Gentle Ben

 

 

 

First, the Fed should try to preserve a buffer zone for the inflation rate, that is, during normal times it should not try to push inflation down all the way to zero.
Second, the Fed should take most seriously–as of course it does–its responsibility to ensure financial stability in the economy.
Third, as suggested by a number of studies, when inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more preemptively and more aggressively than usual in cutting rates. By moving decisively and early, the Fed may be able to prevent the economy from slipping into deflation, with the special problems that entails. Read More

In honor of the upcoming, extra-special, 2-day Fed meeting speech, I have prepared the following document to consider when listening to the hype about upcoming QE3 announcements.  I don’t think it will be announced until it is in full swing and either complete or near completion.  Meanwhile, behind the curtain there are other games already being played with our livelihoods.

For your reading pleasure, I prepared the following document after a monologue given by someone whom I respected in the podcast sphere.  I have since lost some of that respect as I now discover that he quoted verbatim some text from Wikipedia without giving due credit.  The original article may be found here.  I have expanded on the quotes from his Helicopter Speech in my text below.

You should be able to see what “tools” have been used, and what might still be to come.  Enjoy.

The Fed’s tools according to Ben (a.k.a. The Bernanke Doctrine):

Increase the money supply.   
“..the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

Ensure liquidity makes its way into the financial system through a variety of measures.    
“Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).8 Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system–for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities.”

Lower interest rates to zero.     
Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has “run out of ammunition”–that is, it no longer has the power to expand aggregate demand and hence economic activity. It is true that once the policy rate has been driven down to zero, a central bank can no longer use its traditional means of stimulating aggregate demand and thus will be operating in less familiar territory. The central bank’s inability to use its traditional methods may complicate the policymaking process and introduce uncertainty in the size and timing of the economy’s response to policy actions. Hence I agree that the situation is one to be avoided if possible.

Control the yield on corporate bonds and other private securities.    
“…a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.”

Depreciate the U.S. Dollar.   
“A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation.”

Execute a de-facto depreciation by buying foreign currencies on a massive scale.     
“The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.”

Buy industries throughout the U.S. economy with newly created money.
General Motors…more to come?