Prophet Bernanke Plans for Inflation 15 comments
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In religion, a prophet is a person who has encountered the supernatural or the divine and often one who serves as an intermediary with humanity. In the late 20th century the appellation of a prophet has been used to refer to individuals particularly successful at analysis in the field of economics. Now let's meet Prophet Ben Bernanke.
In a speech made more than 6 years ago before the National Economists Club, Washington, D.C., Bernanke wrote:
About Preventing Deflation
As I have already emphasized, deflation is generally the result of low and falling aggregate demand. The basic prescription for preventing deflation is therefore straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation.
About Zero Interest Rate Policy
But suppose that, despite all precautions, deflation were to take hold in the U.S. economy and, moreover, that the Fed's policy instrument--the federal funds rate--were to fall to zero. What then?
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.
About Printing Money ASAP
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.
We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.
About Quantitative Easing
A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.
So, Prophet "OKI" Bernanke (Oki stands for a famous Japanese printer brand), will do all that he can to create inflation. And he knows he can, if he has enough printers. So, the real problem the US economy will have regarding prices will not be deflation but big, runaway inflation. There is no quick fix for all this money being printed. As Jim Rogers says, every time in history a huge amount of money was printed it has always led to inflation. This time the outcome won't be different.
Another very savvy investor, Marc Faber, has serious inflation concerns. I have no doubt in my mind. Inflation is coming and US Government Bonds will collapse. There is no other way around it. Fasten your seat belts.
Stock position: None.
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This article has 15 comments:
Obama the genius will follow Roosevelt.
"By Patrick Rial and Lynn Thomasson
June 24 (Bloomberg) -- Japanese stocks, Asian real estate and commodities are investors' best bets as faster inflation erodes returns in the rest of the world's markets, said investor Marc Faber, author of the Gloom, Boom & Doom Report.
``Demand for commodities and oil will not vanish.'' Faber said at a conference in Tokyo. ``The shift in demand that drove up commodity prices is not going to go away.''
Record prices for commodities have accelerated inflation around the world and lifted shares of raw material and energy producers. Oil more than doubled since the beginning of last year, while products including coal, rice and fertilizer also reached record highs in 2008.
Faber, who told investors to buy gold as the metal began a seven-year rally, predicted inflation may boost Japanese share prices and Asian property will benefit as more people gain access to mortgages.
Specific ways to hedge and exploit this eventuality:
1) Short long-term U.S. Treasuries (either ZB futures or TLT ETF)
2) Short USD (buy UDN, or any other currency ETF or futures contract)
3) Buy gold and other precious metals
Since the federal government seems intent on destroying our currency, we all need to take care of ourselves or jump ship with our assets to more prudently governed countries.
However, this does not mean that high inflation is certain. To understand this, one must have a little basic knowledge about the money supply, and more than a cursory look at Bernanke's quotes above.
First off, there are basically two major economic actors when it comes to the money supply. There are the banks (collectively) and the central bank (the Fed). The former is far more powerful than the latter. The creation of money in the economy primarily occurs through banking activity; then a bank takes a deposited dollar and lends it, that loan is are subsequently deposited in another account, and where there was one dollar in deposits there are now two. When the banks stopped lending, this primary driver of money creation also stopped. Worse, as banks have collectively moved to shore up their capital positions, they have been reducing the money supply, which will tend to make money more valuable - deflation.
The Fed (backed by Treasury) is a much smaller player than the collective banking sector, and so to counteract the deflationary actions of the banks has had to move in unprecedentedly large ways. But these actions are not necessarily inflationary.
In a normal time, in fact, in any other time since 1933, recent Fed actions would have had huge inflationary impacts. But because of the shrinking the money supply resulting from the credit contraction, these actions are not currently inflationary. The question is what impact these actions will have in six months or a year or two years, as the credit markets heal and begin expanding again. The author, and lots of others, are quite sure that the answer is that we are certain to see very high levels of inflation.
But a more careful look at these carefully considered actions is warranted. After all, Bernanke's been studying the Great Depression, or more specifically the monetary aspects of the Depression, for virtually his entire academic career. Those who would assume he doesn't know what he's doing, or has not thought this through, or doesn't care about future inflation, don't really understand the problems and solutions.
