March 28, 2023

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Central banks are fighting the wrong war – the West’s money supply is already crashing

2 min read

Jerome Powell – Jonathan Ernst/Reuters

Monetary tightening is like pulling a brick across a rough table with a piece of elastic. Central banks tug and tug: nothing happens. They tug again: the brick leaps off the surface into their faces.

Or as Nobel economist Paul Kugman puts it, the task is like trying to operate complex machinery in a dark room wearing thick mittens. Lag times, blunt tools, and bad data all make it nigh impossible to execute a beautiful soft-landing.

We know today that the US economy went into recession in November 2007, much earlier than originally supposed and almost a year before the collapse of Lehman Brothers. But the Federal Reserve did not know that at the time.

The initial snapshot data was wildly inaccurate, as it often is at inflexion points in the business cycle. The Fed’s “dynamic-factor markov-switching model” was showing an 8pc risk of recession. (Today it is under 5pc). It never catches recessions and is beyond useless.

Fed officials later grumbled that they would not have taken such a hawkish line on inflation in 2008 – and therefore would not have set off the chain reaction that brought the global financial edifice crashing down on our heads – had the data told them what was really happening.

One might retort that had central banks paid more attention, or any attention, to the drastic monetary slowdown underway in early-to-mid 2008, they would have known what was going to hit them.

So where are we today as the Fed, the European Central Bank, and the Bank of England raise interest rates at the fastest pace and in the most aggressive fashion in forty years, with quantitative tightening (QT) thrown in for good measure?

Monetarists are again crying apocalypse. They are accusing central banks of unforgivable back-to-back errors: first unleashing the Great Inflation of the early 2020s with an explosive monetary expansion, and then swinging to the other extreme of monetary contraction, on both occasions with a total disregard for…

2023-02-08 01:00:00

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