Federal Reserve Chair Janet Yellen gave her bi-annual Humphrey-Hawkins testimony before congress this past week. Although the prepared remarks were much the same as expected with any monetary policy review. What really made “news” to anyone paying attention was the Q&A. Yes, may times Ms. Yellen seemed to give the usual rebuttals of “We would consider this if that …” and so forth.
Yet, in response to questions that took issue with the Fed. paying banks on excess reserves The Chair seemed not only defensive, but rather perplexed, as to why they were even questioning it to begin with. This line of questioning in my view opened up, and brought to light, the Pandora’s box of Keynesian insight and thought processes now emanating from the Fed. In fact, I’m quite sure Ms. Yellen herself didn’t realize just how far she threw the lid open.
However, there was one exchange where not only the answer was revealing. It was the tenor and tone that was not only jaw dropping, rather, it sent shivers. Forget about the old “behind the curtain” analogies. This one is far more troubling not only to business and free markets, but rather: the very fabric of what free enterprise is, and possibly capitalism itself.
Yes, I’m well aware it’s conjecture bordering on fire and brimstone. However, if you make/made your living based on your ability to both ascertain information, as well as, understand its implications by what someone is saying and/or doing, along with the manner in which they are being done, you can’t help but to see things others miss. (e.g., as I’m quoted to say: “You grow in business when your knowledge of product gets replaced by your knowledge of people.”)
From what I’ve garnered having read, watched, or heard from the financial press as of this writing. It seems few caught, or understood, its implication. So what is this exchange or statement that sent me into “The end is nigh!” bewilderment? Fair enough…
In response to push-back as it pertained to paying banks interest on reserves and it efficacy, as well as whether or not there may also be some unfair advantages vis-à-vis where banks are receiving slightly more of a payment than the stated interest rate implies. The Chair argued from what I construed as a far more defensive argument and posture to the program, rather – than merits based. It’s not a distinction without a difference.
And what clinched this assumption to the affirmative, in my opinion, was another part of her defense as to warrant its efficacy. That defense? I’m paraphrasing: “The Federal Reserve has gone from remitting to the Treasury a few $Billion dollars a year to now over $100 BILLION which helps fund the government itself.” i.e., You want to blow a hole in your budget of $100 Billion? Are you hearing me? Hello?!
I strongly suggest one would be prudent to find that Q&A on their platform of choice and view, read, or listen too it for themselves, rather, than just take my word for it. I feel it’s that important.
So what’s so wrong with that one might ask, “The Fed. is paying the Treasury money it’s making from all the bonds and sorts they have on their books. What’s wrong with that?” From my viewpoint: everything. Here’s why…
Regardless of what any so-called “smart crowd” financial aficionado will state. There is one – and only one – construct that keeps what the world deems “monetary policy” afloat: The belief in confidence. Only “the belief” part is what keeps it all together. i.e., What you or I believe to be money, and what its worth today. Period.
Today the world is awash in fiat based currencies. Debt, is priced in fiat based currencies. And, political wealth and power is also based on it. Change “belief” into “assumption” even ever so slightly – and everything you once thought of on how the world works is thrown into the trash pile along side most, if not all, fiat anything. Believe me.
This is the “fire” the Fed. is playing with. For it’s not lost on anyone (“anyone” also includes other governments) who understands business and free markets that the $100 Billion remitted to the Treasury was made possible by the Fed. creating that money ex nihilo. Arguing or using it as a shield to deflect criticism, as well as, implying the benefit for such actions opens the Pandora’s box of just how far off the ranch of sound monetary policy we’ve now come. (“we’ve” meaning the U.S. once considered the “gold” standard of monetary prudence.)
To use the term uber-Keynesian as to describe this rationale is an understatement. Now, not only does the Fed. seem open to, but also, apparently willing and/or eager to pursue going “Full-Krugman” as to facilitate – a negative interest rate policy agenda. Even if, “Currently they’re not sure if they have the authority.” But, (and it’s a very big but) “don’t know of any restriction as to why they can’t.” i.e., Again, if one reads between the lines one may prudently infer: They’ll seek forgiveness, as opposed to seeking permission, first.
So why is this so dangerous? Well, let’s look at the big picture and rationale as I see it for context…
As for the efficacy, as well as, the defending of those increases in payments to the Treasury. One has to argue (or assume) that this is not some form of a “tax” on the economy as a whole.
The reasoning is this: If the banks don’t (or won’t) lend it out for whatever the reasons, that’s money being rewarded (reward meaning it’s making money through interest payments via the Fed.) for sitting on balance sheets rather than working its way into the general economy via loans and such where the multiplier, as well velocity effects, can take shape.
