Federal Reserve | timiacono.com - Part 4

The tumbling trade-weighted dollar is one of the surprise stories of the year so far as many analysts thought the greenback would fare better than its freely traded rivals due to an improving U.S. economy and a central bank that was reining in its money printing effort while prepping financial markets for higher interest rates.

But that’s not what has happened as detailed in this story at CNBC.

After years of tough love from policy makers and central bank officials, the eurozone may finally be on the road to recovery despite perpetual warnings of deflation (either that, or bond bubbles in places like Spain and Greece are contagious). The euro is now near $1.40 for the first time since it looked like the U.S. government was going to implode in 2011.

Also (and this took me by surprise when I looked it up), thanks in large part to a blossoming housing bubble, the British pound is threatening $1.70 for the first time since 2008!

It’s not clear what any of this means, but it sure has taken a lot of people by surprise.

Yellen on Capitol Hill

Financial markets appear to like what Federal Reserve Chair Janet Yellen has said so far in her appearance before the congressional Joint Economic Committee up on Capitol Hill.

A short time ago she was asked about this Wall Street Journal op-ed by Fed historian Allan Meltzer How the Fed Fuels the Coming Inflation and, while responding, she objected  to the term “goosing” when referring to the effect monetary policy has had on the stock market.

The U.S. Department of Agriculture forecasts that food prices will rise as much as 3.5% this year, the biggest annual increase in three years. Over the past 12 months from March, the consumer-price index increased 1.5% before seasonal adjustment. These are warnings. Never in history has a country that financed big budget deficits with large amounts of central-bank money avoided inflation. Yet the U.S. has been printing money—and in a reckless fashion—for years.

The relationship between Fed money printing and growing inequality in the U.S. was also brought up in this interchange and Ms. Yellen didn’t acquit herself particularly well, offering up the usual “trickle down” theory of boosting the economy without calling it such.

Senator Bernie Sanders (I-VT) just asked her whether we’ve transformed into an oligarchy of some kind with Fed policy only making this situation worse and she similarly didn’t have anything very useful to say. Yellen just admitted that Fed forecasts are just “guesses”, a word she stumbled over twice before finally getting it out, and she clearly seems to be most comfortable talking about such things as the intricacies of the labor force participation rate rather than much weightier questions about the effect of central bank policy.

I haven’t watched one of these in some time (and not one of Yellen’s prior appearances) – it’s all quite fascinating and, for once, lawmakers are asking some interesting questions.

For some reason, Wall Street seems to just love what she’s saying.

What Exactly is Money?

Here’s a new infographic from the folks at Buddy Loans that looks at the evolution of money and why we assign value to those little slips of paper we carry around in our wallets and, more importantly today, those digital bank account entries.


Click to Enlarge

The history of money and the role of commodities such as gold are detailed in the much larger version of this graphic and, at the end it is concluded that all money is based on the perception of value, even commodity money.

One interesting comment about the transition to pure fiat money comes via the following:

As economies grew, gold couldn’t be mined fast enough to meet the world’s demand for currency. The world shifted to a less scarce commodity – IMAGINATION.

While it is true that history is replete with complaints of “a shortage of specie”, that’s not necessarily a bad thing. One of the main benefits of commodity based money is that its supply increases only as fast as you can dig the stuff out of the ground which, for gold, coincidentally was about the same pace as population growth.

It seems that much of the increased demand for money in recent decades has arisen due to the pleasurable effects of asset price inflation and Wall Street seems to like that quite a bit.

Still Dancing in 2014

I feel compelled to pass along these comments from Doug Noland’s latest Credit Bubble Bulletin and, while reading them, it might be useful to recall what Mark Twain once said about history rarely repeating, but often rhyming (or something like that).

Throughout the financial markets, Bubble excess seems to turn more conspicuous by the week. From star hedge fund manager David Einhorn: “There is a clear consensus that we are witnessing our second tech bubble in 15 years. What is uncertain is how much further the bubble can expand, and what might pop it.” Obvious Bubble excess in the Credit market also garners increased attention. Bloomberg quoted Apollo Global Management co-founder Marc Rowan from this week’s Milken Institute Global Conference: “All the danger signs are there of a future crisis. We’re back to doing exactly the same things that were done in the credit markets during the crisis.”

It’s been my view that a going on six-year old “global government finance Bubble” last year suffered its first subprime-like cracks (EM and China). It’s worth recalling Citigroup CEO Chuck Prince’s infamous quote from July 2007 (via the FT): “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Why was Mr. Prince – and about everyone else – still dancing in the summer of 2007 – when it seemed rather clear the environment was in the process of changing? Because there was so much money to be made. Because the cautious were being left in the dust. Because it seemed irrational not to be participating in one of the most lucrative financial backdrops ever. Because not participating in the industry boom was career jeopardizing. Because, as Keynes noted a long time ago, if you’re going to be wrong you’d better be wrong right along with the group. The exuberant Crowd had convinced themselves that the Fed had everything under control (“Would never allow a housing bust!”)

Of course, Fed chief Janet Yellen will trudge up to Capitol Hill this week to answer lawmakers’ questions about the health of the U.S. economy and, in the process, she’ll probably have some soothing words for whatever currently ails financial markets, all part of what is now being called the Greenspan-Bernanke-Yellen Put (that works most of the time, but when it doesn’t, there’s hell to pay, as Ms. Yellen will learn at some point).

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