Archive for Janet Yellen

Yellen to End QE Someday, Maybe

126px-US-FederalReserveSystem-Seal.svgJanet Yellen spoke to lawmakers today. After making it very, very clear that bad weather is the cause of the lackluster economy,  Yellen then went on to confirm that the Fed will wind down quantitative easing (specifically, the bond-buying stimulus program) seven months from now if ”the labor market continues to improve and inflation remains low.”

Yellen is clear that if the Fed concludes that things are just right somewhere down the line, the Fed may or may not reduce bond-buying to zero. Even then, however, the Fed’s commitment to low interest rates remains in force indefinitely, we’re told.

Read More→

The Hidden Motive Behind Quantitative Easing

220px-Marriner_S._Eccles_Federal_Reserve_Board_Building Foreign individuals and businesses long ago cut back on their purchases of U.S. bonds. Their place was taken by foreign central banks. The central banks simply created money in their own currency and used it to buy our bonds.

The Federal Reserve always knew that we couldn’t rely on foreign central banks to buy our bonds forever. This may be the main reason it began the program called quantitative easing, in which the Fed created money out of thin air specifically to buy back U.S. debt.

Quantitative easing may have been intended to be a kind of insurance policy. If foreign central bank buying of U.S. bonds collapsed, the Fed would already have a program in place to buy them back itself.

The Fed  said that quantitative easing was meant to create U.S. jobs, but this never made much sense. Even a hard core proponent of QE, Fed official William Dudley ( formerly of Goldman Sachs), admitted that the Fed’s own economic models could not explain how creating money out of thin air and using it to buy U.S. bonds would increase employment. Some link to rising stock prices could be demonstrated, if only through the cheap financing of corporate stock buy-backs, but then rising stock prices could not be shown to create jobs either.

One inference from this was that chairman Ben Bernanke, and now new chairman Janet Yellen, were just taking wild stabs in the dark. A more reasonable inference is that they had another reason for QE, one which they did not want to acknowledge.

Viewed in this way, the 2008 bail-out should be viewed not as a bail-out of Wall Street, but rather  as a bail-out of Washington. The Federal Reserve feared that the market for government bonds was about to collapse, which would lead to soaring interest rates, and a complete collapse of our bubble financed government.

The Fed did not have the option of creating money and buying debt directly from the Treasury. That would be illegal. The Treasury must first sell its bonds to Wall Street, after which the Fed can then use its newly created money to buy them back. Hence, in order to rescue the Treasury, the Fed felt it had to rescue Wall Street.

This is a simplification of what happened, and only part of the story, but it is the untold part of the story, and in all likelihood the most important part. The Fed was in a panic in 2008, but not primarily about what might happen to Wall Street, and certainly not about what might happen to Main Street. It was in a panic over what might happen to government finance.

This interpretation is strengthened by new information contained in former Treasury secretary Hank Paulson’s recent book. He revealed that Russia tried in 2008 to persuade China to join in a collaborative effort to dump U.S. bonds in order to bring down the U.S. financial system. Although China refused to do so at the time, its government would clearly like to end dollar dominance, and has  been paring U.S. bond purchases.

At the moment,  Janet Yellen’s worries about finding buyers of government bonds can only be getting worse. For much of last year, foreign central bank purchases of U.S. bonds in aggregate fell. As of October of 2013, they had been negative for three and six months. Then they turned up a smidge, only to fall again, so that the last three months show a decrease of just over 12%.

It is known that Russia withdrew its U.S. bonds from custody of the Fed after the Crimea invasion, and has either been selling or could sell at any time. It will no doubt try again to persuade other countries to join in undermining the U.S. bond market and replacing the dollar as the mainstay of world trade.

Under these circumstances, it should not be surprising that the Fed is today taking only baby steps to reduce its program of creating new money to buy U.S. bonds. This program is probably not just meant to revive the economy, which it has not done and cannot do. It is more likely designed as a desperate and in the long run counterproductive effort to finance the U.S. government and save today’s dollar dominated financial system.

