The Financial Folly Lurking Beneath Yellen’s Patient Lack Of Impatience

Janet’s Yellen’s pettifogging today about her patient lack of impatience was downright pathetic. Her verbal hair-splitting is starting to make medieval ritual incantations sound coherent by comparison.

But unlike the financial media’s dopey dithering about “dot plots”, Yellen at least has something to hide behind all the gibberish.  Namely, she and her merry band of money printers are becoming more petrified each month that they will trigger a thundering Wall Street hissy fit if they move to “normalize” interest rates—even as they are slowly beginning to realize that continuance of ZIRP much longer will only intensify the market’s addiction to rampant speculation, free money carry trades and the associated risks to financial stability.

But the Fed’s new found worry that it’s tsunami of liquidity might have untoward effects doesn’t even rank as a death bed conversion. It’s way too late to worry about a financial bubble that has become epic in scope and danger; and its especially too late to think that it can be weasel-worded down from its Brobdingnagian heights.

The reason the Fed is impaled in a monster trap is that history is closing in on it. We have now had upwards of three decades of increasingly aggressive monetary inflation—a corrosive trend  culminating in what will be 80 months of zero money market rates and a massive monetization of debt claims that originally funded the consumption of real labor and capital resources.

Needless to say, that has generated a dangerous and ever widening disconnect between the real main street economy and the nominal value of assets in the financial system. This fracture has been called “financialization”, but it amounts to this: Fed attempts at monetary stimulus are now wholly contained within the financial system where it generates persistent inflation of existing asset values. That is, stimulus never leaves the canyons of Wall Street.

There is no monetary policy transmission outward to the real economy because the credit channel to households and businesses is terminally busted. This condition is partially owing to peak debt among households, meaning that they can’t borrow any more even if the interest carry cost is virtually free; and also due to financial arbitrage in the corporate sector, where equity is being systematically strip-mined by debt-financed financial engineering in the form of stock buybacks, M&A takeovers and LBOs.