The Fed is creating uncertainty "“ breaking long term understandings with the financial markets, and in too many instances by doing things that are more properly labeled lying, foolish or both. The subprime contagion is not well contained. There is no deflation in the lives of 99.99% of the population (housing prices reverting to a long term trend after a bubble is not deflation). The true cost of living — college costs, local schooling / property taxes, healthcare, energy costs (gasoline and heating oil), and food costs are ALL climbing at least 5-6% per year. FOMC members should know this "“ but they live such sheltered lives in Washington DC that they might be clueless instead of lying… either way, the Fed has destroyed its own credibility.
Fed created uncertainty has two effects that should be obvious, even to the coddled academics that now dominate the FOMC:
The result is the money multiplier "“ which gives Fed money creation its true power "“ gets destroyed. The money multiplier goes from its historical norm of around 9x (every dollar the Fed prints creates about $9 in the economy) to less than 2x.
Worse, when the economy does recover (post-Bernanke?) and the money multiplier reverts to its long term mean, the Fed cannot realistically shrink the money supply fast enough. If $1.5 trillion suddenly dumped into the economy in one year is stimulus, then the same amount suddenly withdrawn would cause a severe recession. If the Fed withdraws the money over a period of time, the normalized money multiplier will turn Bernanke’s failed experiment into massive inflation.
Far from stimulating the economy "“ the Fed is preventing needed restructuring. The economy needs fewer bankers and less housing construction. Not zero, but less than we had in 2007 and arguably less than we have now.
Protecting the status quo is having enormous costs – both direct and indirect psychological costs. Its time for the Fed to stop hurting the USA.
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