‘Everything we are told about deflation is a lie’

By Tim Price

[The Cobden Centre]

“The European Central Bank has given its strongest signal yet that it is prepared to embrace quantitative easing to prevent the euro zone from sliding into deflation or even a prolonged period of low inflation.”

- ‘Draghi strengthens QE signal’, Financial Times, April 4, 2014.

Yes, heaven protect Europe’s embattled citizens and savers from a prolonged period of low inflation. How could they possibly survive it ?

If history is any guide, probably quite well. As Chris Casey points out in his essay “Deflating the Deflation Myth,” the American economy during the 19th Century twice experienced deflationary periods of roughly 50 percent:

Source: McCusker, John J. “How Much Is That in Real Money?: A Historical Price Index for Use as a Deflator of Money Values in the Economy of the United States.” Proceedings of the American Antiquarian Society, Volume 101, Part 2, October 1991, pp. 297-373.

This during a period of “sustained and significant economic growth”. But just think of all those poor consumers, having to make the best of constantly falling everyday low prices.

In their research article ‘Deflation and Depression: Is There an Empirical Link?’ of January 2004, Federal Reserve economists Andrew Atkeson and Patrick Kehoe found that “..the only episode in which we find evidence of a link between deflation and depression is the Great Depression (1929-1934). We find virtually no evidence of such a link in any other period.. What is striking is that nearly 90% of the episodes with deflation did not have depression. In a broad historical context, beyond the Great Depression, the notion that deflation and depression are linked virtually disappears.”

In his 2008 essay ‘Deflation and Liberty’, Jörg Guido Hülsmann writes as follows:

Read More→

For More Jobs and Stability, Set the Economy Free

6718John Cochran writes in today’s Mises Daily:

Unfortunately Yellen’s strong compassion for the plight of the unemployed comes tied to a faulty understanding of the cause of unemployment. With Yellen’s ascendency to the Chair of the Fed, the Wall Street Journal notes the “Tobin Keynesians are back in charge at the Federal Reserve.” The last time this group’s Phillips Curve-based ideas dominated Fed policy, the Fed engineered the stagflation of the 1970s. Exhibiting a lack of historical understanding, sympathetic cheerleaders such as Justin Wolfers see Yellen’s commitment to the dual mandate as a plus.

Yellen’s appointment should be viewed as an investment in the Fed’s dual mandate, which emphasizes the central bank’s role in taming both unemployment and inflation. The unemployed should rejoice that they have a powerful advocate willing to battle the hard-money types willing to consign them to the economic scrap heap.

The Fed: Blame It On The Weather

The economy is lackluster at best, as anyone who isn’t a beltway politico or hedge fund manager can plainly see.  But Janet Yellen says there’s an easy explanation for why things aren’t even better than the official numbers show: cold weather.

In tomorrow’s Weekend Edition of Mises Daily, Frank Shostak will neatly dispose of the weather “argument.”

At the Fed, the More Things Change, the More They Stay the Same

by Ron Paul

Janet_yellen_swearing_in_2010Last week, Federal Reserve Chairman Janet Yellen testified before Congress for the first time since replacing Ben Bernanke at the beginning of the month. Her testimony confirmed what many of us suspected, that interventionist Keynesian policies at the Federal Reserve are well-entrenched and far from over. Mrs. Yellen practically bent over backwards to reassure Wall Street that the Fed would continue its accommodative monetary policy well into any new economic recovery. The same monetary policy that got us into this mess will remain in place until the next crisis hits.

Isn’t it amazing that the same people who failed to see the real estate bubble developing, the same people who were so confident about economic recovery that they were talking about “green shoots” five years ago, the same people who have presided over the continued destruction of the dollar’s purchasing power never suffer any repercussions for the failures they have caused? They treat the people of the United States as though we were pawns in a giant chess game, one in which they always win and we the people always lose. No matter how badly they fail, they always get a blank check to do more of the same.

It is about time that the power brokers in Washington paid attention to what the Austrian economists have been saying for decades. Our economic crises are caused by central bank infusions of easy money into the banking system. This easy money distorts the structure of production and results in malinvested resources, an allocation of resources into economic bubbles and away from sectors that actually serve consumers’ needs. The only true solution to these burst bubbles is to allow the malinvested resources to be liquidated and put to use in other areas. Yet the Federal Reserve’s solution has always been to pump more money and credit into the financial system in order to keep the boom period going, and Mrs. Yellen’s proposals are no exception.


