Fed monetary easing is not stimulating economic growth, because interest rates are not the problem. The economy is in the midst of a period of lessened demand due to the consumer deleveraging ongoing since 2008. The article deftly makes these points but repeats the myth that there has been no inflation because of the monetary easing. This myth is very dangerous. People believe that the Fed might as well ease, because there are no adverse consequence to Fed action. This is simply not true.
These are some of the inflationary effects of Fed Action since 2008:
- We have witnessed two oil price spikes, one during 2008 caused by easy credit and the current one caused by jawboning by Messrs Bernanke and Draghi since late June.
- The stock market is correlated to more stimulus promises. First, it rose in the aftermath of easy money. Now, it rises on the just the promise of more just like Pavlov’s dog’ mouth watering at the sight of a treat.
- We are in the midst of a massive worldwide bond bubble with bond prices inflating ever since the beginning of the GFC. Remember, lower bond rates meaner higher bond prices.
- We have had bouts of price inflation in copper, iron ore and agricultural products among others.
- Food price inflation so steep that it has led to the Arab Spring and social unrest in places like India and China.
Just because all of the inflationary pressures are not apparent in the United States does not mean they do not exist. In fact, I believe that further Fed action has a chance to destabilize the geopolitical situation: