Federal Reserve Is "Running Out of Ammunition"
AUSTIN, TEXAS – March 25, 2019
When leading mainstream newspapers, magazines and other media begin to talk about the prospects of the US economy and the actions of the Fed, then even the everyday reader begins to suspect that this is no accident.
Greg Ip, a leading economic columnist for the Wall Street Journal writes about the policy of the US monetary authorities: “The Federal Reserve now believes its monetary policy is back to normal. That should worry you: if this is normal, then the Fed has precious little ammunition for when economic conditions again turn abnormal.”
Bloomberg writes: “Various indicators of recession (US economy) are sending alarming signals.”
"The US bond market smelled a recession," echoes the New York Times.
Leading publications in the rest of the Western world also show no optimism.
“Those are not settings (monetary policy) that would reflect the super-charged growth targets Trump said he could deliver. Instead the Fed’s sudden shift in thinking and policies ought to have him worried about his re-election prospects and the rest of us worried about an even more significant global slowdown,” writes Stephen Bartholomeusz, the leading economic columnist of the Sydney Morning Herald.
What happened? Where does this pessimism come from?
Last week, on March 20, the Fed made the widely unexpected decision to keep interest rates unchanged, and also stated that there were no longer plans for a rate increase in 2019. Moreover, it spoke about the reduction rate and the imminent termination of the process of the sale of the portfolio, accumulated on the Fed balance sheet after the 2008 crisis.
And now the translation “from economic to English”: The Fed has concluded that the US economy and corporate sector are so weak that raising rates to a level slightly higher than the current 2.5% will lead to serious economic problems. Moreover, the US bond market is so weak that it will not sustain the sale of those $2.1 trillion US Treasury bonds that the Fed bought in the past to stimulate the US economy.
American (and not only American) economic journalists and experts immediately understood everything and began to write that the US was facing an economic crisis. Moreover, the Fed is already experiencing a "shortage of ammunition" in terms of opportunities to combat it.
The upcoming recession in the US and in the global economy as a whole is likely to again be “flooded with money” (in the sense of newly printed dollars), and this always leads to interesting consequences.
It is important to understand the historical context. In 2009, the head of the Fed Benjamin Shalom Bernanke explained that “printing money” and the purchase of US government bonds by the Fed, as well as “toxic” mortgage bonds, were temporary measures. When 60 Minutes reporter Scott Pelley asked Bernanke if the Fed was printing money, his reply was, “Well, effectively. And we need to do that, because our economy is very weak, and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation.”
The problem (and the main reason for pessimism) of American journalists today is that it became finally clear on March 20: No one is going to fulfill Bernanke’s promise. The rate will not be raised, the money supply will not be compressed, the bonds that were bought for “printed money” will not be sold off. You can make a comparison with medicine: If a doctor suddenly declares that you need to take medicine again (expensive and with serious side effects), that means the patient has not recovered, despite all the positive predictions that were made before.
Moreover, this change in attitude means that treatment is not effective enough and is unlikely to be effective in the future. CNBC reports on the reaction and forecast of the Nobel Prize laureate in economics Paul Krugman, putting a disappointing verdict in the title: "Paul Krugman expects a global recession this year (or in 2020) and warns: ‘We have no effective answer.’”
Of course, the global recession is bad, and if the forecast is implemented by Krugman and other economists who do not see any particular reason for optimism in the future, the world economy will also be under pressure.
However, the greatest pressure will certainly be experienced by leading developed countries, which are more dependent on financial markets than on the real economy. After all, dollars can be printed just like the euro, yen and any other "paper" assets. Actually, this is how all the central banks will once again try to save the world economy. However, it is impossible to “print” oil, gas, grain, metals, diamonds and other real goods. So, in the conditions of total monetary incentives in the US (or in general throughout the West), all exports in relative terms will become more expensive.
The only serious risk in this situation is that the US has a bad tradition of solving economic problems by force.
On the one hand, “the war will write off everything,” and on the other, a successful war can really turn a country that could compete with American economic power into ruins, as happened twice in the 20th century. If the Fed "runs out of ammunition," then the Pentagon has enough real ammunition, and the CIA has enough money for "color revolutions."
But if this time the power methods of destroying competitors do not work, then Washington will have to say goodbye to world hegemony and economic power.