Read More→

More nonsense about a rules-based Fed

220px-Marriner_S._Eccles_Federal_Reserve_Board_BuildingLarry Kudlow frets that Janet Yellen simply doesn’t understand the need for a rules-based Fed model to guide the money supply and interest rates.  Ms. Yellen, Kudlow informs us, should “limit her focus to stable prices and a reliable King Dollar.”

“Stable prices”. “King Dollar.” This is rich. I wonder if Asian central bankers would agree with Kudlow’s characterization of the dollar, and whether he’s visited a supermarket lately (he states with a straight face that inflation is 1%).

Here I thought Yellen’s biggest problems might include the wholesale devaluation of the US dollar; asset markets hopelessly addicted to endless rounds of QE; upward pressure on long term interest rates; or staggering future deficits arising from America’s unfunded entitlement liabilities (deficits even the Fed will have a hard time papering over). Apparently, however, it’s a lack of “rules” at the Fed that should keep the new Chairman up at night.

This fetish for rules-based Fed policy (e.g. inflation targeting) and obsession with the Taylor Rule serve as the rightwing, “free market” response to substantive and populist criticism of the Fed itself.  We don’t want to end the Fed, the Kudlows tell us, but we do want to keep it in check and maintain the dollar’s lofty status.  It just needs a firm hand.  After all, as Mr. Greenspan famously told Ron Paul in 2005, the Fed can essentially mimic a gold standard.  But how long  has it been since the Fed restrained itself in the face of public and political pressure (think Volcker)?  And can central banks truly be constrained by rules at all?

We shouldn’t be too hard on Mr. Kudlow.  As a former Fed staff economist and later managing director at Bear Stearns, he hardly can be expected to offer more than gentle criticism of the institution that made him rich.  And he’s well known as a permabull, using his pulpit at CNBC as a de facto informercial for equity markets.  But one has to wonder whether he really believes that tinkering with so-called rules based monetary policy can keep the dollar from going around the bend.

Since Mr. Kudlow effectively supports setting prices (interest rates) and quantities of a particular commodity (money), I wonder what his objection would be to having a quasi-private group of individuals determine how many bushels of wheat should be produced in 2014?  Or the hourly wage of a factory worker at Ford? Or the retail price for an iPhone 6?

Interesting questions, but I’m sure Kudlow would say “Oh that’s different.”

Employment Growth, the True Money Supply, and Janet Yellen’s Cold Feet

3479600161_67d3c9a7b6Jeff Peshut has posted a nice article indicating the full dimensions of the stagnating recovery in labor markets.  Peshut focuses on the absolute level of employment and the rate of growth of employment rather than looking solely at the far rosier unemployment rate.  He shows that the employment growth rate was far lower during the Greenspan inflationary bubble years of   2003-2007  than  it was in the periods 1983 to mid-1990 and mid-1991 to 2000.  Furthermore, as Peshut points out, after almost five years of so-called “recovery” the level of employment has not even reattained its 2007 peak :

As a result of massive layoffs during the Great Recession, Employment reached a trough of about 129.4 million at the end of 2009 – a loss of almost 8.6 million jobs over two years.  This means that the U.S. economy lost 500,000 more jobs during 2008 and 2009 than it gained during the entire 2003 to 2007 growth period.  It’s no wonder that so many economic commentators refer to the period from 2001 to 1010 as “The Lost Decade”.

Since the beginning of 2010, the U.S. economy has recovered about 7.5 million of these jobs – slightly less than 1.9 million per year — resulting in Employment of 136.9 million at the end of 2013.  This is still short of the 2007 peak.

Peshut also uses the Rothbard-Salerno TMS (“true money supply”) aggregate, which is calculated by Michael Pollaro of  Contrarian Take at,  to forecast total non-farm employment.  Peshut observes:

Although TMS has been increasing over the past two years, its growth rate has been slowing, which is what really matters. The Fed’s reduction of bond purchases will likely decelerate growth of the TMS even further, setting the stage for the next credit crisis.  If the two-year lag between the TMS growth rate and the Employment growth rate holds true going forward, look for the Employment growth rate to begin to decelerate from its present rate during 2014.

