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October 15, 2014

Low Rates and QE are Deflationary at the Zero Bound

By EconMatters


San Francisco Fed's John Williams is part of the Problem at the Federal Reserve

Sure enough the S&P 500 drops 6% from its all-time highs, and all the idiots start talking about another round of QE when we haven`t even finished with the latest one (still buying bonds through October). The latest lemming who this time isn`t some dumb analyst on CNBC needing to pump his firm`s lagging stock, but no less than a voting member of the Federal Reserve in the form of the San Francisco Fed's John Williams, where do they get these clowns? Really QE again with a 5.9% unemployment rate and more JOLTS jobopenings than the US available workforce can possibly fill? Enough of this QE Forever crap, when are these clowns going to realize that low rates are actually incentivizing poor and inefficient uses of capital allocation.

San Francisco Innovation an Argument against European Weakness Having Any Direct Correlation with ZIRP or QE Infinity – Structural Issues Cannot Be Fixed with QE!


If ZIRP and QE Infinity hasn`t brought the economy back to normal operations after 7 years, then maybe these geniuses will figure this out that their policies are actually part of the problem, and have been proven not to be the solution. Every time I have heard San Francisco Fed's John Williams talk it reminds me of the Peter Principle, and how incompetent people rise within organizations and society because even more incompetent people feel comfortable and not threatened by their presence. In a sense this says a hell of a lot about the competence of Janet Yellen to have this intellectual lightweight as her wingman at the Federal Reserve. This guy is an embarrassment to the economics community, the Fed really stooped to all-time low levels with this hire, he literally is just there to insulate Janet Yellen from competent economists like James Bullard who should be head of the Federal Reserve, and actually can make sound objective judgments regarding the state of the US economy apart from his ideological disposition.


US Economic Data Should be Focus of Fed & Nothing Else


The US Fed is responsible for basing monetary policy on the economic data here in the United States, and not based upon an Ebola outbreak in the third world, how many times has that happened over the last 40 years? Many parts of Africa have been a shithole, and probably always will be because their values are shortsighted, yes cultural values matter, you do stupid things and you as a country are going to get stupid results, starvation, civil wars, Ebola, other diseases, etc. We seriously have not withered to a new low level of monetary policy where we are waiting for Africa to get its act together before normalizing rates and getting out of the business of manipulating market prices with QE Infinity creating more continued and unsustainable asset bubbles? Why do you think these markets freak out every time QE ends, because the asset prices were not created through a natural price discovery process – again the Fed is part of the problem with these insane bubble creating monetary policies!



US is a Capitalist Country (at least used to be) European Union is a Socialist Entity – and their Socialist Economy reflects this reality: US Fed has no control over Structural Issues in Europe

Does US monetary policy really revolve around whether Germany deficit spends to boost their sluggish economy, or diversifies from their current narrow engineering and manufacturing based economy? If the US really wants to help the German and European economy then just take back all the Sanctions against Russia one of the region’s most dominant trading and business partners. But since when does US Monetary policy depend on structural issues that they have no control of in the European Union? Where is that in the Fed mandate? The US cannot raise rates because Europe is a socialist mess, and until they adopt more market based capitalistic economies that can compete on a global basis, the US must continue on with recession era interest rates. How did we ever survive World War II without ZIRP & QE Infinity?

ZIRP & QE Poorly Incentivize Capital Allocation at the Zero Bound

However the biggest reason to discontinue ZIRP, never entertain QE again, and normalize interest rates is because of all the wasted capital around the globe chasing Yield Delta trades based upon 10 to 15 basis point borrowing costs, think about all this capital that could be better served actually creating economic growth in the form of project development, cap ex spending, bank lending for infrastructure projects, research and innovation, and small business loans. Literally low interest rates are actually self-fulfilling and deflationary, they are not good for any economy, and this is the Fed fallacy. 

ZIRP is Deflationary at the Zero Bound Level

If financial capital is so cheap that normal investments decisions are put on hold because investors can borrow at 10-15 basis points and without taking any project risk at all, just electronically Delta or pocket the difference between ZIRP borrowings and US Treasuries, Global Debt, Utilities, and anything else with an Electronic Yield of course this is an overall deflationary effect on the economy. The entire chase yield trade which is in the Trillions is a counterproductive, inefficient and poor use of capital allocation which only stunts long-term economic growth. What the Fed doesn`t get is that once you normalize interest rates you get healthy capital allocation strategies which boost economic growth because they are not strictly Electronic Transactions, but transactions that actually have knock on effects that add to other parts of economic growth, and thus they are growth driving and inflationary in nature. If the Fed truly wants inflation like they always make an excuse for why they need to print more money, just raise interest rates and that is the fastest way to get real inflation once you hit the zero-bound level, see Japan for the best example of the self-fulfilling policy of lower interest rates actually being deflationary, and not inflationary. 

If the Fed Really Cares about Raising Inflation Expectations, then they need to Raise Rates

The Federal Reserve has this all backwards! If they want to create inflation they need to raise interest rates off the zero-bound level period! What does the Fed have to lose [besides their whole Reason for Existence I know], but try normalizing rates and then examine the results, because we know low interest rates and QE hasn`t worked, or they wouldn`t have to be re-initiated in the form of additional QE Programs, and we wouldn`t still be having this entire conversation 7 years after ZIRP began. So enough of the excuses from these dovish Fed members, End QE, Never bring back QE Programs, and normalize interest rates ASAP, and stay the hell out of financial markets forever! Your only job is show up at economic conferences and raise and lower the Fed Funds Rate between 3.5 and 5.5%, and that is it! San Francisco Fed's John Williams is an absolute idiot, and representative of why so many market participants have lost all deference for the Federal Reserve and their incompetent monetary policies.


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Item Reviewed: Low Rates and QE are Deflationary at the Zero Bound Rating: 5 Reviewed By: Econ Matters