Why is the Fed Not Printing Like Crazy?

I try to read all sides of the economics blogosphere, and try and grasp the ideas of even those who I would seem to radically disagree with.

One thing that the anti-Fed side of the economics blogosphere seems to not fully appreciate is the depth of disappointment with Ben Bernanke from the pro-Fed side. For every anti-Fed post bemoaning Bernanke’s money printing, there is a pro-Fed post bemoaning Bernanke for not printing enough. Bernanke, it seems, is tied to everybody’s whipping post.

And in fairness to the pro-Fed side, the data shows that the Fed is not printing anywhere near as much as its own self-imposed interpretation of its mandate demands. (Of course, I fundamentally disagree that price stability should be interpreted as consistent inflation, but that is an argument for another day).

Scott Sumner notes:

Recall that the Fed tries to keep inflation close to 2.0% and unemployment close to about 5.6% (the Fed’s current estimate of the natural rate.)  One implication of the dual mandate is that they should try to generate above 2% inflation during periods of high unemployment, and below 2% during periods of low unemployment.

In July 2008 unemployment rose above 5.6%, and it’s averaged nearly 9% over the past 46 months.  So the Fed’s mandate calls for slightly higher than 2% inflation during this 46 month slump.  Last month I reported that the headline CPI had risen 4.6% in the 45 months since July 2008.  Now we have the May data, and the headline CPI has gone up 4.3% in the 46 months since July 2008.  So the annual inflation rate over that nearly 4 year period has fallen from a bit over 1.2%, to 1.1%.

Raw data:

Note that downward slope in inflation into 2012?

That’s the Fed not doing QE3 when everyone (especially gold prices) expected them to, and when their own self-imposed interpretation of their mandate calls for them to inflate more. And nobody can say that the Fed is out of bullets; central banks are never out of bullets — there was a time when a central bank was limited to the number of zeroes it could fit on a banknote, but in the era of digital currency, even that limit has been removed.

Here’s the younger Bernanke’s views on the subject:

Franklin D. Roosevelt was elected President of the United States in 1932 with the mandate to get the country out of the Depression. In the end, the most effective actions he took were the same that Japan needs to take — namely, rehabilitation of the banking system and devaluation of the currency to promote monetary easing. But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment— in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done. Japan is not in a Great Depression by any means, but its economy has operated below potential for nearly a decade. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn’t more happening?

To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work. Perhaps it’s time for some Rooseveltian resolve in Japan.

And here’s Paul Krugman pulling a Bernanke on Bernanke:

Bernanke was and is a fine economist. More than that, before joining the Fed, he wrote extensively, in academic studies of both the Great Depression and modern Japan, about the exact problems he would confront at the end of 2008. He argued forcefully for an aggressive response, castigating the Bank of Japan, the Fed’s counterpart, for its passivity. Presumably, the Fed under his leadership would be different.

Instead, while the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers. The U.S. economy remains deeply depressed, with long-term unemployment in particular still disastrously high, a point Bernanke himself has recently emphasized. Yet the Fed isn’t taking strong action to rectify the situation.

It really makes no sense — except in terms of politics. I really believe that we have reached a point where the Fed is afraid to do its job, for fear of being accused of helping Obama.

I am fairly certain the answer to why Bernanke isn’t increasing inflation when his former self and former colleagues say he should be is actually nothing to do with domestic politics, and everything to do with international politics.

Most of the pro-Fed blogosphere seems to live in denial of the fact that America is massively in debt to external creditors — all of whom are frustrated at getting near-zero yields (they can’t just flip bonds to the Fed balance sheet like the hedge funds) — and their views matter, very simply because the reality of China and other creditors ceasing to buy debt would be untenable.

Why else would the Treasury have thrown a carrot by upgrading the Chinese government to primary dealer status (the first such deal in history), cutting Wall Street’s bond flippers out of the deal?

As John Huntsman (in his days as ambassador to China) reported in a cable back to Washington, China is keen to stop buying low-yield treasuries and start buying other assets, but the US is desperately pushing China back toward treasuries:

The Shanghai-based Shanghai Media Group (SMG) publication, China Business News:

“The United States provoked a trade war again by imposing high anti-dumping duties on Chinese-made gift boxes and packaging ribbon. China has become the biggest victim of the U.S.’s abusive implementation of trade remedy measures.

The United States no longer sits still; it frequently uses evil tricks to force China to buy U.S. bonds.

A crucial move for the U.S. is to shift its crisis to other countries – by coercing China to buy U.S. treasury bonds with foreign exchange reserves and doing everything possible to prevent China’s foreign reserve from buying gold.

