The Curse Of Keynesian Central Banking, Part 5

Keynesian central banking is the mortal enemy of capitalist prosperity. And if you take off your recency-bias goggles the evidence is plain as day.

What we are saying is that the Fed had virtually nothing to do with the economic growth delta’s reported each quarter or even for a string of quarters. And that’s notwithstanding all the back-patting in the Eccles Building and the financial press’ unexamined presumption that what the Fed claims is the actual truth of the matter.

The fact is, the quarterly GDP prints are riddled with measurement noise; represent the underlying propensity of capitalism to relentlessly shinny up the slope of growth unless blocked by the state; and are washed with the cross currents of the world’s $80 trillion economy that are far beyond the Fed’s ability to control.

We prefer the figure for real final sales because it is GDP at the end of the day, but it excludes the short-run stocking and destocking fluctuations which distort the current period headline figure, even though they  end up in the wash over time.

However, a drunken sailor would likely have a steadier hand on the tiller than represented by the annualized growth rate chop in the chart below. During the eight and one-half years since the US economy steadied itself from the Great Recession, quarterly growth has exceeded 4% four times (BTW, twice each under Obama and Trump), printed short of 1% eight times and the rest of the time was all over the lot in-between.

Nor does the chop go away entirely when you average over six month periods. Bernanke had the gall to claim the Fed had perfected the art of business cycle management to such a fine-tuned degree that the present era could be called the Great Moderation.

We think not. The pace of economic expansion fluctuates greatly even in the medium term, and we think there is not much evidence that the Fed has moderated anything.

What it does do is essentially wave its arms. That is, it claims credit for adroit policy when the bars in the chart are on the higher end of the range, while gumming about what it believes to be the external forces causing lower end outcomes (trade war headwinds being the latest), musing about how long they might last (transient or not) and postulating what the Fed’s current and potential policies (forward guidance) might do to ameliorate sub-par growth prints.

The truth is, this is all self-serving Fed-speak. It’s an arbitrary narrative of the central bank priesthood that is not based on any quantitative science whatsoever with respect to the exact transmission channels through which its policies operate or the lag time between action and effect.

But if you can’t quantify either the channel or the time lag, you can say anything. And they do.

In the best case, therefore, Fed policy making and implementation is an arbitrary economic art, and in the more realistic sense its just central banker voodoo.

They try to conger macroeconomic outcomes with tools—interest rate pegging and bond buying—that can’t possibly move a $2o trillion US economy or the $80 trillion global economy in which the former is  inextricably intertwined, and by the day and hour owing to massive global financial markets and instantaneous global communications networks.

In short, the Fed’s claims to be actively managing the US economy and business cycle are pretty much fake. Whatever they said about the ups and downs in the chart below—other than the 2008 meltdown and Great Recession—-was just self-serving narrative.

And the deep collapse in the shaded recession columns of the chart were the collateral effects of bursting financial bubbles, which they Fed denied will they were inflating, and accepted no responsibility for after they burst.

However, when it comes to the longer-run trend of things the untoward and unintended impact of the Fed’s incessant “policy” making and fine-tuning is plain to see. That is, the more intrusive the Fed has become, the worse have been the main street outcomes.



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