Monetary Policy & Lady Luck

Federal Reserve Bank Credit is about where it was on 6/30/11 when QE 2 ended. There was a
nice positive jolt to liquidity during the winter when the Fed did currency swaps which added
$100 bil. or 3.5% to the Fed's balance sheet, but that has largely run off. The economy is now
running on what I think is inadequate credit driven liquidity, which when viewed generously is
running at a little over 3% yr/yr. Now the private sector credit situation is improving but it is
thawing out so slowly, that to rely on it to support further economic expansion, puts you in the
position of counting on a sustained warm smile in your face from Lady Luck. I am in the small
minority camp which thinks the Fed is gambling with the US economic recovery and that in the
absence of a speedy, broad based and sizable acceleration of credit demand, the Fed needs to
step in and provide a more open ended QE program until the credit markets come into better
balance. I'll be happy to take a large currency swap program in the interim, but foreign central
banks have to request it, and they'll do that more out of desperation than not.

The economy is not only dysfunctional with regard to private sector lending, it is also
dysfunctional with regard to the real wage and the distribution of profits. Thus, with continuing
low wage growth and no indication this policy is about to change, even a robust new QE
program will have limited success as rising commodity prices will ultimately push up the
inflation rate and further punish the real wage. But, more QE should help business confidence
and provide for some further progress in unlocking lending.

I think the US needs much larger fiscal stimulus to support the economy, but at present, official
Washington is at powerful loggerheads with interest tilted more toward cutting spending than
increasing it. This leaves the Fed as the main game in town, and unless Lady Luck smiles down
brilliantly and sustainably we could be the worse for it without a hefty new QE.