The Fed’s Epic Failure To Read the Economy in Four Charts

The great liquidity tsunami of the post Crash era is coming to an end. But the inflationary aftereffects are only just beginning.

The Fed is now actively tapering its QE programs.  The $85 billion per month QE 3 and QE 4 programs have been reduced to $45 in asset purchases billion per month.

While this still comes to an annualized rate of $540 billion in purchases per year, it marks a significant shift in Fed policy.

Let’s be blunt here. The Fed has engaged in the single largest monetary experiment in history, betting the US economy and banking system on misguided theories that have little to no evidence of success.

The 1970s proved that the Phillips curve (the idea that high inflation cannot coincide with high unemployment) was a bogus idea. And both Japan and the UK have proven that QE does not generate sustainable growth: both countries have engaged in QE efforts equal to over 25% of their GDPs… neither have seen sustained economic growth.

Finally, and this is the single most important item to note… the Fed is fighting the wrong fight. And it has been for well over a decade.

In the early 2000s, Alan Greenspan was worried about deflation. So he hired Ben Bernanke, the self-proclaimed expert on the Great Depression from Princeton. The idea was that with Bernanke as his right hand man, Greenspan could put off deflation from hitting the US. Indeed, one of Bernanke’s first speeches as a Fed President was titled “Deflation: Making Sure It Doesn't Happen Here"

The entire reason Bernanke was hired was to ward off deflation. Now take a look at the following charts.

Here’s what happened to home prices during the Greenspan/Bernanke tenure.

This looks an awful like inflation, not deflation.

Here’s what happened to food prices.

Here’s what happened to oil prices.

And here’s what happened to stocks.

All of the above items indicate intense IN-flation, not DE-flation.  The Fed literally hired a deflation expert who helped manufacture one of the greatest periods of inflation in history!

My point with this is that the Fed is typically way behind the curve when it comes to economic forecasts and subsequent monetary policy. By worrying about deflation, the Fed blew bubbles in most asset classes resulting in the 2008 Crisis.

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Best Regards

Phoenix Capital Research