They’ve made Janet Yellen the new Chairperson of the Federal Reserve in the US and the quantitative easing crowd are in ecstasy. It will be a flood money until recovery sets in which means it will be a flood of money for near on ever. As it happens, I met Janet (why not first names, as we were then) when she worked for the OECD and I was representing Australian employers at an OECD meeting in Paris, this one if my memory serves me right, on some aspect of the business cycle – I think it was on consumer and business confidence surveys. I remember the meeting well for a lot of reasons but one that stands out was that the OECD wanted us to agree with them that the economics profession had conquered the business cycle and that recessions were a thing of the past. So I led the rebellion against such idiocy (true) in the person of Janet Yellen who was the OECD person responsible for trying to get us all to agree. It was her bad luck that she had to deal with me because the probability that I then or now would have agreed to such a thing would be in the vicinity of zero-point-zero. She was just another specimen of that same macro menace that continues to lead us from one disaster to another. At the OECD her potential for damage was generally limited. Now, however, there is no end to the harm she might yet do.
This is from one of her big supporters although I suspect her detractors would say exactly the same thing:
The Fed will be looser for longer. The FOMC will continue to print money until the US economy creates enough jobs to reignite wage pressures and inflation, regardless of asset bubbles, or collateral damage along the way.
On past performance there is little doubt she will do exactly that because that was the mentality I met up with all those years ago. But if you would like to see the other side of this same question, you could do worse thanto read this article from The American Thinker. Many fascinating paras to choose from but let me just jump to the section outlining a sketch of the kind of world Janet Yellen and her approach may be laying out for the US as everything finally falls apart, “the perfect storm” as he calls it. Not at all my own forecast; I provide it merely as a contrast to the belief that all will be well as long as we keep flooding the market with money and distorting factor markets for as long as it takes until Janet Yellen finally realises that things are not working out.
As the perfect storm approaches, the regime will address it the only way it knows how — as a revenue, rather than a spending, problem.
And, as the regime becomes more desperate, unwilling to make cuts to anything other than the military, it will look for opportunities to increase revenue, all the while being indifferent to, or ignorant of the negative economic impact of taking more money out of the private sector and transferring it to the government. Like throwing gas on a fire to put it out, it has the opposite effect.
Here are prototypical examples, not literal predictions, of an increasingly desperate regime:
One-time tax on all IRA account balances as though they are current income, without deleting future taxes on gains from the remaining balance, but removing tax credits for subsequent losses;
Reduce the face value on all short-term (2-3 years) Treasuries if redeemed at maturation, plus subtract interest gained from the pay-out, unless, that is, the holder renews their T-bill at the same rate of interest as at the last renewal, or purchase, whichever is lowest;
Forgive student loans to placate young voters disaffected by the unexpected – to them -high cost of their health insurance under the ACA;
Offer federally-subsidized, reduced-interest loans for first-time “poor” home buyers;
Remove tax-exemption on debt incurred by major municipalities (over 500,000 residents);
Remove interest deductions on all mortgages over $300,000;
Require 401Ks, IRAs and Pension Funds to have a certain portfolio percentage in Treasuries;
Accelerate the schedule of required minimum withdrawals from IRAs to kill the stretch IRA concept and boost tax revenues;
Install a national federal sales tax at 1% on all goods and services (soon rising to 2%, and then up);
Remove the tax-exempt status of all non-profit organizations, including churches and charities;
Collect a yearly tax on the endowments of religious and educational institutions (For example, Harvard University received $650 million from the federal government during their last fiscal year. At the end of 2012, Harvard’s endowment was $30,745,534,000 – #1 among universities. It’s time to tax Harvard. It’s only fair.);
Eliminate deductions for state income tax payments;
Install a yearly tax on vehicles based on miles driven (a 2011 CBO suggestion);
Install a minimum tax rate of 50% on all former members of Congress for five years after leaving federal service and joining think, lobbying firms, and PACs.
Gruesome, of course, but by no means impossible. We live in dangerous times.
UPDATE: A trimmer version of the above article may now be found at Quadrant Online under the perfect title, “On Planet Janet the Spending Never Ends“. Comes with the above picture as well.