ECONOMYNEXT – The US Federal Reserve said it will continue to print money, though at a lower rate, despite inflating having rating at 40 year highs and more than triple its target rate in by November 2021, as warned by classical economists earlier in the year.
The Fed has fired a global commodity bubble that has led to high food, energy and used cars poor Americans and made life difficult for less affluent around the world while giving more money for commodity rich economies run by oppressive regimes.
Sri Lanka’s central bank generated 9.9 percent inflation by printing money and depreciating the currency, amplifying US policy errors.
Sri Lanka set up a Latin America style soft-pegged central bank in 1950, on a cookie cutter model established by the Fed, abolishing a currency board and gaining independent policy.
Inflation, measured by the US consumer prices, rose to 6.8 percent in November, the highest in 40 years and over three times its target 2 percent rate amid global aggregate demand bubble that has strained supply chains.
But the Fed will continue to print for several more months.
Steve Hanke, a classical economist at John Hopkins University in Maryland, who had accurately predicted the course of US inflation said high prices were ‘baked in the cake’ from two years ago, and nothing the Fed does now will stop inflation quickly.
Inflation is robbing the people, Hanke said, with prices outpacing wage gains by over 2 percent.
He said the Fed started on the current debacle in March 2020.
At the time the Fed also unremunerated excess reserves.
Classical economists within the Fed brought the window back in part based on Milton Friedman’s view that that should be no opportunity cost of holding money when large scale liquidity injections were made to bail out collapsing US banks, during the ban run of 2008/9.
Sri Lanka also ratcheted up money printing from February 2020.
Sri Lanka’s pegged exchange rate regime, gets hit by balance of payments trouble as quickly as four to six weeks after printing money, depending on private credit growth, long before inflation hits, analysts say.
Mercantilists in Sri Lanka pointed to money printing by the Fed and other reserve currency central banks when so-called ‘Modern Monetary Theory’ stimulus was started in Sri Lanka despite warnings by the classical economists in the country, politicians and the media both financial and non-financial.
After unremunerating excess reserves, Powell then recklessly continued his ‘asset purchases’, an euphemism for money printing that emerged after the Greenspan-Bernanke bubble burst in 2008.
Powell, who claimed inflation was transitory, had been printing 120 billion dollars a month, buying 80 billion Treasuries and 40 billion in state agency debt up to November.
Powell had been called delusional by classical economists for denying a link between money supply growth and inflation.
The Federal Reserve open market committee said liquidity injections would be now be reduced by 30 billion dollars a month to 90 billion.
In January it will continue to buy 60 billion dollars.
Rates would still be kept near zero.
Sri Lanka’s policy rates are also below inflation but money is now being injected mostly to sterilize interventions and not to keep down gilt yields.
The Federal Reserve’s ability to keep inflation low is compromised by its so-called “dual mandate” an employment target set by the US Employment Act of 1946, enacted when de-mobbed soldiers were returning home and Keynesian dogma was running high.
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run,” the Fed said in its latest policy report.
“In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation having exceeded 2 percent for some time, the Committee expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment.
“In light of inflation developments and the further improvement in the labor market, the Committee decided to reduce the monthly pace of its net asset purchases…”
Remarkably, US media claimed said the Fed will “aggressively dial back” money printing and it has become more “hawkish”, despite the agency continuing to print money at least until March and no rate hikes.
The same media had earlier amplified Powell’s claims that inflation was ‘transitory’ and was caused by ‘supply chain’ problems.
At a congressional testimony under-fire Powell said it was time to retire the word ‘transitory’. No mention of transitory was made in the current statement.
Central Banks printing money to boost growth was advocated by classical Mercantilists including John Law and revived by John Maynard Keynes after the Federal Reserve created the Great Depression firing the so-called ‘Roaring 20s’ bubble after virtually inventing open market operations.
The bubbles then collapse, creating more unemployment than was present in the beginning.
Law whose ideas were rejected in his native Britain, went to France set up an easy money central bank and destroyed the French economy.
The Fed is the worst bubble blower among reserve currency central banks.
In addition to the pre-Depression boom, it fired a massive commodity bubble (Arthur Burns bubble) in the early 1970s and ended a three-centuries-old gold standard maintained by European central banks as well as US free banks before the Fed was set up, without an active policy rate.
Burns fired the bubble after President Nixon effectively fired William McChesney Martin, who had managed to keep the Bretton Woods system going despite open market operations. Nixon had feared he will tighten policy.
The current tendency for ‘asset purchases’ came after the US banking system was badly hit by mal-investments from housing mortages and other loans in the wake of the Greenspan-Bernande bubble.
Before the Powell Bubble, it was labelled the ‘mother of all liquidity bubbles’ by critics.
Though Powell is now firing a bubble over an obsession with employment, Bernanke is believed to have egged on Greenspan to cut rates over an obsession with deflation. (Colombo/Dec15/2021)