Topic: Federal Reserve
A Conversation on the Latest FEDspeak on Inflation and Deflation Feel free to join in!by Jake Towne, the Champion of the Constitution
(libertarian)
Friday, April 10, 2009
I started a conversation on my Facebook wall and thought I would try to see if any here at the Chart want to add to it. The subject was this Reuters post where the president of the Kansas City Federal Reserve Bank, Thomas Hoenig, said that hard as it was to predict when the winding-down process must be initiated, it will happen and the FED will do its best to avert inflation.
"We know it has to happen, but the timing I can't tell you. Nobody knows. We will watch every indicator of data that suggests a recovery is on the way... Failure to do that at the right time means you risk a much higher inflation environment."
On March 18th, the FED's Open Market Committee stated:
"In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability." (emblem)
Not released on their website yet, Avery Goodman reported that the FED stated on Wednesday:
"Members agreed that the monetary base was likely to grow significantly as a consequence of additional asset purchases; one, in particular, stressed that sustained increases in the monetary base were important to ensure that policy was consistently expansionary. Members expressed a range of views as to the preferred size of the increase in purchases. Several members felt that the significant deterioration in the economic outlook merited a very substantial increase in purchases of longer-term assets..."
I made an off-hand remark that it doesn't take a genius to figure out what will happen next (a mess) and received a few really thoughtful replies. Here is the counter argument:
Printing of money is a necessary evil in the short term in order to finance 1) the bailouts within the finanical sector 2) ballouts in the housing sector 3) and to provide stimulus to companies and individuals who have or will lose jobs due lack of credit in the finance sector and due to concurrent falling housing prices, i.e. all of these factors create a negative downward death sprial through a negative feedback loop.
If the government simply stands on the sidelines and lets companies that are too big to fail all go bankrupt, the consequences would be catostrophic. Confidence would fall further, causing panic, bank runs, massive deflation as credit would literally freeze to a halt, people would save and not spend at all. As such, the government, I believe, was caught in a tough situation: 1) do I let market forces pan out or 2) or do we step in here? I believe they were right to try and first unfreeze credit, albeit through unpopular bailouts.
This allowed them to somewhat restore confidence in the finanical markets and the greater economy as seen in the tightnening of credit spreads. Banks are originating new loans again as seen in Wells Fargo/Wachovia. Treasury programs will hopefully allow banks to get to value toxic assets (that still have value) and then get them off the books, thus allowing them to originate more loans. Broad market indicators are still falling, but at a de-accelarating rate, which indicates a bottoming-out process may be underway, (granted it may be a very long time that way live at the bottom before recovery ensues.)
The important thing is, despite that things are still very bad, there is now finally more clarity and less uncertainity, which will lead to a stabilization of confidence. BUT yes, Summers is right. We will have to be vigilant regarding inflation over the next few years. The bailouts have effectively monetized our debt, which will likely hurt the $ in some way or another.
The most important thing after all is said and done is that better regulation is put in place and that banks increase the effectiveness of their lending and screening policies and that bankers are no longer able to use incredible amounts of leverage while enoying assymetric payouts, i.e. enjoying privately in the upside gains of their investments while socializing thier lossess - this is the true problem that needs to be rectified. Read Nassim Taleb's 10 principles on how to defend ourselves as a society from Black Swans."
Replies to this were:
The government hasn't been sitting on the sidelines, it's been actively and deliberately controlling our lives socially and economically for quite a long time.
Each of the proposed reasons you listed for justifying money printing as a necessary evil are themselves consequences of government intervention.
You've effectively suggested government, despite having created the problem, should also be the solution; this only continues the perpetual positive feedback loop at the expense of our civil liberties and purchasing power.
Printing money is not a necessary evil, nor is government intervention; government is not the solution to the problem, government IS the problem.
And:
After almost 100 years of a regulated economy you would think we would learn that it doesn't work well; in the long run it always fails. Read Mises' book "Interventionalism", Hazlitts' book on Inflation and just about anything by Rothbard...
My reply was:
Wachovia/Wells Fargo's numbers are likely cooked and are propaganda to get suckers into the market - we shall see. Their assets:derivatives ratio is just 4.4 when compared with Citi (26) and JPMorganChase (50).
The FED caused the problem by inflating these bubbles (Nasdaq/Subprime/Dow and the upcoming Alt-A/Option/ARM), do we really think it can be covered over by more paper? My opinion, from the numbers, is its a bald-faced lie. I happen to agree with them about not actually having a free market for decades as is suggested in Perkin's Economic Hit Man.
Second point is that you are overestimating how much control the government has. My opinion is the bailouts are somewhat of a public spectacle for the masses. Outside of Congress, the FED has been blowing up the monetary base and their balance sheet like crazy. Barack has no say. Even though its their job per the Constitution, Congress has no say and no balls to do their job.
My translation of this FEDspeak:
March 18th - "Inflation is a slight risk, watch out for deflation, which means everything is cheaper which is actually better for all consumers."
Now - "We are going to inflate like hell and will probably make mistakes. Watch out."
Comments anyone?
Tu ne cede malis sed contra audentior ito. Do not give in to evil but proceed ever more boldly against it.
