Commitment to Blow Bubbles
The lead image is from Fed Holds Policy Steady as Economy Stumbles.
The Fed’s Lovey-Dovey All Around FOMC Statement shows the Fed’s commitment to blow bubbles is still intact.
Eight Key Takeaways
- Whatever It Takes: Undertake open market operations as necessary to maintain the federal
funds rate in a target range of 0 to 1/4 percent. - Full Range of Tools: The Federal Reserve is committed to using its full range of tools to support the
U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. - Accommodative Financial Conditions: Overall financial
conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. - Let Inflation Run Hot: With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for
some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. - No End Date to Accommodative Stance: The Committee expects to maintain an
accommodative stance of monetary policy until these outcomes are achieved. - Pile on More QE:The Federal Reserve will continue to increase its
holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. - Roll Over QE Auction Proceeds: Roll over at auction all principal payments from the Federal Reserve’s
holdings of Treasury securities and reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in agency MBS. - Set Low Primary Credit Rate: The Board of Governors of the Federal Reserve System
voted unanimously to approve the establishment of the primary credit rate at the existing level of 0.25 percent.
Bubbles?
In its statements, the Fed made no mention of the obvious bubbles it is blowing. Powell did take questions on speculation in the Q&A that followed.
Price Stability
Fed chair Jerome Powell would not recognize price stability if it jumped out of the audience and spit grapefruit juice in his eye.
Somehow the Fed is wedded to a goal of 2% inflation with no explanation as to why the goal should be 2% in the first place.
The Fed’s commitment to 2% inflation is galling. It cannot see the rampant inflation right under its nose or it is purposely looking the other way.
Offsetting Errors
The idea that one can offset errors by further errors in the other direction is pure nonsense.
It’s as if a doctor said “For the last three months we gave you too little medicine so for the next three months we will give you too much.”
No Economic Benefit to Inflation
My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
There is no economic benefit to inflation but there are winners and losers. The winners are those with first access to money, namely the banks and the already wealthy.
Asset Bubble Deflation
Consumer price Inflation may be tame, assuming you believe the CPI.
It’s asset bubble deflation that is damaging.
Q&A on Bubbles
Not sure what I can add, but I will mention it as a side note on speculation and inflation. https://t.co/Avfq7DXYdE
— Mike “Mish” Shedlock (@MishGEA) January 27, 2021
The Q&A Just ended. Watch a reply here.https://t.co/FM68ob97lj
— Mike “Mish” Shedlock (@MishGEA) January 27, 2021
We are all transitory
Powell needs to reflect on that while trying to save jobs that are not savable. https://t.co/n70iCiOZoa
— Mike “Mish” Shedlock (@MishGEA) January 27, 2021
BIS Deflation Study
The BIS did a historical study and found routine price deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations
Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive build up of unproductive debt and asset bubbles that eventually collapse.
The problem is not deflation, it’s the Fed’s misguided attempts to prevent it.
Asset bubbles in housing and speculation in stocks like GameStop are as obvious a Pinocchio’s nose.
In the Q&A after the meeting, Powell dismissed asset bubbles saying they were based on speculation on vaccines and fiscal policy, not monetary policy.
I disagree. Interest rates are ridiculously low at 0.25%. Real interest rates are hugely negative, way more than widely believed factoring in housing prices.
The Fed is doubling down on mistakes.
Mish
Mish, for the past 4 years you have blamed Trump for many things…is he still at fault here? It’s a Big Club and we aint in it at the end of the day…When this bubble bursts there will be many many Close to Retiring boomers that will be very unhappy…and you know what…it shows that it doesn’t matter what party is in the White House…
We see this publicity about a few companies whose stocks are caught up in a short squeeze, courtesy of all this money sloshing about. Stock prices soar. At some point, the historical tendency is that the bubble will pop, people will start wanting to sell stock beyond what the short sellers want, and the price of the stock will fall, very rapidly. Of course, money is conserved so buy and selling stock simply determines in whose bank account the money resides.
