Will They or Won't They? The FOMC Is Barely Trying Anymore
Will they or won't they? That has been the central question for at least outsiders going back to May 2013. Despite continued surety about the economic direction, the Federal Reserve always seems to find "somehow" to be short. The recitation of this lingering inaction borders on Einstein's version of insanity; each FOMC meeting is supposed to be the "liftoff" yet also at each is accompanied with how the economy just isn't quite there. The singular persistence of "close" is illuminating.
It has to be that, for forward guidance even in the Yellen version is an unrelenting invitation to dissembling. They can't say that the economy is getting worse because they believe, pace rational expectations, that it will lead to the economy actually getting worse. Instead, they repeat how "close" it is to the final banana though just not quite there. When "not quite there" strings out more than a half a year (go back to 2014 and review "predictions" for the first rate hike; it was March for sure, if not as early as January should the Fed risk raging wage growth and therefore its awaited "inflation"), it bears the same as having said there is something wrong in the economy in the first place.
There is no hiding from that particularly given the setup, so "close" has to suffice alongside "some." The latter word was a late and "unexpected" addition to descriptions of labor market progress from the July policy statement itself. In setting out the conditions for exiting ZIRP, the Fed had before pronounced, with surety, that labor progress would be the defining characteristic. With the "dollar" crashing everywhere again in July, by being "strong" of course, the addition of "some" in the labor context was just as deflating as the continued "close." No longer will there be labor progress, full stop, upon triggering a rate hike, there might only be some labor progress.
This cascading dance of semantic reductionism is actually now an established tradition. The very fact that references to QE need to contain an ordinal qualification is itself the same thing. In other words, the very existence of QE3 tells us a lot about the downgrade of QE2; if there needed to be a third, by orthodox reckoning, how fulfilling was the second, or first? To this point, there are actually four in the catalogue, which I fully realize is a departure from convention on the subject. The third was MBS effects upon the traded TBA mortgage pipeline, a perfectly distinct process than the fourth, which counted the now-usual over-premium of UST's from the primary dealers.
For that convention, there is no distinction as it looks from the perspective of the ends rather than the means. In other words, most people see QE for what it meant to achieve in literal terms: to expand the Fed's balance sheet as if that were an end itself. However, there perhaps should be a re-ordered thinking on the subject, not the least of which given the continued inability to define QE's success by it actually leading to promised economic sufficiency; at least minimally to being able to remove the "emergency."
To illuminate that point, we can divert across the Atlantic to the ECB's recent acquiescence to the topic. In some ways, the QE in Europe is very much like my argument against convention in numbering "ours" over here. For the mainstream, QE in Europe is the first, but in point of fact it isn't all that different from the LTRO's of early 2012. I would even go so far as to make an argument, a rough and circumstantial one, that there is more difference between QE3 and QE4 in the US than there is between QE1 and the LTRO's in Europe.
Where that argument starts is in the counterintuitive position of being able to actually find the ECB's QE. Unlike the LTRO's, which are clearly prominent upon the ECB's various balance sheet accountings, particularly its simplified version which forms the basis of the Eurosystem's "liquidity analysis, QE is not readily identifiable. The ECB publishes its account of the PSPP (encompassing QE) but to find it in the tangled nature of European euro liquidity takes some doing.
There are three broad categories of "liquidity needs" in Europe: the current account, the deposit facility and something called autonomous factors (net). The last is itself complicated, but for our purposes here it contains the investment, loosely speaking, portfolios of the various National Central Banks (NCB) that still exist and still have an active and supporting role within the Eurosystem. While the ECB holds policymaking authority on the PSPP, including proportionality in terms of which national securities are to be purchased, it is the NCB's that actually carry them out. Thus, the effect of QE in Europe is that the net autonomous factors in the liquidity matrix actually shrinks; reading the simplified balance sheet literally leads to the interpretation that QE reduces liquidity "needs."
The numbers bear that out, as since March 12, before the NCB's started expanding their portfolios, net autonomous "needs" have fallen from €203 billion to -€51 billion, or a change of about -€254 billion; the latest figures for total PSPP "buying" are €270 billion. However, the NCB effects come back around to the ECB as an offsetting ledger in one of the other accounts. The current account is up €212 billion during that time, while deposit facility balances rose €112 billion (the difference is the liquidity "supply" side, where the ECB has offered an increase of €68 billion in open market operations related to the T-LTRO's and covered bond programs).
