The Pronk Pops Show 235, March 31, 2014, Story 1: Federal Reserve Chair Janet Yellen Has No Exit Strategy — Expanding Credit With Near Zero Low Interest Rates and Quantitative Easing Forever — Financing Big Government Deficits Forever — Spending Addiction Disorder Enabled By Fed! — Fed is A Credit Drug Dealer For Banks and Governments — Videos

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The Pronk Pops Show Podcasts

Pronk Pops Show 235: March 31, 2014

Pronk Pops Show 234: March 28, 2014

Pronk Pops Show 233: March 27, 2014

Pronk Pops Show 232: March 26, 2014

Pronk Pops Show 231: March 25, 2014

Pronk Pops Show 230: March 24, 2014

Pronk Pops Show 229: March 21, 2014

Pronk Pops Show 228: March 20, 2014

Pronk Pops Show 227: March 19, 2014

Pronk Pops Show 226: March 18, 2014

Pronk Pops Show 225: March 17, 2014

Pronk Pops Show 224: March 7, 2014

Pronk Pops Show 223: March 6, 2014

Pronk Pops Show 222: March 3, 2014

Pronk Pops Show 221: February 28, 2014

Pronk Pops Show 220: February 27, 2014

Pronk Pops Show 219: February 26, 2014

Pronk Pops Show 218: February 25, 2014

Pronk Pops Show 217: February 24, 2014

Pronk Pops Show 216: February 21, 2014

Pronk Pops Show 215: February 20, 2014

Pronk Pops Show 214: February 19, 2014

Pronk Pops Show 213: February 18, 2014

Pronk Pops Show 212: February 17, 2014

Pronk Pops Show 211: February 14, 2014

Pronk Pops Show 210: February 13, 2014

Pronk Pops Show 209: February 12, 2014

Pronk Pops Show 208: February 11, 2014

Pronk Pops Show 207: February 10, 2014

Pronk Pops Show 206: February 7, 2014

Pronk Pops Show 205: February 5, 2014

Pronk Pops Show 204: February 4, 2014

Pronk Pops Show 203: February 3, 2014

Pronk Pops Show 202: January 31, 2014

Pronk Pops Show 201: January 30, 2014

Pronk Pops Show 200: January 29, 2014

Pronk Pops Show 199: January 28, 2014

Pronk Pops Show 198: January 27, 2014

Pronk Pops Show 197: January 24, 2014

Pronk Pops Show 196: January 22, 2014

Pronk Pops Show 195: January 21, 2014

Pronk Pops Show 194: January 17, 2014

Pronk Pops Show 193: January 16, 2014

Pronk Pops Show 192: January 14, 2014

Pronk Pops Show 191: January 13, 2014

Pronk Pops Show 190: January 10, 2014

Pronk Pops Show 189: January 9, 2014

Pronk Pops Show 188: January 8, 2014

Pronk Pops Show 187: January 7, 2014

Pronk Pops Show 186: January 6, 2014

Pronk Pops Show 185: January 3, 2014

Story 1: Federal Reserve Chair Janet Yellen Has No Exit Strategy  — Expanding Credit With Near Zero Low Interest Rates and Quantitative Easing Forever — Financing Big Government Deficits Forever — Spending Addiction Disorder Enabled By Fed! — Fed is A Credit Drug Dealer For Banks and Governments — Videos

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Yellen: Job Market is Weak, Strong Fed Policy Needed

 

Yellen Strongly Defends Easy Fed Policies, Cites Labor Slack

Stocks Higher on Dovish Yellen Commentary; Positive Q1 End

Ron Paul Yellen The Worst Fed Chair Yet To Come

Milton Friedman – Abolish The Fed

Special Report & Full Debate: 100 Years of Economic Turmoil: It’s Time to ‘End the Fed’!

 

Milton Friedman: The Purpose of the Federal Reserve

Milton Friedman on the Great Depression, Bank Runs & the Federal Reserve

 

Milton Friedman on Money / Monetary Policy (Federal Reserve) Part 1

Milton Friedman on Money / Monetary Policy (Federal Reserve) Part 2

Milton Friedman Interview with Dallas Fed President Richard W. Fisher

Should the GOVT help the POOR? – Milton Friedman

Highlights: John Taylor, November 2012 Milton Friedman Centennial Celebration

Taylor Says U.S. Needs `Sound’ Monetary, Fiscal Policies

NYU Stern Economics FRED Tutorial #3: Taylor Rule

FRED Economic Data

The FED Effect with Bill Still

Peter Schiff–Can You Trust Janet Yellen? 26.Mar.14

Stefan Molyneux on the Keiser Report The Federal Reserve is a Crime!