However, there is a complication that has not yet had much attention. Some of these folks trying to squeeze the shorts have been buying on margin. As the price of the stock soared, their net worth soared, meaning the amount of stock they could buy might have gone up a lot. When the price of the stock crashes, the apocryphal 22 year old instead of having $2000 in the bank is apocryphally in debt to her broker for 1.2 million dollars.
If only one 22 year old had pulled this stunt, well, they have to convince the court that they will not in a reasonable time be able to pay off the debt, so they can go bankrupt.
However, the broker actually had to pay for all that stock, because the seller undoubtedly took the money and ran. When a scad of 22 year olds pull the same stunt, then depending on legal details it is perhaps like the 2009 financial crisis, except now instead of taking down the banks it is the brokerage houses who face difficulties.
This is partly why The Fed and other central banks are so paranoid about supporting financial markets. Their view is that we’ll all be much worse off if they allow the credit risk of the participants to play out with no aid. Although they’re digging a bigger hole. It’s an example of why holding bullion is better than gold etf’s, there’s no credit risk.
“The winners are those with first access to money, namely the banks and the already wealthy.”
And people who can qualify for a home mortgage. 30 year fixed rate money at 2.5%. As liabilities go, it’s a good one.
“”There is no economic benefit to inflation but there are winners and losers. The winners are those with first access to money, namely the banks and the already wealthy.”
And the homeowner and the owner of residential housing. If you have to pick being a winner or a loser I prefer being a winner. Not financial advice, Do your own DD.
Explains why housing is booming. One explanation anyway.
It’s irrelevant – the Stock Market is now UBI for working folks with 401K’s – like me. I’ve increased my contribution to 25% pre-tax because when I retire at 67 I’m going to want that income – consider the Fed’s manipulation of the markets as something similar to a public employees defined pension plan – except it’s for those of us not fortunate enough to win the public employee lottery/jackpot. Get in and enjoy the ride.
“The Fed Doubles Down on Mistakes Despite Rampant Speculation”
“There is no economic benefit to inflation but there are winners and losers. The winners are those with first access to money, namely the banks and the already wealthy.”
So the folks making the alleged mistakes are the ones that benefit? How sure are you that the actions should be classified as mistakes?
Marketcap of US homes increased over 2 trillion in 2020. Value of all homes is $36 Trillion.
That is a lot of money. Total Mortgages equals $15.5 Trillion. So that is a pretty good assets to liability. Essentially there is $20 Trillion in equity.
Been listening to Fed Up. You know I think the Proud Boys attacked the wrong building in DC. Seriously populist revolts are springing up left and right, when does a ragtag group short squeeze the Fed?
And as for what is driving all this distortion….
From the NYT…
The monoclonal antibody treatment made by Eli Lilly is powerless against a variant of the coronavirus discovered in South Africa, according to a new study posted online on Tuesday.
In addition, one of two monoclonal antibodies in a cocktail treatment made by Regeneron also is significantly less effective against that variant, although the combination still works, researchers at Columbia University reported.
The findings underscore growing concerns that because of new mutations in its genetic material, this variant, called B.1.351, may be able to resist antibodies contained in these treatments and perhaps those created by the body following vaccination.
Why does the Fed hate savers? Why won’t the banks pay for savings? Why is money basically free? Because it has no value anymore?
“Fed chair Jerome Powell would not recognize price stability if it jumped out of the audience and spit grapefruit juice in his eye.
Somehow the Fed is wedded to a goal of 2% inflation with no explanation as to why the goal should be 2% in the first place.
The Fed’s commitment to 2% inflation is galling. It cannot see the rampant inflation right under its nose or it is purposely looking the other way.”
The FED has an agenda. The FED chairman doesn’t see what the FED chairman doesn’t want to see.
Bernanke was asked why the FED still kept gold. He answered, “tradition.”
Its a very speculative market when I bought GME and BBBY in July because I shop and like them apparently my shares made me a millionaire today but it was only 6000 between them originally. I literally am selling everything other than retirement too crazy.
Speaking of CPI inflation, as a thought experiment: Close down national borders for commerce. There are too many such noises out there for comfort. Talk about a global-cooling level disaster waiting to happen.
