Coppola, who calls QE "one of the biggest policy mistakes in history," backs up her claim with a number of charts and graphs which show how inflation fell during periods when central banks were buying sovereign bonds and boosting reserves at the banks. (Remember, the point of QE is to raise inflation expectations, not lower them.) Her repudiation of QE is further underscored by the fact that the so called "velocity of money" has dropped to a six decade low. Get a load of this graph from the St Louis Fed:
According to Investopedia the "velocity of money" means: "The rate at which money is exchanged from one transaction to another, and how much a unit of currency is used in a given period of time...Velocity is important for measuring the rate at which money in circulation is used for purchasing goods and services. This helps investors gauge how robust the economy is, and is a key input in the determination of an economy's inflation calculation."
Bernanke knows that velocity is in the doldrums and that QE has had no meaningful impact on activity. Keep in mind, these are the Fed's own charts. All the members of the FOMC are familiar with them and know what they mean. And what they mean is that the money is going no where; it's stuck in the financial system goosing asset prices and providing needed balm for bloody bank balance sheets which are still deep in the red five years after Lehman Brothers collapsed. In other words, QE is working largely as it was designed to work. It is boosting profits for the financial sector while keeping the real economy in a permanent slump. As long as the economy underperforms, the Fed will have a reason to continue the existing policy. If, however, the economy gains momentum and inflation rises, the Fed will be forced to wind down its asset purchases and raise rates cutting off the flow of interest-free money to the banks. Thus, the Fed's strategy requires that the US Congress and the White House continue to shave the deficits, curtail public spending and implement other belt-tightening measures to make sure the economy does not rebound and upset the Fed's plan to continue its wealth transfer to Wall Street.
This sounds easier than it is, in fact, the droopy rate of inflation suggests that Bernanke may already be too close to the cliff-edge to pull back in time. Credit growth, personal consumption, wages and incomes remain either flat or trending lower. The recent bump in Third Quarter (3Q) GDP was largely due to one-time inventory buildup that will undoubtedly weigh heavily on future readings. The same rule applies to unemployment where the uptick in payrolls is overshadowed the bleak participation rate which continues to reflect the abysmal state of the labor market. Also, the New York Fed just released a report (FRBNY Survey of Consumer Expectations: Household Finance Expectations) showing that "both household income growth and spending expectations are basically flat-lined (and) that there is no expectation of things getting any better or any worse." (Housingwire) Needless to say, when consumers are as pessimistic as they are today, it greatly impacts their spending habits. (which the survey confirms)
Finally, the US economy is bound to be wacked by Japan's accelerated QE program which has slashed the value of the yen weakening US exports while pushing up the value of the dollar. Like the Fed, the Bank of Japan is following a beggar-thy-neighbor policy which exports deflation to its trading partners in the relentless pursuit of aggregate demand. This is how currency wars start.
All of these are adding tinder to a woodpile that could burst into flames in 2014. CLSA's prescient analyst, Russell Napier, believes the world is about to experience a "deflationary shock" that will send raw materials, manufactured goods, and stocks plunging. Here's a short excerpt from his article titled "An Ill Wind" via zero hedge:
"Three times since 1997 inflation has fallen below 1% with very negative impacts for equity investors. On all three occasions an existing low level of inflation was forced lower by dramatic events: the bankruptcy of Russia and collapse of LTCM in 1998; the terrorist attacks of 11 September 2001; and the bankruptcy of Lehman Brothers in September 2008. While nobody would attribute the 11 September atrocity with extant global deflationary forces, the other two episodes can clearly be associated with such forces. So perhaps it is global deflationary forces creating a bankruptcy event, somewhere in the world, that is the catalyst for a sudden change in inflationary expectations in the developed world. It can all happen very quickly; and it is dangerous to stay at an equity party driven by disinflation when it can spill so rapidly into deflation.
In 1998 falling export prices triggered a Russian default, and in 2008 falling US house prices triggered the Lehman bankruptcy. Going back further, deflation in the oil price in 1982 produced a Mexican default and a credit event which threatened to bring down the US banking system. Deflation in these key prices produced a credit event which rapidly produced a major reassessment of the outlook for the general price level. Across the world today we see falling commodity prices and, primarily due to the weak yen, falling manufactured-goods prices. When there is plenty of leverage in the system and any key price starts to decline then a credit event and a sudden change in inflationary expectations are much more possible than the consensus believes." ("An Ill Wind", Russell Napier, CLSA, selected excerpts, zero hedge)
The threat of deflation is quite real, in fact, it's probably just one bank failure away.
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