FEDERAL RESERVE CONSPIRACY – Murray Rothbard

“Why Was the Fed Created?” with George Selgin — Ron Paul Fed Lecture Series, Pt 1/3

 

History of the Federal Reserve (Money Masters)

“If America Doesn’t ABOLISH The FED, The FED Will ABOLISH AMERICA” | G. Edward Griffin

Yellen Says Extraordinary Support Needed for ‘Some Time’

By Jeff Kearns and Craig Torres

Federal Reserve Chair Janet Yellen, easing investor concern that interest rates may rise earlier than previously forecast, said the central bank’s unprecedented stimulus will be needed for “some time.”

Yellen, citing the examples of three people struggling to find work, used a speech to a community development conference in Chicago to make the case for continued Fed stimulus, which has included more than five years of interest rates near zero and trillions in bond purchases.

“This extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policymakers at the Fed,” Yellen said. “The scars from the Great Recession remain, and reaching our goals will take time.”

Stocks rose as Yellen highlighted the Fed’s commitment to spur the economy and put 10.5 millionun employed Americans back to work. Share prices fell on March 19, when she said in a press conference that the Fed might start raising the benchmark interest rate above zero about six months after ending its bond purchase program. Yellen didn’t mention a timetable today.

“It is an indirect pushback,” said Ward McCarthy, chief financial economist at Jefferies LLC in New York. “I don’t think she could directly contradict what she said at the press conference, so she did the next best thing, which was to paint a picture of a Fed that is going to be accommodative for a long, long time.”

Stagnant Wages

Large numbers of partly unemployed workers, stagnant wages, lower labor-force participation andlonger periods of joblessness show that “there remains considerable slack in the economy and the labor market,” Yellen said.

The Standard & Poor’s 500 Index rose 0.6 percent to 1,868.55 at 11:38 a.m. in New York. The yield on the 10-year Treasury note was up two basis points, or 0.02 percentage point, to 2.74 percent.

The Federal Open Market Committee has kept the benchmark interest rate near zero since December 2008 and sought to cut borrowing costs and fuel growth through bond buying that has more than quadrupled its assets to $4.23 trillion.

While policy makers have slowed the pace of their monthly asset purchases over the past three gatherings to $55 billion from $85 billion, Yellen said the central bank’s “commitment is strong” to helping sustain progress in the job market.

“Recent steps by the Fed to reduce the rate of new securities purchases are not a lessening of this commitment, only a judgment that recent progress in the labor market means our aid for the recovery need not grow as quickly,” she said. “Earlier this month, the Fed reiterated its overall commitment to maintain extraordinary support for the recovery for some time to come.”

Human Cost

Yellen, 67, has focused on the labor market and the human cost of unemployment for much of her career as an academic and central bank official. After three years as Fed vice chair, she was sworn in last month to succeed Ben S. Bernanke.

The FOMC said in a policy statement this month that rates will likely remain low for a considerable time after the bond buying program ends. The committee said it will weigh a “wide range of information,” including labor-market measures, in deciding when it will eventually begin raising rates.

Unemployment was 6.7 percent in February, up from the 6.6 percent level in January that was the lowest since October 2008. The economy added 175,000 jobs in February, more than economists projected, following the weakest two-month hiring gain in more than a year in December and January.

Yellen departed from the style of her recent predecessors by citing three individuals by name and discussing in her speech how their struggles with joblessness “tell us important things that the unemployment rate alone cannot.” Yellen spoke to them by phone, Fed Spokeswoman Michelle Smith said.

Claims Processing

Yellen cited Dorine Poole, who lost a claims processing job and struggled to find work after two years of unemployment. She said Jermaine Brownlee, a plumber and construction worker, “scrambled for odd jobs and temporary work” and still makes less than before the recession. Vicki Lira lost two jobs, was homeless at times, and now serves food samples part-time at a grocery store.

“They are a reminder that there are real people behind the statistics, struggling to get by and eager for the opportunity to build better lives,” Yellen said. “Their experiences show some of the uniquely challenging and lasting effects of the Great Recession.”

 

QE, uncertainty and CPI
Commentary and weekly watch by Doug Noland

In last Wednesday’s press conference, Federal Reserve chair Janet Yellen upset the markets with her comment suggesting that the Fed might commence rate adjustments as early as six months after it concludes its latest quantitative easing program. Several officials have since tried to reassure market participants that the Fed has not moved forward its plans to raise rates. Even hawkish Fed officials went to pains to communicate that rate moves were not in the immediate offing.
Clearly, the Fed’s strategy is to do its utmost to reduce market uncertainty. The ratee-setting Federal Open Market Committee is moving forward methodically to wind down its balance sheet operations, while telegraphing an ultra-cautious rate policy (future, future little “baby steps”).