If the 10yr were at 5% where would S&P 500 be? I don’t think 3800!
Betamax.
Blockbuster Video’s stock had its best day in over a decade.
You call it a bubble but I say that’s the market looking ahead.
VHS is coming back.
Dummies fat fingering for BlackBerry buying blockbuster instead. So funny
Honestly I thought for today’s era this was pretty hawkish. No expansion of eligible debt? The train has left the station, even a ever so slight tightening will trigger meltdown in the economy.
The Fed is very clear, in their view the risk of economic slowdown exceeds the risk of a bubble. I don’t agree but their language and actions leave no doubt.
We Are All Transitory
Whoah, deep.
We are imitating China in just about every way now with dirt-cheap credit leading to financial and asset bubbles but also generating a booming economy, at least that’s the plan (or hope) now.
Laissez le bon temps rouler.
Let them leave you up in the air.
Let them brush you rock ‘n roll hair.
Hair is transitory.
There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures.
‘Tis well said again;
And ’tis a kind of good deed to say well:
And yet words are no deeds.
Let it roll!
Hey grenouille, what’s up ?…Long time no read !….Japan started the madness decades before China, have a look at the Nikkei chart….wouldn t be surprised if western and chinese stockmarkets go the same way rather sooner than later…with the housing bubble imploding big time… Let’s hope not of course but something is definitely rotten in the state of Danmark(Hamlet)..
Hey Russian. I thought of putting Japan also but they inflated under a
world-deflationary environment. I don’t think we will get that this time around. Our situation looks more like China.
Also I am not frog. I just live here.
yes, know that by now…just kidding, ok ?
The FED is riding a tiger; we all are and we don’t know how it will end. The alternative would be mass unemployment in the developed wold leading to who-knows-what. Very few people believe in MMT and even fewer wanted it to be policy but with COVID there was no choice. In 2008 you could make a case of bailing out one sector and then depend on the trickle-down effect to bring back prosperity. Something like that now is out of the question. It’s going to be an interesting next ten years. Is that why Mish moved to Utah?
Utah …beach….Far from where you live ? Belle région !
The Q&A with Powell just ended. I put a link in the post.
Low rate mortgage loans amortize a lot faster than high rate loans…..that’s another way to stack wealth using this cheap mortgage money…if I could get one more house right now…with say a 3.5% loan…that would probably make up for the higher current price I’d have to pay for the house…..in the long run. It would be an interesting math problem to look at that.
I don’t think he has a choice. Interest rates are effectively slightly negative. Pushing em lower will blow up US (world) capital markets. Only other way I see to keep this reflation game going is UBI. Otherwise asset prices crater as debtors go insolvent.
real interest rates are enormously negative,
I have charts I am working on that show that
Awesome! Can’t wait to see em!
They’re more than “slightly” negative. Banks will soon charge for deposits paying no interest.
Switzerland does …and european banks pay the ECB for euro deposits…only a matter of time for them to pass on the costs to the clients….
They’re more than slightly negative; soon banks will charge for deposits on which no interest will be paid. Admittedly, they’re nearly there now.
We’ve hit a permanently low plateau (flood plain???) on interest rates. Seriously, can anyone see the Fed raising rates ever again?
Took them seven years to raise above zero last time, I’d expect it will take them even longer this time, if it ever happens!
Only if inflation does run very hot…..and frankly I don’t see the drivers for that happening…but when you beg for it like they’re doing…..maybe…..
Inflation is rampant but it’s not the CPI inflation the Fed is focused on
Sorry. I do understand….I meant the Fed will be forced to raise rates if the CPI shows hot inflation for very long…..but I don’t think that’s really likely.
What would be the driver…..rapidly rising wages? Somehow I doubt that’s gonna happen. Not sure if raising the minimum wage would have much of an effect on CPI. I doubt it.
I agree – CPI inflation is not coming
Automation
AI
$15 minimum wage
Continuous outsourcing
Deflation in CPI as far as the eye can see.
Inflation in asset prices … but for how long now that the floor is in in interest rates?
It will be hard to raise interest rates because it would take a bite out of the Federal Budget.