The Federal Reserve Board’s decision to implement a rise in interest rates this month is widely expected. However, this is only the second time in 8 years that this has occurred, the first 0.25% in December of 2015 and, as seems likely, 0.25% one year later. This is hardly tight monetary policy; 50 basis points in 8 years is largely symbolic, although, having said this, the January 2015 hike did cause quite a kerfuffle in the markets.
The Fed’s monetary incontinence has been replicated by central banks around the world in their attempts to deal with the bust of 2008, and the sluggish growth since that time. Monetary policy (to be distinguished from fiscal policy) has been used to counter deflationary trends and act as a prop to stave off complete economic/financial collapse. The policies involve several guidelines which include control of interest rates, bank reserve ratios, and Quantitative Easing (QE). The theory and practice of QE is not new. Once called Open Market Operations it involves the Central Bank – in this instance the US Federal Reserve Board, or, the ‘Fed’ – buying US Treasury Bills (government debt instruments) from various investors. From there the new money finds its way – it is hoped – into the American banking and credit system and further on to new investors. The policy is designed to increase liquidity putting more money into circulation and thus boosting aggregate demand; this in turn is supposed to increase growth and lead to a lowering of unemployment. So much for the theory.
In practice, however, things haven’t quite worked out as planned. Prior to QE, the Fed engaged in an aggressive policy of lowering short-term nominal interest rates; still the policy. These now stand at 0.25%, and in the UK, at 0.5%. This did not, however, have the desired outcome; so, enter QE. The first round (QE1) saw an injection into the US economy of US$1.75 trillion. This led to a recovery (of sorts) which started in the first quarter of 2009 and reached the giddy heights of 6% GDP growth in January of 2010. Since then, however, diminishing returns have set in and growth has declined significantly since those heady times: averaging an annual GDP growth rate from 2008-2015 of 1.3%. These anemic figures are not what a ‘recovery’ should look like.
The last QE injection – QE3 – took place in 2012, and the programme was officially closed in 2014. During this period the Fed expanded its balance sheet of ‘assets’ (should those toxic debts purchased as part of the Troubled Asset Programme TARP be regarded as ‘assets’ one wonders?) from $870 billion in 2008 to $4.5 trillion by 2014. And the effect on unemployment? Per the headline figures US unemployment fell from 9.9% in 2009 to a present low of 4.9%., However, to make any significant impact on unemployment a growth rate of more than 3% would have been required. Moreover, the figures for the labour participation rate have fallen concurrently with unemployment from 66.2% in 2007 to 62.8% now. We are asked to believe that both employment and unemployment fell at the same time as each other. Swallowing this piece of nonsense would take some Jesuitical reasoning, or Orwellian double-think! Thus, this unprecedented peace-time rise in liquidity, notwithstanding, all that has been achieved is, at best, a jobless recovery or growth recession, the emergence of asset price bubbles in property, stocks and bonds, and a huge increase in US government debts and unfunded liabilities to unpayable levels.
One of the reasons for the failure of orthodox monetary policy has been the inability on the part of the monetary authorities to recognise that in depression conditions (i.e., the current situation) as opposed to bog-standard post WW2 recessions; making more money available will not in itself lead to increased consumer spending and businesses investment; this is because of the high levels of both personal and household debt, as well as excess capacity in industry. Thus, despite the Central Banks’ attempts, both in the US and UK, to kick-start the economy by injecting further liquidity, such liquidity is simply piling up in the vaults of retail banks simply because consumers are paying down their debts, rather than spending, and businesses are putting investment decisions on hold due to market uncertainty and the existence of spare capacity in their businesses. Similarly, the retail banks, having had their fingers burnt when their mortgage derivatives turned overnight into toxic debt, are more interested in rebuilding their balance sheets than lending. Such lending that does take place – particularly mortgage lending – is now subject to very strict lending criteria. Increasing the money supply in this situation, is, as Keynes once said, like pushing on a piece of string. This is what is referred to in the economics jargon as the “liquidity trap” a situation where no amount of loose monetary policy has any impact on the level of demand in the economy. Retail banks are simply hoarding and profit seeking, mobile capital, is looking at more profitable climes abroad or speculation. This brings us to the second point.
