On Saturday we once again explored the question of whether central banks are creating deflation. The idea that post-crisis DM monetary policy may be causing disinflationary pressures to build is somewhat counterintuitive on its face but in fact makes quite a lot of sense. Here’s how we explained it: http://www.zerohedge.com/news/2015-04-26/when-qe-leads-deflation-look-confounding-global-supply-glut
Read it. Don't agree. The reason you have a glut is because of high prices that preceded the great recession. High prices encourage new entrants and increased production. Demand falls rapidly in a recession, an oversupply results from this and the conditions that preceded the recession. Some prices may fall, others extremely sticky, having to do with whether the market is globalized. The weaker market participants eventually fold or are absorbed. All part of the business cycle. This recovery much longer than most because the recession was much deeper than most. Demand is still weak and will build extremely slowly in this cycle. (Demand in the U.S. is not helped by the extreme U.S. income distribution.). There is still a supply hangover. Prices and wages are locally sticky. The shake out takes time. Be patient.
I agree with piezoe and want to stress that it's not just a supply hangover. The underlying problem is fear among the wealthy. This has caused a collapse in the velocity of money. See St. Louis Fed papers and charts on the subject here: https://research.stlouisfed.org/fred2/categories/32242 The collapse basically means that rich people, and the institutions they control (especially big profitable corporations) aren't spending their money. They're leaving it just sitting in the bank. Hence the supply glut. To get them to spend their money the Fed is doing several things. First, pumping huge amounts of money into the system increases their bank accounts and that makes them more inclined to spend. Second, lowering short term interest rates makes the return for holding money lower and that makes rich people look around for investments / spending. Third, the increase in the money supply suggests that we'll eventually have inflation and that should be influencing people to diversify out of money and into real goods (i.e. spend their money). If the Fed hadn't done the QE thing, our economy would have been that much worse. We could have gone through a depression similar to the 1929 one. Instead the public isn't rioting in the streets for bread, the communists aren't getting 5% of the US vote, downturns aren't being set on fire and the Nazis aren't taking over in Europe (yet). All these things did happen in the 1929 depression but the Fed has ameliorated the effect to the extent that we've avoided these kind of nasty problems.
Completely agree that we would be in a 1929 style deflationary depression. I just wish the Fed had taken preventative steps since to break up banks and had ended QE sooner (accepting a little pain) to stop any malinvestment. Instead, here we are in 2015 with all time stock market highs and just like in 2008 a simple rate hike threatens to crash the economy.
Ended QE sooner? It's going to be here forever! Here's the Boston Fed's take on adding QE to the number of tools available permanently, not just for emergency! ------- Perhaps it was inevitable. After all, the term “QEfinity” entered the financial lexicon long ago and there were already quite a few commentators out there suggesting that it may now be too late to remove the punchbowl, meaning an “exit” will not only prove difficult, but may well be impossible. Take Makoto Utsumi, who oversaw foreign-exchange policy at the Japanese Ministry of Finance from 1989-1991, for example. Utsumi recently said a BoJ QE exit was out of the question “for the foreseeable future” and went on to note that “even the thought of an exit is a nightmare.” Meanwhile, it’s virtually impossible to say what effect Fed tightening will have in both the Treasury and corporate bond markets given the lack of liquidity in both and then there’s EM where carnage unfolded in 2013 after a certain bearded bureaucrat said the wrong thing about the direction of Fed policy. Given all of this, we’re not surprised to learn that in a new paper entitled “Let’s Talk About It: What Policy Tools Should The Fed ‘Normally’ Use?”, the Boston Fed is now suggesting that QE become a permanent tool at the disposal of the Fed. After all, “financial stability” depends on it… During the onset of a very severe financial and economic crisis in 2008, the federal funds rate reached the zero lower bound (ZLB). With this primary monetary policy tool therefore rendered ineffective, in November 2008 the Federal Reserve started to use its balance sheet as an alternative policy tool when it began the large-scale asset purchases. Now attention is turning to how the Fed should transition back to a more conventional monetary policy stance. Largely missing from these discussions about the Fed's "exit strategy" is a consideration that perhaps it should retain, not discard, the balance sheet tools. Yes, oddly missing from the Fed’s exit strategy is the idea that there should be no exit. Of course the idea that what was previously “unconventional” policy should now become “conventional” is supported by Fed mission creep because now, the dual mandate has apparently become a “tri” mandate: Since the Dodd-Frank Act (DFA) has added maintaining financial stability to the Fed's existing dual mandate to achieve maximum sustainable employment in the context of price stability, it might be beneficial to have several tools to achieve multiple policy objectives. An additional consideration is that some of these tools may be needed to stem future crises as a result of the DFA's new limitations on how the Fed can provide liquidity under such adverse circumstances. The particularly amusing thing here is that if the Fed’s third mandate is promoting financial stability then they’re doing a rather poor job of it so far and asset purchases are the primary reason why. A lack of Treasury market liquidity contributed to last October’s Treasury flash crash and as we’ve pointed out on so many occasions that it now borders on the comical, nothing good can come from sucking every piece of high quality collateral out of the system. Meanwhile, keeping rates low has triggered a bonanza of corporate debt issuance just as the new regulatory regime has ensured that secondary corporate credit markets are just as illiquid as the Treasury market. * * * So yes, please retain QE as a permanent policy tool (as we always knew you would). It’s done wonders for demand and financial stability thus far.
