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Goldman and Bernanke Are Wrong About Inflation
This article originally appeared in The Daily Capitalist.
Don't double-down your bet on Goldman's latest assertion that QE2 is good for the economy. Last month chief Goldman economist, Jan Hatzius said it was bad. Goldman said before that the Fed would need to pump $500 billion to $1 trillion via QE. Then they said it would be at least $2 trillion, but really they would probably need $4 trillion. Now they say we don't have to worry about inflation and that QE will work:
Goldman Sachs Group Inc., which warned a month ago that the U.S. economic outlook was “fairly bad” at best, said the Federal Reserve’s decision to increase bond purchases will spur growth.
“Downside risks to the economic outlook have declined significantly,” Jan Hatzius, the New York-based chief U.S. economist at the company, wrote in an e-mail to clients. “As we move through 2011, the lagged effects of the renewed monetary easing combined with a gradual slowdown in the pace of private deleveraging should result in a substantial pickup in GDP growth.”
The Fed’s decision will lower the risk of deflation, Hatzius wrote.
Hatzius defended Fed Chairman Ben S. Bernanke when others including E. Gerald Corrigan, former president of the New York Fed, have voiced concern that the central bank actions will lead to a surge in costs for goods and services. Bernanke on Nov. 6 dismissed the idea the central bank will increase prices to higher levels than it prefers.
“The widespread hostility to the Fed’s actions is misplaced,” Hatzius wrote in his e-mail, which he distributed yesterday in New York. “The slack in the system is so enormous that U.S. inflation is unlikely to become a problem for years.”
Hatzius’ outlook has improved from a month ago, when he said the U.S. economy faced two main scenarios, neither of them good:
“A fairly bad one in which the economy grows at a 1 1/2 percent to 2 percent rate through the middle of next year and the unemployment rate rises moderately to 10 percent, and a very bad one in which the economy returns to an outright recession,”
he wrote to clients on Oct 6.
Now he gets a couple of bits of good news (private employment up and a positive in the ISM manufacturing index) and he does a 180. The news really isn't all that good. There are other positive signs, but none of them in my opinion will act in a timely way to revive employment significantly.
Ben Bernanke believes the same thing. At a Fed conference at Jekyll Island, Georgia--the famous place where a meeting occurred in 1910 among prominent bankers which is seen as the real birthplace of the Federal Reserve Bank--he defended his QE actions:
"There is not really, in my mind, as much discontinuity as people think" in the path the Fed is currently following, the central bank chief said. "This sense out there, that quantitative easing or asset purchases, is some completely far removed, strange kind of thing and we have no idea what the hell is going to happen, and it's just an unanticipated, unpredictable policy—quite the contrary. This is just monetary policy," Mr. Bernanke said. ...
Mr. Bernanke explained "we are not in the business of trying to create inflation," and "I have rejected any notion that we are going to try to raise inflation to a super-normal level in order to have effects on the economy." But because the Fed is "equally committed to both sides of our mandate," the central bank should also avoid having prices fall below levels consistent with price stability, he said.
"If inflation is declining and continuing to decline, at a minimum we should not be satisfied," and should view current price pressure levels as "a signal more should be done." ...
"We see an economy which has a very high level of under utilization of resources and a relatively slow growth rate," Mr. Bernanke said. "The standard considerations suggest we should be using expansionary monetary policy, and that was the purpose of the action" taken last week, the chairman said.
I don't think Mr. Hatzius or Dr. Bernanke has it quite right about inflation. Inflation has nothing to do with "slack" in the system. They confuse factors of supply and demand for inflation. Inflation is, always has been, and will be an increase in money supply by the Fed. Otherwise how does he explain the periods in the 1970s when we had high inflation yet capacity utilization was low.
This is a complex topic. I believe this is the Fed's Hail Mary pass. Stay tuned.
I will soon becoming out with an article explaining stagflation and why I think that's the logical result of QE.
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Clearly, this is untrue.
Unless, until and when private banks and other lenders and asset re-hypothecators create money, the amount of money the Fed creates is relatively trivial.
Red is correct, it's wrong to say that inflation is [always] caused by an increase of the money supply. It's not hard to think of a scenario where inflation can increase while money supply remains neutral or shrinks. Conversely, it's not hard to think of a scenario where deflation occurs as the money supply increases.
It's more correct to say that inflation is a consequence of an increase in the ratio of available money to things to trade it for. Scenarios where inflation can increase without an increase in money supply include: repatriation of Eurodollars, dropping a whole lot of bombs, entropy taking its toll on the assets in a stagnant economy.
But we're having the wrong conversation here because the Fed isn't printing money, it's swapping reserves for bonds. There's a big difference. One policy is ultimately inflationary, the other deflationary. The current policy is ultimately deflationary (just look at Japan). Even Bernanke doesn't seem to understand this, he just thinks that he needs to try harder than Japan. *sigh*
I agree with Econophile that Bernanke doesn't really get it, but I also think Econophile doesn't really get it.
Here's a good article on the matter.
[edit: I'll add that I also didn't really get it until I recognized that I was participating in groupthink and went to do some reading].
Is that you, Steve Keen? Not true. You watch.
