The Fed has long been out of options.  It never really had any to start with, except to create delusions of demand through monetary machinations, and to attempt to reduce real wage rates through inflation so that employment would expand, and the masses would feel better about themselves.   Why it feels better to work for money than to have it given to you is inexplicable except as a curious by-product of our origins in Puritanism.  But money never buys anything.  Money is simply a conduit.  Goods and services buy goods and services.  Tinker with the money acting as a conduit for transactions enough, and the money itself will become an impediment to commerce.  The Fed has been ceaselessly tinkering since 2008.  It now has announced it will tinker some more, buying half a trillion dollars per year in mortgage bonds, presumably in a bid to ensure no house gets left behind.  Mortgage rates, along with all other commercial rates, are deep into negative territory.  Perhaps the Fed should just start doling out cash to people who agree to borrow money.  Nothing like a bit of raw meat to juice those animal spirits.

It seems everyone understands the fecklessness of the Fed’s ability to fine tune the economy, except the Fed.  Even George Will, who usually sticks to politics, but is no man’s political shill (ht CB) though, as he points out, what the Fed is doing with quantitative easing is conducting fiscal policy, which is the purview of the Congress, has weighed in on the subject, from his Washington Post column today (September 13, 2012):

The basic interest rate — i.e., the federal funds rate minus the inflation rate — was negative during about 40 percent of the disastrous 1970s and the 2000s, which ended disastrously. Because today’s rate is negative, the Fed’s stimulus repertoire is reduced to “quantitative easing.” That phrase, which is how government speaks when trying not to be understood, means printing money. Except printing is so 20th century. Nowadays, the Fed gives banks digital transfusions of money to lower long-term interest rates, which result in . . .

Not much bang for trillions of bucks. With corporations holding upward of $2 trillion in cash, and 30-year mortgages at 3.5 percent, George [Ezra George, President of the Federal Reserve Bank of Kansas City], speaking several weeks before this week’s meeting of the Federal Open Market Committee, asked: “Is there anyone not borrowing today or purchasing a house because interest rates aren’t low enough? Do we expect that businesses will hire if their long-term rates are lower?”

 Mike Larson, over at Weiss Research’s Money and Markets (sent in an e-mail, so no cite), rather succinctly, if quite shrilly (another ht CB), describes how dire is the situation:

So what’s the result? [of all the Fed stimulus to date]


Sure — all that free, easy money temporarily buoyed the stock market — but despite everything the Fed has done …

** Unemployment has stayed over 8% for 42 straight months …

** The average family home is STILL falling in value …

** Profits at many major corporations STILL stink — and they’re getting more rotten almost by the day …

** U.S. economic growth is STILL grinding to a near standstill …

** And now, as America approaches the precipice of its great fiscal cliff, the stock market looks for all the world as if it’s a massive bubble about to burst!

Worse, the middle class — the very backbone of the U.S. economy — is getting eaten alive:

>> HOUSEHOLD INCOME IS PLUNGING: The U.S. Census Bureau just reported that real median household income has now fallen for the fourth straight year.

Income has fallen so low, in fact, that when you adjust for inflation, the median family has the same income today as it did in 1967 — 45 long years ago!

>> THE INCOME GAP IS WIDENING ALARMINGLY: The Census Bureau is also reporting that the movement of income away from the middle class has just hit a record high.

That’s terrible news: Typically this kind of increasing disparity in income occurs just before economic calamities — and today, it’s more extreme even than before the 1929 stock-market crash and the Great Depression!

>> U.S. POVERTY IS AT ALL-TIME RECORD HIGH LEVELS: Finally, as if to add insult to injury, the Census Bureau also reports that a staggering 46.2 million Americans now live in poverty!

And not only isn’t the Fed HELPING … its failed efforts to revive the economy are creating a second crisis:

Thanks to the Fed’s past money-printing gambits, the Producer Price Index just jumped 1.7% in August — hands-down the biggest surge in producer price inflation going back to June of 2009!

There’s not a lot to add.  Will points out that the best, and the only way, without usurping Congressional imperatives, for the Fed to ensure as many people find work as possible, is to simply manage the currency for its ability to transmit value, both for everyday transactions and for evaluating future prospects.  What the Fed is instead attempting, incidental to its attempt to reduce the real wage rate through inflation, is to create an illusion of expanding demand.  Like always, this will not end well.   Illusory demand prompts a real expansion in supply, i.e., output, which feeds on itself for a while in a positive feed-back loop, until the illusion is stripped bare and it is realized there was no real increase in demand, so that demand has now been vastly oversupplied.  Economic activity screeches to a halt. 

I still believe the economy drives off a cliff again by the end of the year, by late fall or early winter.  The pressures are again building.  The only question will be whether it crashes into a crumpled heap, or pops open its parachute for a smoother landing.  It would perhaps be the latter, except that the Fed used all the parachute cords to bind up the jalopy so it could continue careening its way toward the precipice.