Ambrose Evans-Pritchard is out with a new post suggesting that the US is perilously close to political gridlock which is preventing the Fed from engaging in more QE and putting the country at risk of sliding into a “Japanese trap.”
His prescription calls for the Fed to make massive bond purchases but with a twist:
The Fed has an arsenal of neutron bombs if it wants to use them, and uses them correctly. It can engage in “monetary policy a l’outrance” as Maynard Keynes propsed in his Treatise on Money in 1930, before he lost his way with the General Theory.
Blitz the market with bond purchases, but do so outside the banking system by buying from insurers, pension funds, and the public. This would gain traction on the broad M3 money instead of letting it collapse (yes, the “monetary base” has exploded, but that is a red herring), working through the classic Fisher/Friedman mechanisms of the quantity of money theory.
This is quite different from the Fed’s QE which buys bonds from the banks and works by trying to drive down borrowing costs. While Bernanke’s ‘creditism’ is certainly better than nothing, it is not gaining full traction.
“Bernanke continues to babble on about futile credit easing: neither he nor his staff seems to appreciate the difference between purchases of assets from non-banks and from banks,” said Tim Congdon from International Monetary Research. Crudely, banks sit on the money. Others use it.
Mr Congdon said a $750bn blitz of QE done the right way would lead to 5pc rise in M3 over three months. “This would indeed transform the US economic outlook”. Instead, America drifts. It is already closer to a Japanese trap than Washington wants to admit, and may not escape from it for similar reasons of ideological paralysis.
It would take more than a little courage for Bernanke and friends to embark on such a mission. The first dollar that goes out the door to buy the bonds of a private enterprise is going to be met with howls about favoring this or that over the other. The more he buys, the more he will be second guessed. Congress and the administration are sure to try and use their powers to direct the money to their constituencies. More trips to Washington for drubbings in front of committees will be a certainty.
I hope he has the guts to try it. Compared to the half-baked proposals for more fiscal stimulus and serial housing initiatives that seem to be about all the administration has to offer at this point, Evans-Pritchard’s idea looks enticing. Meaningful tax legislation that would entail reform and investment friendly policies a la Reagan in the 80′s is probably a political non-starter, so that pretty much leaves us by default looking to the Fed.
Critics (and some of his colleagues) are going to paint new QE as potentially inflationary. They may be right but I’m not sure that we have much choice but to accept that risk and deal with those consequences if they arise.
Evans-Pritchard defines our current economic state as a “social depression” that is worsening. If that description is proper then unconventional intervention on the part of the Fed is not just warranted but required.