Austrian economist Professor Gary North recently suggested that the Federal Reserve has been tacitly tightening.
He offers three charts as proof
The adjusted monetary base (which fell by November but has now recovered)
M1 Money Stock
M2 Money Multiplier
Here is Professor North,
``Why is the FED deflating? I offer these suggestions.
``It is testing the waters to see if unwinding will cause a crisis: a secondary recession.
``It is giving itself some wiggle room in case commercial banks begin to lend, which threatens to let M1's expansion force up consumer prices.
``It is providing visible confirmation for an announced policy that it cannot follow without creating a true depression.
``It has begun to unwind, as promised." (read the rest of Professor North's article here)
Perhaps.
But I'd like to add more to his charts and his theory
As seen in the table of the Cleveland Fed, the Federal Reserve has been unloading some of the US treasuries it recently bought as part of its quantitative easing program, since December 9th.
And this appears to coincide with the firming of the US dollar from which markets instantaneously interprets as having the same dynamics as the 2008 episode. Hence all these signs may perhaps point to a tightening in spite of the Federal Reserve's continued QE.
While correlation may not be causality, I'd offer an added perspective in terms of why the Fed could have been experimenting- a possible conspiracy theory based on a political agenda.
The issue is connection with Ben Bernanke's confirmation.
As you can see from the Intrade prediction markets the Fed Chair Ben Bernanke's confirmation only surged by mid to late November.
Moreover, until mid January, there had been lingering doubts whether his tenure would be mandated since it appeared that opposition to his reappointment had been growing. It even took President Obama to personally endorse Mr. Bernanke, as per Businessweek ``Obama called some senators yesterday, including those in the leadership, to ensure Bernanke’s confirmation won’t be derailed."
In short, Bernanke's reappointment wasn't in the bag until the last minute.
Could it be then that the tightening shown by Professor North was actually an insurance policy taken by Mr. Bernanke?
By portraying that markets would be anxious over the uncertainty of his mandate, as enunciated by Connecticut Democrat Senator Christopher Dodd who said ``I think if you wanted to send the worst signal to the markets right now in the country and send us in a tailspin, it would be to reject this nomination" [as earlier discussed in US Trembler: Volcker Rule or Bernanke Confirmation?], his appointment would now be the "key" solution to the market's stabilization?
So like hitting two birds with one stone, the Federal Reserve could have been tightening to work for Bernanke's political interest BUT camouflaged by the experiment with 'exit' strategies.
Now that Bernanke has attained his goal, could we see the attendant easing to boost markets anew?
One must remember that market responds to policies with a lag, hence if this theory is correct, then markets should start to reflate over the next 2-3 months.
It's all about the boom bust cycle anyway.
Perhaps.
But I'd like to add more to his charts and his theory
As seen in the table of the Cleveland Fed, the Federal Reserve has been unloading some of the US treasuries it recently bought as part of its quantitative easing program, since December 9th.
And this appears to coincide with the firming of the US dollar from which markets instantaneously interprets as having the same dynamics as the 2008 episode. Hence all these signs may perhaps point to a tightening in spite of the Federal Reserve's continued QE. While correlation may not be causality, I'd offer an added perspective in terms of why the Fed could have been experimenting- a possible conspiracy theory based on a political agenda.
The issue is connection with Ben Bernanke's confirmation.
As you can see from the Intrade prediction markets the Fed Chair Ben Bernanke's confirmation only surged by mid to late November.
Moreover, until mid January, there had been lingering doubts whether his tenure would be mandated since it appeared that opposition to his reappointment had been growing. It even took President Obama to personally endorse Mr. Bernanke, as per Businessweek ``Obama called some senators yesterday, including those in the leadership, to ensure Bernanke’s confirmation won’t be derailed."
In short, Bernanke's reappointment wasn't in the bag until the last minute.
Could it be then that the tightening shown by Professor North was actually an insurance policy taken by Mr. Bernanke?
By portraying that markets would be anxious over the uncertainty of his mandate, as enunciated by Connecticut Democrat Senator Christopher Dodd who said ``I think if you wanted to send the worst signal to the markets right now in the country and send us in a tailspin, it would be to reject this nomination" [as earlier discussed in US Trembler: Volcker Rule or Bernanke Confirmation?], his appointment would now be the "key" solution to the market's stabilization?
So like hitting two birds with one stone, the Federal Reserve could have been tightening to work for Bernanke's political interest BUT camouflaged by the experiment with 'exit' strategies.
Now that Bernanke has attained his goal, could we see the attendant easing to boost markets anew?
It's all about the boom bust cycle anyway.
