This page has been archived and commenting is disabled.
Obama, Democrats, Republicans AND Bernanke All in a Bind – What they will do and when
We
have two distinct groups in D.C. that are stuck between a very big rock
and a hard place. The first is the Federal Reserve. The second is the
Democrats and Republicans and the battle being waged over the debt
limit. I see a possible solution to these impasses. It’s so simple that I’m sure it is being considered. The prospect is scaring the crap out of me however.
The Fed is in a bind. The economy is clearly slowing down again.
Unemployment will soon follow. According to the Fed’s Dual Mandate they
should be doing something about that.
They have few options. They can’t do more Large Scale Asset Purchases
(“LSAP”). What has become referred to as “QE”, has not worked. It was
also very unpopular (both in and out of the country). LSAPs may come
back sometime, but they are on the shelf for at least a year. What could the Fed do in the near future?
I) They could increase the inflation target (core CPI) from “A little under 2%” to “A tad over 3%”.
II) They could alter the ZIRP (zero interest rates) language from: “For the foreseeable future” to: “Until such time as the Fed’s new inflation target has been achieved but not less than one year”.
These relatively minor changes would have very dramatic effects.
-Inflationary expectations would jump. Actual inflation would follow.
-The dollar would crap out. Exports would increase.
-This would result in wage pressure. Exactly what the Fed wants.
-The resulting inflation in all commodities would roll into new home
construction costs and therefore be a boost to existing values. (Soft bailout to housing/lenders)
-It is (short-term) supportive of equities. Exactly what the Fed wants.
-Debt costs can’t rise too fast as ZIRP keeps the belly of the curve cheap. This has to happen. Without LSAPs, this is the only way to achieve it.
Are you scared yet? Now consider where the politicians are on the inflation story.
Republicans have drawn a line in the sand on the debt limit with their position of “No New Taxes”. The Democrats have said pretty much the opposite with, “No spending cuts”.
Neither side appears to be giving an inch. There is no common ground.
Yet, to go to August 2 without a resolution is just a dumb move. Both
sides of this big debate know that the next presidential election is
riding on the outcome. If the US is to default; one side or the other
will shoulder the blame. The “side” that gets the blame will lose the election. And both sides understand this. So where’s the compromise?
The solution is inflation. The
government has got to get out of its inflation indexed obligations. You
don’t have to raise tax brackets to raise revenues or cut expenses. You can mess with inflation adjustments to achieve these ends. Both sides can appear to win if this is accomplished.
Consider the words last week of Brian Graff of ASPPA (Lobby for pensions and actuaries) (The conference was sponsored by the IRS!!)
"Eliminating
indexing is one of the proposals receiving serious consideration as
Congress enters “uncharted territory” with legislation to raise the debt
ceiling, If Congress were to stop indexing for a period of time, which
would affect tax brackets, individual retirement account contributions,
and contribution limits under tax code Section 415, “you could raise a lot of money, and those are the kinds of things they are talking about.”
On the expense side of the equation a great deal of fat can be cut by
eliminating/cutting COLA increases in a variety of programs. The most
important of which would be Social Security. Depending on how the cuts
in COLA are defined and how they are applied a huge amount of money
would be saved over an extended period.
If all social obligations had their COLA increases cut in half it would
(on paper) put the US on a much more solid long-term footing. It is a
very appealing “kick the can down the road” approach. No cuts in programs (just smaller increases) and no new taxes (but higher revenue as the inflation adjustments for AMT and other tax issues kick in).
If you buy into this thinking this is they way it could play out:
We DO go to the 11th hour on the debt limit. But a compromised is reached. Central to the deal is a broad restructuring of the way inflation impacts both revenue and expenses at the federal level. Both sides claim victory.
Two months later Bernanke will announce what will be called QE3. He will
make a long-term commitment (at least one year) to maintaining interest
rates at near zero levels. And he will raise the inflation target that
the Fed is hoping to achieve by 35% ('smidge' over 3% core CPI)
Should things play out along these lines it will be sea change series of
events. If anything like this were to be in our future the very worst financial position would be short gold and long bonds. Being short volatility in any market would also be a mistake. Outside of that, I’m not sure where/how to position for this.
