Tuesday, September 2, 2014

St. Louis FED Admits QE is Not Working

Given that we just posted below the 45 minute infomercial interview with Jim Rickards, this new article on CNBC is very timely. The article cites a new report from the St. Louis FED which confirms what Rickards and others have been saying. Namely that QE policy is failing because the money created is not circulating into the economy at normal historic rates. Or, as the FED puts it, "people have decided to hoard money".

We are getting more and more evidence piling up that FED monetary policy is not working. This new report from the St. Louis FED adds some more. Below are some quotes from the article and then some additional commnents.

"One of the great mysteries of the post-financial crisis world is why the U.S. has lacked inflation despite all the money being pumped into the economy."

"The St. Louis Federal Reserve thinks it has the answer: A paper the central bank branch published this week blames the low level of money movement in large part on consumers and their "willingness to hoard money." The paper also cites the Fed's own policies as a reason for consumers' unwillingness to spend."
"Monetary velocity—or the force to which money is put to work in the economy—is widely considered a key metric in measuring inflation."
"Under normal circumstances, according to the Fed analysis, when the money supply increases at a faster rate than economic output, which has been the case since the Fed has instituted its aggressive easing practices, prices should keep pace. Factoring in the growth in the money supply against output, inflation should have grown at a whopping 33 percent annually, when in fact it has been rising less than 2 percent."
 . . . ."This implies that the unprecedented monetary base increase driven by the Fed's large money injections through its large-scale asset purchase programs has failed to cause at least a one-for-one proportional increase in nominal GDP. Thus, it is precisely the sharp decline in velocity that has offset the sharp increase in money supply, leading to the almost no change in nominal GDP."
My added comments: This is a stunning admission from the FED itself that its loose monetary policy is not working. Virtually everything in this report is what Jim Rickards and others have been saying. I view this as strong confirmation he is right on this point (lack of velocity of money is negating the QE attempt to stimulate the economy).
Combine this report with the recent article that appeared in Foreign Affairs calling on the FED and other Central Banks to give away free cash to try and stimulate the economy and we are seeing troubling evidence that there is concern within the system. This almost sounds like desparation to avoid a deflation event. 
Note that the CNBC article says we should have gotten 33% annual inflation based on the amount of money they have created in an effort to stave off a deflation event. Let that sink in! The FED expected the amount of money they have created to generate 33% inflation but only got 2%. All that money has resulted in NO NET INCREASE in GDP per this article! This is a massive admission of the failure of the policies by the FED itself. I can't overstate the signifigance of that.
Based on this evidence we need to be very alert to the possibility that deflationary forces are overwhelming the ability of the Central Banks to deal with the problem. It also appears the the public is losing confidence and therefore piling up cash reserves expecting some hard times ahead. Micheal Pento suggests people having too much debt is part of the problem.
If this is the case, we can expect that a potential deflation event may be worrying officials. Then we have to see how the financial authorities react. Do they attempt to not only expand the money supply but also try to "force" people to spend money? Do they adopt the recent proposal from Foreign Affairs to just give out money? If so, under what conditions? Only if the money is used in a way that will get it out into the economy? Will they start charging people interest to hold cash in the bank for example? Will they impose a tax on savings?
All of this is important news related to what we watch here. We need to watch closely for further signs of deflation (oil and gold both took sharp drops today). These conditions could certainly lead to major changes if we get a major deflation event or if we get a major inflation event due to a panic response to the potential deflation event. Either outcome is possible.
On top of everything else we have serious geopolitical problems ramping up worldwide which will probaly drag down global GDP. And there are derivatives exposures all over the world we can't even calculate because they are not disclosed to the public.
It is becoming more than just important to stay informed and keep up with these events. It is becoming critical. When we see the FED itself express concern over its own policies and a major CFR publication call for a radical new policy of free cash transfers directly to the public, we should see warning signs flashing. We will try to follow it all here. 

Added note: Here is a link to the actual FED report. I note that the report actually states an expected inflation rate of 31% annually instead of the 33% used in the CNBC article. But the point remains the same. The FED admits that it should expect the money created to have generated 31% annual inflation and they only got 2% (using their method of calculations for both numbers).

Update 9-4-14: Thanks to a blog reader here for pointing us to this NY Times Article. More evidence of a fear of deflation. We  will run an article on this NT Times story on Friday (Sept. 5th). And here is a similar Bloomberg article.

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