Zero Hedge has a piece on Fed policy that is worthy of being shared.
No, all of these are secondary items. Here is what is of absolutely critical importance in the just released Goldman letter, nested deep in Hatzius’ final paragraph, where it would otherwise be missed by most:
…we have found some evidence that at the very long end of the yield curve, where Operation Twist is concentrated, it may be not just the stock of securities held by the Fed but also the ongoing flow of purchases that matters for yields…
For those who are aware of the Fed’s sentiment vis-a-vis the debate of stock vs flow of money effect, this will be a stunning revelation. Especially since it vindicates what we have been saying since day one, namely that when it comes to securities price formation in a centrally-planned regime, it is flow not stock that matters. And as those who follow the Fed’s thinking know too well, the Fed is convinced it is stock, not flow that serves as a consistent catalyst for subjective risk valuation. The above quote is just the first crack in the Fed’s thinking, because if Goldman now believes this, so will Bill Dudley, following his next meeting with Jan Hatzius at the Pound and Pence, and shortly thereafter, it will become canon at the Fed.
One way of visualizing what this means is to think of a shark which has to be constantly in motion in order to survive. Well, the allegory of Jaws can be applied to liquidity addicted capital markets. Translated simply, it means that it is irrelevant if the Fed’s balance sheet is $1 million, $1 trillion or $1,000 quadrillion. A primacy of flow over stock means that UNLESS THE FED IS ACTIVELY ENGAGING IN MONETIZATION AT EVERY GIVEN MOMENT, THE IMPACT FROM EASING DIMINISHES PROGRESSIVELY, ULTIMATELY APPROACHING ZERO AND SUBSEQUENTLY BECOMING NEGATIVE!
You should read the entire article, but I wanted to highlight this part as it reinforces something I am often criticized for. Clearly, Fed policy is directed by style over substance as appearances are everything. Liquidity is paramount as money on the sidelines detracts from the shell game. The Fed needs the money to keep flowing. This is why they get involved with their stealth stock purchases to keep the illusion alive.
I get knocked because I note the importance of consumer confidence. Austrian economists dismiss it as myth, but in Fed world it is very much a part of the show. It directly feeds into consumer spending which is central to the Keynesian business cycle theory. Consumers need to ‘feel’ that illusion of recovery so they will keep spending money. It’s not about whether or not this is a successful model to operate under. It is what it is. We can point out what we should be doing all day long but the fact is the Fed requires consumer confidence leading to consumer spending leading to liquidity spending. As the article said, it’s about “flow”. So never fear, the “crash” is still on schedule coming to a neighborhood near you.