This page has been archived and commenting is disabled.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 -
Come on Bruce, do you really think the Fed gives a flying fuck about their dual mandate? Look at their track record. Get a grip on reality.
it would be great to have some real insight into their intentions. unfortunately for us serfs, the bankster cabal has their own interests first.
what's the adage? hope for the best, be prepared for the worst.
There is another alternative. The Feds could sell gold out of Fort Knox. There would suddenly be lots of money to balance the books, there would be a drop in the price of gold making the markets look more stable, and the banksters could buy the gold cheap with zero interest loans hich they'd never have to pay back. What a deal.
Did this, long ago. There is no gold in Ft. Knox. That's why no audit.
Exactly.
Bruce - Glad to see you have touched this.
What you outline is nothing new and goes under the name of financial repression. Although the idea is old (c. 1973), Rienhart and Rogoff discuss this in their book "This time is different", and here is a paper by Carmen M. