A Pointed Question for Janet Yellen


Yesterday was a good day for almost everyone on Wall Street. The Dow went up. Gold went up.

But the poor bondholders suffered a loss. The bond market seems to think its biggest buyer will bow out.

The proximate cause of both rising prices and falling ones was the news from Washington.

First, Congress voted to suspend the debt ceiling, without quibbles or conditions, until next year. So, the sky’s the limit on US debt…and on stock prices.

Second, Janet Yellen made her debut in Washington with this question from Republican Jeb Hensarling from the sovereign state of Texas:

Are you a sensible central banker, and if not, when will you become one?

It was a coded challenge, based on Mrs Yellen’s 1995 statement that a sensible central bank follows formulas…rules…rather than making ad hoc decisions.

Mrs Yellen replied that, yes, she was sensible, and yes, a central bank should follow transparent rules…

…but that she would continue making it up as she goes along. CS Monitor reports:

For more than a year, the Fed’s policy committee has said it wouldn’t consider a hike in the short-term interest rate until unemployment dipped to 6.5 percent, as long as inflation didn’t exceed 2 percent. Today, with the jobless rate already down to 6.6 percent, Fed officials including Yellen are saying the 6.5 percent rate is not a “trigger” for raising rates.

In practice, Yellen told lawmakers Tuesday, she’ll be looking at a range of labour-market and inflation data to assess when to raise rates. It’s likely the Fed will maintain ultra-low interest rates “well past the time that the unemployment rate declines below 6-1/2 percent,” she said in the written testimony prepared for Tuesday’s hearing.

So, QE could go on…

It looks like Richard Duncan was right. The macro-strategist told us that the US Federal Reserve provides ‘excess funding’ of America’s credit needs and that this funding drives the stock market. There should be enough to keep the stock market up during the first half of 2014, he said. Then, if the Federal Reserve keeps to its tapering promises, watch out.

This source of funding is like manna from heaven. No calloused hands earned it. No drop of sweat stains it. No furrowed brow figured out how to make it.

Five years ago, we would have known for a certainty that the Fed could not add $3 trillion of it to the monetary base without grave and ghastly consequences. But month after month goes by with no such consequences…nor even the top of their masts visible on the horizon…what are we to think?

When the crisis of ’08-’09 arrived, our prediction sounded like a tour itinerary: first Tokyo… then Buenos Aires.

We meant that the US economy was entering a period of deleveraging much like that of Japan. Paying down, defaulting on, writing down and writing off debt would be long and hard, we thought. Then, when that was over… we would find ourselves in a period of inflation, maybe even hyperinflation. This could come about in one of two ways.

When the deleveraging was complete, people would begin to borrow and spend again. This would increase the money supply – especially with the larger monetary base to draw upon – and drive up prices.

Or, desperate and impatient to revive the go-go days before the crisis began, the Fed might resort to direct monetary stimulus (some sort of helicopter drop). The Fed surely has a contingency plan on the subject. A sensible central banker wouldn’t think of doing it. But we are in an age of improv monetary experimentation. We shouldn’t rule anything out.

US consumer prices – by the official measure – are rising a bit less than 2% per year. Economists worry not about inflation but about the lack of it. We are still very much in Tokyo, not Buenos Aires.


Bill Bonner
for The Daily Reckoning Australia

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Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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