In effect the Fed. is “taxing” the overall economy by making that money “safer” on a banks balance sheet as opposed to moving the banks back into the risk business (e.g. loan making business) where they say they want the banks to be in the first place. And when you’re talking about $Trillions deposited on the Fed’s books. Suddenly that tiny accrued interest payment adds up to truly big bucks.
One could further argue (and I’m of this mindset) that this, along with, the exploded $4 TRILLION balance sheet of the Fed is a fair representation of comparative cumulative figures on just how much potential productive capital the Fed. has unwittingly siphoned out from the economy today. And, in conjunction, pulled forward from future potential of the overall economy. That’s how (or why) I argue the “tax” argument as opposed to the “rewarding” type view-point the Fed. seems to be embracing.
Remember, most (if not all) of the Fed’s balance sheet is made up of bonds. (this is the key point) So, as the Fed. bought and continues to “re-invest” they alleviate the needed fiscal pressure away from lawmakers to make needed policy changes whether it be taxation, or other business incentivizing laws. All while the Fed. itself argues “The Fed. can’t do it all.”
This process no mater how it’s argued as “beneficial” fosters and facilitates negative affects into the business mindset where examples of crony capitalism, as well as, other economic disabilities and/or hindrances manifest in ways far too numerous to list here.
Currently, many (including the Fed.) are arguing current monetary policy and economic malaise as some chicken and egg quandary. This arguing of such a quandary I’d like to point out is not only manufactured, but rather, is now running in near perpetuity – by the Fed. itself. A quandary I’ll again remind those arguing such nonsense only a few years ago was argued by the very same as “preposterous” to even consider. (e.g., monetizing the debt argument) Now it’s morphed into, “Look how much money you’re making with it!.” This chicken and egg quandary takes monetary gene splicing to a whole new level in my opinion.
Understanding this one point is a lesson in uber-Keynesian (or Full-Krugman) economics 101. And, it tells you almost everything you need to know about what’s wrong with the economy in general and why more tinkering won’t help. But wait, I’m sorry too say – it gets worse.
As bad as the above sounds, the reason why it gets worse is this: All of the above is made manifest via the Fed. with money created ex nihilo. Why does that matter you ask? Simple…
Just as I made the argument where the “preposterous” has now morphed into “prudent monetary policy.” So too is that other “Full-Krugman” idea which is not only being contemplated as possible, but now, seems near inevitable: Negative Interest Rates. e.g. NIRP – the ultimate tool in Pandora’s box of monetary policy.
Why is NIRP the equivalent of a Pandora’s box filled with fire and brimstone? It’s for this one simple difference that’s being lost on everyone who claims to be a member of the so-called “smart crowd.” NIRP doesn’t just effect the banks or is some obscure construct for efficacy within the world of economic theory. No, it sets a much more meaningful, as well as, dangerous precedent. Here’s how I see and sum it up. To wit:
Via an incontestable dictate or decree; It (e.g., The Federal Reserve) will directly impose a “tax” and implement the collection of that “tax” on money held directly by the U.S. citizenry without their consent or approval by means of an un-elected supposedly “non government” independent agency. In other words: unless you put it under your mattress or spend it – you’ll be fined a “tax” anywhere throughout the banking system. Period.
Does anyone else but me see the inherent dangerous consequences just lying within this “Negative rates might be just the thing we now need here in the U.S.!” based argument? I’ll contend it may just be the thing to make even Pandora herself more nervous.
Unlike the overall assumptions when talking about Fed. fund rates, or balance sheet and interest payments. Those arguments reside in some monetary construct which is foreign to most people. i.e., “That all effects someone else like banks and businesses – not me” type of mindset.
NIRP in the United States is a-whole-nother matter entirely.
This is because NIRP directly touches the money markets. Yes, those very same money markets that hold many a 401K holders cash, certain checking accounts, savings, and a whole lot more. Not to mention what they hold in lines of readily needed access capital for many a businesses daily operational funding.
I can not stress the implications for the disruption of mindset of not only people in general, but rather, businesses of all sizes and stripes if money can be penalized – for just being. (i.e., you’ll be not only charged but it will automatically be deducted from your balances)
You think this is just some “Hey sounds like we should try that NIRP thing here!” no-brainer that should be enacted willy-nilly as “just another tool in the monetary policy box” based argument when thought through more clearly as to the implications or ramifications in the U.S.?
However, if one listens for such warnings – the silence has been breathtaking. And the Keynesian’s of the world are acting and arguing as if there should be “no big concern.” After all, the question is framed as “Plus 25 basis points or minus (e.g. negative) 25. What’s the big deal?”
