The Federal Reserve is Shooting Blanks

The Federal Reserve is Shooting Blanks
For the last several days of pandemic fears, all that many analysts were talking about (other than COVID itself) is the “bazooka” that the Federal Reserve was planning on firing wildly, in the general direction of financial markets.

Sure enough, on Sunday the Fed unleashed its bazooka.
 
  • Benchmark interest rate slashed 100 basis points, all the way to 0%
  • $700 billion in additional “securities” buying
  • A 150 basis-point cut in the discount rate (down to 0.25%)
  • Beefing up “swap lines” in conjunction with other central banks

…and nothing happened. At least, nothing positive.

On Monday, U.S. markets suffered their worst bloodbath since Black Monday in 1987. The Federal Reserve used up nearly all of its “ammunition” and it had no (positive) impact at all on either financial markets or equity markets.

The surprising thing about this event is not that the Fed’s bazooka was ineffectual. It’s how many sophisticated market pundits were surprised by this complete failure.

They haven’t been paying attention.

For well over a decade, the Federal Reserve’s monetary policies have been more and more ineffective. Today, the Fed is simply shooting blanks, as evidenced by the U.S. velocity of money.



Think of the velocity of money as the financial heartbeat of an economy. You don’t want the heart beating too quickly (as the U.S. economy did in the Dot-Com bubble). But you also definitely don’t want the heart beating slower and slower and slower.

We have a word for that: “Japan”. The chart above is the chart of a Zombie Economy.

Among the many false promises made by the Federal Reserve (and other Western banks) back in 2008 was that they would never “copy Japan”. By 2016, even the West’s Zombie Banks had shattered that myth.
 
The global economy appears to be trapped in Japan-style stagnation, HSBC’s high-profile senior economic adviser said on Tuesday, adding his voice to the chorus of economist warnings.

Stephen King said economic activity around the world was slowly deflating, with undershoots in both growth and inflation.

“These shortfalls are reminiscent of Japan’s difficulties in the 1990s and beyond. Relative to projections five years earlier, Japan was nursing a 24 percent nominal GDP shortfall by the turn of the century. And many of Japan’s problems are now being replicated elsewhere: Low bond yields, falling bank share prices and deleveraging,” King said in a report.
 
Today, there is virtually no financial “pulse” in the Mighty U.S. Economy. This comes after nearly 12 years of the Federal Reserve force-feeding unprecedented liquidity into financial markets – with ever less effect.

Now, in a time of ultimate crisis, the Federal Reserve has fired its bazooka and the whole world has seen it fail. Shooting blanks.

What’s left? Going beyond the monetary insanity that has already turned Japan into a permanent Zombie Economy.
 
  • Negative interest rates
  • Direct asset purchases by central banks
  • Much larger “bazooka” salvos aimed at financial markets

Will these beyond-insanity monetary policies work? Have a look again at the chart above.

That’s your answer.

Yes, if central banks pump enough trillions of their funny-money into the global economy it will cause asset and equities prices to rise.

But we have a word for that as well. Hyperinflation.

Fed Chairman Jerome Powell has already said “it is essential that we at the Fed use our tools to make sure that we do not permit an unhealthy downward drift in inflation expectations and inflation.”

Meanwhile, gripped by panic, market pundits and Wall Street traders are begging the Fed to do anything and everything to re-inflate asset prices.

Be careful what you wish for. You just might get it.

 

Exclusives

Wall Street traders are currently smiling -- high atop their ivory towers and perched for a fall. The REAL rally in markets today is in gold.


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