Fed's Evans Says US Is In A Liquidity Trap, Says Boosting Inflation Is "Entirely Appropriate"

Tyler Durden's picture

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Jack's picture

FX looks like a huge mess today.  What is going on out there?

hedgeless_horseman's picture

It looks a lot like the beginning of Rawles novel, Patriots.  Yes?

Noah Vail's picture

We don't need to worry about inflation anymore. The mega banks are going down and the great money machine goes down with them. There is no way the Fed can inflate when their cartel of megabanks are no longer functioning and in receivership. Anyone who thinks the Feds can bail these banks out of this disaster is drinking the kool aid.

fearsomepirate's picture

That's dangerously naive.  The Fed can always just funnel the money directly to the US government, which is more than willing to spend it on hookers and blow.

Assetman's picture

Well... the Fed created their own liquidity trap, by essentially allowing banks to shelter capital into reserves... rather than have the liquidity move through the economy via real loan growth.  Of course, who in the world would want to take out a loan and lever growth even more these days?  Yeah... I know... there would be plenty of takers, if there were no consequences for default.

You want inflation, Mr. Evans?  Then find incentive for lending institutions to increase money velocity-- you'll get more than you bargained for.  I'm finding it very difficult buying into the argument of "liquidity trap" in an environment where the same Fed official is predicting economic growth of 2%-3% on an going forward basis, and inflation rates above zero.   If you provide disincentives for the banks to hoard excess reserves and use that liquidity to make make loans, then you'll get the growth and inflation you're looking for-- and probably MUCH more than you would expect.  Not that I would endorse that approach.

Bottom line... there is PLENTY of liquidity in the financial system-- there appears to be little demand for that liquidity.  The Fed is essentially responding to a drop in demand for wickers... by increasing the supply of wickers, and then lowering the price by a half percent-- and then letting the merchant (banks) decide if they want to actually sell the wicker to the customer (which in many cases, they don't).  Why does anyone in a Fed suit think that will work, especially if the merchant doesn't feel the need to make that loan??? 

So why is QE 2.0 even being discussed at this point?  QE 2.0 is primarily going to be used as an extended means of (a) transferring wealth from savers to those who have irresponsbily levered up; and (b) providing cheap finanacing for Treasury funding needs-- becuase foreign sources of capital are pulling away.   

And as was the cases with QE 1.0 and QE-Lite, no real economic value will be created from the nightmare exercise that will be QE 2.0.  Banks can continue to the game of playing the free money spread by increasing reserves, Timmy can sleep at night knowing that Uncle Ben will be there to sop up any new issuances at auction time, and asset values can remain artifically propped-- until the problem is passed down to the next round of unfortunate political and economic leaders. 

So... Mr. Evans rationale for another round of QE (inflation targeting, more lending, lower unemloyment) is disingenuous at best, and extremely dangerous at worst.  If we do get inflation (a desired outcome so it seems), it will likely be the stagflation variety, as there are no incentives to increase wages with 10%+ unemployment and 17% underemployment in the system.  If the rest of the globe does a "fuggit" on our approach to exporting deflation and sells their own $USD denomiated assets-- then we have our own currency crisis to worry about (and hyperinflation).

My hope is that the QE talk is a bluff in the international trade poker game, as others have mentioned.  But I'm really afraid these dolts at the Fed are so blinded by ideology, they are going to plow over the money printing cliff-- and do much more long term damage than good.  

These guys aren't re-introducing QE increase to inflation, reduce unemployment, or even spur economic growth-- they are doing QE to rescue a terribly insolvent financial system.  They should at least admit as much to the rest of us.

And it's STILL not likely to work.

101 years and counting's picture

Come on Europe.  Ball is in your court.  Just let Greece or Ireland default.  Absent QE2 of 5+ trillion, EUR will crash when the German and French banks take it up the rear.

the not so mighty maximiza's picture

Just give everyone a raise...problem solved!!!

sweet ebony diamond's picture

What do they call it when the Federal Reserve is the Buyer of Everything?

Turd Ferguson's picture

"A policy that targets a price-level objective emerges from analyzing standard—modern macroeconomic theory. The desirable properties of the price-level target (or temporarily above-average inflation) become most apparent in analyses that consider liquidity traps."

What pathetic, Keynesian nonsense this is. Classic man-controls-nature BS.

The arrogance of these fools is breathtaking. 


SheepDog-One's picture

Arrogance rules the times. 'Liquidity problem'? Oh, well thats because the core economy is totaly destroyed by you lunatics who had to leverage everything up 40X and swap it a million times. NOW they want to talk about economic fundamentals like an ECON101 prof? Ludicrous.

Bob's picture

+QE2.  Post of the day, SDO!

Xedus129's picture

ECON 101 is in the same lecture hall as my EECE class I usually get there early and they are always watching a John Stossel Movie or something ridiculous.  No Lie, great education system we have, hmmm.

Deflationburger with Fleas's picture

"We have a liquidity trqap.  Quick, add more liquidity"

 

"Hey fellas, there is a herion addict over here.  Quick, he needs more heroin!!"

