There is much debate these days about the powers of the Fed and what they can do to strengthen the economy (if anything). Regular readers are familiar with my position – monetary policy matters little in times of a balance sheet recession. It is not the supply of money that matters, but the demand of money when the private sector is experiencing a period of deleveraging. This renders the Fed largely powerless.
I’ve been beating this dead horse since long before Ben Bernanke initiated his outrageous trickle down bank bailout policies, but it’s only just now becoming evident to the mainstream media that this might be the case. The bank bailout and the gross ballooning of the Fed’s balance sheet has done practically nothing for Main Street. If that isn’t clear by now then people need to pull their heads out of the sand. Despite this, we continue to hang on every word out of this powerless Federal Reserve. We are all waiting for Ben Bernanke to save us from economic downturn. Why?
What’s even more absurd is that the shrieking for more quantitative easing is growing ever louder. I know QE is very fancy sounding and even more confusing sounding, but it is nothing more than an asset swap. The Fed swaps particular interest bearing assets for deposits. When will people realize this and stop making QE out to be something it is not? It is not inherently inflationary. It is not the “printing of money” that the deficit terrorists ignorantly label it as. In its very simplest form it is nothing more than an asset swap. That is all. The Fed swaps deposits for interest bearing assets. If anything, you could argue that this is an inherently deflationary event.
Next time you hear someone shrieking about the dangers (or worse, the benefits) of QE just put them on mute. Take them off your list of credible sources. STOP LISTENING TO THEM. These are clearly people who have a very low level of understanding when it comes to the way our monetary system works and what we are currently experiencing. The Fed is practically powerless in this environment. Mr. Bernanke predicted NONE of this. When will we stop relying on him to get us OUT of this? The sooner the better in my opinion.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.