My thoughts:
Deflation is scaring us to death. But inflation will kill us. And that is exactly what the ‘Deciders’ have in store for us.
»
- advertisements -
Agreed, but I thought that this has been known for two years now. China openly warned the US not to inflate our way out of debt back then.
The solution is always inflation. The Answer is Silver Bullion. Bring it on.
Bruce,
Great post, but I have one question for you--what about the impact of rising rates on the cost of the deficit? Since the Treasury has moved to the short end of the yield curve, costs will spike.
Any thoughts?
thought they should have RAISED rates in 2008 as a solution, and if you disagree with what they really did, maybe you can agree with that solution. With credit drying up it only made sense that the Fed should target risk, and the cost of credit at or about where THOUGHT the market would price risk, and the current credit demand. If the credit market is tight, rates should reflect that.
Instead they played the statist economic solution, deciding they were smarter than the markets, and that they were in control of the markets, that they could stimulate credit demand, rather than pricing it appropriately.
if you plugged in new fed chief, his strategy should be to normalize lending conditions as much as possible, don't you think? that means pricing risk, and targeting rates at a level which is comfortable with supply and demand under normal conditions, and hope that works.
Bruce, you make a lot of sense here. It's a solution that comes in one color: Beige. It could be snuck by the public with a few gratuitous lies and "Look! What's that?" diversions buttressed by the corporate media.
That's very realistic.
As for how to trade this, the triple inverse etf's should be hitting bottom very soon and leading us profitably to that 11th hour announcement. I'm a lazy man and it's like shooting fish in a barrel.
Bruce,
I sent this earlier, but apparently got here too late for a response from tom, so I am forwarding it to you.
by oldmanon Tue, 06/28/2011 - 02:35
#1408061
tom,
Maybe, it no longer works because the machine is dead. I remember the fed and treasury playing together, also, but the capital is gone. The theory the other night here about a continual float having been created with the QE's and banks just rolling it to each other as required was interesting and it is pretty certain that this money has not entered the US economy-----it has never been spent, just permanently loaned to entities without capital that require capital each day.
I'm in over my head here, after twenty years in the forest of southern ecuador, so---------------maybe someone will be able to direct my oversimplified and foggy brain to shelter. thanks
Great article Bruce but I'm afraid a far more horrifying final solution than Inflation awaits us all.
If ONLY inflation could get us out of this....Since the 50's our over-educated workforce population has grown exponentially due to women (at half again the population numbers) entering the jobs market, higher level education attainment, and modern medical miracles allowing increased working-life spans. Add to that the fact that we are all now told we will have to work at least 5 years longer (retirement funds being wiped out) resulting in virtually NO attrition in the workforce and god knows, thanks to the banksters and the Crash of '08 as well, virtually no NEW jobs being created. All the while Technology, which we have all grown to know and love so much, has been reducing jobs at an increasing rate along with our Efficiency Experts advising the business world on how to increase profts with Fewer lower paid workers working Overseas at that! Hardly a surprise that over the last decade fewer jobs have come back with each recession. Inflation, should we be lucky enough to get even that, will be Stagflation with still NO JOBS.
Bottom line due to all the above, there just aren't enough jobs/food to go around for the SIZE of the world working population now; an oft occurring situation throughout world history as Thomas Malthus once noted. The time-honored solution to this unfortunate predicament has always and unfailingly been war, famine and/or pestilence (think Bubonic Plague in Europe's over-crowded, rat-infested cities), ALL of which TPTB (who created the present mess) dedicate themselves to defeating!!
So when the politicians shilling for TPTB tell us they have "solutions" for the JOB SITUATION ....(drum roll)....they will be LYING (Obama-style). Else God help us all.
