Tag Archives: inflation

In the World’s High Stakes Game of Chicken, Bernanke May Have Just Blinked

In Ben Bernanke’s first ever news conference, he stared down reporters with his boldface rejection of a QE3, but my guess is that in this international game of chicken, Bernanke will soon blink. He disclosed that he will not begin a QE3 after QE2 finishes on June 30, and that the Fed funds target rate may buoy from its near zero rate. His reasons for this decision were that his concerns for inflation have overtaken needs to prime the sluggish economy, and that QE2 has been “effective” and “successful”. With Bernanke’s finger on the button of the world’s economy, has he really forsaken quantitative easing?

Pumping a previously unimaginable $1.5 trillion into the economy certainly had to be “effective” on some level but unfortunately, not on the level that would ease anyone’s mind that America, or the world for that matter, has dodged imminent danger. With all of the stimulus and quantitative easing that encouraged it, the U.S. economy crawled ahead 1.8% in the first quarter of 2011, well below the rate of a normal recovery. Meanwhile, unemployment claims are edging higher as a quarter of the U.S. suffers unemployment or underemployment, and the recent moderate gains in housing prices have peaked and are retreating once again.

The recent rise in commodities signaled the expected results of America’s monetary intervention, inflation. America’s consumer’s goods consumption is import driven and those prices are going up. If Bernanke actually holds true to the promise he gave America prior to testing his monetary theories, and pulls dollars from the economy in response to rising prices, America’s economy will turn down a more diligent path of squeezing out its excesses through a hard double dip recession combined with inflation.

The combination of Japan’s recent tragedy and a continued potential for a downturn in the U.S. may lead to a softening in the growth of worldwide demand, thereby reducing the potential for real demand inflation. However, as the unprecedented flood of dollars multiply in the market, we will see the lagging effect of a continuing drop in dollar purchasing power that will more than offset the soft economy to produce inflation. Commodity prices are the leading indicator of future general inflation as the QEs work their way through the economy.

America will then have stagflation similar to that caused by the currency expansion and oil embargo of the ‘70s. Our import consumer goods prices will accelerate higher, while our domestically captive service prices will drift lower leading to reduced wages and higher unemployment, as commodity inflation saps the energy out of our service driven domestic economy.

Bernanke has the choice of funding a QE3 to pay for rising interest rates that are bound to occur as a result of previous government intervention, or of pulling the plug on this bad monetary experiment and potentially having some frustrated economist coin a phrase with his name in it to mean a “really really bad stagflation”. My guess is that rather than be known for the Bernanke Splits, he will blink and a third, perhaps more moderate, round of QE3 will begin to assist inflation even higher.

That’s my take, what’s yours?

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Filed under American Governance, Federal Reservre, U.S. Monetary Policy

Will Someone Tell America’s Emperors of Finance They Have No Clothes?

There are those that tout Keynesian and Chicago theories as our protection in this dire economic situation America finds herself. They claim these theories were successfully tested in the Depression, but we know that many experts equally believe that stimulus and money printing was not successful then nor will it be now. Friedman himself said that excessive money printing, like drug addiction, has to keep accelerating until ultimately failing in hyperinflation to sustain short term positive effects. No, evidence strongly leans toward the theory that what drew us out of the double dip depression of the thirties was that bombs destroyed worldwide industrial output creating demand for U.S. manufacturing, not the eerie monetary and fiscal voodoo policies we are chanting around the fire today. Prominent economists now say we are headed imminently toward our second dip.

I am warning my friends of dire inflation, but predicting inflation, after global merchants like the CEO of Wal-Mart disclose they cannot hold inflation back any longer isn’t fear mongering. I am simply a master of the obvious taking no credit for my discernment. However, to claim that all is well as the Emperor rides naked through the streets is simply blind loyalty to failed policies. I like the little boy who pointed out the Emperor flaunting of body parts that should never be displayed in a processional, am simply calling the tailor a fraud.

I hope that my fears are allayed but it seems there will more than likely be no return from the abyss. No government in history has been able to turn back once this extreme an acceleration of money supply has occurred. This drug crazed college experiment must unfortunately continue on for our economy will implode otherwise. We have no choice but to continue printing. However, let’s not rewrite history. If the real purpose of Henry Paulson’s “shock and awe” monetary policy was not to protect the wealth of his cohorts but to save the world’s financial system and to avoid the catastrophe of burning down of America’s house, then adding an unprecedented amount of dollar flow to an already bloated supply to eradicate the residue of his quick fix was the equivalent of burning down the entire city of Rome to drown out the awful fiddling of Nero.

Certainly, this disastrous repair of our economy would not have even occurred if it were not for repeated administrations allowing the deregulation and consolidation of the financial industry. I could never defend their malfeasance. Each time, the financial industry coalesced and bubbled into an interweaving quagmire of evasive tactical and strategic conglomeration, I scratched my head at the seemingly complicit nature of our regulators. Gone was the protection envisioned at the height of dismantling that occurred with the Depression. The multinational gold rush fueled the revolving doors between Wall Street and Capitol Street, creating a frenzy of Ponzi fever gambling America’s future for a few gold nuggets.

And if I will not defend almost criminal policies of creating businesses too big to fail, I certainly would not defend spending billions if not trillions to keep them in place. The banks that created the morass should have been allowed to fail along with the humanoids that crept within their demonic walls. Those bankers and banks that had enough souls to live through the implosion could have been propped up to continue on, sorely but not worse for the wear than today.

Ask the 8 million 99ers, that forgotten group that has a higher suicide rate than any other, if these policies were the right ones. Or perhaps we could get a positive response from the millions who have lost or will lose their homes through foreclosures even as scores of millions lose their life’s savings holding onto the obsolete dwelling boxes we used to proudly call our prime investments. Perhaps the elderly gents who used to own their own businesses who will now be bagging groceries for a living until they can no longer lift the cans of food, inflated by our QE2, off the checkout line into upper class grocery bags will proudly support our future path. Like Japan, we will drift into our forgotten decades and wonder if there was a better way out of the collapse of 2008.

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Filed under American Governance, Foreign Policy, U.S. Monetary Policy