The closing paragraphs of Doug Noland’s latest Credit Bubble Bulletin seemed worth sharing here, not that anyone really cares about this sort of thing anymore, but just as a reminder of how far out into the deep water we have collectively been swimming.
Fed QE operations (“leveraging”) have incentivized what I believe is unprecedented leveraged speculation on a global basis. This additional leveraging has unleashed only more liquidity/purchasing power that has exacerbated inflationary distortions. I argue strongly that all this leveraging has created a deep systemic (financial markets and real economy) dependency to ongoing balance sheet growth (liquidity creation) by the Fed. It has reached the point where even zero rates, massive QE, highly speculative securities markets, pockets of overheated real estate and asset markets, and record securities values spur only modest growth in the general economy.
From Yellen: “If the public understands and expects policymakers to behave in this systematically stabilizing manner, it will tend to respond less to such developments. Monetary policy will thus have an ‘automatic stabilizer’ effect that operates through private-sector expectations.”
The traditional gold standard was so effective because it in fact provided an “automatic stabilizer.” If Credit was created in excess, an economy would suffer a loss of gold. The reduced gold reserve would dictate higher rates and a (stabilizing) contraction in lending. Bankers and politicians understood the mechanics of the system (and were committed to sustaining the monetary regime), so they would tighten their belts when excess first emerged. In this way, the gold standard for the most part provided a stabilizing and self-correcting system. These days, everyone knows the Fed will not respond to excess. Our central bank, however, will be predictably quick to print additional “money” at the first sign of a faltering Bubble, liquidity that will reward financial speculation. Excess begets excess. Today’s system is the very opposite of “automatic stabilizer.”
This all could sound too theoretical. But with the Fed intending to conclude balance sheet leveraging later in the year, this theory might soon be tested.
That highlighted passage is key – all the Fed’s work hasn’t done much for the economy.
Naturally, stocks are higher today along with bonds, real estate, and other asset classes.