Right there is the effect that binds the LTRO's to QE as mostly inseparable of kind if different in methodology. Recall the great fuss created in June 2014 as the ECB was the first major central bank to take a nominal policy rate negative. That policy rate was for the deposit facility. Not content at just -10 bps, the original negative setting, the ECB reduced that rate (increased the negativity) further last September to -20 bps which is still the rate of interest being "paid" at this moment.
The central tenet of the negative deposit rate was as all the QE's, to try to discourage "hoarding" liquidity so that such "currency" would transition into credit and economic activity. Yet, here we are again in now ECB's QE and the deposit facility grows significantly even at -20 bps; the only difference between that and the LTRO's, in this respect, is that the PSPP is coming at a more measured pace.
The total balance for the deposit facility is a stark €155 billion; the highest amount since February 2013. Inevitably, the primary question from any layperson (or even those supposedly and assumed more sophisticated, such as orthodox economists and policymakers) is "why would any bank knowingly place so much money at such a negative rate of interest?" These banks are, after all, paying the ECB for the privilege of doing nothing.
One answer is opportunity cost, and I mean that in both directions. The first is more obvious, in that banks could instead put that money "to work" as orthodox theory intends, but clearly, and we have to add the current account into this framework, these banks have judged little benefit or profit to doing so. We know that because lending in Europe hasn't budged since the negative deposit rate except from and by financial firms to each other (likely in anticipation of QE and the scalping/rent opportunities "doing business" directly with a central bank affords; that burst of "lending" has declined alongside the actual QE activity in the NCB portfolios). Lending to households in Europe is largely the same amount now as it was when the LTRO's were first extended in 2012; the same for non-financial corporate lending.
If there is no profit opportunity then the other direction affords no cost mitigation, either. A bank with so much "excess" liquidity is thus quite limited in choices for avoiding the penalty deposit rate. An ordinary person has, of course, the option of converting a deposit liability into actual cash but banks really can't appeal in that direction - where and how would you store €10 billion (or more) in vault cash? It is not just cumbersome, it is exceedingly costly in raw operational terms apart from opportunity cost; thus the passive inactivity of paying 20 bps to the ECB to "store" a ledger balance on a computer.
That last phrase captures well the surreal nature and absurdity of what QE, LTRO's and all the rest really are. The generation of monetarists that defined the monetary system and the package of responsive philosophies to the foundational task of central banks despised "hoarding" as the primary evil in money. The first defined task of the Federal Reserve was to overlay money hoarding with its brand of currency elasticity, which was nothing more than circumvention. When that didn't work, in the great crash of the early 1930's, economists, deriving from Milton Friedman's starting point, pulled together all their efforts to remove "hoarding" altogether (so they claimed) - that was the end of the gold standard as gold was the primary vehicle for "hoarding", really personal withdrawal from financialism, and thus as property beyond all central control.
I have made this point before, but it bears repeating in this renewed context, they banished personal hoarding and thus personal financial power but hoarding remains only on "their" side now. What changed, then? Only the power structure, as the rationale for it dissolves into the same blended mess as from the first time banking function was initiated.
If people weren't the problem in the first place, since banks are funneling the same tactics in their own less-tangible conceptions, all that is left is the results from all these balance sheet expansions - worthless reserves and banking/central banking byproducts. This is the factor that unites all the QE's experienced everywhere no matter their flavor, the end result is "hoarding" of a financial element that has no immediate usefulness (long-term could be more arguable, but let's face it, QE has been around almost a decade and the FOMC still can't, to their own chores, end ZIRP). It is exactly the same view this strain of economics saw of regular people holding gold physically; hoarding a useless hunk of metal. Banks now do the same except with binary digits and there is nothing wrong with the system, let alone the entire theory?
It marks not just a great change but an obvious one; prior to August 2007 there were practically none of these byproducts or reserves anywhere. Europe had a more visible accounted value of "liquidity needs" but they themselves were rising at a stable pace related to actual reserve requirements. In America, the amount of reserves on account with the Fed was utterly negligible. And yet, credit flowed quite freely then while it at best stagnates now under the predominance of central bank influence into all these money market corners.
This disparity is not, of course, limited to the financial. The real economy in America is, as the FOMC alludes in its "close" determinations, at best deficient; at worst falling off with the "strong dollar" that suggests as much. It may even be much deeper than that, whereas financialism's greatest contribution is hiding the real economic damage through all of it. A few weeks ago, I referenced a study in Nature that showed the economic consequences on pollution; lower carbon dioxide emissions persisted through this "recovery" suggesting strongly through that correlation that there is and has been none. That idea was reinforced even by illegal immigration, where (though numbers are in dispute) young male Mexicans that were disproportionately represented in that trend as looking for work in America first stopped coming in the Great Recession and have not come back.
