'There’s actually a strong case to be made that further stimulating asset Bubbles at this stage of the cycle only exacerbates disinflationary dynamics at work in goods and some services. There is today in the U.S. and globally a proliferation of new companies and products. The flood of finance into new technologies and startups ensures an even greater supply of goods and services (with many tech, cloud and web-based products/services enjoying essentially unlimited supply). The extreme financing backdrop creates aggressive companies flush cash and under no pressure to achieve profitability. It’s great for consumers, but it’s also an unsustainable Bubble that creates escalating risk to a deteriorating financing environment.''The world has changed profoundly in 30 years – the nature of economic output, economic structure, finance, monetary policy and “globalization”, to name broad categories that have profoundly altered inflation dynamics. Individual country inflation dynamics are no longer dominated by domestic Credit growth, financial conditions and monetary policy. Today, the impact of a central bank’s monetary stimulus would work through various channels, perhaps stimulating asset prices, spending, imports and even investment – with a very unpredictable effect on an aggregate measure of consumer prices. As much as the Fed – and other central banks – rue the loss of influence over consumer prices, momentous changes in financial and economic structures ensure the system has been fundamentally and irreversibly altered.
With individual central banks having lost command over consumer price inflation, there has been gravitation to concerted global monetary stimulus. “If we all stimulate together, then we can spur a more systemic boost of inflation globally.” Such an approach is doomed to fail. There is today a strong inflationary bias in securities and asset prices. At the same time, the legacy from the historic Chinese and EM booms is unprecedented overcapacity throughout manufacturing. The disinflationary dynamic in many goods markets ensures that monetary stimulus will spur powerful flows to speculative Bubbles with muted impact on aggregate consumer price indices. Finance will flow in force to – and exacerbate – areas with strong inflationary biases (i.e. assets markets).
There’s actually a strong case to be made that further stimulating asset Bubbles at this stage of the cycle only exacerbates disinflationary dynamics at work in goods and some services. There is today in the U.S. and globally a proliferation of new companies and products. The flood of finance into new technologies and startups ensures an even greater supply of goods and services (with many tech, cloud and web-based products/services enjoying essentially unlimited supply). The extreme financing backdrop creates aggressive companies flush cash and under no pressure to achieve profitability. It’s great for consumers, but it’s also an unsustainable Bubble that creates escalating risk to a deteriorating financing environment.
..
Maintaining the pretense of effectively orchestrating higher inflation has become paramount to contemporary central banking doctrine. Central bankers pay lip service to ever widening wealth disparities. They surely recognize their activist reflationary policy measures are a primary contributor. Loose monetary policy fuels robust asset inflation, much to the benefit of the wealthy. At the same time, average workers with bank deposits receive essentially no return on their savings. Worsening wealth disparities then only work to exacerbate the extreme dispersion of inflationary effects, with more “money” flowing into assets markets relative to the extra purchasing power available to drive aggregate consumer price inflation. Focused on below target CPI – while ignoring assets inflation and Bubbles – monetary stimulus only intensifies inequalities and attendant social and geopolitical tensions.
It’s somewhat difficult for me to believe the Fed will reduce already low rates in the current market environment. Alan Greenspan weighed in.
July 24 – Bloomberg (Alister Bull): “Former Federal Reserve Chairman Alan Greenspan endorsed the idea that the U.S. central bank should be open to an insurance interest-rate cut, to counter risks to the economic outlook, even if the probability of the worst happening was relatively low. ‘Forecasting is very tricky. Certain forecast outcomes have far more negative affects than others,’ he told David Westin in an interview… ‘It pays to act to see if you could fend it off.’”
Whatever happened to William McChesney Martin’s, the job of the Fed is to “take away the punch bowl just as the party gets going.” Or even the imperative for the Federal Reserve to “lean against the wind.” Wednesday the Fed will be spiking the punch – again – after one of the longest parties ever. Instead of “leaning against the wind”, they’ll be Fanning the Flames.'
- Doug Noland,
Fanning the Flames, July 27, 2019
Context '..a complete breakdown in discipline - in central banking, in Washington borrowing and spending..''..BIS chastises central banks .. More fundamentally, monetary policy cannot be the engine of growth.''..The crazier things get the more unsustainable Bubble prices become.''..Philippa calculated that at current rates, the economy won’t be where it “should” be until the year 2048.'