Monday, November 8, 2010

The Deeper Game: Managed Deflation

On the heels of the Fed's announcement of QE2, the Fed today announced the results of it "Senior Loan Officer Opinion Survey on Bank Lending Practices," which Calculated Risk summarizes, stating "in general banks have stopped tightening standards (they are alredy very tight) and demand has stopped falling (there is little demand for loans)."

A couple of things to note.  First, this report only discusses lending to households and non-financial businesses.  I don't know whether there is a similar report for lending to financial institutions, but the banks are very secretive (and the Fed protects that secrecy), so I doubt it.  Second, the FOMC must have known the results of this report, but they went ahead and announced QE2 anyway. 

Got that?  The Fed knew last week that adding more liquidity to the system would have no direct effect on households and non-financial businesses, but they went ahead and announced QE2 anyway.

What does this mean?  It confirms that the Fed is not even pretending to follow its dual mandate of price stability and maximum employment.  Yes, Bernanke says he's trying to combat disinflation/deflation by creating inflation (you know, an increase in the money supply), but he knew last week that none of the QE2 "money" can or would find its way into the real economy through lending, increased employment, or higher wages.  In other words, he knew that QE2 would have no impact on M0 or M1 (and perhaps M2).

He also knew last week that a lot of the QE2 money had already found its way into speculation in the commodity markets, as he acknowledged that the prices of staple commodities were rising.  All this will do is shift spending away from discretionary goods into necessities, to the detriment of non-financial businesses and to the benefit of financial speculators (aka the banks). 

The screwflation will continue until the next round of layoffs, which will cause a tumble in the commodity markets, which the banks will have shorted by then as many from the "lower rungs of the rich" will have piled into the trade, just in time to get fleeced.