With apologies to The Vapors; I don't think so but the quote I posted from Niels Jensen earlier this week is still on the front burner.
The inescapable conclusion is that when you need inflation the most, it is the hardest to engineer whereas, when you don’t want it, you can have it in spades.
The context here is the debate between US debt issuance causing meaningful price inflation versus deleveraging causing a debt spiral, IE deflation. This article from Seeking Alpha delves in with more detail but I had another thought with this. Part of the equation is the reliance on Ben Bernanke and the rest of the crew to know when to start raising rates. While some of the policies that have been enacted have been effective in the short run (we do not know about the long run yet) we must remember that this is the same group who publicly had no idea the financial crisis was coming and so reacted very late.
The reason I say "publicly" is because obviously the Fed Head can't say "hey we got a big big problem coming," that would surely make any bad situation worse. While I do not know how the Fed could have acted preemptively without causing a panic the fact is they did not act preemptively and it is reasonable to conclude that if they did see something bad coming they would have done something.Given the above quote and the extent to which the country is relying on the guys who previously got it wrong to now get it right is a high expectation.
I'm not in the deflation camp at this point but I am thinking about this side of the debate a little more lately.
6 comments:
Bernanke was late/wrong in seeing the financial/housing crisis --- but when he acted, he did so with unprecedented force. And he invented new quantitative easing tools (all the facility acronymns) that Japan had no clue about.
The velocity of money went into freefall --- the fed really can't control that. All they can do is try to offset it with policy.
If you want to compare it to Japan -- I would look at the ECB. Trichet raised interest rates in summer of 2008, just as the meltdown really started to kick in. He sat in his chair at a press conference and said "we will not let you down, we will fight inflation".... ha.
the first half of the book written on Bernanke is going to be about his innovation in monetary policy. The second half of the book is yet to be written -- how he pulls back on all this as the economy/velocity comes back.
chris
It will be difficult to feel the stimulus of QE for the ordinary people. Minor benefits only since the MAJOR beneficiaries will the the very wealthy. Over the last 30 yrs. real income for average american is static while the VERY wealthy have incresed their incomes/net worth by 500% (govt. data). So massive amounts of cheap moneyand leverage do not benefit most of the population in our system but only the super wealthy. This causes asset bubbles as the super wealthy chase different assets classes. Ordinary americans had home equity leverage which is noe gone. Unless the liquidity can be transferred to masses inflation will be very hard to generate.
Roger,
The Fed could have acted pre-emptively in a few ways. One, raising the discount rate sooner than they did or not lowering it to such a ridiculously low rate. Greenspan's elixir to cure all financial woes was lower rates.
The second is the reserve requirement. I realize the Fed doesn't touch that tool often because the drop rates elixir usually did the trick, but the Fed could have reduced leverage by altering the reserve requirements.
It comes down to a harsh reality. The Fed's main purpose is to support the banks. They are not going to pull the punch bowl away when the banks are making so much money.
ETFreplay talks about the creative actions of Bernanke, but his actions just prove my previous point. Please tell me how these actions aren't just benefiting the banks. How are they fixing the structural problems?
Leverage is just as high as it was before the crisis. The only reason it looks smaller is the banks remove debt before the quarterly numbers are released. The banks are selling as many CDS instruments now compared to before the crisis. Profits at the banks are large, but not for banking activities. It is taking risk or lending to the government using dollars borrowed at 0%. We don't have a banking sector; we have socialized hedge funds.
If Bernanke had taken any steps to actually restructure the system, I might applaud his creativity, but this system is still broken. We are praising him for his creative use of duct tape.
As far as the deflation/inflation arugment, I am looking at deflation. Outside Wall Street, most Americans are paying off debt or defaulting (7 million foreclosures in the pipeline). The banks are lending and consumers aren't asking. This is deflationary. I am not buying 30 year Treasuries though. Too much risk if I am wrong. However, I think those that do will be pleased with the results in a few months.
we are in unprecedented times , so we don't know how this will turn out, inflation or deflation. I never in my life thought we would see massive foreclosures. I find it amazing there is not an associated panic.
Not to be political, but when the anchor began to sink, the Republicans were in office and no way would they disrupt business.
Bernanke can't structurally change the economy so why debate that?
I was just commenting on the fact that he not only used duct tape -- he invented new forms of duct tape. As far as a fed chairman can go -- this was innovative.
Regarding banks, Bernanke is the foremost student of the depression in the world. It was incredibly fortunate to have this man in this role at that time in history. And yes, he viewed the primary cause of the depression the fact that so many banks failed. So if you want a depression, don't support the banks.
Criticize him all you want -- but his actions helped the economy in a great time of need. No, he did not structurally change the global economy -- he just did his job.
The Fed staved off the liquidity crisis, but we still have a solvency issue. Here, Bernanke is merely following the Japanese zombie method.
We should followed the Swedish model where we forced banks to write assets down and make the bondholders/equity owners take the losses.
So folks can argue that Bernanke took quicker action, and those actions were more creative, than Japan, but it is still the same essential moves.
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