Today when the United States is determined to beggar thy neighbor, shifting its crisis to China, the Chinese must be very clear what the key to victory is.  It is by no means to use new foreign exchange reserves to buy U.S. Treasury bonds.  The issues of Taiwan, Tibet, Xinjiang, trade and so on are all false tricks, while forcing China to buy U.S. bonds is the U.S.’s real intention.

And that, in a nutshell, is why Bernanke is not printing nearly as much as Krugman wishes. In my view only a brutal 2008-style collapse can bring on the kind of printing — QE3, NGDP targeting and beyond — that the pro-Fed blogosphere wishes to see, because it is only under those circumstances that China and other creditors will happily support it.

To a heavily-indebted nation, creditors have big leverage on monetary policy.

45 thoughts on “Why is the Fed Not Printing Like Crazy?

  1. The real reason is that Bernanke is not actually quite as stupid as his caricature.

    He realizes that QE does a lot more for food and energy prices than it does for wages or employment.

    • Bernanke on Roosevelt:

      But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment— in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done.

      Experiment. If he thinks QE is weak sauce why is he not trying NGDP targeting or any of the other various policy options?

      Nouriel Roubini:

      Unconventional policy could include targeting the 10-year Treasury at 1 percent, doing credit easing rather than quantitative easing, targeting nominal GDP, price-level targeting and lots of stuff that is more esoteric. Eventually if everything goes wrong, they can even buy equities.

      Bernanke’s hands are tied. It’s political. But it’s not domestic like Krugman thinks.

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  3. The could have been thretened by China. Once Romney gets into the Whitehouse and makes demanding threats, China will issue Sino bonds, take a bath on US Treasuries and attract foreign capital.

    November 2012 is the time where the USA currency collapses, and China takes its place as Global leader.

      • This period is the point where the US administration is most vulnerable. The Romney team will be confused and unsure of their new roles. Wise Chinese leadership will use this period of confusion to provide certainty for Bond vigilantes.

        If China offered 6 percent or the Fed offered 6 percent I would be buying Yuan over USD!

        • Romney team is full of vicious ex-Bush neocons looking for fights. However I am pretty sure the Generals in the Pentagon can control them and prevent them trying to launch a war like they did with Bush and Iran.

        • China has it’s own mascinations to deal with with it’s change of leadership. I wouldn’t assume that at this moment it’s leadership is either stable or wise.

    • So what your saying is, US labour costs are cut in half, and this DOESNT put 200millon chinese people out of work?
      It in fact makes China king of the world?

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  5. The Fed doesn’t have nearly as much power as people believe. In a debt crisis, it gets to the point where people no longer are interested in taking on more debt, nor are banks willing lenders [to poor credit risks and/or they are capital impaired].

    As far as China is concerned, if they are + USD40B or so per month in trade, they have no other choice but to buy USTs. This is a symbiotic relationship. Besides, what else are you going to do with that kind of money every month? Is there any other market in the world that could absorbs that kind of cash? Not even close.

    Although the Fed could [and might] partake in all kinds of additional stupidity [like to BoJ], Bernanke is not quite that desperate [yet]. People need to understand that the bullets already fired have hit their target squarely, resulting in huge profits for the FIRE economy [especially banking], massive transfer of worthless assets to the public, and scores of financial law re-written in favor of Finance.

    The money interests have certainly not wasted this crisis thus far!

    • Which is why Ambrose has argued the Fed should be buying other stuff, like newly issued shares in mid caps after expanding ect

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  9. When natural gas prices go up more than 50% in three months, that’s not price stability.
    When oil drops 27% in two months, that’s not price stability.
    When the price of a 30 year bond goes up 6% in three months, that’s not price stabilty.

    If you want price stability, you’ve got to clamp down on the casino games that determine prices. Bernanke’s a coward, plain and simple. The Fed chair is a cop’s job and we’ve got a school teacher in it.

    When house prices started rising +10% a year, that was price instability, however the Fed willfully ignore this, choosing to look at things like “rent equivalents”. Literally rationalizing the price instability staring them in the face away.

    When the real estate bubble popped, the fed threw away rent equizalents and suddenly started concerning themselves with nominal prices to save the banks from the consequences of the Fed’s inaction.

    How can you expect the guy who never understood what he was supposed to be doing to suddenly get it?

    • Mark McHugh – all inflation statistics are manipulated. Changing from rent equivalents is part of the manipulation. Anything to hide the real inflation and price increases we’ve been subjected to.

      I agree with you, but I go one step further and say that HE KNOWS WHAT HE IS DOING. He is a puppet being told what to do. He DOES NOT WORK FOR YOU. He works for the FINANCIAL ELITE and BIG CORPORATIONS. They’ll use you if they happen to think you can help them get richer, but they are not working for you.