Well, here’s what “The big deal” is: One policy (e.g., paying on reserves) is what could be described as a “closed” loop. (i.e., just affects the banks) Whether good or bad is a different argument. However: touch the money markets in an adverse way such as “taxing” it as proposed via NIRP? Excuse me – Is that Pandora I see? And what is that box she’s carrying with the lid open? Is she bringing a gift?
Again, people will point to the EU and say “Look they’re doing it there what’s the big deal?” Yet, they fail to look (or comprehend) at just how quickly everything about the EU is now coming unglued. The current policies of the ECB along with Mario Draghi’s “whatever it takes” initiatives are failing almost as fast as they are being tested. And, if anyone thinks the EU along with current ECB policies are doing “just swell?” I have some wonderful oceanfront property in Kentucky you can turn your dollars into hard assents before the crash. Trust me, the price will be right!
If the Fed. does indeed consider, then implement, a NIRP policy – the backlash and fallout will be devastating to not only businesses that need a well-functioning money market and payment clearing system. But rather, to the citizenry as a whole that relies on those business not just for gadgets and trinkets. But; for the very sustenance of everyday essentials like food at the market, gas at the stations, heating fuels for the home, and a whole lot more.
What has been lost (and not fully understood by many more) is the real crisis that occurred when everything was about to come off the rails during the financial crisis in ’08. It was when the money markets “broke the buck.” Until then the crisis was much more of a financial spectacle on Wall Street for the average person. However, when the money markets came under pressure and showed signs of melt down? That’s when “all bets were off” type arguments and reasoning became manifest.
And, this onslaught of panic was just as intense throughout the business community when payments that were always assumed and needed to clear the banks were anything but. Remember: If the farmer/rancher can’t trust the packing house checks to clear – they’ll be no food going to market. A disruption of only a week can send a rippling effect many have little understanding of.
If businesses suddenly infer that they can not get paid accordingly or properly – it grinds to an absolute halt, where disruptions of supplies and far more can cause not only panic, but also, a complete breakdown in society. Think I’m off base?
Watch how fast any metropolis or big city morphs into Mad Max styled overtones if the food supply chain that supplies grocery stores breaks down or grinds to a halt. Having spent my early career in the food business I can state with confidence the much touted “3 days supply within any supermarket” is not only accurate, it’s a best case scenario when folded over any potential “normal” emergency many have experienced such as a blizzard or blackout. Then your lucky if essentials last 24hrs.
And here we are only 8 years since and one can’t help but think not only does Wall Street and others have a short memory, but rather – the Fed. itself.
If you want clues on just how awry, as well as quickly, things have the potential for unraveling just look to Japan today, and what’s taken place over the last 2 weeks since in the wisdom of the Bank of Japan’s governor Haruhiko Kuroda unleashed NIRP to a stunned market only weeks after saying such a move – was not even being considered.
Suddenly Japan’s stock market is looking and acting in reminiscent fashion mirroring 2008. In a matter of weeks the Nikkei™ is down from just above 20,000 to now 15K and change while briefly breaking that level to test one with a 14 handle. One doesn’t need advanced math skills to comprehend shedding some 25% of its value at any given time (let alone weeks) does not bode well for an economy. Especially when that NIRP policy directly affects the number one carry trade currency in the world. (And I haven’t even mentioned China)
Yet, we’re told cavalierly there’s really “no reason for concern” here. After all, we’re only talking about the impacts that could arise in the worlds most dominant, as well as, bench-marked currency in the world: The $Dollar. Besides, (we’re told) we should take the utmost comfort in the fact the Fed. knows exactly what it’s doing.
If that’s all true I just have one thing to ask:
You mean just like they were some 30 days ago when Ms. Yellen all but touted a banner stating “Mission Accomplished” at the last FOMC presser where she delightedly stated they were finally raising interest rates after so many years, for the economy had improved to such levels where it proved receptive to it? Only to be surprised weeks later amidst a maelstrom of global financial selloffs and upheavals in stunning speeds to now move Wall Street consensus as to cut all expectations of any future rate hike this year, where describing what was only weeks ago as “baked in” (i.e., 4 more hikes) as now “ludicrous?” All the while breathlessly needing to explain (or plead) in great detail why the Fed. is (or should) currently explore options of not only reversing, but rather, going below the zero bound – and into negative territory.
All that comes to mind is that famous quote from Alfred E. Neuman…
“What, Me Worry?”
I wish I were trying to be funny.
© 2016 Mark St.Cyr