Fed Hints During Next Recession It Will Roll Out Income Targeting, NIRP

In a moment of rare insight, two weeks ago in response to a question "Why is establishment media romanticizing communism? Authoritarianism, poverty, starvation, secret police, murder, mass incarceration? WTF?", we said that this was simply a "prelude to central bank funded universal income", or in other words, Fed-funded and guaranteed cash for everyone.

On Thursday afternoon, in a stark warning of what's to come, San Francisco Fed President John Williams confirmed our suspicions when he said that to fight the next recession, global central bankers will be forced to come up with a whole new toolkit of "solutions", as simply cutting interest rates won't well, cut it anymore, and in addition to more QE and forward guidance - both of which were used widely in the last recession - the Fed may have to use negative interest rates, as well as untried tools including so-called price-level targeting or nominal-income targeting.

The bolded is a tacit admission that as a result of the aging workforce and the dramatic slack which still remains in the labor force, the US central bank will have to take drastic steps to preserve social order and cohesion.

According to Williams', Reuters reports, central bankers should take this moment of “relative economic calm” to rethink their approach to monetary policy. Others have echoed Williams' implicit admission that as a result of 9 years of Fed attempts to stimulate the economy - yet merely ending up with the biggest asset bubble in history - the US finds itself in a dead economic end, such as Chicago Fed Bank President Charles Evans, who recently urged a strategy review at the Fed, but Williams’ call for a worldwide review is considerably more ambitious.

Among Williams' other suggestions include not only negative interest rates but also raising the inflation target - to 3%, 4% or more, in an attempt to crush debt by making life unbearable for the majority of the population - as it considers new monetary policy frameworks. Still, even the most dovish Fed lunatic has to admit that such strategies would have costs, including those that diverge greatly from the Fed's current approach. Or maybe not: "price-level targeting, he said, is advantageous because it fits "relatively easily" into the current framework."

Considering that for the better part of a decade the Fed prescribed lower rates and ZIRP as the cure to the moribund US economy, only to flip and then propose higher rates as the solution to all problems, it is not surprising that even the most insane proposals are currently being contemplated because they fit "relatively easily" into the current framework.

Additionally, confirming that the Fed has learned nothing at all, during a Q&A in San Francisco, Williams said that "negative interest rates need to be on the list" of potential tools the Fed could use in a severe recession. He also said that QE remains more effective in terms of cost-benefit, but "would not exclude that as an option if the circumstances warranted it."

"If all of us get stuck at the lower bound” then "policy spillovers are far more negative,” Williams said of global economic interconnectedness. "I’m not pushing for" some "United Nations of policy."

And, touching on our post from mid-September, in which we pointed out that the BOC was preparing to revising its mandate, Williams also said that "the Fed and all central banks should have Canada-like practice of revisiting inflation target every 5 years."

Meanwhile, the idea of Fed targeting, or funding, "income" is hardly new: back in July, Deutsche Bank was the first institution to admit that the Fed has created "universal basic income for the rich":

The accommodation and QE have acted as a free insurance policy for the owners of risk, which, given the demographics of stock market participation, in effect has functioned as universal basic income for the rich. It is not difficult to see how disruptive unwind of stimulus could become. Clearly, in this context risk has become a binding constraint.

It is only "symmetric" that everyone else should also benefit from the Fed's monetary generosity during the next recession. 

* * *

Finally, for those curious what will really happen after the next "great liquidity crisis", JPM's Marko Kolanovic laid out a comprehensive checklist one month ago. It predicted not only price targeting (i.e., stocks), but also negative income taxes, progressive corporate taxes, new taxes on tech companies, and, of course, hyperinflation. Here is the excerpt.

