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Low Rates and QE are Deflationary at the Zero Bound
By EconMatters
San Francisco Fed's John Williams is part of the Problem at the Federal Reserve
Sure enough the S&P 500 drops 6% from its all-time highs, and all the idiots start talking about another round of QE when we haven`t even finished with the latest one (still buying bonds through October). The latest lemming who this time isn`t some dumb analyst on CNBC needing to pump his firm`s lagging stock, but no less than a voting member of the Federal Reserve in the form of the San Francisco Fed's John Williams, where do they get these clowns? Really QE again with a 5.9% unemployment rate and more JOLTS jobopenings than the US available workforce can possibly fill? Enough of this QE Forever crap, when are these clowns going to realize that low rates are actually incentivizing poor and inefficient uses of capital allocation.
San Francisco Innovation an Argument against European Weakness Having Any Direct Correlation with ZIRP or QE Infinity – Structural Issues Cannot Be Fixed with QE!
If ZIRP and QE Infinity hasn`t brought the economy back to normal operations after 7 years, then maybe these geniuses will figure this out that their policies are actually part of the problem, and have been proven not to be the solution. Every time I have heard San Francisco Fed's John Williams talk it reminds me of the Peter Principle, and how incompetent people rise within organizations and society because even more incompetent people feel comfortable and not threatened by their presence. In a sense this says a hell of a lot about the competence of Janet Yellen to have this intellectual lightweight as her wingman at the Federal Reserve. This guy is an embarrassment to the economics community, the Fed really stooped to all-time low levels with this hire, he literally is just there to insulate Janet Yellen from competent economists like James Bullard who should be head of the Federal Reserve, and actually can make sound objective judgments regarding the state of the US economy apart from his ideological disposition.
US Economic Data Should be Focus of Fed & Nothing Else
The US Fed is responsible for basing monetary policy on the economic data here in the United States, and not based upon an Ebola outbreak in the third world, how many times has that happened over the last 40 years? Many parts of Africa have been a shithole, and probably always will be because their values are shortsighted, yes cultural values matter, you do stupid things and you as a country are going to get stupid results, starvation, civil wars, Ebola, other diseases, etc. We seriously have not withered to a new low level of monetary policy where we are waiting for Africa to get its act together before normalizing rates and getting out of the business of manipulating market prices with QE Infinity creating more continued and unsustainable asset bubbles? Why do you think these markets freak out every time QE ends, because the asset prices were not created through a natural price discovery process – again the Fed is part of the problem with these insane bubble creating monetary policies!
Read More >>> The Fed Cannot Wait For Wage Inflation to Raise Rates
US is a Capitalist Country (at least used to be) European Union is a Socialist Entity – and their Socialist Economy reflects this reality: US Fed has no control over Structural Issues in Europe
Does US monetary policy really revolve around whether Germany deficit spends to boost their sluggish economy, or diversifies from their current narrow engineering and manufacturing based economy? If the US really wants to help the German and European economy then just take back all the Sanctions against Russia one of the region’s most dominant trading and business partners. But since when does US Monetary policy depend on structural issues that they have no control of in the European Union? Where is that in the Fed mandate? The US cannot raise rates because Europe is a socialist mess, and until they adopt more market based capitalistic economies that can compete on a global basis, the US must continue on with recession era interest rates. How did we ever survive World War II without ZIRP & QE Infinity?
ZIRP & QE Poorly Incentivize Capital Allocation at the Zero Bound
However the biggest reason to discontinue ZIRP, never entertain QE again, and normalize interest rates is because of all the wasted capital around the globe chasing Yield Delta trades based upon 10 to 15 basis point borrowing costs, think about all this capital that could be better served actually creating economic growth in the form of project development, cap ex spending, bank lending for infrastructure projects, research and innovation, and small business loans. Literally low interest rates are actually self-fulfilling and deflationary, they are not good for any economy, and this is the Fed fallacy.
ZIRP is Deflationary at the Zero Bound Level
If financial capital is so cheap that normal investments decisions are put on hold because investors can borrow at 10-15 basis points and without taking any project risk at all, just electronically Delta or pocket the difference between ZIRP borrowings and US Treasuries, Global Debt, Utilities, and anything else with an Electronic Yield of course this is an overall deflationary effect on the economy. The entire chase yield trade which is in the Trillions is a counterproductive, inefficient and poor use of capital allocation which only stunts long-term economic growth. What the Fed doesn`t get is that once you normalize interest rates you get healthy capital allocation strategies which boost economic growth because they are not strictly Electronic Transactions, but transactions that actually have knock on effects that add to other parts of economic growth, and thus they are growth driving and inflationary in nature. If the Fed truly wants inflation like they always make an excuse for why they need to print more money, just raise interest rates and that is the fastest way to get real inflation once you hit the zero-bound level, see Japan for the best example of the self-fulfilling policy of lower interest rates actually being deflationary, and not inflationary.
If the Fed Really Cares about Raising Inflation Expectations, then they need to Raise Rates
The Federal Reserve has this all backwards! If they want to create inflation they need to raise interest rates off the zero-bound level period! What does the Fed have to lose [besides their whole Reason for Existence I know], but try normalizing rates and then examine the results, because we know low interest rates and QE hasn`t worked, or they wouldn`t have to be re-initiated in the form of additional QE Programs, and we wouldn`t still be having this entire conversation 7 years after ZIRP began. So enough of the excuses from these dovish Fed members, End QE, Never bring back QE Programs, and normalize interest rates ASAP, and stay the hell out of financial markets forever! Your only job is show up at economic conferences and raise and lower the Fed Funds Rate between 3.5 and 5.5%, and that is it! San Francisco Fed's John Williams is an absolute idiot, and representative of why so many market participants have lost all deference for the Federal Reserve and their incompetent monetary policies.