Although the evidence for liquidity injections into the economy designed to bring about increased rates of growth and a fall unemployment were, to say the least, tenuous, this hasn’t stopped the monetary authorities from pursuing this strategy. Ah, if only wealth could be created ex nihilo, a bit like the big bang theory, something out of nothing. However, given that there are always opportunity costs in the world of economics, this policy has a very dangerous downside. Other things being equal, such a policy will almost certainly bring about a rise in the general level of inflation. Fortunately, this did not happen since these liquidity injections did not find their way into the real economy and money aggregates – M4 – contracted during the QE period. The monies were simply hoarded or used for speculative asset purchases. That would be bad enough in itself. But we should remember that the US$ is the global reserve currency and most central banks around the world hold most (60%) of their foreign reserves in US$s. This being the case US$ inflation would become global inflation. Additionally, given that excess dollars on global markets will lead to a devaluation of that currency, this will mean that all other currencies will be effectively re-valued which will give the US a competitive trade advantage. Now who is the currency manipulator?
Moreover, the surplus dollars with no investment outlets in the US will seek out investment opportunities which give the greatest return. These optimal investment opportunities will be found in the emerging economies of the BRICs. Brazil, Russia, India and particularly China with its massive infrastructure projects in central Asia and beyond, a 21st century Silk Road. But the influx of hot monies into these economies will drive up local currencies as well as equity and property markets causing multiple asset bubbles which would eventually burst as the hot money, after profit taking, promptly departs. This could be a re-run of the 1997/8 Asian crisis where hot money inflows inflicted severe damage on the then emerging economies of Thailand, South Korea, the Philippines and Indonesia.
As far as the rest of the world was concerned the US has declared a currency war on them. Now, retaliatory measures – control of capital inflows, competitive devaluations – are beginning to take shape. Non-Anglosphere nations increasing resent the extraordinary power enjoyed by the US through the position of the $ as the global reserve currency, central to international finance, trade and payments. This is to be expected in straitened economic times, notwithstanding all the pious platitudes about the need to avoid protectionism.
For their part the Americans argued that its huge deficits on current account have been caused by China pegging its currency to the US$ and thus trading with an undervalued currency. This seemingly reasonable argument would stand up if the fact that the USA runs a trade deficit with nearly all its trade partners is conveniently ignored. In this respect the UK is very similar. If a nation chooses to de-industrialise, allows its industry to be hollowed-out, allows foreign takeovers of its manufacturing base, allows its domestic industries to offshore (invest productive manufacturing abroad) and generally is content to see its export earning companies wither, as its economy becomes increasingly dependent on house price bubbles, financial services and the construction industry, while at the same time allowing an ultra-loose monetary policy, whereby banks offered limitless credit, which then resulted in increasing import penetration, then it can hardly complain about trade imbalances.
Being of a rather cynical disposition I would contend that the Fed’s policy is one of a deliberate attempt to initiate inflation (or debt monetization in the economics jargon). Not so much QE as Weimar MK2 to erode the mountains of debt which have piled up around the world. Inflation is, after all, just devaluation by the back door. In this way governments are rescued from their fiduciary commitments whilst savers, creditors, wage-earners, pensioners are shafted. Of course, this can never be openly admitted but this is nonetheless the policy which is being implemented. Better hope the bond markets don’t get a whiff of what is going on or they will certainly dump any inflated currencies thereby pushing up long-term interest rates. Then the world will go the way of Ireland and Greece. However, the attempt to stoke up inflationary pressures from central banks around the world is coming up against the immovable object of global deflation as prices fall due to lack of demand and excess capacity. This being the case a stalemate exists as the tectonic plates of inflation and deflation push against each other.
Little wonder the rest of the world regards US monetary policy as the beginning of an open trade and currency war. China, for example, with its massive holdings of US dollar denominated assets (US Treasury Bills) estimated at US$ 2.5 trillion, will take a huge hit as the value of these debt instruments is eroded. An induced inflation will also hit ordinary Americans as they see the value of their earnings and savings deteriorate. What inflation will do is pump up asset prices to unrealistic levels – this, it is hoped, will result in a “feel-good” factor which will encourage people to go out and spend. So there could be a short lived inflationary boom as stock markets go into euphoria mode as the inflation artificially lifts their asset values. Of course, it will be no more successful than the last ‘boom-cum-bubble’ Worse in fact since several nations are now in fact insolvent.
