The Wall Street Journal Calls “BS” On Monetary Policy?

Wow, this is a new one for the Journal…

Mr. Obama yesterday blamed rising demand from the likes of Brazil and China, and there is something to that as well. But this energy demand is also not new, and if anything Chinese and Brazilian economic growth has been slowing in recent months.

Another suspect—one Mr. Obama doesn’t like to mention—is U.S. monetary policy. Oil is traded in dollars, and its price therefore rises when the value of the dollar falls, all else being equal. The Federal Reserve throughout Mr. Obama’s term has pursued the easiest monetary policy in modern times, expressly to revive the housing market. It has done so with the private support and urging of the White House and through Mr. Obama’s appointees who are now a majority on the Fed’s Board of Governors.

Yep.  And it hasn’t worked — because it can’t work.

“Reviving” the housing market presumes there’s something to revive.  That is, the presumption is that the “slump” in home prices and demand is something that is unnatural and can thus be reverted to a “mean” that is actually positive.

That’s a fantasy — what was false was the price signaling in the housing market during the 2000s.  From 2003 to 2007 house prices went on a tear that had nothing to do with intrinsic value, and indeed that problem had been brewing since the 1980s! What we saw in the 2000s was the final, end-stage parabolic blow-off top that always happens when a geometric series gets out of hand — unless, of course, it’s short-circuited first.

All the arm-waving that has gone on since is an attempt to do nothing more than re-inflate fraudulent prices that were generated through fraudulent lending practices.

It won’t work because it can’t work.

Look folks, I know that people don’t want to hear it, but the fact is that real purchasing power of the American worker has been in decline for more than a decade.  Nominal wages have declined since 2000 and with inflation purchasing power has been in the toilet.  The so-called “2% inflation target” is a rude scam over decade-long periods (not to mention longer periods of time) and must be eliminated in favor of actual stable prices.

Greenspan, Bush and The Fed generally all tried to evade recognition of the Internet Bubble’s “valuation blow-off” with more cheap credit, which fueled the housing bubble and led to a consumption blow-off with borrowed home equity “money.”

But that value never existed although the debt created sure did, and as a result we dug an even-bigger and deeper hole.

It is time to “eat our peas”, despite the fact that we won’t like it.  The reason to do it now is the same as it was in 2007 when started I writing on this — the longer we wait the more damage we must accept, as geometric functions never get “better” in their impact the longer you wait to deal with them.

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