No Kidding

Economists Warn Fed Risks Losing Control (via Denninger). 

Some witchdoctors dowsers economists, including a former Fed governor, have decided that money printing could get out of hand, even if you call it quantitative easing.  It could even result in (gasp) inflation.  It's really insightful:  The combination of a massively expanded central bank balance sheet and an unsustainable public debt trajectory is a mix that has the potential to substantially reduce the flexibility of monetary policy ....


Who would have thought that printing money would paint the central bankers into a corner? 

The central bank is currently purchasing $85 billion a month of Treasuries and mortgage-backed securities, following two previous rounds totaling $2.3 trillion, in an effort to lower an unemployment rate stuck near 7.9 percent. Once the economy strengthens, the central bank plans to unwind its balance sheet by raising interest rates and selling many of the assets acquired over the past four years.

To be sort of fair, I understand that, since they are all bankers and buddies, they felt that they had no choice except to try and keep the financial system afloat for a while.  The idea -- the hope was, I'm sure, that things would pick up, and the Fed could shift the burden, and if federal revenues were enhanced, that, coupled with some sensible spending cuts would close the gap.  They could not reckon with the political regime of a Chicago mobster like Obama & Friends.  The political calculation of expanding the reach of government, of destroying the entrepreneurs, of creating more and more extensive government dependence took priority over the raw reality of economic considerations.  It was what was good for Obama, not America. 

Now, of course, there is no one interested in buying those assets.  Europe is coming apart.  The Chinese and the Russians are hunting for gold, and Bernanke is insulating his mansion with Treasuries. 

Fiscal dominance refers to a situation in which a central bank is forced to purchase government debt and finance deficits through inflation. If the central bank does not do this, interest rates will rise and the economy will contract and the government could even default, leading to a crisis that would cause an even worse contraction, the authors say. The central bank “will in effect have little choice,” they write.

The problem is that the Fed is supposedly obligated to keep inflation at 2% or less.  They have done this by playing fast and loose with the statistics and claiming that "core" inflation was 1.6% last year.  We all know it was higher than that but as long as the fiction can be maintained, the Fed can leave interest rates at or near zero.  Once they are forced to admit inflation is getting out of hand, they will be pressured to jack up rates.

My guess is that this paper is sort of a shot-across-the-bows, not so much for the Federal Reserve, as for the Obama Administration.  It will be interesting to see if the thugocracy takes note.