What will governments and central banks do in the scenario of a great liquidity crisis? If the standard rate cutting and bond purchases don’t suffice, central banks may more explicitly target asset prices (e.g., equities). This may be controversial in light of the potential impact of central bank actions in driving inequality between asset owners and labor. Other ‘out of the box’ solutions could include a negative income tax (one can call this ‘QE for labor’), progressive corporate tax, universal income and others. To address growing pressure on labor from AI, new taxes or settlements may be levied on Technology companies (for instance, they may be required to pick up the social tab for labor destruction brought by artificial intelligence, in an analogy to industrial companies addressing environmental impacts). While we think unlikely, a tail risk could be a backlash against central banks that prompts significant changes in the monetary system. In many possible outcomes, inflation is likely to pick up.

 

The next crisis is also likely to result in social tensions similar to those witnessed 50 years ago in 1968. In 1968, TV and investigative journalism provided a generation of baby boomers access to unfiltered information on social developments such as Vietnam and other proxy wars, Civil rights movements, income inequality, etc. Similar to 1968, the internet today (social media, leaked documents, etc.) provides millennials with unrestricted access to information on a surprisingly similar range of issues. In addition to information, the internet provides a platform for various social groups to become more self-aware, united and organized. Groups span various social dimensions based on differences in income/wealth, race, generation, political party affiliations, and independent stripes ranging from alt-left to alt-right movements. In fact, many recent developments such as the US presidential election, Brexit, independence movements in Europe, etc., already illustrate social tensions that are likely to be amplified in the next financial crisis. How did markets evolve in the aftermath of 1968? Monetary systems were completely revamped (Bretton Woods), inflation rapidly increased, and equities produced zero returns for a decade. The decade ended with a famously wrong Businessweek article ‘the death of equities’ in 1979.

Kolanovic's warning may have sounded whimsical one month ago. Now, in light of Williams' words, it appears that it may serve as a blueprint for what comes next.

Comments

pods Bes Thu, 11/16/2017 - 19:20 Permalink

Don't worry, it'll be wrapped up in a nice little nationalist bow so the people will beg for it. I'm really tired of all of this. They are gonna drag this out for way longer than I thought. With the intelligence of the Amerikan people, they can probably get away with anything. It's not like the jew media is ever going to ask about the legality of this. And if challenged, the courts will simply decree they can do whatever they want. FFS, the FED bought MBSs, which is clearly illegal. The only thing limiting what they do is the number of people who decide life's not worth living under this system and they decide to take a banker out on their way out the door. Wish I could find some hope, but there simply isn't any around anymore. pods

In reply to by Bes

Rhetorical pods Thu, 11/16/2017 - 19:28 Permalink

Buy BTC and other alts that you think will work well.That is how you see gains that will beat out whatever inflation rate there is.Is it perfect? Hell no but its a hell of a lot better than keeping your money in greenbacks and the banks that dont hold them. Plus its mobile and some of them like Zencash and a few other privacy alts are not traceable. 

In reply to by pods

Stuck on Zero Rhetorical Thu, 11/16/2017 - 20:49 Permalink

Instead of handing out cash to billionaires and ghetto zombies how about building some infrastructure? That's a technique that has worked for 6000 years.  And guess what? When you're done you have something to show for it. How about an irrigation system stretching from the lower Mississippi to Los Angeles? How about high-speed trains? How about subways for our cities?  Sure beats $450 million paintings.

In reply to by Rhetorical

Manthong JimT Fri, 11/17/2017 - 00:06 Permalink

 
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My two  .90 dimes bought a gallon of gas in 1960…. They will actually buy a gallon of gas today as well….. ….and I have whole bunch more of them…. With no vol like BTC.

In reply to by JimT

Endgame Napoleon bobcatz Thu, 11/16/2017 - 23:18 Permalink

They might try a few other things before resorting to universal basic income, which is MUCH fairer than the current non-universal basic income for “working moms.” Non-universal basic income for womb-productivity, tied to part-time work at low wage levels, drives wages down and increases competition for jobs for the people without unearned income from government.

Add 3 to 4 percent inflation to the burden felt by all of the citizens who lack the pay-per-birth freebies—the people whose rent takes half or more of their pay—and you will have a horrible situation. Inflation is already sky high on the biggest expenses in life, like housing.

