The contractionary stimulus

Record commodity prices. Rising energy prices. Over-indebted households. Countries on the edge of default. Unstable banks. It sometimes seems as if central bankers see these ills of our time as plagues sent by a vengeful god (or extraneous factors, in econospeak), rather than as what they surely are: the inevitable consequence of a decade of irresponsible monetary expansion. Not that identifying the cause of the problems would make them any easier to solve, of course, but it might at least dissuade the Fed and others from trying to claim that the solution to problems caused by printing too much money is to print even more money. That could only be a good thing.

There was an interesting discussion about this on CNBC's pre-market show on Friday morning. The panel was speculating that the Fed is starting to realise that it is locked into a negative feedback loop: printing more dollars is driving down the value of the USD and, as most major commodities are still traded in dollars, pushing up the price of commodities. Wow, who would have thought that could happen?? Higher commodity prices, particularly for oil, are becoming a major drag on global growth, implying that the stimulus is having exactly the opposite effect from what the Fed intends. The view on CNBC was that the Fed would keep its fingers crossed that commodities would fall back in the next few months, but if that didn't happen -- and frankly there's not much reason to think it will as long as the monetary spigot is at full blast -- then it would start to remove the stimulus in the fall.

Just how open is that monetary spigot? Consider this little nugget from the pen of Dennis Gartman:

As for the Fed itself, the adjusted monetary base continues to rise skyward. Since the end of last year when the adjusted base was approximately $1.95 trillion it has risen to a stunning $2.475 trillion. This is high powered, and we fear inflationary, money of the first order, and we wish not even to annualize the number for it is mindnumbing in its implications without being annualised.

And this is happening at a time when monetary authorities around the world are supposedly looking to tighten conditions! A number of Fed governors, including the Presidents of the regional Federal reserve Banks in Minneapolis, Richmond, Dallas and Philadelphia, have been sounding more hawkish in recent days, and the markets are pricing in one 25 bp hike in the funds target before the end of the year. According to The Economist, however, it may not happen:

Markets habitually assign too much weight to the hawks, however. The real power at the Fed rests with its leaders: Ben Bernanke, the chairman; Janet Yellen, the vice-chairman; and Bill Dudley, the New York Fed president. Their views are more discreet but they are the ones that carry the day. At present they are sanguine about inflation and worried about unemployment, which means a rate rise this year is unlikely.

Bernanke's views are, as The Economist says, "conventionally Keynesian"; basically, he does not believe that inflation can get out of hand if there is a lot of surplus capacity (e.g. high unemployment). Thing about Keynes, though, is that he was never conventional. If he had encountered the type of monetary growth that the Fed is visiting on the world economy right now, and observed its apparently perverse effect on growth prospects, it's likely that his policy prescription would have been very different from Mr Bernanke's.