I think a good start would be to deport all illegal immigrants and especially those in our prisons. Make being here illegal a 4th degree felony would be a good start. Empty out prisons of third time violent convicts by revoking their citizenship (how bad would they have to get to deserve this>>> five violent felonies??) and sending them to Somalia or somewhere. Deport George Soros. Disbar about half the tort lawyers and forbid any lawyer from holding any office other than judge. Put a 1% import tariff on everything. We are still a major consuming nation. Revoke NAFTA and those who passed it ( Clinton and Emanuel). All this should help the economy nicely. We need a benevolent dictator before we get the other kind!
glitch
glitch
glitch
glitch
there is a third way out, but the congenital defect called ivy league blindness prevents seeing the obvious... cut the bankers out - not the things we care about.
+1 - Good Cheater Analysis. You're kind of scary... you think just like the bastards.
Measuring Inflation: The Core Is Rotten
http://research.stlouisfed.org/econ/bullard/pdf/Measuring_Inflation_May_18_2011_FINAL.pdf
Measuring Inflation: The Core Is Rotten
http://research.stlouisfed.org/econ/bullard/pdf/Measuring_Inflation_May_18_2011_FINAL.pdf
It has been pointed out by many that my claim that Democrats have drawn a line in the sand re: cuts is flat out wrong.
Okay. I heard you. And yes some cuts have been put on the table. But I would urge anyone to google "Democrats resist cuts" you will find dozens of articles that support this view.
One of the biggest defenders is Paul Krugman (who I disagree with on a daily basis). But PK does speak for the "no cut" crowd. Read his stuff for a week. It will make you puke. This guy would spend us down a dark path. http://krugman.blogs.nytimes.com/
I say again. There are no cuts of substance unless Medicare and Social Security are up for discussion. You can dance around all you want about the 15% (discressionary) that governemt spends. But you can't make a dent in the problem unless you look to where the big bucks are going today (and more importantly, in the future).
Thanks for all these comments.
Bruce Krasting
Social Security is not broke. It is owed a trillion or three.
If one of two things would have happened after the increase in payroll scam in '83-84, not rob the excess and not limit the tax for the higher paid, SS would have been paid for, for all time some years ago.
Now they want to raise the contribution, up the retirement age, and still excuse the higher wage earners. Then they will steal the money again to pay for tax cuts to those who already had their contribution arbitrarily capped.
Guess what, there is already an increase in age qualification on the books.
OMagain,
Tell'em oldmanagain!
And I want to add that any increase in contributions is not for old men and old woman; we have paid in and are OWED what we are receiving. It is not about young vs. old, but the fact is that the young are not paying for anyone except themselves no matter what the MSM slant is---we old will not fight with our children or grandchildren. There is plenty for all in a country where the money received for protection in one's later years is spent on war and bailing out risk-takers who lose; the congress has acted forever as criminals syphoning off our funds paid in rather than using them to fund their obligations and promises.
Does anyone want to talk about 'how long they can kick the can down the road'? Well, in the case of SS, it has been nearly seventy years. How are you going to hedge anything for seventy years????
No, it is not about young vs. old---we are on the same side!
You both conveniently forget to mention that SS was built on the premise that each generation will be larger than the previous one, or at least same size.
That was never in any discussion at all. We lived in a different time---a different universe----every time the subject was raised about funding it---the pols said: "We don't need to---we will pay it as required. The same as any general obligation of the US Gov't----the security that AAA is measured against(I never heard of US debt being rated during the twenty years I traded munis), GO, baby, taxes have to be to raised to pay GO---without any one's approval."
Malek, I've been away a long time, but in that time everything has changed about the ethics of this country---I don't care about morality, just ethics----it seems to be a word that no longer exists.
Anyway, each time the question of funding SS was raised----the pols said the same thing. Most of us would have rather had a funded pension----but the security was ironclad:
"obligation to raise taxes to meet the obligations of the general fund". Things have changed, but my issue is: it is not an issue of young vs. old and I will not be divided by this from you or any other citizen.
I trust that this will not offend anyone, Malek.