The trick here is not in flooding the markets with Fed-derrived money to replace that lost through the credit collapse. The trick is on the other end, in removing the additional money as the banking industry moves back to a more normal money-creating paradigm. The combination of Fed actions to date and Bernanke's quote above show that the Fed is well aware of the upcoming problem.
The TARP preferred investments in the banks are a good example of thoughtful government action (even if it wasn't what they originally said, and even if the idea came from overseas). The banks will take the money and it will help them improve their capital positions, enabling them to get to normal lending faster (that it hasn't happened yet doesn't mean that it won't). As banks become more comfortable with their position, and more importantly with the economy as a whole, they have a strong incentive (high dividend payments) to pay back the government equity, which will take money out of circulation, which will be anti-inflationary.
Bernanke's discussion above about buying 2-year Treasuries to manage interest rates is also very thoughtful. The idea here is that a two-year period is long enough for the economy to recover from vitually any deflationary shock (if managed well on the front end through massively expansionary monetary policy). The Fed buys the 2-year-ish notes, injecting money into the economy, which then goes elsewhere. In two years, when the credit markets are recovering, the federal government pays off those notes, but instead of the cash re-entering the markets, it goes to the Fed instead.
Basically, the Fed puts money into the market now that would normally not re-enter the market for two years. The net result in the money supply in two years is zero, so that beyond the two-year period the action has no impact on inflation. In the short term, however, it is inflationary -- or anti-deflationary, which is exactly what is needed.
Basically, the Fed isn't run by a bunch of morons. Give them some credit for being thoughtful and being studied, and take some time to try to understand the forces at work. What they're doing may not work exactly, as crisis intervention is sloppy work. But it is NOT sure to fail.
Recession happens from a fall in aggregate demand.
Deflation is a purpose-driven process undertaken by a Central Bank to reduce excess credit through increases in reserve requirements and through higher interest rates.
Central Banks, like the Federal Reserve, engage in inflation, which is the purpose-driven expansion of credit by cheapening the Price of Now Money as rented cash.
"After all, Bernanke's been studying the Great Depression, or more specifically the monetary aspects of the Depression, for virtually his entire academic career. Those who would assume he doesn't know what he's doing, or has not thought this through, or doesn't care about future inflation, don't really understand the problems and solutions. "
On Dec 28 02:04 PM BS Detector wrote:
> This article seems either to be simplistic so that it can be frightening,
> or else frighteningly simplistic. The author seems to ignore the
> linkage between deflation and inflation; namely, that there is a
> point in between where there is neither inflation nor deflation.
> If a central bank is taking action to avoid deflation, it must risk
> overshooting its mark to be effective. Clearly, the Fed is more concerned
> with preventing a deflationary spiral than it is with causing higher
> than desirable inflation in the future.
>
> However, this does not mean that high inflation is certain. To understand
> this, one must have a little basic knowledge about the money supply,
> and more than a cursory look at Bernanke's quotes above.
>
> First off, there are basically two major economic actors when it
> comes to the money supply. There are the banks (collectively) and
> the central bank (the Fed). The former is far more powerful than
> the latter. The creation of money in the economy primarily occurs
> through banking activity; then a bank takes a deposited dollar and
> lends it, that loan is are subsequently deposited in another account,
> and where there was one dollar in deposits there are now two. When
> the banks stopped lending, this primary driver of money creation
> also stopped. Worse, as banks have collectively moved to shore up
> their capital positions, they have been reducing the money supply,
> which will tend to make money more valuable - deflation.
>
> The Fed (backed by Treasury) is a much smaller player than the collective
> banking sector, and so to counteract the deflationary actions of
> the banks has had to move in unprecedentedly large ways. But these
> actions are not necessarily inflationary.
>
> In a normal time, in fact, in any other time since 1933, recent Fed
> actions would have had huge inflationary impacts. But because of
> the shrinking the money supply resulting from the credit contraction,
> these actions are not currently inflationary. The question is what
> impact these actions will have in six months or a year or two years,
> as the credit markets heal and begin expanding again. The author,
> and lots of others, are quite sure that the answer is that we are
> certain to see very high levels of inflation.
>
> But a more careful look at these carefully considered actions is
> warranted. After all, Bernanke's been studying the Great Depression,
> or more specifically the monetary aspects of the Depression, for
> virtually his entire academic career. Those who would assume he doesn't
> know what he's doing, or has not thought this through, or doesn't
> care about future inflation, don't really understand the problems
> and solutions.