Since AI is already reducing the need for human workers, instead of pursuing the deeply insane policy of paying women in monthly welfare and child tax credits to produce more humans to compete with AI for jobs, as long as the women take scarce jobs, maybe, government should incentivize stay-at-home parenthood, disbanding the mom-absenteeism-clique workforce and opening up some jobs for people who lack unearned, womb-productivity-based income from spouses or from welfare and child tax credits.

In reply to by bobcatz

Endgame Napoleon Stuck on Zero Thu, 11/16/2017 - 23:28 Permalink

Infrastructure spending will help some underemployed male workers, particularly if they make sure that citizens get the jobs..........It will not help underemployed women who lack unearned income for womb productivity. Leaders are more concerned about underemployed men, though, to forestall any street-level backlash. The only underemployed women thus far addressed by public policy of any kind — ever — are those with productive wombs. Due to fake, fake feminism, Z-Hedgers who fear the UBI as a slippery slope to full-fledged socialism can probably stop rubbing their worry stones.

In reply to by Stuck on Zero

Manthong pods Thu, 11/16/2017 - 19:53 Permalink

 
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Well maybe the good news is that all of the streets might be jammed and the cops will be kept busy because nobody is working anymoar…. Oh, wait a minute there…that is the way it is now.

In reply to by pods

Endgame Napoleon Manthong Thu, 11/16/2017 - 23:35 Permalink

True. And the police jobs are now some of the best paying, relative to the part-time / temp / churn jobs in the private sector, making the USA more like one of those 19th century societies, where civil service jobs were the posher employment options. Only problem: The police now pay for the comfort of a regular salary that is far more reliable than most of the private-sector offerings with a much higher chance of being injured or killed on the job due to all of the social mayhem already surfacing in a country with mass underemployment.

In reply to by Manthong

NoDebt peddling-fiction Thu, 11/16/2017 - 19:08 Permalink

"In many possible outcomes, inflation is likely to pick up."Good luck pushing on that rope.  If deflation sets in (which it will in all areas that do not have price points set implicitly via government largesse like healthcare and college education) it's a nasty bitch to put back in the bottle.I think more likely the extra "income" (which will STILL accrue mostly to the upper and upper-middle classes) will result in a significant increase in the savings rate, again fueling asset price increases while doing little for the "real" economy, if there even is such a thing any more.Now, listen, I'm just an old economist shooting from the hip here but why would we believe that the continuation of monetary stimulus via even more extrordinary means would result in a radically different outcome than the current monetary excesses have?  If your solution involves little more than Ctrl-P, that printed money will still end up piling up at the top end of the wealth scale regardless of where you inject it into the system.  It might have to make an extra hop or two to get there but it will end up there nonetheless. 

In reply to by peddling-fiction

Vlad the Inhaler NoDebt Thu, 11/16/2017 - 19:12 Permalink

This ain't your daddy's inflation.  In hyper-inflation you get panic spending, where you gotta use it or lose it, because it's worth visibly less every day.  The difference between helicopter money/UBI and monetary stimulus is that the former goes instantly into the hands of people who need to spend it just for basic necessities. while the latter mostly sits in bank reserves.

In reply to by NoDebt

GreatUncle NoDebt Thu, 11/16/2017 - 19:23 Permalink

The whole economic system is one relative measurement to another, inflation / deflation are the measures.The Keynsian system applies deflation to the debt through forced inflation and anybody who does not have an excess to put into those asset prices will soon suffer ever increasing NIRP.Party is only just beginning and I reckon they know it.

In reply to by NoDebt

Conscious Reviver NoDebt Thu, 11/16/2017 - 21:47 Permalink

ND Re. Pushing on a string.The US has a half Trillion dollar a year trade deficit. Without GRC demand, the dollar will tank. How will these imports be paid for with a dollar tanking in value? Rember? Venezuela can't import toilet paper. Price skyrockets. Hello big inflation.I agree some things will deflate. Unskilled labor for example.

In reply to by NoDebt