And with $2.4 trillion of excess reserves (aka loanable funds), the banks' lending firepower is truly awesome, however they decide to use it.
It just may be, then, that this new development now calls for instrument navigation because the policy horizon is clouded, and the visibility for data-driven actions may be unacceptably low.
Because a strong and effective monetary stimulus has begun to feed into the real economy. In other words, the monetary policy is beginning to work; it is no longer spinning its wheels because the transmission mechanism – the banking system – is back in action.
And here comes the problem: the impact of this credit expansion is not instantaneous. There are long and variable lags in the way the monetary policy affects economic activity. Nobody knows how long these lags are. Estimates range from two to four quarters, or even longer, depending on the nature of particular financial markets and their intermediation systems.
(Read more: Yellen hopeful for 3% GDP growth in 2014)
You can now see that a consummate debater Milton Friedman is back with a smirk and a self-assured: "I told you so."
Yes, because by the time this stimulus begins to move the real economy, it might not be needed since the economy may already be accelerating on its own steam. That, of course, would just be adding oil to fire, causing an inflationary flare-up that would force the Fed to keep raising interest rates until the inflation begins to calm down. But by that time, the economy would also be down into an irretrievable tailspin.
And here is the Friedman corollary: booms and busts are always created by errors of monetary policy because the stimulus (restraint) is maintained longer than necessary.
This is not the usual Fed-bashing. I have the greatest respect for the very difficult job my former colleagues are struggling with. It is my sincere and fervent wish that they exit this crisis-ridden period with flying colors.
But savers cannot live of pious hopes. I believe they should stay in equities and, selectively, in commodities, including some of that yellow stuff, just in case the navigation gets too bumpy.
Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.
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