So, in policy terms we are back to square one: a policy debt-fueled, asset-price inflation. The very policy which got the world into this mess in the first place. These people are like the Bourbons: Forgotten nothing, learnt nothing.
In the coming period, it seems almost inevitable that globalization will no longer be able to survive in its present form. The forces of protectionism will become (have become) irresistible as each nation will endeavour to protect its interests as it sees them. Of course, the forces of globalization will push back. But this crisis has been brewing since the breakdown of the Bretton Woods dollar-gold based trading system and is now in an advanced stage.
For direct-transfer bank details click here.
This article should be entitled ‘Monetary Policy: The Endgame’. Globalisation and the monetary policy adopted by most central banks in the last 30-40 years are distinct although connected. The description of monetary policy in this article is accurate. As for globalisation, perhaps someone should talk to Jeremy Corbyn, who seems to think that the most important issue concerning the EU is access to a ‘free market’. I’m wondering which Marxist textbook he read that in.
I have found this article highly interesting and thought-provoking.
I also found some of the comments highly informative, especially the reference to window guidance as mentioned by Norman Pilon and further elaborated upon through his YouTube link to Princes of the Yen.
There is a lot more information on window guidane, jawboning and ‘suasion on the internet.
It has – apparently – been used in China too to power their economic development.
I would like to thank offGuardian for providing me – and us? – with a very useful thought-stimulating article.
I think the other John (below) missed the part of the article that read as follows:-
‘We are asked to believe that both employment and unemployment fell at the same time as each other. Swallowing this piece of nonsense would take some Jesuitical reasoning or Orwellian double-think! Thus, this unprecedented peace-time rise in liquidity, notwithstanding, all that has been achieved is, at best, a jobless recovery or growth recession, the emergence of asset price bubbles in property, stocks and bonds, and a huge increase in US government debts and unfunded liabilities to unpayable levels.’
The article does not claim to be news but an analysis of the USA’s current economic situation with regard to a number of factors, including employment and unemployment, among others.
My reading of what Frank is saying is that it is obvious that the official statistics are untrustworthy, bordering upon being completely meaningless. It is the same everywhere. Governments all around the world have spent years if not decades recategorising definitions of labour employment and unemployment in order to massage public perception on the issue.
To gain an understanding as to the extent to which employment and unemployment figures in the UK have been manipulated over time, read the rather long and quite complex article at http://www.radstats.org.uk/no079/webster.htm, reading closely the section headed ‘Why are the official unemployment statistics so misleading?’.
I imagine many of the same manipulative techniques have been employed by successive US administrations too.
What ever side of the pond one lives on or even elsewhere around the world, we have all been subjected to having pure bull-dust thrown in our eyes for the last four decades or so. It is little wonder people are confused.
Whoever wrote this article must be smoking the same thing the lying US Government is when they state the unemployment rate is around 4%. Try 28-32%. If OffGuardian is going to allow this type of propaganda on it’s website masquerading as legitimate reporting/dialog, then it is going to have to live with the label, “Fake News!”
Thanks Norman, you make the point I was trying to make below, far more eloquently than I could. That point being that ‘they’ know how to set up a functional QE programme – yet ‘they’ choose to do otherwise. I wonder why?
So how might Trumps fiscal policy shape up – as opposed to one that could actually deliver economic reform and close the inequality gap?
He wants to cut taxes for the already rich – he wants to cut taxes for the super rich corporations – these measures alone will put a big hole in his Federal budget. I wonder, who is going to pay for that?
He wants to repeal Dodd-Frank (which was a lame attempt to re-regulate the banks) – which will no doubt lead to a resumption of the free-market-free-for-all that led to the crash. Who picks up the pieces?
He wants to fund his infrastructure projects through tax breaks for the corporations who build them – these ‘revenue neutral’ schemes will not cost him or his friends a cent – but ‘Johnny Doe’ (an average citizen) will pay many times over (funding the tax breaks, paying the tolls – even paying the tariffs on their imported foreign cars) – and ‘Johnny Doe’s’ hick cousin will not see any new infrastructure at all – as it will not be economically viable to fund and build any in the rural heartland. The ‘Rust Belt’ could well be the ‘Even Rustier Belt’ in four years time.
Trump has two appointments to make to the board of the Fed immediately – and seven over the course of four years – will he choose reformers or will he fill the places with his laissez-faire capitalist cronies?
