Please consider the 2023 First Quarter Review by Lacy Hunt, emphasis mine.
[Fed forward guidance] was heavily used in the Pandemic, and quite possibly may ultimately prove to be very costly on both the micro and macro level. As of late 2021, the Fed was unequivocally advising that policy would be loose for longer, a tactic that undoubtedly led to overly aggressive risk taking by the bank, shadow bank, corporate and household sectors. The Fed’s forward guidance of late 2021 proved highly inaccurate.
Even more explicitly than Fisher, Charles Kindleberger wrote “Speculative manias gather speed through expansion of money and credit or perhaps, in some cases, get started because of an initial expansion of money and credit.” To paraphrase Kindleberger money and credit excesses lead to “manias, panics and crashes,” which is also the title of his famous 1978 book in which the above quote is found.
Another major breakthrough can be found in “Loose Monetary Policy and Financial Instability” Federal Reserve Bank of San Francisco, February 2023 by Maximilian Grimm, Òscar Jordà, Moritz Schularick, and Alan M. Taylor (referred to as GJST).
GJST provide strong empirical documentation that the posture of monetary policy affects the stability of the financial system. To quote the authors, “a loose stance over an extended period of time leads to increased financial fragility several years down the line.”
From one financial cycle to the next, the conditions described by GJST could bring a new array of policy actions but, in so doing, the Fed could eventually destabilize the economy even more than in the prior financial cycle
Outlook
The risk of a recession continues to rise, even though the economy grew in the first quarter. The Fed has neutralized the inflationary impact of the fastest modern era money growth in 2020-2021. Other deposit liabilities (ODL), in real terms, have registered a double-digit decline in the 12 months ended March, with the 24-month change at a negative 5%. Over the past 12 months, real bank credit had declined even before the recent, and highly visible, bank failures and is now unchanged for the past 24 months. Although monthly data is not available before World War II, the latest 12 month decline in M2 is undoubtedly the sharpest since 1934.
Two considerations suggest that the rise in velocity in 2022, and the first quarter of this year, which has thus far interfered with the Fed’s efforts to contain inflation, will reverse. By formula and statistical estimation, velocity lags the business cycle. Since V equals GDP (a coincident variable) divided by money (a leading variable), V must definitionally lag. Econometrically, velocity is determined by the marginal revenue product of debt and the loan to deposit (L/D) ratio, both of which are lagging indicators. The econometrics would be highly questionable if V were determined by leading indicators.
Accordingly, with low or declining economic activity, the inflation rate will continue to recede. Further progress will be made in terms of moving consumer inflation into the Fed’s target zone in 2024. Therefore, with the historical pattern of the financial, GDP and price/ labor cycles proceeding on its well documented path, this year’s decline in long-term Treasury bond yields is expected to continue.
There is much more in the report. Please give it a look. As always, thanks to Lacy Hunt.
This post originated at MishTalk.Com
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prices are 16.9% higher than in March 2020. This represents a .6% increase from last months 16.31% triennial CPI figure. Long term, we are still not in a disinflationary cycle.
to economic theory, & Nobel laureate, Dr. Milton Friedman and Anna J.
Swartz (“Money and Business Cycles”), monetary lags are not “long & variable”
(A Monetary History of the United States, 1867–1960, published in 1963).
lags for monetary flows, M*Vt, i.e. the proxies for (1) real-growth, & for
(2) inflation indices (for the last 100 years), are historically, mathematical
constants.
interest rates), is indirect, varies widely over time, & in magnitude. What
the net expansion of money will be, as a consequence of a given injection of
additional reserves, or change in policy rates, nobody knows until long after
the fact. The consequence is a delayed, remote, & approximate control over
the lending and money-creating capacity of the banking system.
mechanism, the private bankers, not the Fed, are capable of exercising Central
Bank powers (when policy uses a price mechanism, pegging interest rates, to
ration Reserve Bank credit).
(from an asset standpoint) can expand credit (create money) significantly
faster than the majority banks expand. And the parameters of economics are not
those of mathematics – the whole is much larger than the sum of its parts.
a single error, an error so silly that generations to come will scarcely
believe that it could have persisted for as long as it has done.” & “The logic was that such precautionary holdings are not intended to be
spent and hence do not qualify as money.”
(from an asset standpoint) can expand credit (create money) significantly
faster than the majority banks expand. And the parameters of economics are not
those of mathematics – the whole is much larger than the sum of its parts.”………….”From the standpoint of the system, banks don’t lend deposits. Deposits
are the result of lending/investing. Hence, all bank-held savings are
lost to both consumption and investment, indeed to any type of payment
or expenditure.”