Extrapolating the TMS’s current trajectory into the future, TMS growth should approach zero in early 2015, setting the stage for a credit crisis near the end of 2015 or the beginning of 2016.

Of course, Peshut properly qualifies his projection, noting that the “trajectory of the TMS and the employment growth rate could change as a result of a change in the Fed’s current policy.”

As events unfold, there is much uncertainty about the Fed’s future course which could suddenly veer toward ratcheting up monetary expansion.  Janet Yellen  seems to be getting cold feet in pursuing  further QE tapering even as the unemployment rate declined to 6.6 percent for January, a whisker’s hair above the 6.5 percent target rate that the Fed had articulated in December 2012 for implementing serious monetary tightening.  In reaction to the January jobs report  released last week, however, Yellen expressed “surprise” at the weak jobs data, while unnamed  Open Market Committee officials “indicated that the target likely won’t hold.”

Photo Credit: Derek Jensen

Can The Fed Reverse The “Monetary Morphine?”

800px-MorphineRxDuring Senate confirmation hearings on the nomination of new Fed chairman Janet Yellen,  Mike Johanns ( R-Neb) expressed the opinion that Fed stimulus is putting the economy on an unsustainable “sugar high.”  Pat Toomey (R-PA) described it as a monetary “morphine drip.”

The Fed insists that it can quickly reverse all the new money it has conjured up to create this  “sugar high” or “monetary morphine.” Retiring chairman Ben Bernanke said on 60 Minutes that he had 100% confidence about this. But the facts suggest otherwise.

Respected economist John Hussman has called present Fed policies a roach motel, easy to get into but hard to get out of. He calculates that lifting short term interest rates back to 2%, a very low rate by historical standards, would require the Fed to sell at least $1.5 trillion of securities on the open market. Who would buy these securities?

In recent years, the US government has counted on foreign central banks to buy US treasuries not purchased by the Fed. These foreign central banks, like the Fed, are using newly created money. And their willingness to hold more US debt has sharply waned over the past year. There are indications that China in particular has decided not to add to its US treasury holdings.

For now, it is likely that the Fed will at least appear to “taper” its “stimulus.” It will report less “quantitative easing,” but this shift does not mean it won’t create new money in a slightly different way, using a different term for it. This is already under consideration within the Fed building.

Here is Janet Yellen’s explanation for the paradoxical policy of creating more new money and debt to cure a problem caused by creating too much new money and debt in the first place:  “You know, if we want to get back to business as usual and a normal monetary policy and normal interest rates, I would say we need to do that by getting the economy back to normal.”


New Fed Chair Starts With– What Else?–A Forecast

Janet_yellen_swearing_in_2010Janet Yellen celebrated her confirmation as Fed Chairman on January 6 by immediately issuing a carefully hedged prediction: “I am hopeful that the first digit [ of GDP growth] could be 3 rather than 2… and  [that] inflation will move back toward our longer-run goal of 2%.”

Let’s hope she has better luck with her predictions than the retiring Ben Bernanke, who almost always got his wrong.

In 2006, at the zenith of the housing bubble, he told Congress that house prices would continue to rise. In 2007, he testified that failing subprime mortgages would not threaten the economy.

In January 2008, at a luncheon, he told his audience there was no recession on the horizon. As late as July 2008, he insisted that mortgage giants Fannie Mae and Freddie Mac, already teetering on the verge of collapse, were “ adequately capitalized [and] in no danger of failing.”

Following the Crash of 2008, Bernanke’s prognostications did not much improve. Nor did Yellen’s, who had also misjudged the housing bubble, and who became Fed vice chairman in 2010.

The two of them got the “recovery” they predicted, but the weakest “recovery” in history. Real income for the average American fell during the recession, but then fell even more after its supposed end, and now hovers at a level last seen in 1989.

