The Inverse of 'Fedspeak' Is On Display In 2021
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If there is an inverse to fedspeak, Alan Greenspan’s infamous tendency to shroud monetary policy in the cloak of intentional obfuscation, it would have to be what’s now on display all around 2021 regarding the current state of the major global factors. Inflation or deflation? Recovery or back to less? Maybe not even that good.

What the “maestro” sought was to maintain the aura of a functioning, omnipresent central bank by never saying anything and thereby allowing the already-awed public (and financial press, most of all) to fill in every gap positively.

We have no clue just what Greenspan was saying, but he must’ve been explaining why this awesome result could only have been the skillful product of just the right doses of easy money!

What a transformation it has been ever since. No more any maestros, nor, if you’ve noticed, a central bank symphony by which to play the same soothing melody. Below is from the Wall Street Journal (“Covid-19 Fueled a Treasury Market Meltdown in 2020. Report Offers 10 Potential Fixes”) published a couple days ago, reporting on a new official report dealing with the events of last March.

See if you can spot this profound contradiction from its very opening paragraph:

“A global dash for cash sparked by the coronavirus pandemic in March 2020 forced the Federal Reserve to buy hundreds of billions of dollars of U.S. Treasury securities in a matter of days to prevent a broader meltdown in financial markets.”

Most would read that sentence and conclude with a hearty congratulationssent along to Mr. Powell, the institution’s Chairman, for a job well done. He has, as much, accepted on behalf of it. They saved the world. Again. We are meant to focus exclusively on the passage’s finale rather than those few initial words slyly setting you up for that conclusion.

To the vast majority, the Federal Reserve is a central bank. It is our central bank and a good one.

OK, but what is a central bank?

I don’t recommend using Investopedia when searching for answers in this general arena. For one, what you’ll see staring up from your computer screen is almost always taken from what these same central banks tell you. In this case, however, their definition of that very thing matches up perfectly with both what people think as well as the traditional standard for operating one:

“A central bank is a financial institution given privileged control over the production and distribution of money and credit for a nation or a group of nations. In modern economies, the central bank is usually responsible for the formulation of monetary policy and the regulation of member banks.”

This characterization is, after all, the whole of it behind the notion central banks print money; QED QE.

This description, in point of fact, quite opposite the opening observation laid down by the Wall Street Journal article. You can’t have what’s stated and then arrive at “a global dash for cash.”

The view of the Federal Reserve as put forward by this newspaper story is, maybe news to you, uncontroversial. In academic circles, those which overlap Washington’s bureaucracies including the Fed, they even have a name for it: market of last resort.

Whatever it is, that is not a central bank. In such absence, a janitor, perhaps, in the end nothing whatsoever like the definition proposed by Investopedia or any rational-minded layperson. You might even ask, where were the Congressional hearings as to such fundamental overhaul.

None ever undertaken; no politician I’m aware of fully aware of it, either.

The job of an actual central bank comes before the quote, not toward its end; to prevent the “global dash for cash” in the first place, thus the “broader meltdown in financial markets” is avoided altogether. Walter Bagehot and such. They claim to have done so, the monetary system and real economy seriously beg to differ.

Disaster entered and devastated the real economy for the second time in fourteen years. This latest under the cover of COVID, the prior subprime mortgages. Both mere shocks kicking things off, the starting points to broad inelasticity.

For a sense of this, meaning how the Fed isn’t a central bank, we can turn to…the FOMC. As I wrote above, 2021 has already been, the kids say, lit.

“…pressures in the markets for U.S. Treasury securities and Treasury repo that could spill over to other funding markets and impair the implementation and transmission of monetary policy. In this regard, a number of participants noted the potential for pressures in short-term funding markets to arise from time to time, even with monetary policy operating in an ample-reserves regime.” [emphasis added]

Now you know just why the Journal’s rigorous editorial standards had no issue accepting this radical change in methodology. Here we have the FOMC, in its published minutes taken for the April 2021 policy meeting, essentially stating – outright – that its primary “monetary” byproduct in the form of bank reserves is not the end-all, be-all of US$ money condition.

Intentional downplaying aside, in the context of both GFC1 and GFC2 bank reserves didn’t matter much at all. Janitor, not central bank.

This throws an enormous wrench into a lot of things, of course, but a big one into the assumptions used by the Federal Reserve’s biggest critics. The institution time and again stands accused of printing too much money, and only too much “easy” money, when here we have a distributed acknowledgement stating that it really can’t nor ever could (the only reason “global dash for cash” keeps happening).

There is another perhaps even more important consideration at work here: the global in these dashes for cash(es; collateral as one form). For what the Federal Reserve actually is and what it does, as well as how it really does what it intends to do (how’s that for fedspeak!), the agency is as much a domestic bank regulatory authority as anything else let alone a functioning central bank.

This was correctly surmised even in the simple Investopedia definition. What happened at the Federal Reserve, as well as its cousins around the world, is that they were forced entirely into the one (regulation of bank members) because they could no longer function in any way as the other (formation of monetary policy, at least policies with real money contained in them).

As a global dash for cash, emphasis on global, this means the dysfunction in this system gets spread around the rest of the world. In the WSJ formula, this is taken to let the Fed off the hook; outside the US which isn’t the job of the domestic janitor. Cleaning up the mess afterward in the one part of the Treasury market is an insanely narrow focus, don’t you think? That very rest of the world would like a word with whomever is charged with maintaining the US$ reserve system.

