The US print edition of the Wall Street Journal paints a picture today of the US Federal Reserve as it was a failing institute. The front page carries a leader titled, Fed Stumbles Fueled Populism and it is part of a series called The Great Unraveling. Not exactly an encouraging series title. But the main article is well worth reading. It certainly is fascinating stuff. Two comments quoted express the amazing situation we find our collective selves in.
‘ “I certainly myself couldn’t have imagined six years ago that we would be employing the policies we are now,” Fed chairwoman Janet Yellen said to a packed ballroom in New York earlier.’
This is in reference to near- zero interest rates, quantitative easing and asset purchases that had distorted the market totally.
‘ “We should be extremely worried,” Harvard professor and former Treasury Secretary Larry Summers said: “We are essentially on a fairly dangerous battlefield with very little ammunition.”‘
This is in reference to the notion that the US economy is very likely passes its ‘peak’ and now moving down towered a ‘trough’. In many years past this should imply a contraction and possible recession. With near-zero interest rates the Fed has no ability to cushion any such contraction and thereby encourage recovery. The Fed can only further increase its balance sheet through new QE or ‘helicopter money’.
Bottom like folks, we are in deep trouble. Of all the economic crises we have seen, from hyperinflation in Germany, the breaking of gold, the inflation of the 70s, the Asian crisis, the recent financial crisis, this is just as risky but for reasons intrinsic to the systems and levers that are designed to avoid such crisis. This is what makes this time different. It is not external conditions that might trigger a crisis; its the very guides that are meant to save us hat might.
And as written widely before, high Fed policies did save the global economy some years ago, such polices had to persist due to the lack of concrete political action. Our political schism has created a void the Fed stepped into. The Fed is now stuck in the resulting mud and has no ability to get out.