Wow!   The food stamp program is now equivalent to 14 percent of all U.S. grocery store sales.

Though the Fed indirectly finances the food stamp program with its purchase of treasury securities — $45 billion per month starting in January — we wouldn’t be surprised someday that the central bank actually begins to print food stamps.  This wouldn’t pack the potential punch of creating “high powered” bank reserves, which can be multiplied in a healthy financial system through credit creation, however.  But at least the “printed money food stamps” would lead to direct demand creation, rather than, as most of it does now,  sit on deposit at the Fed in the form of excess bank reserves.

Seriously.  Monetary policy has almost become this absurd.

What if the Fed’s policies actually contribute to unemployment?   Such as repressing and changing the relative cost of capital.  This makes it easier for companies to finance machinery which either enhances labor productivity,  reducing the need for more workers,  or less costly to replace workers with robots.   Clearly, some of this is currently taking place.

The Fed’s  policy of repressing government borrowing costs and indirect deficit financing  reduces the government’s  incentive to implement the necessary structural reforms to put the budget on a sustainable path.  This would reduce uncertainty and maybe give the business sector more confidence to hire and spend their cash hoard.

We’re starting to think that the business sector behaves according to the Ricardian equivalence model.  Consumers?  We are not so sure.   Great thesis for a Ph.D. dissertation, by the way.

In other words,   the probability the Fed has the wrong, or, at the very least,  flawed model of the economy (think Apple maps instead of Google maps) is much larger than is priced,  in our opinion.   This wouldn’t be the first time.   No problem now, but if the Fed loses cred with such a ballooned balance sheet,  the demand for money could become more unstable or collapse.

It would, at first,  feel nice as equities would shoot to the moon.  Beyond the short-term, however, we would be in a heap of trouble, with a capital T, right here in River City!   Big trouble.

Just got back from the grocery store.   Inflation cometh!

P.S.  Negative real interest rates are immoral.

Dec13_Foodstamps

(click here if chart is not observable)

Category: Federal Reserve, Politics, Taxes and Policy, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

8 Responses to “The Fed on Food Stamps”

  1. Frilton Miedman says:

    Excellent piece, whether I agree or not with the conclusion, it’s very informative.

    A thing that nags me, this statement:

    “… In other words, the probability the Fed has the wrong, or, at the very least, flawed model of the economy …”

    Question – Isn’t Fed policy reactionary to economic conditions, which in turn are resultant of fiscal, trade, regulatory policy?

    It blows my mind to hear complaints over Fed policy, yet the same individuals never parse the “cause” within the cause and effect for that policy.

    Are we to assume the Fed is only engaging in QE and easing rates for the sake of it?

    Is there a reason the Fed started doing this, or is it effect without cause?

    To be clear, I agree, this unprecedented level of Fed intervention WILL yield something nasty down the road…but what I hear no one asking is HOW it got to this.

    How did we get to a place where 14% of all grocery consumption is government subsidized? – If memory serves, you have to prove an annual income of less than $15K to qualify.

    How did we get to a place where near 50% of all healthcare is government subsidized, yet US healthcare is DOUBLE the cost for anywhere else in the world?

    I can go on to other sectors, but it gets my point across…the medicine is nasty, so are the side effects – Why aren’t we looking at the malady and considering options for “medicine” instead of blindly groaning about medicine?

    Austrians/Atlas Shrugged fanatics need not reply, that answer has been made all too clear in the last decade, enough already.

  2. econimonium says:

    Please tell me this post is satire.

  3. gusgus says:

    You’ve got your direction of causation backwards.

    In 2008 there was a recession which got a lot worse when Lehman Brothers went bankrupt. Unemployment spiked, and guess what, food stamp use went up. Imagine that, people don’t have jobs; guess what, they don’t have money to buy food.

    The Fed’s quantitative easing did not cause the high unemployment, rather the high unemployment prompted the Fed to employ unconventional measures, like quantitative easing.

    Notice that since the Fed started purchasing Treasuries, unemployment has come down. So it’s hard to imagine that these measures have caused unemployment, given that people have been going back to work. Or maybe you claim things would have been better if the Fed had stood aside? Sort of like in Europe or the UK, where there’s been much less support from the gov’t and central banks? How’s they’re unemployment compared to the U.S.

    The whole suggestion that the Fed is causing unemployment is just wrong.

    As for the Fed reducing the gov’t’s incentive to make structural changes, again let’s look at Europe. How’s the ECB’s efforts to enforce structural changes going over in that fair continent. And you suggest that for the U.S.? Are you mad?

    This post is just silly. The saddest part about it is that the author doesn’t even realize that the U.S. deficit is actually sustainable in the mid-term, even without spending cuts or tax hikes. Check out this AEI report which argues that very point http://www.aei.org/outloook/trillion-dollar-deficits-are-sustainable-for-now-unfortunately

    This post is just wrong.

  4. gusgus says:

    econimonium Said:
    Please tell me this post is satire.

    I must learn to be succinct like you, well said!

  5. funkright says:

    Our inability to evaluate the system, not just working to treat the illness, is what will lead us to the precipice. The recent video with the (former) Central Banker from Belgium (if I recall correctly) talks to this specifically. We need to be prepared to adjust our way of doing things, not modify their existing execution.

  6. jashead says:

    “P.S. Negative real interest rates are immoral.”

    Can you put this at the beginning of your ridiculous post next time. Save me the time of reading this so called ‘analysis’?

  7. Greg0658 says:

    1 going backwards .. neg rates immoral – to me means earning money on savings – not being forced into investing via corp stocks and their rules for disbursement

    2 got a laugh with FED on food stamps too – & I caught that line about issue’g them food stamps that canNOT be inflated to the tune of 1:10 to 1:50 – did anybody else catch that one?
    but but – is that a problem or a cure? .. this stuff is so complicated of roundNround

  8. Greg0658 says:

    further more – my stick .. feudalism is that really what folks long for – benevolent corportations? sure seems like it > government bad | corporations good
    we don’t need no stinkin Gman messin it all up
    true & pure capitalism