Seven
years of extraordinary fiscal and monetary stimuli are proving ineffective
towards achieving the growth and inflation targets laid out by the Federal
Reserve. The Consumer Price Index (CPI), the Producer Price Index (PPI) and
Gross Domestic Product (GDP) have all failed to grow over 2%. This is because
asset prices, at these unjustified and unsustainable levels, need massive and
ever increasing amounts of QE (new money creation) to stave off the
gravitational forces of deflation. Fittingly, it isn't much of a mystery that
the major U.S. averages have gone nowhere since QE officially ended in October
of 2014.
According
to the highly accurate Atlanta Fed model, GDP for Q3 will be reported at an
annual growth rate of just 0.9%. And things don't appear to be getting any
better for those who erroneously believe growth comes from inflation: September
core retail sales fell 0.1%, PPI month over month (M/M) was down 0.5% and year
over year (Y/Y) was down 1.1%. CPI was down 0.2% M/M and the Y/Y headline level
was unchanged.
While
the deflation effect from plummeting oil prices wears off by years-end, there
is no reason to believe the same deflationary forces that sent oil and other
commodities down to the Great Recession lows won't start to spill over to the
other components, such as housing and apparel, inside the inflation basket.
This would especially be true if the Fed continued threatening to raise
interest rates and driving the U.S. dollar higher.
Central
banks and governments can always produce any monetary environment they desire.
It is a fallacy to believe that deflation is harder to fight than inflation.
Deflation is currently viewed as harder to fight because the policies needed to
create monetary inflation have not yet been fully embraced-although this is
changing rapidly.
The
Fed just can't seem to grasp why its newly minted $3.5 trillion since 2008
hasn't filtered through the economy. But this is simply because debt-disabled
consumers were never allowed to deleverage and markets were never allowed to
fully clear.
But
the Fed isn't one to let the truth get in the way of its Keynesian story. And
why should it? Financial crisis is the mother's milk of increased central bank
power. For example, before the last financial crisis the Fed was unable to buy
mortgaged back securities; rules were then changed to allow it to purchase
unlimited quantities of distressed mortgage debt. The Fed is perversely
empowered to continue making greater mistakes, thus yielding them greater
authority over financial institutions and markets.
Since
2008 the rules and regulations fettering Central Banks have become more
malleable depending on the level economic distress. Congress has mandated that the
Fed can not directly participate in Treasury auctions. But there is no reason
to believe in the near future that this law won't be changed to better
accommodate fiscal spending.
Strategies
such as: pushing interest rates into negative territory, outlawing cash, and
sending electronic credits directly into private bank accounts may appear more
palatable in the midst of market distress. The point is that Central Banks and
governments can produce either monetary condition of inflation or deflation if
the necessary powers have been allocated.
In
the Fed's most recent dot plot (a chart displaying voting member's expectations
of future rates) the Minneapolis Fed's Kocherlakota was mocked as the outlier
for placing his interest rate dot below zero. However, persistent bad economic
news has quickly driven the premise of negative rates into the mainstream. Ben
Bernanke told Bloomberg Radio that despite having the "courage to
act" with counterfeiting trillions of dollars, he thought other
unconventional issues (such as negative interest rates) would have adverse
effects on money market funds. However, anemic growth in the U.S., Europe and
China over the past few years has now changed his mind on the subject.
Supporting
this notion, the president of the New York Fed, William Dudley recently told
CNBC, "Some of the experiences [in Europe] suggest maybe can we use
negative interest rates and the costs aren't as great as you anticipate."
Indeed, over in Euroland, ECB President Draghi hinted recently that the current
1.1 trillion euro ($1.2 trillion) level of QE would soon be increased, its
duration would be extended and deposit rates may be headed further into
negative territory.
Statements
such as these have me convinced that negative interest rates in the U.S. are
likely to be the next desperate move by our Federal Reserve to create growth
off the back of inflation. After all, the Fed is overwhelmingly concerned with
the increase in the value of the dollar. Keeping pace with other central banks
in the currency debasement derby is of paramount importance. Outlawing physical
currency and granting Ms. Yellen the ability to directly monetize Treasury debt
and assets held by the public outside of the banking system could also be on
the menu if negative rates don't achieve her inflation mandates.
Instead
of repenting from the fiscal and monetary excesses that led to the Great
Recession the conclusions reached by government are: debt and deficits are too
low, asset prices aren't rising fast enough, Central Banks didn't force interest
rates down low enough or long enough, banks aren't lending enough, consumers
are saving too much and their purchasing power and standard of living isn't
falling fast enough.
The
quest of governments to produce perpetually rising asset prices is creating
inexorably rising public and private debt levels. The inability to generate
inflation and growth targets from the "conventional" channels of
interest rate manipulation and the piling up of excess reserves are leading
central banks to come up with more desperate measures.
We
can see more clearly where Keynesian central bankers are headed by listening to
NY Times columnist Paul Krugman's suggestions for Japan to escape its third
recession since 2012. He recently avowed that Japan needs much more aggressive
fiscal and monetary stimulus to escape its "liquidity trap" and
"too-low" rate of inflation. However, his spurious argument overlooks
that the Bank of Japan is already printing 80 trillion yen each year, its
Federal Debt is spiraling north of 250% of GDP, and the annual deficits are
currently 8% of GDP.
Here
it is in his own words: "What
Japan needs (and the rest of us may well be following the same path) is really
aggressive policy, using fiscal and monetary policy to boost inflation, and
setting the target high enough that it's sustainable. How high should Japan set
its inflation target...it's really, really hard to believe that 2 percent
inflation would be high enough."
You
see! According to this revered Keynesian economic expert if what you've already
done in a big way hasn't worked all you need to do is much more of the same. Unfortunately,
Krugman and his merry band of arrogant Keynesian haters of free markets
represent the conscious of global governments and central bankers. What they
indeed are creating is a perfect recipe for massive money supply growth and
economic chaos. Therefore, if these strategies are followed, it will inevitably
lead to a worldwide inflationary depression. And this is why having a gold
allocation in your portfolio is becoming increasingly more necessary.
http://affluentinvestor.com/2015/10/fed-headed-into-inflation-overdrive/
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