We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
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Veritas numquam perit. Veritas odit moras. Veritas vincit. Truth never perishes. Truth hates delay. Truth conquers.
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A friend and I were discussing inflation the other day. If $30 trillion of wealth is destroyed, and $3 trillion of new money printed, then we would seem to still have a deficit of $27 trillion. So where does the inflationary pressures come from?
It would seem that the wealth is being taken/destroyed from those that had it and being released to those that are lucky enough to be selected to do the government's dirty work.
Redistribution of wealth would seem to be the objective of this administration.
Posted By: Jake, the Champion of the Constitution
Date: 2009-04-10 15:06:25
I've got to run so this might seem a bit rushed....
The money supply expansion - still, obviously, increasing creates"inflationary pressure". If there were no such thing as credit, we'd just see inflation right?
The deflationary pressure seen is all from "credetary deflation" which I wrote a couple articles on (links above). Its invisible to the man on the street, but believe me, its very visible to those who work in the innards of the financial system
My conclusion here is its pretty damn near impossible to say for sure what will happen next. The FED and US gov't will do whatever they possibly can to stave off deflation, however. As for me, I suppose I dont really count on bread and eggs getting all that cheaper. It'll be interesting for sure.
Now, the flip side is that everything we call "Money" - dollars, yen, whatever, is not money. It is debt - the dollar bill is a "Note" as you are probably aware. The FED offers us the credit, and We the People (through our ever-"stupid" Congress) accept it, making us debtors.
The argument that you can still exchange fiat dollars for real wealth still stands -it has purchasing power via the force, or fiat, of government and its mandated legal tender status.
However, the wealth of the people is remains the same, no matter what its "dollar" value is. The origin of the word "wealth" comes more or less from "well-being" - your health and loved ones are really what makes you wealthy. However, land, possessions, business, shop, food, etc also make you wealthier.
Redistribution of wealth is the objective of the new Obama administration, but we have had this tendency ever since the mercantilists, starting with the accursed Alexander Hamilton
Posted By: Jake, the Champion of the Constitution
Date: 2009-04-11 13:56:45
A very intelligent reply from the same source as the "counter argument" viewpoint:
"In response to the above.
Alan Greenspan when he was with the FED is primarily to blame and I agree with you both. He and the FED encouraged complex derivatives as he naively believed this would allow risk to be spread more effectively to many counterparties, thus supposedly reducing the potential of systemic risk. The opposite happened. Counterparty risk was concentrated by a few too large-to-fail firms. We didn't know after the fact given the opacity of the OTC market. Writing of naked CDSs by AIG was a sin and based on the hurbris of a team in London that thought housing prices would never fall and that risks and correlations among mortgage pools could be adequatley assessed via a flawed Gaussian copula.
Understand that I am making the case for the current government, and I mean that in the broadest sense, i.e. FED, Treasury, Capitol Hill, etc. and what I believe they have to do to keep a COMPLETE finanical meltdown from occuring.
I understand the inflationary risks of printing more money and expanding the monetary base and the federal reserve balance sheet. But what else do you propose we do? Bernanke and Gietner are not Paulson and Greenspan. THey have to shovel up the crap left behind their predecessors. I believe they had to enact FED's longstanding policy of "lender of last resort". The government had to bailout certain banks and insureres. They also had to make implict guarantees that they would step in if needed be, e.g. run on mutual funds. I believe these bailouts (which will create inflationary pressures down the road) were necessary to stave off a meltdown. Are we better off then Nov and Dec of 2008 when we were on the brink? I would say yes, which would mean that the policies of the FED and Treasury (which were conconcted by Bernanke and Geitner - the new guys on the street) have made headway. Banks seem to be stablizing, credit spreads such as the TED have dropped, the VIX, while still high, has lowered, showing less fear in the markets. Other indicators such as housing prices are still falling but at a decelarting rate. Housing supply is still high but eventually we will work through that supply which will help to stabilize prices. Do we still have a long way to go? Yes, no doubt.
I believe the fiscal stimulus (of which only a third has been spent), alot of which wont go into effect until 2010- 2011 can still be called off if we start to see inflation. If inlfation creeps up, why can't capitol hill reconvene and simply not implement the rest othe USD750 billion? IN any case, we will still need stimulus to create work for the 8.5% of our nation that is unemployed. I also like the fact that a lot this money will go towards getting us off oil dependence and has really started to make Americans aware of the need to shift to greener solutoins for energy sustainabliity.
IN addition, if inflation creeps in, Bernanke can reverse the FED balance sheet pretty quickly. Whatever will happen I have invested in gold and sivler as well as a hedge against inflation.
THe most important thing is that we have better regulation and more effecitve government, not bigger government. The SEC was a disgrace. We need a smart government to intervene every once in awhile otherwise capitlism left unchecked and hijacked by greed will create bubbles time and time again."
Posted By: Jake, the Champion of the Constitution
Date: 2009-04-11 14:18:57
My reply:
Actually we are in a large amount of agreement and I commend you, as you are obviously well-read. Yes, I too cant believe those idiots believed in those copula equations. And you are right, most of the public arent aware that the Obama stimulus was really a "Obama 2012 Re-election Stimulus" Our difference is somewhat philosophical, so let me nit-pick a bit and rant a bit - perhaps you will reconsider.