Sorry, housing does not inflate unless wages do or easier mortgages (THE house buying currency til recently). And even if there was a major increase in jobs and wages, which there will not be if gas and food prices are high, there are currently too many empty. So there will be a major lag in house prices compare to price of everything else. Even when commodity and input prices were cheap in 2009 and houses were being built for far less than a few years before, existing houses were selling for cheaper than a builder could make them. Some people will have means and willingnessmto pay a huge premium to get a house buikt to their custom desires regardless of cost, but most people don't want to be 30 percent underwater before they even move and they will by existing houses for less than they can be built from scratch. If gas prices are high, certain inner areas will have rents gomup, while ex urban mcmansoins will sink even more in price, but overall, with warehouses of houses in most cities available, no way house prices rise...because the change in culture about housing and debt, it would take massive wage increase, way looser lending standards and years of low unemployment to get housing to pop again.
My argument was not that the Fed could do anything to move the needle on housing. They can't. They have been pushing on the string for three years now and have accomplished next to nothing. My point is that they are going to continue to push on the string. And no, I don't think that inflationa targeting is going to do anything positive. Just pushing the string.
Recently the UMW won major pay increases for its members
at Consol Energy and across the board.
One can be pretty confident that farmers are also enjoying major pay increases these days.
One would not be surprised to learn that oil workers are also getting small increases.
The bottom line is that there are still a few americans who are engaged in gainful production, and those groups of workers are starting to get real pay increases to keep up with inflation.
Lots of lofty, Econ analysis/forecasting. Let me bring you all back to earth:
House and Senate members are only going to sign off on public policy postions that will get them re-elected.
How divorced from tangible reality are these electeds? Suffice it to say, if AAARP carps about a COLA cut, their congress person - House or Senate - will hear about it.
More realistically, reinstating a graduated income tax - and, closing the loopholes - married to public works projects (other than weapons systems) is what the electorate wants to hear. Telling the electorate what they want to hear is what Washington will pass as public policy.
Any and all electeds who ignore this "mandate" will do so at their own peril.
I have heard very few politicans complain about the Bernank and his printing press. My prediction is that he goes on printing...
Hmmm. Good post. Lots to ponder from this.
Humpty Dumpty is busted.
All the Kings Men cannot put it back together.
"We have two distinct groups in D.C. that are stuck between a very big rock and a hard place. The first is the Federal Reserve. The second is the Democrats and Republicans"
......... I count 3.....The first is the Fed,the second is the DemoRATS,and the THIRD is the Repukelikens.
Deflation trade is Asia, which you would short, hedge would buy UST's and USD. Till Asia and the Fed compete with massive money printing. Then long gold
3-6mth short of emerging economies and commodity producing economies.
Europe is kicking a grenade down a alleyway with a brick wall. EZ is toast, as is the EUR
question? just what in the hell does the good ole usa export these days anyway. I'm pissed at hearing all the bullshit that "this or that" will send jobs overseas. FUCK, they are already gone overseas since Nafta went into effect for the big corporations. Give me a fucking break on all of this other threatening bullshit please.
The ones I can think of are weapons, capital goods, grain, and shitty movies.
The ONLY "dual mandate" that I expect from the fed at this point in time is for the Bernank & the Kikener to take a gun and blow their fucking brains out. Pretty simple really. Maybe it'll start a "sea change" in the rest of the .gov, and be a contagion. Wishful thinking........no bullshit here folks, just honesty from an American, veteran, and taxpayer.
There is a THIRD alternative: BYPASS the Fed completely, have CONGRESS / the Treasury ISSUE 'money' DIRECTLY, put it in to REAL, PRODUCTIVE jobs - ALTERNATIVE ENERGY that actually pumps some non-fossil or nuclear energy into the grid would be one example - and GET THE MONEY VELOCITY back UP where it should be.
What is amazing is that the Wall St & Fed Neo-Cons who infest BOTH parties - the Harvard Rubinites & Larry Summers toadies in the "Democratic" Party; the Phil Gramm & Dick Armey (& Enron Ken Lay) Texans, the U.Chicago boys - have completely saturated Americans with the notion that GIVING MONEY to BANKSTERS is "STIMULUS".
IT IS NOTHING of the sort! It is pure Robber Baron neo-feudalism, allowing the connected elites to prowl the globe (economic hit man fashion) looking for ALREADY productive assets, to BUY with their cheap Bernanke/Fed/FIAT... MADE OUT OF THIN AIR dollars!
