How many Americas can deal with another six years of middling economic performance?
September 25, 2014 – While the restUS-POLITICS-CONGRESS-CONFIRMATION-YELLEN of the world hung on Janet Yellen‘s every word last week for news of the future of the Federal Reserve‘s policy of quantitative easing, her real bombshell came at the end of her press conference and was largely ignored by the media who had rushed to release their pre-written narratives. According to Yellen: “So the story is, it is not that the Fed is behind the curve in failing to return the funds rate to normal levels when the economy is recovered. It is rather that in order to achieve such a recovery in 2016 or by the end that it is necessary and appropriate to have somewhat more accommodative policy than would be normal in the absence of those headwinds.” [Emphasis mine.]
The media and Wall Street, in their hope for eternal quantitative easing, focused on Yellen’s comments about accommodative monetary policy and how it might take until the end of the decade for the Fed to shrink its balance sheet back to normal levels. They ignored the above statement, coming as it did near the end of the press conference, that acknowledged that the economy has not yet recovered. Six years of Federal Reserve intervention, nearly $4 trillion of balance sheet expansion, and a 45% increase in the money supply (M2 & MZM), and the Fed is hoping that the economy might recover two years from now? How many more trillions of dollars will be doled out to Wall Street before the Fed admits that it has hurt, not helped, the recovery?
Yellen’s statement also requires a bit of parsing. When she said “in 2016 or by the end,” did she mean by the end of 2016 or by the end of the decade? Given her view that full policy normalization won’t occur until the end of the decade, the latter interpretation would not be at all surprising. This would mean that the Fed believes that we are still at best only at the halfway point toward economic recovery. The last financial crisis recovery that took that long was the recovery from the Great Depression, in which the economy really didn’t return to normal until after World War II. How many American households can deal with another six years or more of middling economic performance?
More importantly, Yellen’s admission of non-recovery belies all of her previous statements about the rosy condition of the economy and the job market. From now on, every time you hear someone from the Fed talking about how well the economy is doing, take it with a huge grain of salt. It is just a continuation of the Greenspan-Bernanke conduct of monetary policy via psychological manipulation, euphemistically referred to as “expectations management.” With one hand the Fed tinkers with the levers of monetary policy while with the other hand it holds the megaphone with which it announces that the economy is doing just fine, even if bubbles are beginning to burst all around.
The Federal Reserve’s thinking is that if it can convince people to believe that everything is alright then things actually will be alright. The power of positive thinking only goes so far, however. At some point it will run into the brick wall of economic reality. No amount of happy thoughts can overcome the reality that the Fed’s money creation is leading to rising prices and inflating asset bubbles. Positive thinking won’t find jobs for the unemployed and underemployed, nor will it put food on the table of families who are living from paycheck to paycheck. Expectations can only be managed so far, until people realize that they are being sold a bill of goods.
At that point, no amount of talk can turn the American people away from the conviction that the Fed is giving them the shaft. The Fed may imagine itself as Santa Claus, stuffing money down chimneys in an attempt to stimulate the economy, but the impoverishing effects of its inflationary monetary policy make it clear that it is more like the Grinch.