It's just not Jay Powell or anyone like him. Privately, anyway, they’ve admitted as much since these dashes first showed themselves (from the September 2007 FOMC transcript)

“MS. JOHNSON. Of course, many of the dollar issues that we have spoken of— and that Bill talked about—are really being captured as a London phenomenon. But you might say that, from the point of view of the Bank of England or the U.K. economy, these dollar issues are somewhat separate from the domestic economy. There is some truth to that, but also the institutions are involved, the institutions have obligations, and the shocks to the institutions reverberate back into the domestic economy, it seems to me.”

It is an issue the public has never known needed to be settled; what do these people actually do? Do they, as most expect, manage the money supply by managing the dollar? And if so, wouldn’t that include the entiremoney supply, not just pieces or parts here and there?

You’d be forgiven if that’s the impression you’ve been left with for all these years. That’s really the point, as I noted from the outset. Unable to do anything about effective money all the while leaving the public to comprehensively believe otherwise.

The confusion expressed by Kathleen Johnson here was hardly unique, riding all the way up to the top in the form of Ben Bernanke (he was actually being honest when he said earlier in February 2007, he believed subprime would be contained; For all he knew, it would be.) Ms. Johnson, and you have to laugh here, shortly after the Fed got everything wrong about the Summer and Autumn of 2007 (leading to TAF auctions and overseas dollar swaps) was promoted from staff economist to Senior Advisor to the Federal Reserve’s Division of International Finance.

This explains very well both why there were overseas dollar swaps (and why US-based subs of so many big foreign banks were bidding for TAF funds anyway) as well as why they hadn’t a prayer for success. Either time; 2008 or 2020.

This, then, explains also the several nearly regular dollar shortages come about in between them. And more than those, why the critics are only ever wrong. The dollar’s death has been greatly exaggerated because everyone still believes there are central banks doing real monetary things.

All way back in May 2009, when QE was the primary focus, UK’s Telegraph blared the headline “China’s Yuan ‘Set to Usurp US Dollar’ as World’s Reserve Currency.” A month later, delegates at a BRIC summit declared there had been “a gun aimed at the US dollar.”

Despite lack of inflation and an unexpectedly steady exchange value, these constant claims would intensify in 2011 when China was said to have “challenged” the dollar’s hegemony directly by introducing bilateral currency arrangements in CNY among several partners. A year later, Foreign Policy Magazine openly wrote both sides of this fallacy within a single paragraph:

“Because U.S.-dollar financial markets seized up during the 2008-2009 global financial crisis, businesses in Asia and emerging economies desire an alternative trade settlement and reserve currency.”

This part mostly true, setting everything up once you recognize “global dash for cash” was money first before “financial markets seized up.” Still, that was the animating principle, not the Fed in overdrive with “money printing.” Inelasticity, the lack of dollars in foreign hands rather than an overabundance of them (as if that could be bank reserves, too!)

After identifying the global monetary dissatisfaction, again, in the same paragraph, they end up just restating the common myth(s) anyway:

“The U.S. Federal Reserve stimulated recovery in the United States through ‘quantitative easing’ – increasing the money supply by buying mortgage-backed securities and Treasury bonds, which lowered the value of these holdings to foreigners like the Chinese, weakened the U.S. dollar, and stimulated the capital outflows to emerging economies that increased inflation.”

The dollar, obviously, never weakened despite trillions in several more QE’s. From 2012 forward, on the contrary, up, up, and away taking with it the price of those specific asset classes (these are related: rising dollar and higher-priced Treasuries). The value of these reserve assets first increased in value (nominal and absolute prices went up, not down) and then increased again for overseas reserve holders when translated from a higher dollar exchange rate back into their local currencies.

Who in or outside the US could possibly hate that?

And yet, at root (one of them) of March 2020’s major malfunctioning was, surprise, foreign reserve managers desperately trying to liquidate US Treasury reserve assets (almost all OFR) in any way they could arrange – including by pawning them off on bank dealers who felt more than obliged (pressured) to take them even though the repo market they’d normally use to fund these compulsory transactions was breaking down at the same time, too.

This, ladies and gentlemen, a very key part of last year’s massively disruptive global dash for cash. I wrote a few months ago on this same subject (sorry):

“Of the few who notice such things, none have ever asked the only question worth asking: where the hell did all that selling come from in the first place?”

We keep hearing about the Fed “printing money” and “increasing the money supply” which, as the media always writes, “pouring trillions of dollars into the financial system” or real economy. And then, what gets described are all the ways this could not have happened.

The dollar never weakened. “Potential” for market pressures despite ample meaning trillions of bank reserves. Foreigners selling US Treasuries abundantly. This real dollar system aggravating overseas officials but not because the currency contained within is near enough plentiful.

Persisting questions about dollars in London; or, are they London dollars?

The WSJ article spells it out for you. It’s no longer the stated purpose of the Federal Reserve to determine which, or what either may mean. Instead, never once advising the public of the profound change, the janitors clean their QE-brooms and bank-reserve-mop-bucket “in case” there’s a next global dash for cash needing an after-the-fact cleanup.

Any collateral (pardon the pun) damage to the global economy from it left as if some roll of the dice.

I have no doubt foreign reserve managers, the entirety of repo market participants, domestic and overseas money dealers, and the vast majority of the public especially those who can longer find suitable work – informed of all this or not – would much rather avoid these destructive messes in the first place. All this sudden honesty in 2021 would make Alan Greenspan blush even though he was the one who kept saying, decades ago, the Fed didn’t do money.

After all, he had originally invented fedspeak to hide this fact. 

Jeffrey Snider is the Head of Global Research at Alhambra Partners. 

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