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Like rats…

September 7th, 2017
Like rats…

One of the oddities of nature is that rats are attributed with the ability to sense when a ship is sinking; and they make exit strategies accordingly.

It therefore gives us great pause to note, as a curiosity perhaps, the number leaping from the decks of the Federal Reserve…the latest leap-ee being Stanley Fischer, Vice Chair.

The seven member Board of Governors is now down to three—Janet Yellen, Jerome Powell and Lael Brainard. While it is true that The Fed has often operated without its full complement, the Board has never withered down to three; we do understand that, in theory, it may still operate with so few as two.  But theories are themselves also oddities at times, as anyone who’s ever postulated one or two knows too well.

In any case, the celebratory martini class of financiers recumbent about the decks in chaise lounges are understandably somewhat perplexed by the surge of resignations over the side   Rats leave the cruise ship Fed, doubtless bound for sunnier offshore locales…a disquieting fact given the heritage of a supposedly unsinkable Titanic, the Great Depression and the not so Great Recession.

Scuttlebutt in the lounges is centered on troubles in the boiler rooms. Namely, there’s a $4.5 trillion balance sheet in the bunkers.  Nobody’s quite sure what to do next.

But, the bulkheads are surely in jeopardy under pressure of that enormous laden.  If the general economy does not pick up speed, the entire party might miss its port of call.

The Fed has more “asset balance” than can be expended in several generations of aimless consumption. To be honest, exactly how they managed to stuff so much of it into their bunkers in the first place is a fete of true marvel.  We  attribute it to an un-curious press in the heady days of “shovel ready” colliers.

Unfortunately, when you stuff too much into a fixed space, it becomes difficult to get it back out.  Think sardines…or maybe better…the trend in airlines seating.  At some point, not even shoehorns and Vaseline will assist the Cinderella pretenders.  Prince Charming will move on.

So, with “centrist” Fischer leaping overboard now (purportedly for “personal reasons”) that has all the appearance of him abandoning a difficult financial issue; leaving it to some other so-called wizard economic mind to disentangle. Graciously, we shall pass over the probity of how it came to be that the Zambian-born Fischer (after a stint at the Bank of Israel) came to be on The Fed boat in the first place.  In any case, he’s gone.

As to decompressing the ship’s bunker, unfortunately, the available hands to do so has dwindled shorter and shorter, as the gunwales ratchet deeper and deeper into the abyss above Davey Jones’ Locker.

As for the crew remaining aboard, listening to Mate Lael Brainard tell it, “normalized” rate increases (which everyone formerly thought would happen…before Fischer plunged over the side) may not be done in December this year after all.  Brainard apparently promotes the idea of static rates, while the “Federal Reserve is advancing plans to allow the balance sheet to run off at a gradual and predictable pace.”  The joke is the “predictable” part.

Listening to her Crew Mate Jerome Powell tell it, it’s the same old cruise line—“too big to fail” financiers, those who should have been indicted back in 2008, but were instead lavished with such excessive largesse.

The hangover seems to be that “reserves have been highly abundant and will remain so for some years”…some years, says he.

“Due to the growth of currency and other liabilities, the balance sheet will remain considerably above its pre-crisis levels even if reserves were to fall”…considerably, says he.  So, in other words—the gentleman admits to the following: “Dooh!”

In one of those Homer Simpson clueless moments, Powell stated recently (June 26, 2017) in Salzburg, Austria: “Evidence overwhelmingly shows that financial crises can cause severe and lasting damage to the economy’s productive capacity and growth potential.” Lasting damage…“Dooh!”

Mate Powell and Mate Brainard sing the same ditty.  Apparently (now that Fischer is overboard), the good ship Fed is “advancing plans” to relieve its bursting bunker load of $4.5 trillion in liabilities…“predictably,” or so they claim.

In other words, the public is expected to hold the debt on the theory that that alone will “normalize” rates (i.e. move them up—where they seem unwilling to go).  In theory, this “balance sheet run off” will be just as effective as actual rate increases.  And with less political fallout too.  What a deal.  Unfortunately, much depends on the “predictability” part.

As Mate Powell admits, “In the long run, the ultimate size of the balance sheet will depend mainly on the demand for Federal Reserve liabilities.”  Demand, says he.  Thus far, “demand” for their liabilities is nowhere evident in any quarter of the compass.

No question, though.  Assuming the bulkheads hold in the interim, The Fed will have this “run off” liability on the ship’s menu for “some years” yet to come.

It seems the financier soothsayers aboard are finally beginning to notice, albeit in some puzzlement.  Looking up from the olives in their martinis along the liner’s promenade, they chortle about “uncertainty” and  the “short-handed Fed”.  “The inflation rate isn’t responding as we thought”…as the rodents swim for shore.

Doubtless, some new theory will be advanced as to the cause, and everyone can predictably repose back in the chaise lounges, with a fresh martini on order and completely oblivious to the angle of the list.  The ship is unsinkable, after all.  Icebergs and rats be damned.  “Par Tey, ya’ll!”

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