You hit it right on the head: what I want the Fed to do is keep inflation control...which is another way of saying I don't think the Fed has any damn business trying to maintain full employment in this country or anywhere else. For two reasons. First what the hell is full employment? Thank you, I don't know either. Second the job of creating an atmosphere in which job creation, production and the creation of wealth can thrive is that of the executive and legislative branches. Third the stupid "dual mandate" allow the above mentioned to hide behind the Fed when they refuse to do their jobs...which is precisely the scenario in which we find ourselves today. Waiting for the Fed to clean up the mess left by the past administration and the abject incompetence of The Leader and his band of culture warriors is dangerous, unrewarding and simply plain stupid. GET RID OF THE DUAL MANDATE, RESTORE AN INDEPENDENT CENTRAL BANK AND DEMAND THE ELECTED MORONS DO THEIR JOB! Whew!
Oh good buddy, five years ago out here in the fly-over zone the price of rib-eye steak was $5.99 a pound. Today it's $12.99. Now I know the geniuses who live by the great oceans don't conside the price of food to be a proper measure of inflation but if the Fed wasn't so damn busy trying to set right what the pols cocked up perhaps we could get a re-think of what really counts to Mr. & Mrs. Jones who live in the middle? At least we could try.
Anyway, Mr. & Mrs. North and all the ships at sea, if we go back about 20-odd years we will encounter the great genius of that time, Alan Greenspan, who reversed the tight money policy of Mr. Volker and the fun really began. The Clinton years were terrific; hell, I never made so much money in my life. We are constantly reminded even today as to how good things were. The Leader tells us if we just raise taxes on the "rich" we'll have it all again. Of course while raising income taxes, the good ol' boy from Hope slashed capital gain taxes from which all the growth in revenue came...that's right ALL. Anybody remember the Dot Com. era? Put DotCom. after a company name and the funds available were almost unlimited. And from where did these funds come. Not from under the mattress gang, it was all borrowed money, but hey, while the music was playing you had to dance.
Now, can we spell B U B B L E? 'Cause that's what it was and in 1989 it all started to come apart. Then came 9/11 and things really got bad. The Fed to the rescue. Not content with the results of their first effort the Fed doubled down and promoted even easier money and off we went again. Just like water finding it's own level, capital searches for investment--the higher yielding the better--and when there is a lot of capital looking for a home the guy who can create investment opportunities can make a hell of a lot of money. Enter real estate and collateralized mortgage obligations. Have we learned how to spell B U B B L E? The rest is history.
But while all of this was going on in palin sight what was not so easily seen was the effect the Fed policy was having among friends an foes alike. The effect excess liquidity has on the value of a currency is clearly linked. In both eras the effect was a steady devaluation of the dollar against all currencies and if you rely heavily on exports as practically every nation in the world does (EXCEPT the United States) this is not a good thing. Your exports become more expensive and you must embark on a program to keep your currency in line and of course the way to do that is buy dollars and create your own liquidity through monetary creation. That of course reduces interest rates all over the place and mkes it difficult for investors to obtain decent returns on funds to be invested. So, if you are Brazil for example, you catch a double whammy: you must devalue quickly an appreciating REAL and at the same time you must fight domestic inflation that is a result of of your currency manipulations. American Central Bankers and Treasury Secretaries are not on the top of a Brazilian hit parade...or any one elses for that matter. But, hey, the dollar is your problem not ours.
Non-American investment managers are no different from their American counter parts; their job is obtain the highest returns for their clients and they are judged--and paid--on how well they perform. They are yield whores just like us. But life gets really hard when interest rates and returns continue to decline and having a pretty firm idea as to who is numero uno, these guys, and gals, increasingly seek out higher yield and by definition, higher risk. It matters little that the investment may consist of a bond backed by 200,000 homes in palces of which they have never heard; Moody's (who have been paid to do so) rates it AAA. And guess what? It pays T+350! BUY IT! Best of all, your central bank has all these dollars that they don't want so borrow them or buy the damned things. The thought that there might be a reason that the yield is so much different never enters their minds. By this time I think we all know how to spell B U B B L E.
One can take issue with all parts of this post but may I suggest that if the Fed did not see themselves as the guardian of truth, justice and the American way some of this stuff might never have happened. I guess I'm kinda wierd in thinking that I really don't care what Barclays or 16 other banks did with Libor. I DO care when people like the NYT try to explain Libor as being a creation of the banks in the 1980ies: I'm getting old but I remember making Libor-based loans back in the early 70ies. I do care when fools or liars (or both) try to influence public opinion with neither knowledge nor facts. Just me I guess.
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Many thanks for the kind words from Ewen Watt at Wordpress. Inside the Beltway but a smart young guy from his writings. Look him up
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