- The Big News of Yesterday was Bernanke’s rather formal announcement of deflation. It’s Bernanke versus the Tides as nature – human and otherwise – sets the prices of things, not Bernanke. Here’s the Financial Times:
Mr Bernanke on Friday also marched the Fed another step closer to adopting a formal inflation target – a politically contentious goal he has pursued since becoming chairman – saying that most of the body’s officials think that price rises should be “2 per cent or a bit below”.
It is the first time that Mr Bernanke has put that number in a speech and linked it to the central bank’s inflation objective so clearly, a strong signal that the Fed will tie any new stimulus to getting inflation back to the 2 per cent goal.
“Although output growth should be somewhat stronger in 2011 than it has been recently, growth next year seems unlikely to be much above its longer-term trend,” Mr Bernanke said. He added that “inflation is running at rates that are too low” relative to the levels that the Fed thinks are consistent with its mandate.
The Fed mandate, to rob from Peter to pay Paulie the knee capper.
- Tyler Cowen thinks inflation targets are a good idea. So are flying carz! Inflation is the outcome of business activity expansion which increases the supply of money. Hyperinflation is something else; the establishment circulating more currency. Why does Cowen want hyperinflation? Why do smart people think that processes can be made to run in reverse as in, “If I can create fake inflation .. then business activity will follow!” Aha, lead into gold!
Unbelievable!
The Fed’s balance sheet need not swell to accomplish these aims. Once people believe that inflation is coming, they will be willing to spend more money.
What USA does Bernanke/Cowen/Sumner inhabit? Americans are broke! What are they going to spend? What is this dynamic trio thinking, the Fed will ring a bell,’ let the spending begin’? Perhaps Cowen thinks the bankers will spend more of their customers’ money for them. They seem to assume the Fed can squeeze blood from a stone- or turn lead into gold. Neither the customers (broke) nor bankers (liquidity traps) will spend.
In other words, if the Fed announces a sufficient willingness to undergo extreme measures to create price inflation, it may not actually have to do so. Professor Sumner’s views differ from the monetarism of Milton Friedman by emphasizing expectations rather than any particular measure of the money supply.
In real other words, if the Fed bluffs hyperinflation the same way Hank ‘Bazooka Man’ Paulson bluffed GSE bailouts a couple of years ago, he might achieve something different from Bazooka Man’s failed experiment. Paulson hoped to reassure investors, instead he warned them off.
Monetary policy is reduced to the central bank seeking to fool impoverished people into spending money they don’t have! What is with our leadership cadre? Are these people insane? They must be, they repeat the same failed experiments over and over. What exactly is Bernanke bluffing, anyway? “You better start spending or I am going to give this banker a large bailout!”
The Fed’s confidence- killing actions, like Paulson’s, indicate the wheels are coming off the (so- called) recovery. Incremental solutions are abandoned and fright wigs and witch- doctoring are all that’s left. The inevitable outcome of debt expansion is restructuring and deleveraging. All of the central banks’ squirming and academic rationalizations indicate these are not merely undesirable, but fatal.
Maybe they are and maybe they aren’t, since the outcome is deleveraging it is best to get on with it. Better a managed restructuring than chaos.
The gods make mad whom they wish to destroy … here is a perfect example. Why would sensible people take this seriously? The markets are taking good capital and inflating mini- bubbles which will follow the same dissolute path as all previous bubbles. In this way capital is destroyed – the bubbles are liquidity traps. Good capital caught in these traps will be evaporated.
I’ll go out on a limb here and predict unemployment will increase rather than decrease. Deflation will continue unabated.
The industrial world needs is more oil and the Fed cannot print any.
- If the Fed wants inflation, why not count oil price increases as inflation as was done during 2003 – 2007? You don’t hear much of that any more. Oil price increases are deflationary, that’s why. Funds spent on fuel are not spent elsewhere. The entire fuel use cycle is another deflationary liquidity trap. Don’t believe me, read next:
- Bill McBride @ Calculated Risk blog has been keeping score of bank failures in the US. On Friday, nos. 130 to 132 were subsumed into other banks with losses ‘captured’ by the FDIC. Many community banks are severely over- leveraged to commercial real estate loans and construction/acquisition loans for developers. This sector is has been taking water since the recession began putting huge pressure on these banks. As sprawl dies it will take more and more of these banks with it. Sprawl is a massive liquidity trap which also happens to be the largest component of the fuel use (waste) cycle! Cash spent on roads, box stores and subdivisions is never returned.
- Since competitive currency devaluations (quantitative easing) are breaking out all over, what next? Here’s an expert, Barry Eichengreen speaking about the Depression:
The reason why countries hit harder in the 1930’s were not more inclined to respond by protecting industry from foreign competition is straightforward. The onset of the Great Depression saw a collapse of demand, which in turn led to a sharp fall in imports. As a result, levels of import penetration actually fell, quite sharply, in virtually every country. Producers had problems, to be sure, but import competition was the least of them.
The same thing happened this time: when the crisis went global in 2008-2009, imports fell faster than output. With the decline in trade, foreign competition became less of a problem for import-sensitive sectors. As a result, there was only limited resort to protectionism. The World Bank estimates that only 2% of the decline in trade during the crisis was due to increased protectionism. In the 1930’s, by contrast, roughly half of the decline in world trade was due to protectionism.
We aren’t going to make that mistake, are we Ben?
Why the difference today?
The answer is currency disputes. In the 1930’s, the countries that raised their tariffs and tightened their quotas the most were those with the least ability to manage their exchange rates – namely, countries that remained on the gold standard. In 1931, after Britain and some two dozen other countries suspended gold convertibility and allowed their currencies to depreciate, countries that stuck to the gold standard found themselves in a deflationary vice. In a desperate effort to do something – anything – to defend their economies, they turned to protectionism, imposing “exchange-rate dumping” duties, and import quotas to offset the loss of competitiveness caused by their own increasingly overvalued currencies.
The US cannot manage its exchange rates because it is on the ‘oil standard’; oil priced in dollars makes that a defacto hard currency backed by crude rather than gold. Oil puts the energy- guzzling US in a deflationary vice. Not only that, the largest single component of the (expanding) US trade deficit is our fuel bill.
But trade restrictions were a poor substitute for domestic reflationary measures, as they did little to arrest the downward spiral of output and prices. They did nothing to stabilize rickety banking systems. By contrast, countries that loosened monetary policies and reflated not only stabilized their financial systems more effectively and recovered faster, but also avoided the toxic protectionism of the day.
The only real way to loosen effectively and stabilize is to reduce the fuel bill. We want China and other non- fuel trade partners to carry the burden of our wasteful culture and circumstances will not allow it. Notice that none of the bullying of Geithner & Co is directed toward Saudi Arabia, Kuwait, Mexico or Canada? Only toward China, which ironically is closely following on the US’s wasteful path.
Since the basic causes of our difficulties are not being addressed look for more toxic protectionism and trade wars.