The Bear's Lair: Fed policy makes spendthrifts of us all

[unhappycamper]

http://www.prudentbear.com/2014/09/the-bears-lair-fed-policy-makes.html#.VCovRyh8vzI

The Bear's Lair: Fed policy makes spendthrifts of us all
September 29, 2014 posted by Martin Hutchinson

Last week's inflation figures showed that the Federal Reserve's over-expansionary monetary policy wasn't revealing itself in inflation. But that doesn't mean it's doing no damage. Instead of in inflation numbers, the multiple years of ultra-low Fed interest rates are manifest in savings figures for both individuals and companies. Individual savings are at half the long-term average and corporate stock buybacks, together with dividends, are absorbing 91% of the Standard and Poor's 500's net income, according to the Financial Times.

Traditionally, fiat-money central banks were supposed to run the system with a view to keeping inflation as low as possible. In 1978, the Humphrey-Hawkins Act extended the Fed's remit to the "dual mandate," supposedly managing unemployment and inflation simultaneously. Hard-money types have criticized this as sloppiness incarnate, allowing the Fed to pursue soft money policies even when inflation is rising, as in 2005-06. However, the Fed's period of extraordinary stimulus since 2009 has not been accompanied by an inflation upsurge. Far from it.

There appear to be a number of reasons for this. The link between money supply growth and inflation is nothing like as tight as Milton Friedman claimed, and his parallel assertion that inflation is "always and everywhere" a monetary phenomenon is nonsense. Actually, we could tell that Friedman himself was losing confidence in his own theory during his last years when he gave encouragement to Alan Greenspan's sloppy monetary policy. With M3 money supply rising at close to 10% per annum, Friedman should, as a true monetarist, have condemned it.

Since 2008, money supply growth has risen at 6-7% per annum, but that's still a lot faster than nominal GDP growth, which has rarely touched 5%. Saying that monetary "velocity" has declined is in a sense tautological; if money supply consistently rises faster than GDP then monetary velocity must, as an arithmetic necessity, decline. But that says nothing about events in the real world, nor does it suggest that any real factor is causing monetary velocity to decline and GDP to increase more slowly than money supply.

[littlemissmartypants]

1. There is always a tipping point. eom

[pscot]

2. What rough, slouching beast is that?

Why dear me. It's Milton Friedman.

[unc70]

3. Difference is we don't print currency, we sell more bonds

Almost all our macro policies are geared at keeping inflation low and effective bond yields high. To do that requires keeping all levels of government just barely able to service their debt load and roll the bonds over tax free. Locks up what should be taxed and recycled through the economy. The bond marked usually fear two things, inflation and risk of default. The current situation has low inflation and little risk