Last week, AP published a story on foodbanks running short of supplies. As you can easily surmise, that is not a fact of growing stinginess on the part of Americans but rather as a matter of "unexpected" demand.
"While reliance on food banks exploded when the economy tanked in 2008, groups said demand continues to rise year after year, leaving them scrambling to find more food...
"James Ziliak, who founded the Center for Poverty Research at the University of Kentucky, said the increased demand is surprising since the economy is growing and unemployment has dropped from 10 percent during the recession to 5.3 percent last month."
Again, this is not a story republished from 2010 or 2011; this is 2015 America. The economic fallacy of the mainstream is on full display, as Mr. Ziliak dutifully reports the unemployment rate that is used to beat back every critique without the same apparent awareness of how that rate got there in the first place. And in that fact, his existence is quite linked to the unemployment rate as determined more by the denominator. The less Americans have been working the more, it would make sense, they seek alternate means to feed themselves and their families. In the first few years after the Great Recession, there was an enormous surge in foodstamp participation (SNAP). That has only declined slightly in the past few years, and much from exhausted benefits (under the last reform). Some progress, that, from work to SNAP to the local foodbank; and it's not just a few thousand here and there.
The deterioration in food circulation via economy is stark just in the past year, which follows closely the FOMC's continued "close." AP's article recounts a 15% increase in food distribution at New Mexico's largest just in the past year, while a similar 8% jump at one in Massachusetts. There are breadlines in America and they have gotten longer recently, but the main statistics are incapable of disseminating that deterioration but it is real enough to make its way into even official perspectives anyway.
By these more direct accounts, free from subjective association with economic accounting, the economy appears much smaller for every increased program of bank reserves; the more reserves that are forced out through QE's and such, the less they provide a useful basis for anything tangibly positive. The net result in the actual economy suggests a further interpretation beyond simple uselessness, namely that it is quite possible that there is an inverse proportionality between monetarism and economic progress.
Even the most hardened supporter of this kind of extreme monetarism (Ben Bernanke, for example) recognizes and admits that there are "winners" and "losers" under redistribution. Clearly, that redistribution process isn't directly related to the actual quantity of QE byproducts, but rather something else in the mannerisms of finance globally. Even given that, the justification of the convoluted nature of how this all might work is that, on net, the economy that undertakes QE will be better off in the long run than the one that does not.
The now-familiar losers in the QE/ZIRP paradigm are savers, but given the FOMC's reluctance to figure themselves out in these terms it cannot just be savers anymore. We are now eight years past the date the eurodollar system first broke down and unleashed greater and greater torrents of monetary experimentation, and now almost seven years into ZIRP and QE's; where are the winners?
That question extends, as hard as it may be to believe, to the banks themselves. In the process of cataloguing bank reports you discover there is an undercurrent, quite visible, of almost doom to them. The mantra before 2007 was to grow or die; expansion was the only course lest anyone be gobbled up by the next guy who was shooting risk to the moon (again, with no extreme levels of bank reserves to underpin those efforts). In 2015, especially for the behemoths that were the foundation of the eurodollar, wholesale system, the survival instinct is reform and cut back; to restructure or die. Is it any wonder, particularly in Europe, where the "best" course of action is apparently to take "interest" at -20 bps?
QE is running out of spaces to make a favorable impression. There isn't any direct evidence that QE has had a positive economic impact and the growing weight of observation even in banking is that banks continue to struggle toward downsizing. If it doesn't help people or even banks (banks!), we really have to ask what it does do.
There is no affirmative answer there, which is why its practitioners typically respond, indirectly, with some form of "you are too stupid to know it is for your own good." That might work for even a couple of years, but pushing a decade is far, far more disqualifying no matter any initial deference to complexity. I have focused on QE because it is the most visible "brand" of naked monetarism, but the sad truth is that this distrust equally applies to all its versions. What that has left central banks is some form of what I call the Yellen Doctrine, amounting to nothing more than asset bubbles as the lone hope for growth. If the only positive attributes can be found in asset bubbles, as legitimate policy, QE is in big trouble; just ask the PBOC.
The sum total of "close", "some", "strong" and truly autonomous factors is becoming harder and harder to obfuscate. After all, even the FOMC is barely trying anymore. When QE myths hold no charms even for them, look out.
