Effects Of Monetary Policies

Ed BugosGuest Post   By Ed Bugos

Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.” Dec 17, 2014; FOMC Statement

That paragraph is the only part of the growing FOMC statement that matters – aside from the sometimes entertaining dissenting votes, in

this case three, which didn’t really dissent from the enerally easiest money policy ever; now on its seventh year and counting. I don’t care how many different names it has – QE, ZIRP, twist, liquidity, etc. – it is the longest running monetary intervention in the Fed’s history.

duration of easing cyclesThat’s a hard data point.

The rate of growth in US money supply in the post 2008 period, even with a lower than historic participation of the commercial banks, has been more than 50% greater than in its long run history.

It has averaged 11% yoy post 2008 compared to about 7% on average for its longer-term history (including post 2008). I’ve published these graphs often to remind us of just how unprecedented the current situation really is –i.e., the US money supply has doubled since the crisis! So far it’s mostly just gone into asset prices, fooling pundits into confusing damage to the capital foundation of the economy with economic growth (i.e., inflationary rents with profit). It will affect other prices too, don’t worry.

The lags on these things can be great.

The outbreak of price inflation in Russia only started this year, even though its banks inflated way worse (than now) in the years prior to 2008 without any real fallout occurring from it before now.

As we have seen in our own markets, imbalances can be maintained longer than people expect.

I have written about why we haven’t seen an outbreak of inflation (in prices) in the US and/or Canada, yet.

At the risk of deviating too much let me just summarize the main factors in my analysis,

1. Fed tightening cycle 2004-08 produced a demand shock, commodity prices collapsed temporarily
2. Post 2008 money expansion was not as great as we expected even if it is greatest on record
3. Deflation expectations were initially dominant and resulted in cash hoarding post 2008, up to 2012
4. World’s largest banking systems are impaired and have not generally joined in with the central banks
5. Expanding economic output post 2008 likely absorbed some of the effects of money growth

I don’t think we have to abandon economic logic to understand why price inflation has been relatively low in North America -even though it is true that most gold bulls expected it to be higher immediately after 2008.

The Heart of the Matter; Western Governments Have Become Fundamentally Insolvent

What is truly at risk here is THE monetary experiment that started in 1971. It is different than the one that preceded it (1945-71), which was also different than the systems that preceded (1933-45; 1895-1933; etc.).

What makes it so vividly different is that it is only since 1971 that the world has been completely off of some type of gold related standard (excepting the Swiss who abandoned their gold linkage in the nineties).

That’s just a few generations.

When it happened, gold bugs and other free market economists warned of the consequences of a 100% government managed fiat money system. In fact, they’d been warning of the move in that direction for a while before too. After some initial vindication in the seventies – during the early transition from the failed gold exchange standard to the new fangled fiat dollar based international floating exchange rate regime – gold bugs fell into some discredit again when the new system didn’t spiral out of control in the eighties.



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