The U.S. Needs More Inflation?

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Includes: DIA, QQQ, SPY
by: TraderMark

Clap your hands together for our creditors - we are going to repay them with increasingly worthless dollars. Who's the sucker now creditors? I just love this article from Bloomberg - inflation is now good for you. Remember, in the big picture there is nothing inherently wrong with deflation as long as goods prices fall quicker than wages.

Inflation on the other hand is a regressive tax on the lower parts of society and benefits those with assets... the value of their wealth increases (at least in nominal terms) and many of the wealthiest live off assets not income. So you can guess which camp (inflation v deflation) they live in. And we all know who controls the purse strings in America... trust me, it's not those that will be hit with an egregious regressive tax.

Let's hear the wisdom, and frankly the rationale is close to frightening in some cases.... i.e. we have too much debt and if we devalue it's easier to pay back! Also the threat of inflation will cause cash strapped consumers with destroyed balance sheets to spend now! Cool!

  • What the U.S. economy may need is a dose of good old-fashioned inflation. So say economists including Gregory Mankiw, former White House adviser, and Kenneth Rogoff, who was chief economist at the International Monetary Fund.
  • They argue that a looser rein on inflation would make it easier for debt-strapped consumers and governments to meet their obligations. It might also help the economy by encouraging Americans to spend now rather than later when prices go up.

Wow, those are some incredible rationales.

  • “I’m advocating 6 percent inflation for at least a couple of years,” says Rogoff, 56, who’s now a professor at Harvard University. “It would ameliorate the debt bomb and help us work through the deleveraging process.”
  • Such a strategy would be risky. An outlook for higher prices could spook foreign investors and send the dollar careening lower. The challenge would be to prevent inflation from returning to the above-10-percent levels that prevailed in the 1970s and took almost a decade and a recession to cure.

I think people think inflation is like some video game... its just easy to shoot down, move around... holy smoke. It took a man of Paul Volcker's stature and independence of politics - the type of man this country no longer has anywhere near the top of the food chain - to break the back of inflation once it was embedded. Now we have a Federal Reserve who is the lap dog of the politicos and you think they are going to raise rates to cause a recession if inflation gets out of hand? Have you watched their "solutions" the past 20 years?

Ah yes... if inflation gets out of hand we'll just turn on our HALO first person fighter and shoot it away - like magic.

  • “Anybody who has been a central banker wouldn’t want to see inflation expectations become unhinged,” says Marvin Goodfriend, a former official at the Federal Reserve Bank of Richmond. “The Fed would have to create a recession to get its credibility back."

Exactly. And that just isn't going to happen with the incestuous relationship of the "independent" Federal Reserve.

  • For the moment, the Fed’s focus is on preventing deflation -- a potentially debilitating drop in prices and wages that makes debts harder to repay and encourages the postponement of purchases.
  • The central bank has cut short-term interest rates effectively to zero and engaged in what Bernanke calls “credit easing” to spur lending to consumers, small businesses and homebuyers.

Shop! It solves all our problems.

  • Even after all the Fed has done to stimulate the economy, some economists argue that it needs to do more and deliberately aim for much faster inflation that would also lift wages.

And that's the problem in your logic kiddos. We don't live in the world we lived in, in the late 70s. Workers were much more unionized and offshoring labor was just in the dream stages of profit seeking multinational CEOs. We have a broken economy with excess labor and no bargaining power. And then you want to throw 6-8-10% inflation at them to "lift wages"? My gosh ... scary.

Please just abolish the Federal Reserve and let the so-called "free markets" we cling to (only in good times; in bad times free markets stink) set the correct rates. Granted we'd have small to moderate recessions from time to time, but not these monsters we've created by thinking of policies like those stated above.

  • Given the Fed’s inability to cut rates further, Mankiw says the central bank should pledge to produce “significant” inflation. That would put the real, inflation-adjusted interest rate -- the cost of borrowing minus the rate of inflation -- deep into negative territory, even though the nominal rate would still be zero.
  • If Americans were convinced of the Fed’s commitment, they’d buy and borrow more now, he says.

With what money??? Jobs are evaporating...those with jobs have been stuck with flattish wage growth (adjusted for government figures of inflation) the past decade, and most of our spending has come out of house ATMs and asset inflation. And you want these people to spend now because they fear Federal Reserve induced threats of inflation?

  • “There’s trillions of dollars of debt, in mortgage debt, consumer debt, government debt,” says Rogoff, who was chief economist at the Washington-based IMF from 2001 to 2003. “It’s a question of how do you achieve the deleveraging. Do you go through a long period of slow growth, high savings and many legal problems or do you accept higher inflation?”

That's about the only thing it would accomplish and I'm sure our foreign creditors who are the only reason we've been able to act like 4 year old toddlers ("I want this! I deserve this! Give me this! Buy me this!") would be thrilled with this decision.

  • Some investors are already worried that Bernanke will go too far. “We’re on the path of longer-term, higher inflation,” says Axel Merk, president of Merk Investments LLC in Palo Alto, California. “It’s good for debtors but it’s bad for creditors. It’s dangerous and irresponsible.”
  • Billionaire investor Warren Buffett, chairman of Berkshire Hathaway Inc. in Omaha, Nebraska, suggested that faster inflation was all but inevitable. “A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, it’s going to inflate its way out of the burden of that debt,” he told the CNBC financial news television channel on May 4, adding, “That becomes a tax on everybody that has fixed- dollar investments.”

Let me repeat again - deflation is not "bad" for those without assets, especially if wages are flat, growing slowly or falling slower than cost of goods. It is terrible for those with assets i.e. those who run the country. Inflation on the other hand - especially the kind they are talking about above, in a country where wages have been stagnant and people are trading down to "worse jobs" with lower pay, will obliterate those in the bottom third. It is the most regressive tax on the planet.

But hey, it would help to reduce all our debts and make the oligarchs happy - so let's do it. Then we'll just have to wait for the next version of Paul Volcker to descend from the heavens and say we need to have a recession the likes that makes this one look like a joyous occasion to break the back of out of control inflation, circa 2018 or so.

Sounds like a reasonable plan.