Outer Limits of Monetary Policy and Inflation

The ISM has once again expanded.  Policy is working, so please Dear Mr. Bernanke, begin to withdraw not only a token amount of Treasury bond asset buying in October; make a real statement for the ‘organic’ economy.  Pull all T bond purchases and stop buying some MBS to boot.  You’ll not only help the Fed’s balance sheet by doing so, you’ll also send a clear message to the people that you have confidence in the natural economy to build on its momentum.


September PMI at 56.2%, courtesy of ISM

While you are at it, would you please consider doing what Alan Greenspan did in 2004 and begin to raise the unnaturally low Fed Funds rate?  With the economy briskly moving forward and gaining momentum, how about giving Grandma a break on her savings account at the local bank?  How about giving kids with new savings accounts, being taught by their parents the value of saving, a break with a little interest income?

The banks are bailed out, manufacturing is roaring back and even ‘jobs’ are slowly stabilizing.  Rome wasn’t built in a day.  It has now been 5 years of extreme policy making and it is time to stop punishing the savers, the middle and lower classes and others not connected to the power structures along money trail.  Alan Greenspan did just that in 2004 as his credit-engineered recovery took hold.

But this time around the macro-financial rules have changed; or maybe there simplyare no rules.  Rising yield spreads since 2007 indicate a rebellion in T bonds that dwarfs the one Greenspan dealt with in 2004.  But the policy response has not been the ‘normal’ one pursued by Sir Alan as he raised the Fed Funds and tried to get out ahead of the bond market.  Bernanke’s Fed has simply maintained a ‘damn the torpedoes’ ZIRP-infinity approach and so far it has worked, spectacularly.

For much of the last 2 years the curves have declined as the Fed first TWISTed by buying long-term and selling short-term bonds and after running out of short-term bond supply, simply settled on QE’s long-term bond buying to keep macro signals in line.  The question is, how long will this keep up?

It is truly amazing how the act of inflating is actually keeping inflation signals in check as long-term yields are repressed.  Policy and an uncritical media have gone hand-in-hand, painting a desired picture and keeping unquestioning market players in line and eating out of their hands.

Greenspan’s legacy was a near total destruction of the financial system after he did the ‘right thing’ and raised the Fed Funds rate.  It appears that we will be stuck in a holding pattern as the Bernanke Fed dare not even make a hint that policy will be withdrawn.  Don’t look where the media insist you look (the over hyped partial ‘taper’ of bond purchases), look where the real policy mechanism has been whirring along for nearly 5 years now; ZIRP, the red line on the chart above, in the face of systemic stress.

This is another post by a ‘doomer’ lunatic simply trying to ask rational questions in a cooked up environment.  For 2 years yields spreads have been contained by a combination of bond buying/selling of strategic maturities and outright long-term bond buying.  What would the curves above have done if the Fed were not so active in the bond market?

The answer is they would have indicated another crisis.  Believe me, my personal situation benefits from a ‘Bernanke the HERO’ fantasy.  My problem is that I don’t believe it and have never been comfortable just getting in line and awaiting instructions, in suspended animation.

Over the last couple of years I have worked the Outer Limits schtick for all it is worth, often quoting the show’s opening lines instructing the viewer to sit quietly in front of the TV set while control is maintained.  So this time we’ll paraphrase the show’s closing lines:

“We now return control of your television set to you. Until next week crisis at the same time a future date, when the control voice will take you to – The Outer Limits.”

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