FED IS CHASING ITS OWN TAIL
Did you ever watch a dog get caught up in the act of chasing its own tail? It continues to run in a circle as the object of its fascination and intention continues to elude it. The action is quite comical, almost hilarious.
The expectations of the animal are both foolish and amusing. You might feel inclined to want to communicate the unrealistic expectations to the engaged participant, but you know your efforts would be in vain.
Observing the actions of the US Federal Reserve Bank over the past several years brings to mind similar recollections…
Fed’s 2% Inflation Target Is Pointless
“…if an inflation target is justified, why 2%? Why not a lower number? Or any other number? In truth, it probably doesn’t make any difference. From the Fed’s perspective, it gives them a license to openly discharge their firearms in the public square. If they miss, they can just reload and fire again. Should they happen to hit the target, they can either maintain their current posture, or tweak it accordingly so as not to overshoot in the future. But they will never “hit” their target. Especially this one. Why not? Because it is a moving target, comprised of moving parts. And it is the result of the Fed’s own previous actions.” (The Fed’s 2% Inflation Target Is Pointless by Kelsey Williams)
Inflation is the debasement of money by government. The term ‘government’ includes central banks. The Federal Reserve debases money by continually expanding the supply of money and credit. This leads to a loss of purchasing power in the US dollar. The loss in purchasing power in the US dollar is the effect of inflation. It is cumulative and unpredictable.
By trying to specifically target the unpredictable effects (“rate of inflation”) of its own actions (the continual debasement of money), the Federal Reserve is chasing its own tail.
Another example of the unpredictability of effects of the Fed’s actions came almost a decade ago. Most observers expected the huge inflationary expansion of money and credit associated with QE to send prices of ordinary goods and services soaring. That didn’t happen.
What did happen is that financial assets such as stocks and bonds, soared in price. Also real estate prices recovered and went to new highs. It is reasonable that the higher prices for investments and assets reflected absorption of the inflationary effects of the Fed’s money creation.
Indigestion In Repo Market
Recently, attention has focused on repurchase agreements and the rate for available funds in the overnight lending markets. A scarcity of liquid funds, and the corresponding sharply higher rates in the repo market spurred the Fed to provide billions of dollars to financial companies who needed the money to maintain their operations and fund their ongoing activities on a daily basis.
The Fed announced shortly after that it would buy $60 billion of Treasury debt each month until June 2020 to insure that liquid funds are available.
Wonderful, you say. The Fed has saved the day again. But are there broader implications?
To some it might seem logical that the actions of the Fed are policy driven and could lead to disastrous effects, such as runaway inflation. Then again, that is what quite a few observers thought about the Fed’s actions a decade ago. We know that things did not turn out as expected.
No, runaway inflation is not the bigger risk. The bigger risk, and critical problem, is illiquidity. The illiquidity and fragility of the system is such that another credit collapse is in the offing. Recent disturbances in the repo market are an indication of that illiquidity.
Ask yourself this question: How long can someone loan huge amounts of money indefinitely before unexpected consequences bankrupt them? How long can they do so without seeing the results that justify their own viability, let alone, those who are beholden to them?
In addition, the Fed’s inflationary efforts are losing their intended effect. The Fed has lost control of things and spends most of its time putting out fires.
Purpose Of The Fed
The arguments about Fed policy center on what is, or isn’t, appropriate. Should the Fed lower rates; or raise them? Should it change the reserve requirements? Is Chairman Powell living up to earlier expectations for a “more transparent Fed?”
The problem with those questions is that they presume the Fed exists for the purpose of orchestrating financial order and providing support for the system in ways that will benefit all of us. That is not the case.
The US Federal Reserve exists for the benefit of the banks and bankers. Their purpose and motivation is not aligned with ours. Fed objective is to facilitate the ongoing creation of money and loans which generate interest income. The Fed also acts as an agency of control for member banks and a collective foundation of support for the larger banks. (see The Federal Reserve – Purpose And Motivation)
Ironically, our financial problems are the result of the Fed’s ill-advised attempts to manage the economic cycle. Yet, the Federal Reserve caused the Great Depression and the Great Recession. Is it realistic to think that they can prevent another credit collapse? On the contrary; it is dangerously presumptive.
(also see Federal Reserve – Conspiracy Or Not? and The Federal Reserve And Drug Addiction – A Prediction)