"Bernanke and Gietner are not Paulson and Greenspan."
Yeah, but Geithner was in charge of the Open Market Operations at the NY FED from 2003-Jan 2009!! Both he and Bernanke backed up Greenspan lock, stock and barrel!!! Therefore, I do not like your idea of "smart"government - these people created the problem, their reptilian Keynesian minds didn't see the problem develop (or did they?) and how can they be expected to all of a sudden inject "smart" pills and fix everything?
In a well-run corporation, what should happen if you misperform terribly? You get FIRED! Just like we should have been firing the spies and directors that were paid $40 billion or so left and right after 9/11.
"Bernanke can reverse the FED balance sheet pretty quickly."
Its going to be difficult than before. The FED doesnt have just US Treasuries like 95%+ of its balance sheet before, the majority of it now is just CRAP. (unaudited crap is still crap)
"THe most important thing is that we have better regulation and more effecitve government, not bigger government."
This is a can of worms, agree with you on limited government part. My view is that the laws are already in place, and we do need better regulation up to a point - for instance, people were trying to turn in Madoff YEARS beforehis scheme collapsed!! Have you read this piece by EInhorn on regulation?
"we will still need stimulus to create work for the 8.5% of our nation that is unemployed. I also like the fact that a lot this money will go towards getting us off oil dependence and has really started to make Americans aware of the need to shift to greener solutoins for energy sustainabliity."
1) Unemployment is closer to 15% than 8.5%
http://www.shadowstats.com/alternate_data
2) I am curious to find out how much "a lot" is - from what I read of the plan, it didn't look promising. Of course, I am in agreement with finding solutions to the energy problem, but I would rather have the free market find them.
3) We don't NEED the work - we NEED the production. You probably understand the difference, but it's super-important. If we don't focus on production as a nation, we will wind up doing busywork for the Obama administration and compounding a bad problem by creating socialist bureaucracies to "oversee" this new economy.
I think I reasoned my views most clearly in this article
good reply, jake. though i'm not sure just how much you truly had in common...i'l take you at your word :)
re: inflat vs/deflat. i often wonder if this thing is going to play out similarly to the last mega deflation, w/the hyperinflationary blow-off twist. Is it too simplilstic for them to hold all of this money (which appears to be nearly 14-16 trillion at this point), and use that to buy up much of the wealth in the country when the deflation is at its worst (thus assuring, like they always do, they buy at the lowest prices they can create)?
I began calling the housing bubble in essence "the Land and Wealth Redistribution Act" back in 2004. For it was obvious to me that their goal was to suck everyone in at higher and higher prices, then collapse it, buy it up (for pennies on the dollar) and re-engineer our landscapes. Katrina only further justified that speculation.
But after they have all the wealth redistributed, then they hyperinflation can run its course.
One question I do have, however is this. IF this 16 trillion is being hoarded by these banks (and little doubt embezzled, however [il]legally). Considering one of the laws that was passed in the days surrounding late Sept, though I believe around the 1st of October, essentially enabled banks to no longer need to have ANY reserves.
If this isn't the case, the reserve ratios that I've been hearing which include numbers of 33/1, 60/1 and even 100/1 in some cases, would make that 16 trillion the just about the number of the derivatives bubble, according to Soros and others (with a few hundred trillion on top!). But if it is the case, it makes me worry even more about hyperinflation.
Posted By: Jake, the Champion of the Constitution
Date: 2009-04-23 10:05:58
Dear Brian -
in my latest piece "Off a cliff with no air bag" I stated that it appears the only reserves the banks have are vault cash, so the 33/1 is closest to the current reality.
yeah, deflationary riptide terminating in hyperinflation with the asset confiscation you described is certainly a possibility (it doesnt even have to be a conspiracy-type of confiscation, people/big money may just do it naturally)
have you read fekete recently? he has a pretty cool theory along the same as above, but involves interest rates and gov't Treas debt speculators
I definitely read your "off a cliff..." amazing piece, btw. (I believe you were the one who mentioned about the checking subdivisions??? i didn't know that. if not you, someoen else relatively recently). Moreover, I've also read Fekete for the past 14 mos or so. I deeply appreciate his knowledge and perspective and am very much listening to the debt/gdp metric he likes. I also loved his recent article where he quotes a 1960 the NYU Economics Dept Head. He sure sounds prophetic. Where are the those brave economists today in academia?
I hear the Schiffs, and appreciate his important, simple, and redundant message (though it's very predictable at this point). I really like Fekete, and especially love hearing Nassim Taleb. I'm not as big on Mish Shedlock, though I do agree with much of what he says. I also like Jim Rogers and Jim Sinclair, (and I'm sure there are many others whom i'm forgetting). I won't go tooting your horn, but i still read your blog nearly daily (as with Eric deCarbonnel). there are many others I read, and these times make it so hard for me to finish up my med school pre-reqs :)
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On March 18th, the FED's Open Market Committee