Ben Bernanke has done gone and went insane

Friday, November 20th, 2009 | Economics | Permalink | No Comments |

Karl Denninger - Open Letter To The Chinese Premier:

Dear Wen Jaibao:

We in America have noted with concern your nations’ expression of alarm at our Federal Reserve’s blatant money-printing, debt monetization, and interference in the free markets, in particular the recent commentary of China’s bank regulator cited here:

“The continuous depreciation in the dollar, and the U.S. government’s indication, that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” he told reporters in Beijing today at the International Finance Forum.

Liu said this has “seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies.”

Mr. Liu is correct, of course.  However, yesterday afternoon Ben Bernanke gave you the finger, first in his speech and then later in the Q&A in which he said:

Nov. 16 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke said it’s “not obvious” that asset prices in the U.S. are out of line with underlying values after a 64 percent jump in the Standard & Poor’s 500 Index from its March low.

Donald Kohn, another Fed Governor, erected his middle finger in your direction as well with his comments last night and Yellen added her view this morning in which they also both said “we see no bubble.”  That’s three.

How many more times do you need to be flipped off before you get it: The Fed isn’t going to do what you want, and neither is Obama.  Get over yourself.

On the objective measures the price/earnings multiple of the S&P 500 currently stands at over 130, more than double its previous record and vastly beyond anything achieved even in China’s manipulated and overheated markets.  In short, they’re lying and they don’t care.

Tags: bernanke, the fed

GDP grew at 3.5% - the recession is over!

Thursday, October 29th, 2009 | Economics | Permalink | 1 Comment |

Tags: bernanke, this is me being sarcastic

Inflation or deflation? The man with the dollar printing press says “inflation”

Tuesday, October 20th, 2009 | Economics | Permalink | No Comments |

People are debating whether the United States is going to experience inflation or deflation. Ben Bernanke, the chairman of the U.S. Federal Reserve bank, has always intended to fight any hint of deflation with a massive dollar printing campaign. It’s hard to see how he can avoid overshooting attempts to stop deflation and crossing over into inflation.

Bernanke’s plan is a matter of public record since his time as a Federal Reserve governor before taking the reins of the Fed from Alan Greenspan in 2006. This speech is available from the the Federal Reserve archives (my emphasis in bold):

Remarks by Governor Ben S. Bernanke

Before the National Economists Club, Washington, D.C.
November 21, 2002

Deflation: Making Sure “It” Doesn’t Happen Here

As I have mentioned, some observers have concluded that when the central bank’s policy rate falls to zero–its practical minimum–monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.

The Fed has targeted and maintained an effective zero percent interest rate since December, 2008, forcing itself into a liquidity trap. Continuing from the 2002 speech:

The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject’s oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Gold has risen from $300 in 2002 when Bernanke gave this speech to $1050 today. Gold prices rise when there is public mistrust of government fiscal and monetary policy, and when people expect the money supply to be inflated on a large scale.

Issuing more dollars makes each dollar worth less. It isn’t so much that gold is going up, but that the value of and demand for dollars is falling. This is a difficult idea for most people: we tend to think of prices of things going up and down in dollars. You also have to realize that the price of dollars goes up and down in terms of things - gold, land, stocks, etc. During inflation dollars are worth less so it takes more of them to buy those things. Continuing from the speech:

Each of the policy options I have discussed so far involves the Fed’s acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices.

And in fact the Fed is now engaged in a massive open market purchase of U.S. Treasury and agency debt. Without those purchases the U.S. would be at the mercy of domestic purchasers and foreign governments to buy the $7 trillion in debt we sold in fiscal 2009, which included $1.4 trillion in new debt. All is going according to Ben’s plan. See Federal Reserve has bought 100%+ of 2009 mortgage market. Continuing:

Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers.

Which fits well into the theory that today’s high stock prices are caused - not by fundamentals or earnings, which are in the toilet - but by an excess of dollars floating around and chasing those stocks. See More on the Federal Reserve’s effect on stock markets.

And if you’ve ever wondered why people call him Helicopter Ben:

A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money.

Previously - Inflation or deflation? How about hyperinflation

Tags: bernanke, inflation, the fed

Alan Reynolds: Fed can’t reduce money supply in time to stop inflation

Monday, February 23rd, 2009 | Economics | Permalink | 3 Comments |

I’ve been noting that the Federal Reserve’s unprecedented increase in the money supply will lead to inflation. Federal Reserve Chairman Ben Bernanke is claiming that just as soon as the economy starts to recover he’ll pull back the money supply Wizard of Oz style and - voila! - no inflation.

Alan Reynolds questions Bernanke’s claims:

If inflation catches the Fed by surprise, are they really “able to quickly reverse the actions,” as Bernanke says? How could they do that?The Fed could certainly raise the interest rates on bank reserves — the fed funds and discount rate — which is how it makes money and credit tighter in normal times. But that rationing device would not prove so effective in times like these, because banks are already sitting on a mountain of untapped reserves. Besides, once expected inflation has begun to rise, the Fed has usually moved rates up in 25-basis steps — increases so small that perceived real interest rates can continue to fall even as nominal rates rise.

To literally reverse the actions that doubled its assets since last September, the Fed would have to sell nearly a trillion dollars worth of IOUs. Unfortunately, they don’t have nearly that many Treasury securities to sell. And even if the Fed were willing sell off all of its Treasury bills and bonds, the remaining backing for Federal Reserve notes would be little better than junk bonds. Meanwhile, private and agency securities acquired since last September must be very hard to sell — or else the Fed would not have felt obliged to buy them.

