Chairman of Federal Reserve Ben Bernanke, appointed “Man of the Year” by Time Magazine in 2009 and as “Helicopter Pilot of the Year” by the Econotwist’s Blog in 2008, is ready for take off again. Ladies and Gentlemen; the QE 2 is now boarding. Take your seats, and get ready for another trillion dollar money dropping round of bailouts and economic stimulus.
“In what may be preparatory step for a major shift in the U.S. monetary policy, St. Louis Federal Reserve Bank President James Bullard warned the US is closer to succumbing to a Japanese-style deflation than any recent time.”
The prestigious business magazine Barron’s have made a full analysis of an recent article written by St. Louis Federal Reserve Bank President James Bullard, in St. Louis Fed’s Review. Barron’s do not believe it’s a coincidence that the article is coming out right now – a week-and-a-half before the next meeting of the policy-setting Federal Open Market Committee, of which Bullard is a voting member.
According to Barron’s, the St. Louis FED President James Bullard warns that the US is closer to succumbing to a Japanese-style deflation than any recent time, which he urged be countered with “quantitative easing.”
Quantitative easing, or QE, is economists’ jargon to describe the experimental monetary policy to massively inject money in the financial system, so that it – in theory – starts to flow natural by it self.
In practice, we have so far seen the FED’s massive purchases of $1.7 trillion in Treasury, agency and mortgage-backed securities, a program that started in March 2009 and ended a year later.
The purchases were part of the doubling of the size of the central bank’s balance sheet as the key component of the FED’s efforts to prevent the meltdown of the financial system in late 2008 and early 2009.
And now the economy is recovering.
Most politicians and economists are saying the economy is recovering – although not as fast as they first thought…
The US have spent about 3,7 trillion dollars on bailouts and heaps of different economic stimulus programs, including giving the banks money for free (zero interest rate), and at the same time raised the national debt by an almost equal amount.
Something’s gotta be working, right?
Is it really necessary to do the whole dance over again?
Well, according the the influential FED-fellow in St. Louis, it is.
Suddenly, Deflation Is The Problem
Bullard’s article for the St. Louis Fed’s Review follows FED chairman’s Ben Bernanke’s description to Congress of the economic outlook being fraught with “unusual uncertainty.”
And it comes about a week-and-a-half before the next meeting of the policy-setting Federal Open Market Committee, of which Bullard is a voting member, Barron’s points out.
Bullard argues that Japan’s experience suggests persistent rock-bottom policy rates can result in falling inflation and inflation expectations. Every economic setback delays the eventual normalization of interest rates, leading everyone to expect more of the same.
The alternative, argues Bullard, is for US officials to react to negative shocks with quantitative easing by purchasing Treasury securities rather than zero interest rates.
“Whether Bullard’s theory is correct is arguable. What is empirically undeniable is that his worry has switched to deflation from inflation in a matter of months,” Randall W. Forsyth writes.
Does He Know Something?
The odd thing is; James Bullard has been one of Ben Bernankes strongest opponents when it comes to the QE policy.
Bullard has been critical of the FOMC‘s language that it expected to maintain exceptionally low levels of short-term interest rates for “an extended period.”
He have discussed the FOMC’s “extended period” of low rates and suggested that the FED should plan for an exit strategy from the quantitative easing.
“After the meeting, I asked Bullard privately if the expansion of liquidity through quantitative easing posed a threat to future inflation—even though much of it has wound up as $1 trillion of excess reserves just sloshing around the banking system. His answer was yes, it did have the potential to cause inflation,” Forsyth writes.
So, the big question is; what have transformed this one-time inflation hawk into a dove seeking a new round of QE?
What does Bullard know that we don’t?
Mr. Bernanke – You’re Cleared For Take Off
What’s also important about Bullard’s article is that it is the intellectual successor to Bernanke’s famous speech in November, 2002, which earned the then-Fed Governor the nickname of “Helicopter Ben,” Barron’s notes.
In that address, titled “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” he cited the potential of deflation appearing in Japan affecting the US.
Bernanke didn’t think deflation was a threat because “the US government has a technology, called a printing press, (or, today, its electronic equivalent), that it allows it to produce as many US dollars as it wishes at essentially no cost.” By buying Treasury securities issued to finance a fiscal deficit, the FED was—to use Milton Friedman‘s metaphor—effectively dropping dollar bills from helicopters.
The US quantitative easing measures are unprecedented in history. Some calls it an unprecedented experiment with the global economy.
And it don’t seem to work very well.
Monster Helicopter Under Way?
In the article, Bullard ignores the concept both Friedman and his St. Louis FED are most identified—the money supply.
The M2 measure of the money stock, which consists of currency, checking, savings and consumer money-market accounts, has slowed to a crawl, only about 2% year-over-year.
The broader M3, which the FED no longer publishes but is estimated by Shadow Government Statistics, is shrinking at a stunning 6% annual rate.
According to Shadow Stats’ chief, John Williams, whenever real (inflation-adjusted) year-on-year M3 turns negative, the economy has always fallen into recession (or if it’s already in a slump, the downturn intensifies) six-to-nine months later.
Shadow Stats’ M3 dropped below the zero line last December, it’s not surprising that any number of indicators are faltering, including the ECRI leading indicator.
Last month, the London Telegraph reported the Royal Bank of Scotland was advising clients that a “monster” QE was likely from the FED because the global banking system and the global economy teetered on a “cliff-edge.”
“Think the unthinkable,” Andrew Roberts, RBS’s chief of credit wrote.
After Bullard’s article was published Thursday, QE2 no longer is rumor, gossip or loose talk.
It may, in fact, have been chairman Ben Bernanke’s signal to be ready for take off – again.
Related by the Econotwist:
Related articles by Zemanta
- Is James Bullard Trying To Embarrass Ben Bernanke Into Becoming A Dove (businessinsider.com)
- Bullard Urges FOMC Purchase Treasuries If Deflation Risk Grows (businessweek.com)
- Within the Fed, Worries of Deflation (dealbook.blogs.nytimes.com)
- Choosing sides (economist.com)
- Japan Press: Fed’s Bullard: Deflation In U.S. A ‘Concern’ (forexlive.com)
- St. Louis Fed Chief James Bullard: Dueling With the Deflation Demon (dailyfinance.com)