      After the dot.com crash, they purposely lowered interest rates in order to re-inflate, which brought us the housing bubble. The elite and Bernanke knew what was going on. They quickly started pumping out mortgages to anyone who could breathe, collecting fees, securitizing the mortgages and selling them off to our yield-starved pension plans (who saw what was happening in 2006, that these were anything but AAA, and stopped buying), which led to the mortgage mill coming to a grinding halt. Investors, who bought almost half the houses in the four bubble states, walked away very quickly.

      Bernanke and the financial elite set up systems in order to maintain their power. They know exactly what’s going on at all times. This is all planned, all of it.

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  12. Excellent as always.
    I’ve been argueing from the start, if you are going to print, print big (multiples of GDP, not fractions)

    Its interesting to have some solid back up for why I’ve been argueing it 🙂

    • Trt, counterfeiting is not going to solve any problems.

      What the Fed does is similar to Big Pharma. The drug companies give away samples to get patients hooked [on treating symptoms instead of addressing etiologies], and then slams them when it comes time to get their next fix.

      In other words, the Fed makes it easy for the commercial banks to lure the serf to the table, give them a wiff of easy money [no money down, no first payment, arm’s, and all the rest], and then slap-on the electronic shackles [for life].

      Under your plan, we might as well send everybody a check for USD1B. That would really take care of the problem!!

      • It would be nice, to first explain the value placed on anything. Get back to basics, and prove what you are worth, and not backing it up with a fiat currency.

    • You’re an idiot. Money represents effort/value, you can’t make it out of thin air! Printing now is reaching into the future and grabbing at wealth. IT has to be paid of at at some stage!

  13. TrT – so we blow the biggest credit bubble in history, completely f*&k up the total economy, and what, we continue to blow?

    The only people who want to blow some more are the people with a vested interest: banks, debtors, stockholders, gold bugs, commodity speculators.

    I’m tired of vested interests who could care less about their country and more about their next fix. For every winner there is a loser. It’s about time the people who created this mess take the losing end. They played and they lost. Suck it up.

  14. “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

    “Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.”

    – From an essay by Frédéric Bastiat in 1850, “That Which Is Seen and That Which Is Unseen”

    Bernanke and Krugman – they pursue a small present good that will be followed by a great evil to come.

    We never had any growth; it was all just debt. The debt must be paid back or defaulted on. It will be painful, but only for a short time. Protect all depositor money, force the insolvent banks into bankruptcy and then split them up.

    We must pursue a great good to come, at the risk of a small present evil.

  15. Is Henry Ford responsible for the holocaust? I always wondered how an obscure Adolf Hitler could raise the necessary funds to raise a Political campaign. Having tried to raise one myself, it is almost impossible without time resources and funding. No one has the mesmerising power of a massiah. Hitler praises Ford in Mein Kampf. Ford met Hitler.

    Sherman Tanks were powered by Ford engines.


    The Fed is not printing now, because the currency is effectively toast. This is the calm before the storm. December 2012 is currency collapse in the USA. War should not follow to soon after.

  16. Impermanance
    “Under your plan, we might as well send everybody a check for USD1B. That would really take care of the problem!!”

    I believe I worked it out to be $100,000.

    It really does take care of the debt problem, doesn’t prevent another though.

    • I would use the 100,000 to buy goods and services that are susceptible to demand push inflation, just to skew the statistics for the month. Hang on, so will everybody else.

      We’ll see hyperinflation in Trash Magazines, McDonalds, and Chocolate bars. And don’t start me about cigarettes and booze!

      Then they will complain their mortgage is underwater!

      • Under such a plan, the law wold be that the money would go to your creditors first. You wouldn’t see a penny if you have large debts.

  17. I’m not sure I agree with your reasoning re China though it is about as plausible an explanation as any other. I would venture the reason he’s not printing as much has more to do with sustaining the Fed’s credibility and stature. Given succesive rounds of QE not moving the needle that much – more QE that results in the same would reveal that the emperor in fact has no clothes. Bernanke is trying to delay that possibility as long as possible and conserving his powder for a serious crisis.

    • I think everyone knows what power the Fed has: the power to inflate, to reflate, and to hyperinflate. That, really, is all. It does not and has never had the power to engender a recovery.

      People with treasuries and dollar-denominated assets are using their leverage to prevent the Fed using its inflationary powers. That is not just China, by the way, but they and the ASEAN bloc are certainly the biggest force.

  18. Hi!, Patrons Of Zizonomics Et Al:

    No matter how much everyone is elaborately discussing about economics these days and no matter in what context, I will turn 70 August 05, 2012 with no prospects of achieving any sense of prosperity all those years, although working two jobs which adds up to 75 accumulated working years. Will the next generation be able to go the distance as well?


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