THAT is NOT "capitalism" (creating money out of thin air is NOT "creating wealth and storing it for later use") and it is NOT "free market ENTERPRISE" - it is the MONOPOLY TRUST cartel, the vampire squid, and the 1890 Congress AND Senate voted OVERWHELMINGLY to REIGN IN the trust cartels, passing the SHERMAN ANTI-TRUST Act - http://en.wikipedia.org/wiki/Sherman_Antitrust_Act but of course the rotchilds/JP Morgan & allied bankers BRIBED the executive agencies (and future Congress/Senators) to NOT enforce the anti-trust provisions.
The Fed game plan is SIMPLICITY ITSELF: PRINT OODLES of "money" in boom times, wait until that fait money creates a STOCK MARKET HIGH as prelude to a CRASH - then CONTRACT the money supply, BINGO!
As everyone LIQUIDATES to avoid bankruptcy, YOU (the Central Bank and allied downstream "close to FREE Fed money" banks) have EXCHANGED FIAT DOLLARS, for REAL wealth & assets.
(note: WWII, when America, and the banksters' back was to the precipice of disaster, proved the Fed Reserve PRIVATE banking cabal COULD work to INCREASE economy activity, industrial output, INCREASE wages, and higher national productivity (NAMELY, by STRICT LIMITS on USUROUS lending, financial 'profits,' and 90% tax rate on top incomes!) - but in peacetime, bankers revert to the elite/Autocratic behavior of medieval robber barons, viewing all around them as either competitors to be crushed, or peons & serfs to be enslaved.)
To sum up above, ONLY an IDIOT believes that GIVING MONEY to FAILED, BANKRUPT, INSOLVENT banksters has ANYTHING to do with "KEYNSIAN STIMULUS" - but that apparently includes the vast majority of Americans.
+1
Yes!
YOU lost ME at "REAL, PRODUCTIVE jobs - ALTERNATIVE ENERGY "
Ya OK
well, sorry... but how about, for example, if they took some of those nuclear phsysics geniuses from Los Alamos & Lawrence Livermore, and had 'em do R&D on HIGHER PERFORMANCE BATTERIES & solar panels?
not merely rhetoric! EVEN TODAY, IDIOT obama is ALLOWING Chevron to SIT ON its NiMH battery patents - otherwise there would be 10x the electric cars on the road! (A friend of mine drives one of the several hundred 2001 Toyota Rav4-EV ALL ELECTRIC cars made - before US courts ORDERED Toyota to shut down the production lines based on "patent infringement"
http://en.wikipedia.org/wiki/Toyota_RAV4_EV#Chevron_Patent_incumbrance
that BOTH bush-cheney Rethuglican, AND obama "Democrat" presidents, TOLERATE this SABOTAGE of American alternative energy progress / energy efficiency, IS PURE SABOTAGE !! by CHEVRON, AND American politician hacks!
I think middle america is tapped out. When they see prices rising they will hoard money collapsing the economy. Most people save more money when expenses look likely to rise.
No, to repeat for the 1000th time...
DEFLATION IS GOOD.
DEFLATION IS HEALTHY.
DEFLATION IS NATURAL.
What is not good?
DEBT... and...
fiat, fake, fraud, fiction, fantasy, fractional-reserve toilet paper and the predators who enslave and destroy everyone with that system.
What else is good? For all loans taken from a bank or financial institution (which grants the loan out of nothing by simply pressing a few keystrokes), the good word is DEFAULT.
Let the banksters eat fiat.
For loans you received from someone who actually did productive work to earn the money they lent you? You really must find a way to pay that back.
Increase inflation and cut COALs... Lets start with the 80 yo and up demographic.... And increasing wage pressures - luckily they do not flow through to finished costs, so we will remain globally competitive.