It is not shaping up well with the vulture capitalists he is surrounding himself with (Mnuchin, Cohn, Ross with their turncoat mate Soros in the background.) These people make money out of seeding chaos – foreclosure is a speciality. The ‘Zerohedge’ conspiratorially minded among us might begin to assume that this may be the plan.
With the Yuan (Renminbi) slowly eclipsing the almighty Dollar as the worlds reserve currency – one might begin to wonder if the ‘cashless society’ – thoughtfully being trialed by Modi in India at the moment – is the way it may develop. Indebting an entire society and holding all their assets to ransom – an unlimited pool of ‘human capital’ feeding the Ponzi scheme that can never fail – for the already uber-rich that is – the ultimate ‘shock therapy’ ushered in to ‘save the dollar from collapse’?
What do I know, this is just my worst case scenario – maybe they will all turn out to be philanthrocapitalists and deliver on all of Trumps campaign promises instead?
“Although the evidence for liquidity injections into the economy designed to bring about increased rates of growth and a fall unemployment were, to say the least, tenuous, this hasn’t stopped the monetary authorities from pursuing this strategy.”
Actually, QE as practiced by the Federal Reserve, is a perversion of both the actual theory and the practice, one which was successfully put into effect in Japan in the years following WWII to rebuild the Japanese economy at virtually no cost to the ruling establishments of both the U.S. (the victors over imperial Japan and now the real owners of that country’s economy) and Japan (the Japanese ruling class now under tight American control), and which Professor Richard Werner brilliantly describes in the documentary, Princes of the Yen.
Under a ‘real’ QE program, the money printed by the central monetary authority disburses legal tender in such a way that the funds MUST be used to hire manpower to develop industrial infrastructure to produce goods and services prescribed by the authority disbursing the legal tender. All of the funds printed and put into circulation therefore work to stimulate employment as well as to develop the productive capacity of the overall economic system. This approach was wildly successful in Japan in the period between the end of WWII and about the middle of the 1970s, when the American Oligarchy decided that the industrial capacity of Japan that had thus been developed was now ripe for plunder. At this moment, the Japanese monetary authority was ordered by its American master to cease and desist with “window guidance”, that is, to stop controlling how its funds were to be invested or used, and to merely leave it to the speculators to decide what to do with the money they were being permitted to borrow. Needless to say, the funds which had been going into “real world investements” suddenly began to accumulate in both the bond and stock markets, and the real economy thereby starved of a steady influx of necessary fiscal stimulus, since for-profit production cannot but by itself implode into a vicious spiral of economic contraction, began to falter, and businesses suddenly found themselves going bankrupt, and in doing so, became repositories of capital infrastructure that the U.S./Japanese oligarchies could appropriate for pennies on the dollar, so to speak. And to this day, the monetary policy of Japan, really directed from the U.S. abroad, continues in this vein.
Under the ‘ersatz’ QE program that the American launched after the 2008-2009 meltdown and which is being replicated world wide, and which is touted, as you put it, Frank, as being designed to bring about increased rates of growth and a fall unemployment, is anything but designed in that fashion. The first thing to note is that there is no “window guidance” as there had been in Japan. Rather than decree that all low interest loans of newly printed funds MUST be used to hire labour and to develop the productive capacity of the real economy, the funds are used to “monetize” government debt, thereby reducing the tax bill for the richest of rich, while at the same time providing funds to the giant investments banks for the purpose of, through big money speculators, propping up bond and stock markets, which benefits only, once again, the richest of the rich.
So it isn’t that QE is a harebrained theory that cannot work in practice, but that what we are told is a QE program is in fact a plundering operation resulting in a historically unprecedented concentration of wealth.
I highly recommend this documentary to anyone who wants to have more than just a vague inkling of what is really going on:
About the documentary (as quoted from the YouTube description):
There are two main conclusions you can draw from watching elite policy makers tinker with the collective livelihood of the people a.k.a. the economy. Either they are stupid and they do not know what they are doing – or they are high-functioning sociopathic criminals – operating in plain sight. (Clue – they are not stupid – but they count on collective ignorance to keep on getting away with it.)
Take the QE scandal. You would think that after creating a multi-trillion asset bubble; jobless recovery and a mountain of bad debt there would be a Plan B?
