The President of New York’s Federal Reserve Bank is not at all humbled by all the evidence to the contrary that the Federal Reserve has the ability to create economic growth where none existed before. As quoted in Bloomberg:
“We have tools that can provide additional stimulus at costs that do not appear to be prohibitive,” Dudley, who serves as vice chairman of the Fed’s policy-setting Open Market Committee, said today in a speech to business journalists in New York. “Further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long.”
In other words, the Fed waves its magic wand, and voila, demand returns and the dual mandates of full employment and inflation are resolved. He goes even further:
Lowering long-term interest rates by restarting purchases of Treasuries or mortgage debt would have a “significant” effect on the economy by supporting the value of homes and stocks, making housing and refinancing mortgages more affordable and reducing the cost of capital for businesses, Dudley, 57, said to a Society of American Business Editors and Writers conference.
In other words, by cheapening the currency with which economic transactions take place, we can make it appear that things are more valuable when in fact the only thing that has changed is their value relative to the currency.
I’m really about fed up w/ this bullshit. The illusory juicing of demand via inflation has got to stop. After the mirage of higher prices fades, all we do is find that we again produced more than the market would bear, and then it all comes crashing down, again.
And so, he and the Fed believe in pursuing the exact opposite strategy that would provide a solid foundation for growth:
“The longer this situation prevails and the U.S. economy is stuck with the current level of slack and disinflationary pressure, the greater the likelihood that a further shock could push us still further from our dual mandate objectives and closer to outright deflation.”
I’ve said it before, over and over again, but flat or declining prices don’t necessarily mean there is deflation and rising prices don’t necessarily mean there is inflation. It depends on the underlying demand metrics. If demand is falling, prices should fall. It’s called the downward-sloping demand curve, and is as close to a law that economics has when it tries to pretend it’s a science. The prescription for falling demand is lower prices. If policy attempts to prevent prices from falling, supply stumbles around trying to marry up with demand, the ultimate result being more is supplied than is demanded, and PRICES FALL FURTHER than they would have without the monetary shenanigans. Get that? All monetary policy can do in the face of falling demand that yields falling prices is exacerbate the problem.
I expect more money cheapening will soon (if it’s not already) be pursued. It won’t work, except for a short, illusory while. After which we’ll not be back where we were before. We’ll be worse off than if we’d let the market set prices and work through its oversupply problems on its own.