Joe Gagnon is delusional; about the Fed

Misconceptions About Fed’s Bond Buying
 
He lists a number of delusional ideas that he has and calls it truth. The basic misunderstanding is the old Bernanke fable that the path to high interest rates is via low interest rates. The old cycle theory which has no basis in fact.

Point one: If low interest rates lead to high interest rates then why have rates continually declined for 30 years?

 Point two: Bond buying is done by the Fed because the Fed works for Congress and Congress is losing money hand over fist. To see this, examine the accumulated debt over the past thirty years which occurred as the potential output of the economy has dropped, continually.

Point three: There is no reason to think that continual support for Congress leads to a recovery. Look at the volatility of the deficit over time, it has gotten worse, not better. The deficit is now dropping like a rock, and Congress is helpless, prior to that it shot up like a rocket, and Congress was helpless. Congress is operating a regime of multipliers less than zero, has been for 30 years. What else explains the correlation federal debt and low growth. Why does income inequality grow with increasing Congressional deficits?

 Point five: The Fed cannot create inflation in the consumer sector, it is about four layers removed from the consumer. The only thing that has directly led to a rise in the CPI are shortages of widely used consumer commodities, namely oil. All of the CPI inflation we have seen since 1980 has come from oil shocks, not Fed action. Where does the surge of federal debt show up? In bubbles, the fast movement of money in and out of emerging markets, for example. The inflationary rise in stock values. And continuing income distortions.

Summary.  Congressional activities are loss making and not cyclic.  There is no reason to believe the regime will not break down, it has many times in our history and likely to do so again.  We call this process the bankruptcy of the old regime and the building of a new, a common experience in American history.  It is not a natural cycle, it is the natural adaptation of America to disaster appearing front and center.