Ominous paper by the US Federal Reserve has become the hottest document in high finance: The Fed has run out of heavy ammunition

Ominous paper by the US Federal Reserve has become the hottest document in high finance: The Fed has run out of heavy ammunition. By Ambrose Pritchard-Evans.

It was intended to reassure us that the world’s hegemonic central bank still has ample firepower to overcome the next downturn. But [David Reifschneider] was too honest. He has instead set off an agitated debate, and rattled a lot of nerves. …

The Federal Open Market Committee had to cut interest rates by an average of 550 basis points over [each of] the last nine recessions in order to break the fall and stabilize the economy. It could not possibly do so right now, or next year, or the year after. Quantitative easing (QE) in its current form cannot compensate, and nor can forward guidance. They are largely exhausted in any case. …

The nagging question is what happens at the onset of the next recession. …

Official thinking is for worldwide stimulus. Now that lowering of interest rate is exhausted, that means manufacturing new money, one way or another (“printing”):

An new orthodoxy is emerging in elite global circles that the only way to escape of the liquidity trap and soak up excess savings is concerted fiscal stimulus on a world scale….

History will judge that those nations best able to weather the next global downturn are those that grasp the essential character of our desperate deflationary age [i.e. there is way too much debt], and can cast aside deeply-ingrained and totemic beliefs about debt. The losers will be those spooked by shadows on the wall.

The winners – or survivors – will be those most willing to seize on the cheapest borrowing costs in history to fight back, preferably combining fiscal and monetary in a radical fashion. Call it helicopter money if you want, or ‘overt monetary financing’ of deficits. The accounting terminology is irrelevant.

And don’t allow some countries shirk their duty to print, lest they be stimulated by their neighbor’s printing:

Since no country can risk watching its precious national stimulus leak away to free riders in the austerity camp – at least in a crisis –  this may imply some degree of calibrated protectionism.