The Mother Of All Blow-Off Tops, Part 3

When it gets down to the lick-log, as former Senate GOP leader Howard Baker put it, there is no good public policy reason for a new round of Fed rate cutting and monetary ease. Not this year nor for years to come.

That’s because the primary effect of interest rate cutting and money-printing is a temporary eruption of stock prices. Time and again, however, the resulting speculative bubble keeps inflating until it explodes in a fiery financial crash, with the resulting severe losses being rapidly passed down the line to the last main street sucker standing on his depleted 401k.

Of course, the Fed and its Wall Street shills claim they are doing god’s work. That is, stimulating a higher level of economic growth, jobs and prosperity than would otherwise occur on the free market under its own steam—along with a greater level of financial stability and just the right amount of inflation to optimize the purported Phillips Curve trade-off between employment and inflation.

In that context, it comes down to the supposed magic of the Fed’s 2.00% inflation-target, as measured by the PCE deflator. This exact level of inflation is claimed to be so potent as an economic and jobs elixir that even the risk of financial bubbles is held to worthwhile or at least an unavoidable corollary.

The problem with this thinly disguised rationalization for pleasuring Wall Street with repeated rounds of cheap money is that it’s a lot of damn nonsense that is readily refuted by the historical data. We’d even dare to call it “the science”.

Thus, in the heyday of America’s post-war prosperity between Q3 1954 and Q3 1963 the Fed clearly defied the Keynesian gospel as it is now preached and practiced at the Eccles Building. To wit, during that salubrious chapter in American economic history the Fed’s balance sheet grew by just 0.76% per annum and the inflation-adjusted Federal funds rate (purple line) averaged a positive 1.1%.

Fed Policy Q3 1954 thru Q3 1963: Balance Sheet Growth and Inflation-Adjusted Fed Funds Rate

Had they ever bothered to look at it, the stock peddlers of Wall Street, who otherwise pretend to be economists, would have broken into a fevered sweat at the mere thought of negligible central bank bond-buying and positive real interest rates nearly all the way through the period.