Inflationary Problems Facing the Fed 31 comments
an article to
-
Font Size:
-
Print
- TweetThis
By Simon Johnson
Here is Ben Bernanke’s problem.
1. The financial sector is busy setting up arrangements in which employees are guaranteed high levels of compensation if they stay on through the difficult days ahead. These retention-type payments allow firms to survive in their existing form, pursue business-as-usual, and gamble for resurrection, i.e., make further risky investments.
2. But these same payment schemes, e.g., Goldman Sachs’ loans-for-employees deal, are a form of poison pill with regard to further bailouts - the Administration may want to help these firms down the road, but this kind of tunneling means Congress will put its foot down. Do you think that President Obama’s $750bn for bailouts (scored as $250bn) will survive the budget process? No New Bailout Money is a slogan reaching from here to the midterm congressional elections.
3. And the financial system is in big trouble. Unless the economy turns around, somewhat miraculously, we are in for a big slump. Or even for a Great Depression - watch closely the words and body language in Bernanke’s interview on 60 Minutes.
The big banks are essentially making themselves Too Politically Toxic To Rescue, and this has potentially bad macroeconomic consequences. So what will Bernanke do?
As he sees the world, there is only one course of action remaining: print money and hope for a moderate degree of inflation. The money part was, of course, the announcement yesterday from the Fed.
The inflation part is a leap of faith. If inflation is driven by the so-called “output gap,” i.e., how far the US economy is below potential output, then prices will not increase much, the yield curve steepens moderately, and banks make out like bandits (it’s just an expression).
But if the whole world is moving more into an emerging market-type situation then (a) inflation expectations become deanchored (central bank jargon for “really scary”), (b) potential output falls as we massively deleverage, and (b) people move increasingly into alternative assets - storable commodities spring to mind - and we get some serious inflation.
If oil prices jump, then we have an even bigger inflation problem. Oil is not storable, supposedly. But if you can explain to me exactly why oil prices rose as they did during the first part of 2008, despite the slowing global economy, I might be greatly reassured that we are not heading immediately into a runaway inflation spiral.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication in the last week
Seeking Alpha 100 » -
Fastest Climbers
Those with the largestSee all
increase in followers
in the last week
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
theburningplatform.com...
On Mar 19 01:02 PM raytayzmd wrote:
> ..."But if you can explain to me exactly why oil prices rose as they
> did during the first part of 2008, despite the slowing global economy..."...uhhhh
> -- rampant speculation speculation funded by absurd amounts of leverage
> -- maybe?...greed pays little attention to economic facts...and given
> the exraordinary decline oil prices took over the subsequent year,
> I'd be inclined to think so...
The Fed is acting to force a bottom in home prices and stop deflation as quickly as possible. The Fed, and anyone with a clue really, knows that inflation is on the horizon. They (and I) would far rather inflation occur after we start a recovery instead of before. They (and I) think inflation can be controlled under those circumstances. It just so happens that these moves have some wonderful positive effects. The Fed knows that some of these effects are short-term. They aren't trying to make them long-term.
Bernanke is trying to start a chain reaction that leads to a recovery. It also happens that the Fed's targeting of mortgages for ANYONE capable of refinancing or buying a home is probably the only way to get enough of our huge middle-class spending again to actually form the basis for a recovery.
Oh yah, lets not forget the closing fees for all those refinances. The banks are already raking in the $$, now they will rake in more. Those of us who actually read bank financials know that the large banks already have the revenue rates needed to deal with TARP repayment and mortgage losses. The Fed just gave the biggest banks another few billion a year in donations from the private sector in the form of refi fees and made their high-quality mortgage portfolios tradeable again. So much for the banks being in trouble!
I can't make it any simpler then that.
-Matt
Hang on to any job you've got right now, because with the bailout money and printing presses going like thunder, it won't be long before the next plunge downward accompanied by massive price inflation for gold, silver, oil and anything tangible that hasn't got a president's head printed on it.
And then all these hard-to-hang-onto employees will be state employees because the banks and other financials will have had to be nationalized as no-one else was prepared to pour any more money in.
Um, if this is the case, don't we all have much bigger problems than inflation?
New all-time high
banksters, are you happy?
treasurydirect.gov...
We will have inflation in the US because some commodities- oil, primarily- will not increase in output as fast as growth in money/credit/demand. On the other hand, inflation in oil and a falling dollar have generally meant a growing economy, both US and worldwide, and there is significant excess capacity, provided confidence can be restored.
Anyone who's started a business knows that profits don't come easily, and that when the sun is shining you better make hay. The willingness of this government to take your hay when it goes well doesn't help confidence much.
The real challenge for the US is to figure out how to most profitably take part in the economic boom set to take place in the developing world. We used to be very good at exporting culture, technology, and menial labor jobs, and we better not lose focus on that- or else the Chinese will start exporting the same to places like Vietnam that are a fraction of Chinese labor costs and taking the profit from the deal like we used to.
I agree with your assessment that the fed would rather inflation take hold than deflation, but your belief that new rates are going to create massive new refinancings is out of left field. Hint, hint...no one has any equity left in their house anymore anyway. Who is going to backstop a refinance with even more of their own cash? I sure wouldn't. We're all trapped where we are...only those who took out mortgages in the 90's aren't underwater. And they had the opportunity to refinance at "historically low rates" already.
The developed world will meet the undeveloped world at some time. I can only hope its on the way up.
Of course, Oil can be stored. It is being stored in supertankers, it was stored by Hedge funds in Land based containers, Countries around the world are storing Emergency Supply. China wants its own SPR. Europe stores finished products.
Blame Goldman, Morgan, Pickem, the Chinese and the Hedge Funds and whoever else believes in Peak Oil for last years spike.
Blame Morgan, Goldman and Pickem for their forecasts. Blame the Hedge Funds for taking delivery. Blame the Chinese for the unfortunate natural disasters that ravaged their country and forced the greater usage of oil.
Now, after shooting ourselves by curtailing production, we should be surprised? Opec may have cut production but we have also.
Even a mild economic upturn can send prices soaring. By mild, I mean -3% vs -6%.
Very nicely phrased and a good summary of the implications of the AIG bonus backlash. It's sobering to realize that Bernanke’s trillion dollar gamble signifies the Fed using a last resort measure to patch up the economy now that there is a lack of enough political will to work successfully with the Treasury and Congress to address the financial situation.
My own explanation is that when the fed started its massive program of easing, at the end of 2007 and in early 2008, inflation expectations picked up and investors desperately sought hard asset shelter, whether it was oil, fertilizers, minerals, basic commodities, or the companies that deal with them. When the demand for hard assets collapsed with the recession and inflation failed to materialise, hard asset prices came back to earth. I suspect that at the first news of inflation there will again be a stampede into hard assets, just like we saw with oil and mining stocks following the fed's "bold" (?) move.