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Fed's Monetary Pumping "Just Right"

After a few public appearances of the two or three remaining "hawks" among the regional Fed presidents - among them Charles Plosser, who once again noted he favors a "tapering" of the money printing policy (Plosser made the almost unpardonable comment that he thinks "central banks do not create wealth") - it was the doves' turn.

Charles Evans of the Chicago Fed was at his most hawkish in many months by noting that the Fed's current pace of money printing is "just right." How does he know it is just right? Well, as a monetary bureaucrat he has special insights we mere mortals as a rule don't have. The incoming data prove his case. He even sees the future: in what might be called this year's version of the famous "green shoots," he expects the US economy to attain "escape velocity" in 2014. Will it leave the planet?

"The U.S. Federal Reserve has the appropriate level of monetary accommodation in place, allowing the economy to reach "escape velocity" next year, a top Fed official said on Monday.

"We continue to face powerful headwinds in the fiscal situation and the global economy," Chicago Federal Reserve Bank President Charles Evans told the CFA Society Chicago. But "the U.S. economy seems to be performing pretty well right now," he added, with the labor market improving, consumer spending up and housing stronger.

By 2014, GDP growth should be somewhere between 3 percent and 4 percent, allowing the recovery to be self-sustaining, he said."

(emphasis added)

We will of course only know if the recovery becomes "self-sustaining" if we follow the US economy on its upcoming trip into outer space. What constitutes a "non-self-sustaining" economy in Evans' book? Presumably that is an unruly market economy that is for mysterious reasons bereft of the proper measure of "animal spirits" and therefore in urgent need of a larger pile of its medium of exchange. This "shot in the arm" in the form of more money will then lead to the coveted "self-sustaining" state. We think Mr. Evans urgently needs to read "Fiat Money Inflation in France." What tends to happen to an economy that is pumped up by monetary inflation is that it immediately contracts again once the monetary pumping ends. Then we will hear that even more inflation is required.

Kocherlakota's Roundtrip and Bullard's Ideas for the ECB

Narayana Kocherlakota has completed his round-trip from presumed "hawk" in 2010 to the by far most dovish member of the FOMC in 2013. After arguing a month ago that "inflation is too low" and would therefore justify even bigger doses of money printing, he now blows off any concerns people may have about the developing asset bubbles the Fed's policies have set into motion. In a speech delivered last Friday he noted:

"[...] currently, the gains from tightening related to improving financial stability are both speculative and slight. In contrast, the losses from tightening-in terms of pushing employment and prices even further below the Federal Reserve's goals-are both tangible and significant. I conclude that financial stability considerations provide little support for reducing accommodation at this time."

(emphasis added)

Of course when the inevitable crash in junk bonds and stocks arrives, we will also hear that even more monetary accommodation is needed.

James Bullard is now evidently a member of the dole of doves as well, and he even has ideas about Europe and how it might be able to join the happy world-wide inflationist "effort" (which will soon be augmented by Mark Carney at the BoE, where an experiment in "NGDP targeting" is likely to be put in place).

According to Marketwatch:

"The Federal Reserve should continue with its present bond-buying program and adjust the rate of purchases in view of incoming data on growth and inflation, said St. Louis Fed President James Bullard on Tuesday. In a speech to an economic conference in Frankfurt, Bullard said the Fed's bond buying, commonly known as quantitative easing, is the best policy option at the moment and has been effective.

He rejected calls by some, inside and outside the Fed, for the central bank to do nothing, saying this risks the mildly deflationary situation experienced by Japan. Other tools, like cutting the interest the Fed pays for banks to park reserves at the central bank, or to "twist" short-term government debt on the Fed's balance sheet into longer-term debt, would have only minor effects, he said. Bullard said European leaders should consider a quantitative easing program if more easing is desired. The program should be GDP-weighted, as there is no European-wide government bond market, he said."

(emphasis added)

Let's all happily inflate together! We wonder if the ideas Bullard is providing to Super-Mario will be falling on fertile ground. There is good reason to believe that the answer is yes. Won't a "GDP weighted" bond monetization program be a good way of escaping the charge of "monetary financing of government spending?" Especially since such purchases would be effected in the secondary market anyway? At present such a plan would likely not be considered due to resistance by the German Bundesbank and its dwindling band of allies on the ECB's board. Just wait though for the economic downturn in euro-land to worsen and stock markets to falter again. Then the resistance will likely melt away. Besides, the ECB can always point to developing deflationary pressures: since its mandate is to preserve price stability, it can justify a more intensive money printing scheme by the alleged need to avert deflation.


The often talked about "tapering" of QE may well arrive in the event that macro-economic data strengthen. Right now they are weakening, however, and so there is little reason to expect the pace of printing to slow down in the near term. Once the inflationary policy ceases, the malinvestments of the prolonged easy money period will be due for liquidation. This prospect is unlikely to be relished by severely overbought stock and bond markets.

We conclude that any "pause" in the QE policy is likely to be short-lived.

Addendum: QE2 Asteroid to Miss Earth by a Smidgen

A massive asteroid named "QE2" is set to pass the planet on May 31, and will only miss us by what is considered a tiny distance in astronomical terms.

"It's 1.7 miles long. Its surface is covered in a sooty black substance similar to the gunk at the bottom of a barbecue. If it impacted Earth it would probably result in global extinction. Good thing it is just making a flyby.

Asteroid 1998 QE2 will make its closest pass to Earth on May 31 at 1:59 p.m. PDT.

Scientists are not sure where this unusually large space rock, which was discovered 15 years ago, originated from. But the mysterious sooty substance on its surface could indicate it may be the result of a comet that flew too close to the sun, said Amy Mainzer, who tracks near-Earth objects at Jet Propulsion Laboratory in La Cañada Flintridge. It might also have leaked out of the asteroid belt between the orbits of Mars and Jupiter, she said.


"This is a really big asteroid, similar in size to the one that killed off the dinosaurs, and it's getting very close to us," she said. "Fortunately we've been tracking its orbit very carefully so we know with great certainty it won't hit us.We don't need to panic, but we do need to pay attention," she said.

(emphasis added)

Not to worry though, if the calculations of QE2's orbit turn out to be flawed and it does hit us after all, Paul Krugman is set to assure us a mighty boost to GDP is going to follow in its wake due to massive reconstruction spending. In fact, Kurgman probably thinks that a direct hit by QE2 is just what the doctor ordered for the moribund economy. It may even be better than war with space aliens.

(click to enlarge)

QE2's scheduled flight path. That's awfully close and if it gets any closer, it may well break quite a few windows.