Monthly Archives: February 2016

One last print to come. Maybe a lot more.

“The return to monetary stability does not generate a crisis. It only brings to light the malinvestments and other mistakes that were made under the hallucination of the illusory prosperity created by the easy money. (Ludwig von Mises)”

The Fed’s trip to financial stability.

To anybody who has read Mises in depth, it was glaringly obvious that the road back to monetary stability would be treacherous. Regrettably, the date when we would get going with that uncomfortable transition was not predictable beforehand. Ever since Ben’s no-show in June 2014 (as a consequence of the taper tantrum), lots of confusing and contradictory fed-speak made it difficult to pinpoint the exact moment when they would go for monetary normalization.

It took Stanley Fischer well over a year to convince Janet and colleagues that rates had to take off soon. At long last, they did it last December. Good. We now know where we are, and what they are trying to do at the FOMC. Fisher or Williams have made it very clear, and even the most dovish members were not standing up against a suggested series of three to four rate hikes through 2016. Janet Yellen recently reiterated their commitment to normalization. Their mood will change in due time. In fact, it changes as I write. Back-pedalling is already real at least referred to interest rate hikes. More printing is hopefully not being contemplated… Yet!

“A weakening of the global economy accompanied by further appreciation in an already strong dollar could also have “significant consequences.” … We’re acknowledging that things have happened in financial markets, and in the flow of the economic data, that may be in the process of altering the outlook for growth and the risk to the outlook for growth going forward.” (Bill Dudley 02.03.2016).

I think it is safe to assume that, for the time being, they are going to try to stick to their course and normalize monetary policy -for financial stability reasons. And they are trying to normalize asset values as well. In Fischer’s own words: “if asset prices across the economy -that is, taking all financial markets into account- are thought to be excessively high, rising interest rates may be the appropriate step”. And he added, “the Fed should be open in the future, to raising interest rates to ward off potential asset bubbles”. I read him loud and clear, and it’s a nice change since Bernanke and Yellen last said that monetary policy was not the right way to avoid them.

Even if this reassuring talk comes at the eleventh hour, it is comforting to listen to Stanley Fischer. He means what he says, so we have to assume their commitment to a gradual tightening in the USD. And a tightening in the global reserve currency impacts us all. Together with that, the good news is that they now belatedly admit that the tightening is not really focused on business cycle related requirements. Rather, it is financial stability and risk building concerns that motivate the lift off. Is this as good as Fed-speak can get?

You never know. Anyway, regarding what we have already seen, I am not sure you can say better late than never this time around. There is no easy way out of the plateau of asset overvaluation, and accumulated debt increase, that easy money has engendered. I think a meltdown is inevitable. The deflationary forces unleashed by the tightening in liquidity and higher rates will lead us to financial disorder, and a financially induced recession, and make it necessary to print at least once again. Unless we want to allow the ATM network to run out of paper money! Continue reading