I have an idea - write down the losses and STOP spending money and asset stripping the nation for the benefit of the bankers. How about we call Bernank for the fucktard he is and admit that the next time he is correct will also be the first. How 'bout we STOP banks and lenders from foreclosing on homes they do not hold the paper on? How 'bout we set about getting real estate to a clearing price - that is where its going anyway. How 'bout we set about cancelling off-setting CDOs and the like - there is no underlying there anyway? The equity gets wiped out in insolvent banks; the bondholders become the new equity if there is anything worth salvaging... Most of all - let's realize we do not need to hand over our money creation to private banksters - and let's stop punishing the prudent and set about shrinking the empire and military spending. For starters. let's let people, businesses, funds, etc., fail.
This is gonna hurt, it has to hurt - the bubble was blown too far for too long.
Increase inflation and cut COALs... Lets start with the 80 yo and up demographic.... And increasing wage pressures - luckily they do not flow through to finished costs, so we will remain globally competitive.
I have an idea - write down the losses and STOP spending money and asset stripping the nation for the benefit of the bankers. How about we call Bernank for the fucktard he is and admit that the next time he is correct will also be the first. How 'bout we STOP banks and lenders from foreclosing on homes they do not hold the paper on? How 'bout we set about getting real estate to a clearing price - that is where its going anyway. How 'bout we set about cancelling off-setting CDOs and the like - there is no underlying there anyway? The equity gets wiped out in insolvent baks; the bondholders become the new equity if there is anything worth salvaging... Most of all - let's realize we do not need to hand over our money creation to private banksters - and let's stop punishing the prudent and set about shrinking the empire and military spending. For starters. let's let people, businesses, funds, etc., fail.
This is gonna hurt, it has to hurt - the bubble was blown too far for too long.
we're in a bear market in credit, and creating more credit won't help. the solution is to make credit worth something, and Bernanke can achieve that by raising interest rates, something he should have done at the bottom of the 2008 crisis. (remember the guy is just a bureaucrat). when credit has some value there is pricing power, why they held off this long is a mystery. to achieve this goal they need to dry up easy credit, that would hurt Wall Street a lot.
rember this most people have jobs, and a rise in inflation helps them, as long as wages keep pace, which is what Bruce is saying. and Obama feels in the drivers seat, ready to turn the economy against the welfare class, and the GOP ready to do the same thing. lesser of the two evils, like always. Once more, like in the 30's, America missed its chance at a populist uprising, and now we pay the price once more, unless of course you are part of the 1%.
I can attest that, during the 70's and early 80's, my wages definitely did NOT keep up with inflation. It was so bad that I actually had dental work done by a mexican laborer in the middle of a Florida orange grove. (A little knife work to carve out the gums above my incoming wisdom teeth.)
Wages will be the last thing to move in an inflationary environment.
"so bad that I actually had dental work done by a mexican laborer in the middle of a Florida orange grove."
W. T. F.
So if you detect a little tentaus-induced psychosis in his posting we now know why...
Yes let's force people to borrow and force banks to lend. There was never any doubt about the final solution was there ?
Acheiving a budget balance is so easy. Just do nothing to raise the debt ceiling. (or for a real hoot raise it by $1) Then you cut $1.5T off the potential debt the very first year. None of this maybe we cut $2T over the next ten years nonsense. Run on cash flow alone. Its not like the Dept. of Education educates anyone, the Dept. of Energy provides new energy resources, etc.. If their tasks are so important their employees can serve as unpaid volunteers.
Hurray, you've solved the big problem of how to pay people! Let's just stop paying everyone. We'll be left with the really important jobs which people will do as unpaid volunteers, and the stuff that's not too important won't be done. Communist utopia and everyone wins!
Inflation in Lala land. Nope cannot happen.
Fuel prices rise and demand simply dies. What do you think is happening right now?
Congress/Fed/Finance/media refuse to speak about 8 million pound gorilla in room, oil shortage. They just don't want to talk about it b/c the implications are too severe. Better to have peeps watching the dude in the Bernanke disguise.
DoD sez oil shortages next year in USA and I am going w/ that. Gonna rip the guts out of the fake recovery and the USA waste- based economy peeps love so much.
It's not the gov default that hurts so much it's the energy default. We are so there ...
good luck you need it. steve
Keep driving those huge SUVs...