>
> The trick here is not in flooding the markets with Fed-derrived money
> to replace that lost through the credit collapse. The trick is on
> the other end, in removing the additional money as the banking industry
> moves back to a more normal money-creating paradigm. The combination
> of Fed actions to date and Bernanke's quote above show that the Fed
> is well aware of the upcoming problem.
>
> The TARP preferred investments in the banks are a good example of
> thoughtful government action (even if it wasn't what they originally
> said, and even if the idea came from overseas). The banks will take
> the money and it will help them improve their capital positions,
> enabling them to get to normal lending faster (that it hasn't happened
> yet doesn't mean that it won't). As banks become more comfortable
> with their position, and more importantly with the economy as a whole,
> they have a strong incentive (high dividend payments) to pay back
> the government equity, which will take money out of circulation,
> which will be anti-inflationary.
>
> Bernanke's discussion above about buying 2-year Treasuries to manage
> interest rates is also very thoughtful. The idea here is that a two-year
> period is long enough for the economy to recover from vitually any
> deflationary shock (if managed well on the front end through massively
> expansionary monetary policy). The Fed buys the 2-year-ish notes,
> injecting money into the economy, which then goes elsewhere. In two
> years, when the credit markets are recovering, the federal government
> pays off those notes, but instead of the cash re-entering the markets,
> it goes to the Fed instead.
>
> Basically, the Fed puts money into the market now that would normally
> not re-enter the market for two years. The net result in the money
> supply in two years is zero, so that beyond the two-year period the
> action has no impact on inflation. In the short term, however, it
> is inflationary -- or anti-deflationary, which is exactly what is
> needed.
>
> Basically, the Fed isn't run by a bunch of morons. Give them some
> credit for being thoughtful and being studied, and take some time
> to try to understand the forces at work. What they're doing may not
> work exactly, as crisis intervention is sloppy work. But it is NOT
> sure to fail.
How interesting it is that you have so many comments with a +1 score, even in threads where not a single other post has even one vote. Is being highly rated really so important to you, that you would vote for yourself?
Oh, by the way - do you have something constructive to add here?
On Dec 28 06:36 PM Kelly Lieberman wrote:
> I see, well it's a great thing that our economy has been in such
> fine hands! Such a learned scholar!! If he knew what he was doing
> we wouldn't be in the mess we are in! He is one of the idiots who
> didn't see the train until it hit him!
The statistics have been compiled based on information provided by 12,000 corporate executives throughout the world. A system of rating the banking systems of individual countries was conducted by participants answering a number of questions and rating the banks on a scale of one to seven, one being in need of government support seven being entirely healthy.
Canada’s baking system, lead by Royal bank, CIBC, Scotiabank, TD Bank, Bank of Montreal and National Bank, received the highest rank in the world, scoring 6.8 on the rating scale.
The top 10 safest countries for banking are currently as follows:
Canada (6.8)
Sweden (6.7)
Luxembourg (6.7)
Australia (6.7)
Denmark (6.7)
Netherlands (6.7)
Belgium (6.6)
New Zealand (6.6)
Ireland (6.6)
Malta (6.6)
On Dec 28 02:04 PM BS Detector wrote:
> This article seems either to be simplistic so that it can be frightening,
> or else frighteningly simplistic. The author seems to ignore the
> linkage between deflation and inflation; namely, that there is a
> point in between where there is neither inflation nor deflation.
> If a central bank is taking action to avoid deflation, it must risk
> overshooting its mark to be effective. Clearly, the Fed is more concerned
> with preventing a deflationary spiral than it is with causing higher
> than desirable inflation in the future.
>
> However, this does not mean that high inflation is certain. To understand
> this, one must have a little basic knowledge about the money supply,
> and more than a cursory look at Bernanke's quotes above.
>
> First off, there are basically two major economic actors when it
> comes to the money supply. There are the banks (collectively) and
> the central bank (the Fed). The former is far more powerful than
> the latter. The creation of money in the economy primarily occurs
> through banking activity; then a bank takes a deposited dollar and
> lends it, that loan is are subsequently deposited in another account,
> and where there was one dollar in deposits there are now two. When
> the banks stopped lending, this primary driver of money creation
> also stopped. Worse, as banks have collectively moved to shore up
> their capital positions, they have been reducing the money supply,
> which will tend to make money more valuable - deflation.