The Fed’s System Open Market Account at the Federal Reserve Bank of New York holds $39.4 billion in inflation-protected Treasury bonds — more than twice its $18.4 billion stash of short-term Treasury bills. Are they trying to tell us something?

Point 1 is that you shouldn’t believe Bernanke when he claims he can snap his fingers and put the kibosh on the inflationary dragon.

Point 2 is that Reynolds notes something I hadn’t considered.

To assume, as Bernanke does, that inflation cannot possibly accelerate until “the economy begins to rebound and financial markets stabilize” is to assume stagflation is impossible, though 1973-75 and 1979-82 proved otherwise.

I keep saying that we won’t have serious inflation until after the recovery begins, that the recovery can’t begin until we hit bottom, and that we’re a long way from hitting bottom. Sounds pretty pessimistic, doesn’t it? Thing is, just like Bernanke I wasn’t considering the possibility of stagflation (a stagnant economy combined with the inflation of a red-hot economy). If that happens things could be even worse than I imagined. Dangit.

P.S. In another post Reynolds poo poos the jump in producer price inflation I mentioned last Monday.

Tags: bernanke, inflation, stagflation, the fed

This is where inflation fears are coming from

Monday, December 15th, 2008 | Economics | Permalink | 5 Comments |

The Fed is inflating the money supply to the mother-Blagojeviching moon. I read that last week, but I didn’t get it until I saw this chart From Mish with the vertical trend line at the end:

That’s why people are worried about inflation: the amount of money the Fed has injected into the economy these last few months is unbelievable.

The only reason we don’t have inflation now is that the banks aren’t releasing the money. In small part, that’s because fewer qualified people want to borrow, now that everyone realizes we’re in a serious recession. In larger part, though, it’s because the banks are afraid to loan out the money for fear it won’t be paid back. Too, many banks are essentially insolvent right now, if what Jim Rogers says is true. They’re hoarding the cash for a bailout of themselves rather than others.

For more about the Fed and how it affects the money supply and interest rates, see this earlier post: “The Nov. 13 H.3 bulletin shows that the Fed increased this monetary base by 50 percent over the past 12 months, from $825 billion to $1.236 trillion. Such an increase is unprecedented in U.S. history.” That economist notes that inflation usually occurs between the time the economic recovery begins and the time the Fed is sure the economy has recovered and therefore drains the supply of money down to sane levels.

Inflation occurs when too many dollars chase too few goods. The Fed’s money takes care of the first part (too many dollars). From some of the things I’m reading the recession itself causes there to be too few goods, as companies cut back on production and the capital investment necessary for production. From that CNN article I linked the other day:

Virtually the only asset class I know where the fundamentals are not impaired - in fact, where they are actually improving - is commodities. Farmers cannot get a loan to buy fertilizer right now. Nobody’s going to get a loan to open a zinc or a lead mine. Meanwhile, every day the supply of commodities shrinks more and more. Nobody can invest in productive capacity, even if he wants to. You’re going to see gigantic shortages developing over the next few years. The inventories of food worldwide are already at the lowest levels they’ve been in 50 years. This may turn into the Great Depression II. But if and when we come out of this, commodities are going to lead the way, just as they did in the 1970s when everything was a disaster and commodities went through the roof.

Inflationary investing

So probably some deflation now, followed by inflation during the recovery. During inflationary times you want your money out of things that are in fixed interest, like ordinary bonds and treasuries whose interest rates will be overwhelmed by inflation. Who cares if you’re getting 3% interest if inflation is 8% - you’re losing money the longer you hold the investment.

I’m still getting my head around what to invest in for inflationary times. There are TIPS (Treasury Inflation Protected Securities) that pay a fixed rate plus the official inflation rate. TIPS are extremely cheap right now because people are more worried about deflation than inflation. The next TIPS auction is in January.

Commodities will inflate, but investing in commodities is difficult and risky. In Andrew Tobias’s The Only Investment Guide You’ll Ever Need he says something to the effect of “Ninety percent of professional commodities traders lose money in most years. I submit that is all most people need to know about commodities trading.”

Gold seems like a good investment for uncertain times. (And there’s more uncertainty than just inflation. In my opinion our very banking system could be at risk, FDIC insurance or no.) I picked some up in my 401K the other week at $750 per ounce, though that could turn out to be premature.

Real estate is a good thing to have going into inflationary periods, for two reasons. One, a house has a certain utility attached that fluctuates with the overall economy. As the economy inflates, so do housing prices. Second, inflation diminishes existing debt. My mortgage is at 5.7%. When inflation was 3% my effective interest rate was 5.7 - 3 = 2.7%. But if inflation goes to, for example, 8%, then my effective interest rate is a negative 2.3% - my house would be gaining in value at a faster rate than what I’m paying in mortgage interest.

If inflation is coming there is less incentive to prematurely pay down low, fixed-interest debt like car loans, student loans, or fixed-rate mortgages. Just keep making regular payments and pretty soon you’ll be paying off the old, expensive debt with the new, cheaper dollars. As always, you should still pay off high interest credit card debt.

Bear in mind that inflation won’t happen until the recovery begins, and that isn’t going to happen for a while. Before any recovery can happen we have to hit bottom, and in my opinion we aren’t close to being at bottom yet.

Tags: banks, bernanke, inflation, the fed