The Fed has good reason to worry about the markets and fret the issue of “uncertainty”. And it’s difficult to envisage a more transparent – and market-friendly – interest rate policy. And when the markets are in a good mood, it’s virtual nirvana. Financial markets – in particular stocks and corporate credit – can enjoy splendid market excess without concern that the Fed might choose to “lean against the wind” of destabilizing speculation. And for the Fed to actually get rates to what would be considered “slamming on the brakes” – harsh enough to puncture powerful market bubbles – well, that would be years away (more likely never).

Yet I would argue the notion that the Fed is capable of bridling market uncertainty is a bubble mirage. Our central bank has thus far been successful in keeping the markets focused on rate policies. Meanwhile, a great uncertainty furtively lurks: what will the end of Fed “money” printing mean for US and global markets, the emerging economies and the US and global economies more generally?

The entire QE issue/analysis is incredibly fascinating. Since September 2008, the Fed’s balance sheet has ballooned from about $900 billion to $4.227 trillion. If tapering runs its expected course, QE will end late this year with the Fed’s balance sheet near $4.5 trillion. This would leave the latest round of QE totaling almost $1.7 trillion, with the Fed’s balance sheet having expanded (a parabolic) 60% in two years. This would also place total Fed asset growth at $3.6 trillion, or 400%, in six years.

And why do I posit that the notion of the Fed harnessing uncertainty is a mirage? Because the Fed doesn’t have a clue as to the consequences of the $3.6 TN of liquidity it has pumped into the markets since 2008. And I don’t say this flippantly. Best I can tell, the Federal Reserve has not even attempted a comprehensive study of how this massive liquidity injection has flowed through the Treasury and MBS markets, U.S. financial markets more generally, global markets and financial systems, and economies at home and abroad. They have just remained determined to keep pumping it out there, supposedly to fight heightened deflationary forces. The Bernanke Fed had a theory.

In admittedly superficial analysis (from my perspective), I’ve in past analyses tried to differentiate the widely-divergent effects of QE1, QE2 and (“open-ended”) QE3. Past analysis tried to explain how QE1 was largely a shift of positions from leveraged players onto the Fed’s balance sheet. While this had a profound impact on sentiment, it didn’t really function as a direct injection of liquidity into the markets. QE2, on the other hand, was injected directly into a marketplace with a powerful propensity (“inflationary bias”) for purchasing/speculating in U.S. fixed income and the emerging markets. QE2 fueled “blow off” excesses, proving most destabilizing for EM markets and economies. QE3 has been an altogether different creature. With bond and EM Bubbles having already begun to falter, the Fed’s (along with the BOJ’s) liquidity onslaught predominantly spurred speculative “blow off” dynamics in U.S. equities and corporate debt.

When addressing QE effects, Fed speakers (and papers) focus on basis point declines in Treasury and MBS yields, along with adjustments in the structure of term premiums (the yield curve). Dr. Bernanke’s theories held that Fed “money” printing could ensure a rising rate of inflation (i.e. central banks could inflate away problematic debt loads). Now, as the biggest QE yet begins to wind down, most notions of how Fed “money” printing operations actually function are (over)due for a thorough reexamination. After all, in the face of what will be $1.6 TN of new liquidity, bond yields rose and CPI declined. Stocks, on the other hand, went on a historic moonshot. In corporate Credit, it became 2007 reincarnate.

When the Fed was discussing its so-called “exit strategy” back in 2011, I was writing there would be “No Exit.” Well, the Fed has since doubled the size of its balance sheet. And I just don’t see how the Fed can inflate liquidity from $900bn to $4.5 TN and then just shut down the “printing presses” – that is, without some major consequences for the general liquidity backdrop. The history of monetary inflations provides unequivocal support for this view.

Conventional thinking, well, it simply could not see things more differently. Most believe that QE has had minimal effect, so ending the program will be inconsequential. The bulls (these days that means just about everybody) believe stock prices have been driven higher by robust earnings. The economic recovery has seen a superior economic structure generate outsized corporate profits. The economy drives the markets – and not vice versa. From this viewpoint, QE is for the most part insignificant.

