Since Aug. 2008, the Fed has increased the monetary base by a factor
of 2.2 via purchases of financial assets. This was done to refloat the
economy during the massive recession and to help generate economic
recovery during a period of private sector credit contraction. This has
excited reams of pro and con commentary. Interestingly, it has been a
far smaller version of what the Fed did during the Great Depression
period when it increased the monetary base by a factor of nearly 5.5
times over 1932 - 46 to generate economic recovery during an
extended period of debt "deleveraging". The Fed steamed right along
with this policy during WW2 to backstop the war effort as well.
During the 1932 - 46 period, the Fed also kept short term interest
rates exceedingly low, much like today. Over this same period,
inflation compounded at 2.7% per annum, and the purchasing power
of the dollar contracted as funds left in short term risk free assets
failed to generate returns sufficient to "cover" inflation. However,
the bond market did provide yields above the inflation rate and the
stock market recovered dramatically. Investors had ample
opportunity to protect their assets during this period despite the
extraordinary and sustained easing of monetary policy.
The super accomodative monetary policy of 2008 - present was
designed by the Fed to provide the same initial boost in liquidity
It provided in the dark days of 1932. The Fed would dearly like
to avoid the sort of super quantitative easing it provided over 1932-
46. The decline in US production during the recent recession was
roughly only a third of that sustained during the Depression, so
more serious inflation could develop this time if the Fed does not
maintain sensible balance in trying to coax the current economic
recovery along. Yet, if private sector credit demand remains
subdued, the Fed may have little recourse but to provide further
liquidity to support the economy and prevent deflation pressures
from taking further hold.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!