflation is to get the economy growing faster than the money supply.

Which is impossible, imo, in the current political environment because it would require a great deal of statutory change to eliminate vast swaths of regulations and severely limit tort actions. It will be much easier for the political class to use inflation than confront their pseudo religious beliefs.

I suggest caution here. I support a strong dollar. I do not believe the FED should have a dual mandate. I do not see the FED’s manipulation of interest rates as being helpful and it is potentially very unhelpful as the market can’t rely on market interest rate signals, creating the very uncertainty that undermines the credibility of the FED’s actions.

Here is what the FED is doing in plain English:

They create money (now exceeding $2 trillion) out of thin air and use it to buy mortgage bonds and other fixed income securities in the open market, thus forcing down interest rates. The FED’s artificial demand increases bond prices, driving down the effective yield and thus market interest rates.

I see no particular reason why the FED would ever be compelled to urgently resell these securities short of a complete loss in confidence in US backed bonds forcing the FED to use the cash to pay the government’s bills. The FED is virtually certain to be able to gradually sell these bonds back into the market and/or simple wait for them to mature and retire all that money that was created out of thin air.

So, the policy of printing money to manipulate market interest rates is not risky in the sense that those trillions will not end up dumped into the economy and foster inflation. The most desirable outcome is to allow the bonds to mature and simply declare the cash proceeds not to exist, reversing the money creation.

Of course reversing the money creation over time requires an independent FED and sound judgment on an ongoing basis by FED management, two risks that would not exist absent the money printing/interest rate manipulation policy.

What we can do in the short run is put pressure on the FED to stop additional money printing, sending the first clear signal to the markets that the interest rate manipulation will stop. Once this is done, methods used to reverse the money printing will be the subject of considerable debate and will take years to complete in any event.

Regards, Pete Weldon
americanstance.org

Well put. We are watching a new ‘Keynesian’ monetary policy that as you rightly say (along with Mr. Horowitz) creates a dependency. Much like any narcotic — we can’t live without it!

The real pathway out of this mess has few followers and roughly zero of them in political leadership.

Inflation = too many dollars chasing too few goods. One of the ways the FED pulls dollars back out of the system is by selling the treasuries on their balance sheet.