Let's Ignore the Law

Hedge fund managers long the market (whether in spread product or stocks),  may well like the Fed to do what is proposed below, and damn the torpedoes. Just think about the bonus possibilities!

As CNN Money informs us, hedge fund manager Dan Arbess has a cunning plan he wants the Fed to implement:

 

“Hedge fund manager Dan Arbess thinks the Federal Reserve should use its 'printing press' to funnel money directly to the Treasury instead of simply buying more bonds

Speaking at the Milken Institute Global Conference Wednesday, Arbess said that Fed chairman Ben Bernanke could do a better job at keeping his "Helicopter Ben" nickname. In case you've forgotten, Bernanke was given that moniker during the financial crisis when he suggested dropping money from a helicopter to fight deflation.

Arbess knows debt. He's sometimes called a vulture investor since his multibillion dollar hedge fund Xerion invests in troubled companies around the world. He said the Fed is seeing diminishing returns even though it continues to increase the size of its balance sheet.

"The growth of the money supply has been anemic," said Arbess. Money is sitting in banks instead of making it back into the economy, he said, noting "Quantitative easing is starting to reach its limits."

Here's where "overt monetary finance" or "helicopter money" comes in, said Arbess, explaining that the Fed could bypass fiscal policies that are currently hurting the economy, such as the sequester, and give money directly to the Treasury.

But that may go against the Fed's mandate. The central bank is strictly tasked with using monetary policy to fight inflation and high unemployment.

Arbess said it's the government that's the problem. Fiscal policy or profligate spending is preventing the Fed from achieving its goals.

Bernanke said pretty much the same thing Wednesday. The Fed released its monetary policy statement during Arbess' panel, and it explicitly criticized the government for "restraining economic growth."

 

(emphasis added)

First of all, there seems to be a grave misunderstanding here about what the Fed actually meant when it asserted that fiscal policy is currently 'restraining economic growth'. The Keynesians populating the Fed's board surely did not mean to indicate that the government is spending 'too much'. On the contrary, they were very likely indicating that it isn't spending enough. It probably wasn't really meant to be a critique either, rather it was an attempt to preemptively pass the buck and assign blame should the economy tank.

Secondly, what Arbess proposes is actually illegal. It is not merely 'clashing with the Fed's mandate' – it is expressly forbidden for the Fed to fund government debt directly. We have explained in detail why this is so in 'Quantitative Easing Explained' (scroll to 'The Mechanics of QE'). In brief: directly crediting the treasury with newly printed money would – assuming a 10% minimum reserve requirement, which is a rather generous assumption –  be potentially ten times more inflationary than buying bonds in the secondary market. It wouldn't take long for the currency to become utterly worthless that way, but we take it that this is of course the point: Mr. Arbess believes the economy can be 'helped' by means of more inflation. Not to mention that it would almost certainly help his positions, at least in the short term.

The fact remains though that what Mr. Arbess proposes is currently definitely not legal. Not yet, anyway. 

 

The Money Supply

To argue that the money supply is 'barely growing' is simply nonsense. In mid 2008, money TMS-2 stood at approximately $5.4 trillion. At the beginning of 2013, it stood at $9.4 trillion. There has never been such massive growth in the US money supply in such a short time in the entire post WW2 era.

There was a brief slowdown in money supply growth earlier this year, as the FDIC's unlimited deposit guarantee lapsed and euro-dollars returned home due to the euro area debt crisis calming down, but money supply growth has resumed at a brisk rate in April and there can be little doubt that 'QE Infinity' will continue to push it up. This should ensure that plenty of bubble activities are inaugurated, which will eventually lead to a major bust – a bust that may well make 2008 look like a walk in the park, given the much greater expansion of the extant money supply during the recent echo bubble.

Of course this flood of money has thoroughly distorted prices already and constitutes a 'war on savers'. Savers are practically forced to take on ever more risk in order to preserve the purchasing power of their savings (see also our discussion of bond funds entering the stock market lately). At the same time, this forces them to bear risks that they actually don't want to bear. This is what is generally referred to as 'financial repression' these days. A simpler and just as accurate term would be 'theft'.

 

Conclusion:

It is quite amazing that even in the face of the Fed expanding its 'QE' program to $85 billion per month, some people think that it is still not printing fast enough. Never mind that money printing can only damage the economy further and that the extent to which it appears to be helpful is nothing but a dangerous and quite temporary mirage. In reality the economic activities incited by loose monetary policy only consume scarce capital. This capital consumption is erroneously regarded as representing 'profits', due to the fact that economic calculation has become distorted right along with prices. In the end, the central bank can certainly print us all into the poorhouse (except those who take the necessary precautions, along with the tiny class of speculators that always tends to profit from inflationism). What it cannot do is create a single iota of real wealth. Why anyone would want this process to accelerate is beyond us.

 


 

 

 

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Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

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