Today on CNBC Rick Santelli brought up an issue that NOTES FROM UNDERGROUND has been discussing since Fed Chair Yellen spoke at a Chicago Fed Conference when she placed the names of three long-term unemployed people (as if the Chairwoman’s speech was a State of The Union Address). It is wrong for a Fed Chair to bring moral philosophy to the conduct of MONETARY POLICY IN A FIAT CURRENCY WORLD. The Fed’s role is to preserve the DOLLAR as a store of value even with the DUAL MANDATE. The United States bears an exorbitant privilege with the dollar as the world’s reserve currency, with all commodities priced in dollars. The exorbitant privilege comes with an exorbitant responsibility and that is the maintenance of the DOLLAR AS A RELIABLE STORE OF VALUE.
Santelli was correct to call attention to a quote from Chair Yellen in an article in the current issue of the New Yorker: “I COME FROM AN INTELLECTUAL TRADITION WHERE PUBLIC POLICY IS IMPORTANT, IT CAN MAKE A POSITIVE CONTRIBUTION, IT’S OUR SOCIAL OBLIGATION TO DO THIS. WE CAN HELP TO MAKE THE WORLD A BETTER PLACE.” (emphasis mine)
It is a noble desire of Ms. Yellen but it is not the basis for maintaining and preserving the value of the currency. Yes, Congress may be dysfunctional and as Senator Schumer has previously stated, “THE FED IS THE ONLY GAME IN TOWN,” the Fed is not the bailiwick of social engineering for good monetary policy will generate solid outcomes. It is important to pay close attention to the Senate hearings, especially the questions of Chuck Schumer, Bob Corker, Sherrod Brown and Elizabeth Warren. Senators Warren and Brown have been advocates of legislatively mandated macroprudential regulation to make banks rein in excessive speculation and leverage.
Now that Chair Yellen has made macroprudential tools the primary source of pursuing financial stability, Senators Brown and Warren will be looking for strong support on tightening bank regulations from the Fed chair. The operative phrase from the Fed chief will be enhancing resilience, which means forcing banks to build up vast pools of capital to prevent any type of systemic run on deposits. The problem for the markets is: What will be the impact from enhanced capital cushions in an economy that has very little credit creation and the effects of a zero interest rate policy?
***Tonight the Bank Of Japan announces its interest rate and monetary policy. It’s expected no change of rates and the BOJ is expected to keep on the path of buying about 7 trillion yen a month ($69 billion). The Japanese economy has seen certain sectors improve and even has risen above 1.2 percent, but the massive buying of Japanese Bonds (JGBs) by the Bank of Japan is creating a breakdown in the price of bonds and economic growth. In a Bloomberg article, “Kuroda Killing Data Sensitivity Risks Yield Surge” [Chikako Mogi], the BOJ’s QE program keeps JGB’s bid so there is no reliable barometer for inflation. It has been reported that some days the Japanese Bond market has zero trades and this is the second largest bond market in the world. Sometimes central banks through their policies can destroy the market signaling effects that capitalism needs to allocate capital in an efficient manner. The divergence between fantasy and reality is something that cannot continue forever and this is something the Fed and its zero money cheerleaders ought not forget.