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Few people really think about the economy to any great degree or even try to understand it. The study of economics is often baffling and confusing. Many economic theories exist but many are full of holes and conundrums. Much of how people react to a policy may have to do with timing and perception instead of reality. Economics is full of loops that feed back upon themselves and unexpected pitfalls based on expectations.
All this can become quite abstract. Economist often predict events that never tend to unfold as expected or planned. Many of the "modern monetary theories" in use today have not been proven over time, but reflect an attitude that we can control economic cycles better than in the past. The basis of the economy we have today is unsustainable and because it has been able to exist for so long does not mean it can continue. The fact the system muddles through does not guarantee that we will not suffer financial harm as individuals.
http://brucewilds.blogspot.com/2014/03/few-people-really-understand-economy.html
in my life tyme i have never seen what should happen happen. improve your cogn. dis. and see the reality called wish/think sysndrom. it aint gonna happen, gotta run the route, which is over the cliff. prep, prep preppers....
When you say you want to normalize rates and call for the Fed to raise its rates higher than rates along the entire us treasury complex and higher than soverign debt in europe, japan, uk, etc., you are just as guilty as the Fed is of artificial rate manipulation. I agree with your comments up until jack rates up above the us 30 yr.
Pull out of qe, make a strong statement we are not going back, and equity markets will implode, but rates for us debt and high quality corporate will remain low in a flight to safety. Cash will continue to pay nothing or cost you to hold it as it will remain in abundance for a short period of time. Then, it will happen. Everyone will start paying down their debt and the currency supply will contract sharply along with stock markets and the economy. Basically a complete wash out, which needs to happen.
The Fed can raise rates only after this complete wash out because as currency becomes scarce and risk returns, higher rates will need to be paid. The Fed can then follow the rest of the curve back up towards historical averages. This is what should have happened in japan and it is exactly what europe must do to regain competiveness. But it requires as a natural progression, the people with the money and the power that comes with with it to lose it. That is why none of this will happen and why a decade from now we may continue to be living with zirp.
In the end, it really requires a revolution. Without it, nothing happens.
I agree the powers to be will have a hell of a time getting rates back to normal without crashing the world economies. The Fed is caught in a box. Many people are looking for a "dis-inflationary crash" and it is possible or we may see money shift from bubble to bubble. I have pondered the possibility that what we are and have been going through is the "major deflationary period."
More and more often we seen Central Bankers forced to pull rabbits out of their hats. When we stand on the abyss central bankers will be forced to print so much worthless paper the money it will act as a cushion to our fall but not change the reality. Before you discount this possibility that we will move directly into the final stage of hyperinflation consider that hyperinflation paves an easier transition to a replacement currency and a reset of the system.
http://brucewilds.blogspot.com/2014/10/fed-concerned-that-stong-dollar.h...
The Fed is a plank in the Communist Manifesto. No, make that a pillar. Because of the Fed the US enjoys a graduated income tax and inflation, which are a direct result of the Fed's existence. Remember, Marx wrote the best way to destroy a nation is to grind the Bourgeoisie(middle class) between the grind stones of inflation and then taxation. Who are the Bourgeoisie? Here's the definition:
noun the bourgeoisie1.
the middle classes 2.
(in Marxist thought) the ruling class of the two basic classes of capitalist society, consisting of capitalists, manufacturers, bankers, and other employers. The bourgeoisie owns the most important of the means of production, through which it exploits the working class
QE /zero interest rates used as they have been are deflationary because it did nothing to benefit the real economy. If however the zero interest rates and the money created under QE had been passed to the population it would have been inflationary. Bailout the banks was the option and 1.) as follows.
1.) Keep the rich rich = deflation.
2.) Make the poor rich = inflation.
Rich / poor is a relative concept but the majority of poor not having enough stagnates the real economy and why as QE has been used it only ever made the poor a smaller component of the overall economy hence THEY CANNOT HELP THE TOTAL ECONOMY NOW. The total economy is all those derivatives, bits of paper being traded as a value and the real economy combined. THe real economy is miniscule and what ordinary people trade every day and way to small to justify all those worthless bits of paper.
What happens to govt deficit if rates rise.....
Hey.off topic but anyone else find it strange that Ebola deaths have only been confirmed in a handful of the worst parts of Africa..oh..and..wait for it..........................The USA? Europe is waaay closer with probably as much traffic to and from as the US..so WTF? Seems implausible.
Nice catch, nice eye. In this case it is quite possible they have an outbreak --this is getting real.
Boom and Bust business cycle..nothing to see here move along.
Well, he got the Peter Principal part right.
No shit it hasn't worked, Ponzi Scheme Economics NEVER works no matter how "legitimate" or "powerful" the ponzi originator is (US .Gov)!
Sound money economics and physical wealth based economics on the other hand has worked for 1000's of years bringing stability and prosperity wherever it was successfully tried!!
Loaning larger amounts of money = prices go down.
/retard economics
The Fed drinks its own bathwater. It will never grasp that it is the crux of the problem.
It's Déjà vu all over again...