Please explain how the Fed pumping huge amounts of money into the system increases the bank accounts of rich people and profitable corporations. So you mean it forces people into more risky investments than they would otherwise accept under normal monetary conditions? And this is a good thing? This ship has sailed. Everything from farm land to commodities to equity markets (all asset classes) have already been bid to the moon. Have you seen bonds lately? How about HY? What happens when this ends? What you're advocating is the push to create more and more bubbles. LOL! It's so easy to claim what "might have been". Here's mine: If the Fed hadn't done QE, we'd have had a very painful few years, but would have been on the track of a real recovery by now with debt flushed out of the system in the manner in which debt is usually flushed out when no one can pay - bankruptcy. Instead, we've had no recovery outside of asset markets, main street is still suffering, and we still have all the debt (more, in fact) and huge financial bubbles. We're still at all-time lows in interest rates and under "emergency policy", countries around the world are still flirting with long-term deflation (wage deflation), companies are borrowing at all time low rates just to fund buybacks in their stocks, food stamps at all time highs, unemployment still quite high (especially when you remove the over 55 jobs added - which are the balance of all jobs added in the last 5 years), GDP is crawling along, federal debt is over 18 Trillion, the Southern periphery of Europe has double digit unemployment, with youth unemployment in countries like Spain or Greece around 40% or even higher! Japan is STILL in deflation despite decades of the policies you claim to have "helped" us, and even China is now talking about doing QE, with 27 central banks this year to have cut rates or initiated QE like programs for their own economies. Did I miss anything? And these are the policies you claim to have "worked".
Tsing. Just a teeny tiny correction to your post above. What you quoted is not "the Boston Fed's take" but zerohedge's out-of-context take on an expert economist's research that is not necessarily the Boston Fed's position, plus sundry other zerohedge commenter's personal opinions. I may be the only one who would appreciate it if you would begin these repeats of zerohedge nonsense by stating clearly that you are quoting zerohedge, and then give us an explicit link. Please do it just for me. I'm concerned that there might be some young impressionable traders out their that might actually think that what zerohedge posts is somehow related to reality, or worse yet, thinks this zerohedge claptrap is actually the Boston Fed's take. Thanks. For those who would prefer to get their information directly from the source, here is a link that can take you to the pdf file of the Boston Fed sponsored paper by economist Michelle Barnes that the zerohedge poster was referring to. http://www.bostonfed.org/economic/current-policy-perspectives/2014/cpp1412.htm Our federal reserve system is a great source of informative papers by some of the world's most knowledgeable and highly trained economists. I give below a link to some recent Fed Papers. You may see several you care to read. They are all readily available in PDF form.. It is worthwhile to visit the websites of the various Fed Branch Banks as well as that of the mother ship for accurate information. see: http://www.bostonfed.org/economic/respubs.htm It is important to realize that, in general, research papers published by the Federal Reserve system do not necessarily represent the official policy position of the Federal Reserve.
The link is in the first few words of the post. I cannot help if it you are not paying attention. Nothing in the article is different than the tone inferred in the report published. The author was indeed discussing the possibility of keeping the idea of QE on the front of Fed policy, not as an emergency tool but as more normalized operational options. Additionally, the inferred take is that an exit is not only not recommended, but inadvisable. The fact that ZH chooses to mock the stupidity of it with snark, well, I cannot help that. The Federal Reserve should not allow papers published if it does not support the theory that is being discussed, and I doubt that it does. It is an incredibly influential organization. A wrong word here, a misstep there, could spell disaster. You claiming the Fed does not endorse papers posted on it's official website is silly. It isn't a newspaper with an editorial section.