The lackluster nature of the recovery is certainly the byproduct of the debt-infused boom that preceded the Great Recession, as is the excessive uncertainty surrounding the actions — or rather, inactions — of our fiscal authorities in Washington. But to borrow an analogy Rosenblum crafted, if there is sludge on the crankshaft—in the form of losses and bad loans on the balance sheets of the TBTF banks — then the bank-capital linkage that greases the engine of monetary policy does not function properly to drive the real economy. No amount of liquidity provided by the Federal Reserve can change this.
Note the idiocy here.
Who provided the debt-infused "boom"? More to the point, was there ever any actual growth at all or was it all inflation?
Click to enlarge
There was no "growth." Not only was every dollar of new GDP acquired via more debt (that is, $1 in new GDP came with more than $1 in new debt), but since this debt was never removed from the system the inevitable additional interest cost meant that the transfer from production to debt-lenders squeezed investable capital surplus.
This is what ultimately led to the collapse, and the bad news is that the bailouts and "rescues" left the debt in the economy. It is for that reason that no actual recovery has taken place.
Remember your Friedman? Inflation is always and everywhere a monetary phenomena. But to properly interpret Friedman one must first determine what is money -- that is, what would you call "the monetary base." The common monetary theorists will all tell you it is defined by M1, M2, M3, etc. They're wrong; the common man knows damn well what "money" is -- it's everything he can spend right now.
Wait a second -- that VISA card in your wallet, by that definition, is money. It spends exactly like currency. So does a PAL from your bank or credit union at the car dealer or the student loan voucher at the university. You must include all available and circulating credit in the monetary base, and when you do suddenly the truth of the inflation monster becomes clear:
These aren't my numbers -- they're The Fed's numbers. That chart is simply the percentage growth on an annualized basis of credit .vs. that of GDP. Since all money is debt-backed in our system every dollar of additional spending power, whether credit or currency, is always reflected in debt somewhere. Since the Fed Z1 provides us with all of this information comparing that against GDP gives us the actual inflation statistics we need.
Nothing more is required from a monetary perspective and when it comes to price changes nothing more is required either, since all new debt that shows up in the system only appears as a consequence of someone spending those funds somewhere.
We of course don't call the acceleration in house - or stock - prices "inflation", but they in fact are. Assets are something you acquire with economic production. Debt is simply the promise to produce tomorrow so as to have today.
The Fed claims to have a policy of "price stability" but then only looks at prices it wants to count. Asset prices are prices. So why doesn't The Fed count those? That's simple - if The Fed actually looked at its mandate as meaning something it would have to disband tomorrow as it has intentionally and recklessly violated its mandate every year in the modern era, and Fisher is well-aware of this.
In short, the lament is nice, but it's a misdirection. The Fed no more cares about the law than did John Dillinger and Congress could care less either, as the mavens of Wall Street use the rise in "asset prices" as a means to both generate lots of bribes, er, "campaign contributions" while at the same time pointing at them and saying "look, prosperity!"
It's all a lie folks. Dividing the number of units of production by more units of currency doesn't make you wealthier - in fact, makes you poorer when your earnings in nominal dollars don't keep up with the monetary inflation that is taking place.
Don't kid yourself - your standard of living, unless you're one of the banksters, has been in severe decline for 30 years. Only when we force these bandits from office - all of them, including Fisher - and stop clucking and tutting when they talk about "TBTF" will we make progress.
Dallas Fed President's Fisher may make good-sounding noises, but The Dallas Fed still has to square the mandate in the Fed's enabling law with the mathematical fact when it comes to regulation of credit on a systemic basis - a responsibility it has intentionally and willfully abused for 100 years.