Ben wants bets on the table, push the risk. They know they have losses, and they need bag holders. The fed pushes the market into risk, they know by now it ain't working, but they need to attract capital to take the loss.
This will take years, it doesn't matter. We will need the rest of the world to pressure us and we all know we are crazy people with nukes and in need of a diversion.
What you doing for the next 10 years?
Watching the slow motion painful train wreck that was called and american economy.....
Methinks u must be a tad bit drunk. Enjoy, but quit posting, please.
“The slack in the system is so enormous that U.S. inflation is unlikely to become a problem for years.”
Thank goodness somebody saw through that crock immediately. Bernanke lived through the 1970s, and he saw 10%+ unemployment coexisting with 10%+ inflation. He knows perfectly well that high unemployment and idle plants are no damper for inflation when it's monetary policy behind it.
He's just hoping you don't know any better.
There were at least two, perhaps three (if one factors in a highly reluctant FED back then) factors that led to the '70's paradox of high unemployment and high inflation. First, and most important, was that bastard Nixon's repudiation of Bretton Woods, which delinked gold as a monetary support for the dollar. This almost immediately (well, two years later; it took that long for the obvious to unfold, and wake up OPEC) was followed by OPEC's unilateral raise of the price of oil.
Because the US economy was still then (unlike today) primarily a manufacturing economy that ran on oil (and often doubly consumed it, as did the petrochemical industry--ever wonder how your detergents are made? Your window cleaner? Your shampoos? Check out the sulfonation process), the huge increase overnight in the cost of industrial lifeblood led to layoff after layoff, refinement of processing regimens--more layoffs--and depressed profits, which led to, you guessed it--more layoffs, and when the increased percentages on business loans kicked in, you had a perfect storm. This was the original catalyst for basic materials outsourcing to Asia, despite the massive quality differences.
I unfortunately had a front row seat in all of this. I was lucky enough to find a buyer for my chemical wholesaling business in 1998. The decline in the chemical industry in this country over the past 20 years has been breathtaking. I doubt many on Zerohedge can grasp this. We were, from the end of the first World War until the late 1990's, the world producer of all chemicals--basics, intermediates, and fines, the latter including all pharma.
Chemicals, whether one likes it or not, are essential to modern life--and modern warfare. I argued 20 years ago (unfortunately, in live sessions, not online) that the single immediate threat to our nation was chemical outsourcing. The chemical industry, like many others, has long been subject to the rendering of a specialty to a commodity; this took off with full speed in the 80's. Commoditization meant that emerging markets were able to grab market share. Oil was a major problem, but the chemical industry we had built was an absolute essential; without it, we were at the mercy of any third world nation ready to take it on.
If you don't believe me, check out the decline of Chemical Week's ad pages--and pages, period, from 1980 on.
I guess Chemical and just about every industry was replaced by finance and housing industry jobs after 1980 (1982 was when the 401k programs started and the demise of the middle class savings accelerated).
This is all about deflation. The Fed is trying to prevent the deflationary black hole from sucking everything into it when the downward spiral hits due to massive defaults. The Fed has prevented this so far, but it has limited powers. $53 trillion+ in debt will not go away anytime soon folks. Print away Helicopter Ben to your own demise.
"Print away Helicopter Ben to your own demise." ( and ours)
I just don't see how it will work. We have huge private and public debt loads. The public sector debt is growing at an ever increasing rate. I don't know how we can create enough growth, at this point, to catch up with the debt to pay it off. Either we default and get rid of debt, or, we inflate our way out of it...there is no other way.
Meanwhile, of the staggering losses we have observed, no one has swallowed the bitter pill except for the taxpayer and the little guy. The government continues their charade and the TBTF banks get away with breaking the law time and time again. This will only lead to one outcome; the law abiding will become lawless to take back their country.
....so true, the tradewinds of worldwide bad debt will blow all the misdirected sovereigns right on course for Japan. Sooner or later.
Anyone waiting for America to go all 'Vigilante' on these crooks?
What is Ted Nugent up to?
Is he Gettin' the band back together?
LOL
LOL
Read Steve Keen and get some insight. No inflation. As for hyperinflation-that has already started.
The happy days of Weimar are here again...
Why is nobody explaining the "tiny" derivatives package with face value of $615 trillion (last reading from BIS and going up)? JPM, BA, Citi and Goldman have $200 trillion of this and the rest is in the hands of the remaining big ones, and we assume they all just chip in the maintenance margin at around $25 trillion. A bautiful game of musical chairs? Sad that Lehman could not find a chair...
The first problem since 1815. China has now a 2.5 petaflop supercomputer and with that the US brotherhood is suddenly in disarray. Goldman's "doomsday machine" used to steal trades from others just until very recently - it was the old glory times. No more, Ben must help!
What options does the brotherhood now have? A) invent a faster petaflopper, takes time; B) wind down the derivatives game, hide losses, trust uncle Ben; C) if not then even 1913 is gone and Traesury will buldoze the whole mess to dumpsters; D) start WW III - nukes will do it, or will they Russia has them too, so has China, and we can count our friend the Israel...others do not count. Of course in the next phase we need boots on the ground and 10:1 ratio will be enough. Haw many boots did they say we have?