The commonly held view of limited QE impact is driven by another momentous “flow of funds” misperception. Even top Federal Reserve officials these days believe that QE has thus far exerted minimal impact because Fed “liquidity” has been sitting inertly as “reserves” on the banking system balance sheet. I say “another” misperception, because I am constantly reminded of how the profound market impacts of Fannie, Freddie and the FHLB went unrecognized for years (especially 1994-2004) during a protracted Bubble period. The view then was that “only banks create money and Credit.” Somehow, a historic inflation in GSE Credit unfolded with barely a notice from Wall Street analysts or the Fed. The view today is that there is little impact from the Fed’s balance sheet so long as QE is held as “reserves” by the banks.

There is definitely confusion on the issue of “flow” versus “level” analysis. In QE operations, the Fed “Credits” accounts with new purchasing power as it consummates purchases of Treasury and MBS securities in the marketplace. Essentially, the Fed creates new electronic liabilities (“IOUs”) that provide immediate liquidity/purchasing power (“money”) to the seller of securities. Importantly, these liabilities will exist until the Fed liquidates securities and uses the proceeds to pay down its IOUs. To be sure, Fed operations dictate the “level” of its liabilities. Moreover, these liabilities by design are held by financial institutions that have a clearing relationship with the Fed, largely U.S.-operated financial institutions.

At a point in time, the “level” of “reserves” liabilities created by the Fed will be held as banking system assets (it’s just “accounting”). But this basically tells us nothing in regard to the transactions that took place between the Fed’s purchase and the eventual deposit of this liquidity into the banking system. Moreover, the “level” of “reserves” informs us nothing about the “flows” – flows that could be in the hundreds of billions or more on an intra-day basis (who knows?). And it is these transactional “flows” that have profound impacts on market dynamics and pricing.

From my perspective, it’s all rather obvious that the greatest QE3 impact has been the stoking of Bubbles in U.S. equities and corporate Credit. I’ve used the example of the Fed purchasing Treasuries and MBS from a rather large “bond” fund suffering redemptions. In this case, Fed liquidity would then be used to fund bond investor outflows that find their way to, say, a major U.S. equities ETF. The ETF then uses this liquidity to buys stocks, providing the sellers the liquidity to buy other securities (or things). Another example would have Fed liquidity accommodating a rotation of hedge fund positions from bonds to equities. In this example, a hedge fund might sell a (underperforming) 10-year Treasury note to purchase an outperforming Facebook stock. And if the seller is Mark Zuckerberg, a chunk of his sales proceeds will boost California and federal income tax receipts (quickly spent by both governments). Zuckerberg’s employees can use stock sale proceeds to buy homes and luxury automobiles (and planes!). And Zuckerberg can use booming Facebook stock as currency to buy companies in a hotly contested industry acquisition boom.

And with 2013/early-2014 too reminiscent of Nasdaq 1999, one should not understate the role QE3 has played in stoking another historic Bubble and “arms race” throughout the broadly-defined “technology” sector. The mad dash for hits, clicks, likes, advertising dollars and revenues throughout “social media,” the “cloud,” 3D printing, solar, etc. even surpasses 1999 – whether the bulls are willing to admit as much or not. At this point, it’s a full-fledged mania (again).

It’s ironic – and I believe really important. The Bernanke Doctrine holds that the Fed’s printing press can basically guarantee a rising general price level. Meanwhile, QE1-3 liquidity has ensured that only more and bigger companies from Silicon Valley to China to “Hollywood” provide a virtually limitless supply of smartphones, computers, tablets and electronic gadgets, along with a plethora of downloadable content and services. Throughout the markets and the real economy, it’s all leading to unusual price instabilities (which the Fed is expected to counter – of course, with only more QE).

As much as it is reminiscent of the late-nineties, the more apt comparison is to the Roaring Twenties. Major technological innovation throughout the 1920’s had unappreciated consequences for the economic structure and price dynamics more generally. Misunderstanding the forces behind the downward pressure on many prices, the Federal Reserve remained too highly accommodative for too long. In the process, the Fed harbored a prolonged period of deep economic maladjustment, while fostering a historic speculative financial Bubble.

From my reading of history, central banks must be especially diligent with respect to monetary stability (“money” and Credit) during periods of profound technological and financial innovation. Repeating mistakes from the Twenties, the Fed and global central bankers have again done the exact opposite (for a long time now).

From my perspective, the downward pressure on the general consumer price level has been exacerbated by QE3. But this is foremost a “supply” issue as opposed to “deflation.” And as much as the Fed speaks of its 2% inflation “mandate” – and as much as the markets assume this mandate will eventually justify QE4 – low inflation should be recognized at this point as predominantly a global issue. The Fed and its now grossly bloated balance sheet do not – and will not – control CPI.
Doug Noland is a market strategist for the Prudent Bear Funds.

http://www.atimes.com/atimes/Global_Economy/GECON-01-310314.html

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