The Fed CAN’T raise rates

24Nov14

“Are we really supposed to believe that the Federal Reserve is going to delay hiking rates because the CPI has been running a tiny fraction below the central bank’s 2.0% target?”

No, the Federal Reserve won’t delay draining reserves again due to CPI.  They’re going to delay draining reserves again BECAUSE THE BANKS ARE STILL ONE FAT-FINGER TRADE AWAY FROM COLLAPSE!!!

Don’t believe me?  Take a look at the current money multiplier, M2/M0.  Try to say that’s not deflation with a straight face.

multiplier1

2014 has been the worst year for money expansion since I was born in 1979.  Worse than 2008, 2010, 2012, 2013.  And the economists call it a recovery.  In 2014 M2/M0 is at an all time low.

Now can you imagine for just one minute what would happen to that blue line if the Fed were to try to drain reserves from the banking system right now?  I hear the sound of a toilet bowl flushing.

But it gets even better:  the $3 trillion in reserves they just added are set to automatically drain right back out —  all on their own — as the Fed receives proceeds (and soon principal) from all the bonds and MBSs they’ve been buying.  Remember, they didn’t print currency, they bought debt.

So until the banks can drum up an extra $3 trillion dollars out of nowhere, the Fed’s going to be bond-buying.  And don’t even think about rates going higher.  That’s the funniest joke ever.  Rates can’t go higher as that only drains reserves FASTER — forcing the Fed to inject even more reserves with even more bond purchases, etc., forcing rates to zero.

The same thing happened in Japan 20 years ago and they’ve STILL got their hole.  It’s grown bigger from all the central bank “stimulus” — which ultimately drains reserves while nominal rates are positive.  Rates won’t increase until either the economy can grow reserves faster than the debt drains the system; or the debt is liquidated, imposing a negative real rate on balance sheets down to the level current reserves can support, i.e. you stick it to the banks.

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