What about putting money into the grassroots of the economy in the form of extended benefits; a Universal Basic Income or even ‘Helicopter Money’? If the money does not ‘trickle down’ why not try a ‘trickle up’ solution? Or fund infrastructure projects with money NOT borrowed from the Fed at interest? Or craziest of all – “print the money” – which was a campaign trail Trump soundbite. If he were to ‘print’ the money debt free – that might not be so crazy at all.
Or you could bring back Glass-Steagall; re-regulate the banks; separate investment and retail banking and move to 100% reserve banking.
Or you could gamble with peoples lives – raise the interest rates – and risk that Americas Just About Managings – who are living on extended credit – cannot Just About Manage anymore.
Enter Trumps appointees for economic restructuring – the dream team of the 1% – Goldman Sachs billionaires to a man (except for the ex-Rothschild) – representatives of the group that brought in casino capitalism and the manufactured crash of Lehmans – the men that made their money from the biggest crash in living history.
I am not psychic – I think economics is bullshit – but what might we be looking at here – sovereign wealth; real living wages; full employment; social infrastructure – or a manufactured firesale for the 1%?
Also, the banksters have been using cheap or almost free money to speculate on international commodity (including money and metals) markets. This may generate a few extra jobs for some narrowly skilled individuals but it does little or nothing to create large numbers of well paid semi-skilled jobs which Trump has promised.
This is why right-wing populism is so very powerful now.
The banksters transfer their profits to overseas administrations, thus avoiding paying their fair share of taxation.
Meanwhile, the rest of the population are paying for the subsidies granted to private industry through tax payers having to either pay more in taxes or be forced to accept much-reduced social welfare systems from the state.
Just who are governments and central banks working for – only the elite or all of the people?
I think we all know the answer to that question when we simultaneously note the parlous state of public services.
When I was a young lad(in the ’60’s) we were told that taxation of workers wages was introduced in 1914 ostensibly to pay for WWI, and it was supposed to finish when the war ended, which it most certainly didn’t, and it is still with us today.
But, in hindsight, it just so happened to coincide with the formation of The Federal Reserve Bank(in 1913) when the power to print money, was handed over to the FED, and government lost the income that became the FED’s.
America handed its future over to the Banksters when the FED was born……….
The article assumes the Fed has a responsibility to balance the economy. Given it’s a private bank, responsible to private shareholders, how does this square? It has been reported that since 2008 the Fed has loaned at 0% interest about $16 Trillion to other private banks and corporations globally. The US government continues to borrow it’s own currency at interest from this private bank. The ensuing paper debt foisted upon the American public for repayment with items of value. A greater scam doesn’t exist. One doesn’t wonder why the Fed implements policy, one wonders why those charged with leading the country continue this fraud.
“one wonders why those charged with leading the country continue this fraud”
When you have the power to print money out of thin air(these days, it’s done digitally), you can buy whoever and whatever you want, right up to The President…….
Private or not, the Feds mandate is to maximize employment, stabilize prices, and moderate long-term interest rates. Other than that you are spot on – they have set up the biggest Ponzi scheme in history – creating wealth ‘ex nihilo’ for the already wealthy.
Henry Ford allegedly said that when the people realise what is going on – “there would be a revolution by tomorrow morning.” A hundred years later we are still waiting.
“Thus, despite the Central Banks’ attempts, both in the US and UK, to kick-start the economy by injecting further liquidity, such liquidity is simply piling up in the vaults of retail banks…….”
I don’t think that is quite accurate. My understanding is that the QE funds(used to purchase ‘mortgage backed securities’ never actually left the Federal Reserve Bank, but have been ‘parked’ in the Banks’ “Reserves Accounts” at the FED(on which they receive 0.25% interest). One has to question why the Banks ‘sold’ their MBS’s, on which they were receiving, say 5%, and chose to receive instead 0.25% on the QE in their Reserves Accounts(unless of course the MBS’s were actually BAD DEBTS?)
If the Trillions of dollars in QE had made it into the retail economy, all hell would have broken loose with inflation running wild.
Yes indeed, at least two-thirds of the newly minted QE monies issued by the Fed to commercial banks went straight back into the Fed’s excessive reserve function with interest being paid by the Fed to the same commercial banks. The QE never reached the productive economy, the velocity of money circulation ground to a standstill, hence no inflation.