Heads the Fed Wins, Tails You Lose

With the Senate’s recent confirmation, Janet Yellen will soon become the most powerful woman in the world. When she takes over the reins of the Federal Reserve from Ben Bernanke on February 1st, she will become the 15th Fed Chairman and first woman to hold the position. And as I’ve said before, she’s the right woman for the job. At least by the standards set by the position.

Yellen is an ardent supporter of the Phillips Curve, an idea that relates changes in inflation to the amount of slack in the economy. She is a monetary policy “dove”: one who thinks reducing unemployment is more important than halting inflation.

While she might not give the best balancing act to the Fed’s dual mandate of promoting full employment and fighting inflation, at least she considers both. Unfortunately, the Fed’s dual mandate just isn’t what is used to be.

The Quantitative Easing policies enacted under the Bernanke Fed are geared more towards supporting general asset prices than with controlling inflation or supporting employment directly.

Indeed, some Fed officials, like William Dudley from the New York district, have admitted that the Fed does not know how these QE policies work to help the economy. This would be a humbling admission, if it were true. Actually, there is quite a bit of evidence available to Fed economists that says QE is counterproductive and harmful to growth. And this evidence is not just from Austrians warning of the dangers of promoting further malinvestments and stopping those already made from being remedied. Evidence also abounds from mainstream economists.

Robert Hall warned last August at a Fed conference in Jackson Hole that QE is responsible for a buildup in reserves which contracts the economy. He also commented that the attention on new central banking tools, such as forward guidance and GDP targeting, are misplaced and that attention should be given to building up bank capital. (Perhaps by increasing reserves to, say, 100% of the deposit base?)

Read More→

Ron Paul: Yellen Is ‘Worse Than Average’

The Daily Caller reports:

Ron Paul is not a fan of Janet Yellen, the newly confirmed Chair of the Federal Reserve, but he told The Daily Caller Monday she is nowhere near as flawed as the system she is about to take over.

“She’s worse than average,” the former Texas congressman told The Daily Caller in a phone interview shortly after the Senate voted 56-26 to confirm Yellen’s nomination, “but I don’t dwell on that at all.”

“It was never the chairman himself, herself that’s the problem,” Paul said. “It’s the whole system.”

Read more. 

After the Taper: The Fed’s Non-Plan Is Unchanged

6621Frank Hollenbeck writes in today’s Mises Daily:

Since 2008, the central bank has reduced interest rates to almost zero with little to show for it. You can bring a horse to water in a trough, pond, or lake, but you cannot make him drink. Most of the added liquidity has found its way into excess reserves. Banks are not lending because they have few creditworthy customers who want to borrow. The household sector is still deleveraging and has less appetite for more debt, and the business sector is careful about making future investments in a financial and economic environment on unstable footing. Businesses are keenly aware of the malinvestments never cleaned up after the last bubble and of the price distortions of current monetary policy. Why would businesses stick their necks out if they suspect a painful adjustment is around the corner?

Since the first channel has failed, only the second channel remains. Economists are generally in agreement, however, that there is no long-run trade-off between inflation and unemployment. The Keynesians and monetarists believe that there may be a short-run trade-off. If people have adaptive expectations, (based on the recent past) then monetary policy that creates inflation will reduce unemployment by lowering a worker’s real wages. Of course, once a worker realizes he has been fooled, he will demand an increase in nominal wages to bring his real wages back up to previous levels. The gain in employment is only temporary. If, instead, people base their expectations rationally and are not fooled, the neo-classical position, there is no short- or long-run trade-offs between inflation and unemployment.

No Cheerin’ for Yellen

6614John Cochran writes in today’s Mises Daily: 

The recent nomination of Janet Yellen with her strong commitment to the Fed’s dual mandate to head the Federal Reserve system has revitalized the Keynesian more-inflation-as-cure-for-unemployment argument as promoted by Paul Krugman in 2012.[1] These economists, such as Princeton’s Alan Blinder, who Dale Steinreich has labeled “kind of the Paul Krugman of the late 1980s,” look at the continuing slow recovery, and see, not a policy that has been totally ineffective and harmful, but a policy which has been less effective than intended because of the bad behavior of bankers.