Dagny Taggart's picture

Arrogance and hubris. Come on, why "might" there be liquidity traps when more than a quadrillion in derivatives have leveraged everything from Grandma to the Grandkids?

Racer's picture

"hard pill to swallow, but potentially beneficial"

All very well if you have lots of money, but if you have very little you will have to die because you cannot afford to live!

SheepDog-One's picture

Exactly. I suppose these multi billionaires dont care much if a loaf of bread goes to $50. But for the peasantry? Read up on living off the land as a mideval villager had to do, thats whats coming.

Hansel's picture

I'm *shocked* that a criminal, skimming bankster motherfucker thinks inflation is "entirely appropriate".

Mako's picture

In a system where compounding interest is attached, you always need more and more inflation or you collapse.  Inflation is always appropriate in the system you have in place or it collapses. 

Mako's picture

The job of the Fed is to convince the lemmings there is unlimited inflation potential.  Every time the lemmings start to slowdown it's the Fed's job to get every ounce of growth possible before the collapse and liquidation.   The Fed has been very successful on a short-term basis of convincing the stupid lemmings that helicopters are coming, no helicopters are coming.

You can beat a dead horse all you want, but it ain't going to make him run any faster.

 

SheepDog-One's picture

I agree, no helicopters are coming. But in the mean time, GET TO DA CHOPPA!!

Mako's picture

Correct.  Keep the lemmings moving to the choppas that will never show up.

Bob's picture

I'm thinking it will take a few more helicopter deliveries before people catch on. 

tmosley's picture

You seem to think that inflation is growth.  Yet another error in your long list of false premises.

The Fed thinks that inflation is growth too, if that shows you the economic numbskulls you can count yourself among.

Mako's picture

You have serious learning disabilities.  Get out of the trailer from time to time.

tmosley's picture

Right, my serious learning disabilities that force me to work as the manager of a multimillion dollar material science and drug development laboratory.

What have you ever done?  Other than claim the world is going to end next Thursday, so everyone should just give up?

jdrose1985's picture

Yeah dude, you're like...smarter than the Fed, right?

Crude oil is going down in price and up in value (priced in dollars). Dollars priced in crude since 2008 are worth more.

Inflation of the money supply IS growth or is supposed to REPRESENT growth in the system as it exist(ed) until business aka ponzi activity peaked in 2007.

Problem is the Fed now must convince the lemmings for as long as possible not to look down. Apparently the FED is at the end of its rope as a hopelessly hard dollar priced in oil sucks the lifeblood out of commerce and creates the illusion we are swimming in oil.

The FED can NOT get any amount of dollars into the REAL economy. Who is willing to take out a loan with which to INFLATE the money supply?

 

QE2 will simply be more money sitting in bank reserves while cash dollars disappear from circulation.

Edit: Also anyone interested in there being a lack of oil, you need to research the most viable alternative fuel which is hemp. It would take roughly 20-25,000 acres of hemp per day to fuel America at 20mbpd.

1100-TACTICAL-12's picture

All they have to do is reset everyone's FICO score to O"say 750... Then it's Katie bar the door. Americans will do what Americans do best...

Mako's picture

Inflation has to continue to be exponential positive.  The only way you get more houses build then in 2006-2007 is to start digging up dead people at an exponential rate and making them sign on the line.  Good luck with all that.  Eventually you would not be able to find the amount of dead people you need.

People can get credit right now... that is the myth they want you believe.  I can go get a mortgage anytime I want for all-time low rates. 

jdrose1985's picture

Credit is disappearing along with trust along with cash dollars and people with jobs.

There is no spoon.

You just saw the beginnings of a $13T pyramid of mortgage debt sodomized by the big bad dick of debt repudiation. Byebye pensions and everything else.

tmosley's picture

My pet rock is smarter than the Fed.  The Fed has negative intelligence (because they see what happens, but always misinterpret the cause, and thus always fail to accurately predict the outcome of their actions).

Also, I guess you never heard of POMO.  Sure, all the money being printed is just sitting in bank vaults.  I'm sure it isn't going into the stock markets and breaking everything.

tip e. canoe's picture

http://www.hempcar.org/hempfacts.shtml

"In 1941 Henry Ford built a plastic car made of fiber from hemp and wheat straw. Hemp plastic is biodegradable, synthetic plastic is not."

Turd Ferguson's picture

Screw the Fed. Let's talk UFOs!!!

How about this?

http://www.youtube.com/watch?v=rEtTl9cGrJc

Bob's picture

Looks like the Military is fucking with our heads. 

hedgeless_horseman's picture

Four sky divers.

One had a flare malfunction that delayed it lighting.

 

Phat Stax's picture

One light was filmed the other evening above Richmond, VA as well.

tip e. canoe's picture

project bluebeam has launched?

bigdumbnugly's picture

interesting...

first sighted in manhatten, huh?   benny getting airborne in his chopper to do the drops?

i don't know about you but i'm going to east el paso with a big bucket and looking for dollars spread out all over the ground.