In November 1978, only 11 months into his term at the Fed, the dollar had fallen nearly 34% against the German mark and almost 42% against the Japanese yen. Price inflation was soaring. In 1979, the CPI has climbed on an annual basis to over 14%. Miler was a disaster as a Fed chairman.
Miller's role in the out of control inflationary economy came about because he targeted interest rates, while at the Fed. This led to a boom in money supply. M2 money growth reached as high as 12% on an annualized basis.
When Miller was removed, Paul Volcker came in and announced that interest rates would no longer be targeted and that money growth would be targeted and slowed. This killed the Miller created price inflation.
It now appears that Bernanke is pulling a type of Miller act, but with more crazed twists and turns.
Under Ben Bernanke we have had some remarkable changes in money growth, already. Here's a chart of quarterly annualized money growth (M2) since Bernanke took over at the Fed.
Things are likely to get even more erratic from here, since Bernanke appears to be making the same mistake that Miller did. For all Bernanke's bells and whistles about Operation Twist and QE this and that, what Bernanke really appears to be doing is like, Miller, instead of keeping an eye on money supply, he is targeting interest rates.
Over the last month, the Fed appears to be targeting the Fed Funds rate at 0.15%.
What's odd about this is that there appears to be very heavy downward pressure on U.S. rates. The 10-year U.S. Treasury yield fell to an all-time low of 1.659% this morning. Some downward pressure might be attributed to Operation Twist, but most of the downward pressure appears to be hot money flowing out of the eurozone.
This comes from the Dow Jones wire:
The benchmark 10-year U.S. Treasury yield sank to an all-time low of 1.659% early Wednesday in New York as fears about the euro-zone debt crisis intensified.So if rates are sinking, but the Fed Funds rate is not, that must mean the Fed has to be draining reserves from the system. And, indeed, they are. The Fed's H.3 release shows that total reserves have declined since mid_April, roughly the start of the latest intensity in the eurozone crisis.
The latest anxieties center around Spain's ability to support its banking system, piling on top of recent worries about Greece's future in the euro-zone bloc. This prompted global investors to seek out safer assets, pushing the 10-year yield below 1.672%, the previous low originally set in February 1946 and matched briefly last September.
This drain in reserves has been accompanied, as would be expected, by a dramatic slowdown in money growth (M2). According to the latest Fed H.6 release, annualized M2 money growth has declined from 9.8% over the last 12 months to 6.7% over the last 6 months to 4.0% over the last 3 months.
Last Friday, in the EPJ Daily Alert, I explained what is going on and the danger ahead:
What's behind all this? I suspect hot money.Bottom line, Bernanke, like Miller, by tying monetary policy to interest rate targeting is causing wild moves in money supply. Miller's money supply moves were all to the upside. Bernanke's are more erratic. The hot money inflow is causing him to drain reserves and slow money growth at present. It's possible that the drain could result in enough of a slowdown to cause the stock market and economy to head lower once again and cause President Obama to lose in his re-election bid. On the other hand, if things calm down and in the eurozone and the hot money flow stops or reverses itself, the manipulated boom continues with accelerating price inflation.
Despite all the hullabaloo about Operation Twist and other Bernanke "tools', Fed policy is being run, the same as in the past, by targeting the Fed Funds rate. A glance at Fed data shows that the NY Fed has been targeting the effective Fed funds rate for some time at 0.15%.
If some hot money from the eurozone has been flowing into the United States (and it likely has), this would put downward pressure on rates in the U.S. Indeed, if you look at the numbers, it would make a lot of sense for this to go on. German government 6-month paper is yielding 0.06%. while comparable U.S. Treasury bills are yielding 0.15%. If you are a wealthy Greek, or Italian or Spaniard, what rate is going to look most attractive to you? Thus, the flow of money into the U.S. paper, which puts downward pressure on U.S. rates. However, if the Fed is targeting 0.15%, then they have to drain reserves to keep the rate at that level.
What's the problem with all this? Aside from the entire idea of the Fed manipulating interest rates in the first place, the manipulation is now being influenced by this overseas hot money. In other words, the reserve drain continues only as long as hot money is flowing hot into the U.S., a reversal of the hot money results in a reversal of Fed actions. As money flow heads out, the pressure on interest rates will reverse and be to the upside, which will cause the Fed to add reserves.
When this hot money reverses itself is difficult to determine. It will depend upon perceived risk in the eurozone, if the panic calms down, then the hot money flow stops and could even reverse itself.
Assuming, the hot money flow continues, this at some point will result in very slow money growth and a return to a very weak economy and stock market in the U.S., which I then anticipate the Fed would counter with more money printing.
The eventual outcome is likley to be more money printing by the Fed, but a dip may occur first as a result of the way Bernanke is managing monetary policy. Brace yourselves, the Bernanke roller coaster ride is not over.