>
> The Fed (backed by Treasury) is a much smaller player than the collective
> banking sector, and so to counteract the deflationary actions of
> the banks has had to move in unprecedentedly large ways. But these
> actions are not necessarily inflationary.
>
> In a normal time, in fact, in any other time since 1933, recent Fed
> actions would have had huge inflationary impacts. But because of
> the shrinking the money supply resulting from the credit contraction,
> these actions are not currently inflationary. The question is what
> impact these actions will have in six months or a year or two years,
> as the credit markets heal and begin expanding again. The author,
> and lots of others, are quite sure that the answer is that we are
> certain to see very high levels of inflation.
>
> But a more careful look at these carefully considered actions is
> warranted. After all, Bernanke's been studying the Great Depression,
> or more specifically the monetary aspects of the Depression, for
> virtually his entire academic career. Those who would assume he doesn't
> know what he's doing, or has not thought this through, or doesn't
> care about future inflation, don't really understand the problems
> and solutions.
>
> The trick here is not in flooding the markets with Fed-derrived money
> to replace that lost through the credit collapse. The trick is on
> the other end, in removing the additional money as the banking industry
> moves back to a more normal money-creating paradigm. The combination
> of Fed actions to date and Bernanke's quote above show that the Fed
> is well aware of the upcoming problem.
>
> The TARP preferred investments in the banks are a good example of
> thoughtful government action (even if it wasn't what they originally
> said, and even if the idea came from overseas). The banks will take
> the money and it will help them improve their capital positions,
> enabling them to get to normal lending faster (that it hasn't happened
> yet doesn't mean that it won't). As banks become more comfortable
> with their position, and more importantly with the economy as a whole,
> they have a strong incentive (high dividend payments) to pay back
> the government equity, which will take money out of circulation,
> which will be anti-inflationary.
>
> Bernanke's discussion above about buying 2-year Treasuries to manage
> interest rates is also very thoughtful. The idea here is that a two-year
> period is long enough for the economy to recover from vitually any
> deflationary shock (if managed well on the front end through massively
> expansionary monetary policy). The Fed buys the 2-year-ish notes,
> injecting money into the economy, which then goes elsewhere. In two
> years, when the credit markets are recovering, the federal government
> pays off those notes, but instead of the cash re-entering the markets,
> it goes to the Fed instead.
>
> Basically, the Fed puts money into the market now that would normally
> not re-enter the market for two years. The net result in the money
> supply in two years is zero, so that beyond the two-year period the
> action has no impact on inflation. In the short term, however, it
> is inflationary -- or anti-deflationary, which is exactly what is
> needed.
>
> Basically, the Fed isn't run by a bunch of morons. Give them some
> credit for being thoughtful and being studied, and take some time
> to try to understand the forces at work. What they're doing may not
> work exactly, as crisis intervention is sloppy work. But it is NOT
> sure to fail.
I am in TBT, but I don't like it, and I'm looking for something similar but better. Refer to some recent discussions on SA about doubleshort ETFs in general and this one in particular. Basically, the expenses are quite high, and the returns on the ultrashorts have not been what they should be based on their marketing materials.
The problem with TBT is the cost of holding it over time, and I think the Fed will be able to hold rates down for a year or so, until the economy starts picking up positive momentum.
That said, I think short Treasuries is a good idea, simply because the rates are unsustainable. The problem is that the returns may not be high enough; as risk premiums go down and money moves into other investments, those other investments may gain more than one could gain short Treasuries.
On Dec 30 12:23 PM edifish wrote:
> As you
> pointed out though, crisis intervention is sloppy work and the difficult
> task will be to remove the excess liquidity once their actions take
> hold, and there is a LOT of liquidity being pumped out right now.
> The way I see it, Bernanke is very determined to reverse deflation
> to the point of being willing to risk the consequences of having
> to fight another battle against inflation some time in the future.
> That being said, do you not see a wonderful opportunity to speculate
> against the long bond using ETF's such as TBT? In time, it either
> works as intended and 30 year rates return to the 4-5% range, or
> it they have difficulty on the back end and rates go much higher.