Wednesday, April 15, 2009

Federal Reserve Historian Allan Meltzer says Ben Bernanke will Bring us 1970s Inflation

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This is an interesting piece in Bloomberg which concurs with much of what I've written. If Ben Bernanke and the rogue Federal Reserve is indeed "successful" in their campaign, we will have saved the asset owners (the most fortunate among us by wealth/income strata) by sacrificing those at the bottom. Inflation, the most regressive of taxes will return... in bulk. But as with all U.S. policies - fight the fire on the couch and deal with the fire on the roof once we get there.

Uncle Ben, a historian of the Great Depression himself has made it clear he believes the great mistake of the era was government believing the coast was clear too early. He has vowed not to make the same mistake. So even when the economic data and indicators turn for the better, he will follow the Greenspan playbook (who left rates at 1% for about a year after people were saying it was time to turn off the fire hose). And what Bernanke is doing is making Greenspan's moves look puny.
  • Federal Reserve Chairman Ben S. Bernanke is siding with John Maynard Keynes against Milton Friedman by flooding the financial system with money. If history is any guide, says Allan Meltzer, the effort will end in tears. Inflation “will get higher than it was in the 1970s,” says Meltzer, the Fed historian and professor of political economy at Carnegie Mellon University in Pittsburgh. At the end of that decade, consumer prices rose at a year-over- year rate of 13.3 percent.
  • So far, investors and economic data both back up the Bernanke-Keynes view. The market in Treasury Inflation-Protected Securities as of April 6 indicated long-term inflation expectations of 2.5 percent, below the 2.8 percent average inflation rate of the past 10 years. (well this will certainly be true at this point since the global recession is so immense)
  • And Meltzer, 81, who has written an 800-page history of the Fed’s first 38 years and is now working on volume two, isn’t alone in seeing a return of sky-high inflation as a result of Bernanke’s policies. John Brynjolfsson, chief investment officer at hedge fund Armored Wolf in Aliso Viejo, California, says the Fed is still in the early stages of its effort to pump up the economy. “We’ve got at least nine innings of reflation ahead of us, ultimately ending with probably double-digit inflation,” he said in a Bloomberg Television interview on April 6.
  • Behind investors’ caution: a ballooning Fed balance sheet that has climbed $1.2 trillion in the past year to $2.09 trillion and expanded the nation’s money supply. It is poised to increase even further after last month’s Fed decision to buy an additional $1.15 trillion worth of assets, including $300 billion in Treasury securities. (my outlier prediction in late 2008 was this gets to $5 Trillion as the reality of just how bad the financial system is, is finally acknowledged and the Federal Reserve takes over the risks from the banks)
  • M2, a broad measure of the money supply that includes checking accounts and money-market mutual funds, rose in the last six months at an annual rate of 14 percent. That compares with an average 6.3 percent during the last decade.
  • Meltzer says political pressure will prevent Bernanke, 55, and fellow policy makers from withdrawing liquidity quickly enough as the economy recovers.That’s similar to the pattern that occurred back in the 1970s, he says. Then-Chairman Arthur Burns allowed excessive money-supply growth because he was unable or unwilling to resist pressure from President Richard Nixon’s White House to hold down unemployment, leading to the “great inflation” of that era, he says. (but remember, the Federal Reserve is not part of government and is indeed "independent" in it's thoughts and policies - this is where you laugh)
  • Now, Bernanke and fellow policy makers have “squandered their independence” by becoming involved in bailouts of financial firms and by taking long-term and illiquid assets onto their balance sheet, Meltzer says. (not if you ask them, they havn't! still making decisions free of politics and with no additional risks to US taxpayers - it's all AAA garbage.... err, assets) “They don’t have the political ability to control inflation.”
  • John Ryding, founder of RDQ Economics LLC in New York and a former Fed economist, agrees that the central bank will be slow to soak up all the cash it has injected into the financial system, in part because policy makers will be fixated on still- high unemployment. “They pay lip service to inflation being a monetary phenomenon,” he says. “But they’re too much concerned with the Keynesian explanation of inflation.”
  • All that money is going to find a home,” says Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio. He sees oil prices increasing to “$80, $90, $100 before the end of next year” from $52 a barrel now.
  • The Fed is “running a laboratory experiment” on what drives inflation: the money supply or the output gap, says Laurence Meyer, a former Fed governor and now vice chairman of St. Louis-based Macroeconomic Advisers
Again, if this all plays out in a sort of "worst case scenario" you could have an epic return of stagflation - a country full of unemployed facing food, energy, and all other prices surging. That should be excellent for the social fabric. But at least stocks (which are a have a relatively fixed amount of supply) will be chased ever higher by the same phenomenon affecting all other commodities. So we can then point to stocks and say "the market is approving of Ben's policies as the stock prices tell us". Sure - inflation is fine to those with assets and wealth, not so much for the folks who live on the wrong side of the tracks whose earnings power is destroyed. Or thosefixed income seniors - those sorts must be worked over to help feed the financial elite.

Now if you are a true "free market" person you'd ask why the Federal Reserve should even exist....Why the handful of people with economic degrees know "better" than the "all knowing market" where interest rates should be is beyond me. But they insist they do and that's why they are here - although we claim the free market is fine in all other parts of our economy.... but not in setting rates or creating money out of thin air. (We're not even allowed to audit these wise men's institutions - it would be beneath them; you dare question the doings of the gods on Mount Olympus?) Further, we need false idols to worship at, in times of crisis - someone to 'save us' from our messes. The same messes which would never of reached a fraction of the magnitude if not for said Federal Reserve's earlier policies. It's all beautifully circular.

But not to worry - Ben (Zeus) has it under control. Just another fear mongering story by a liberal elite media source. (don't forget to whistle as you walk by the graveyard)

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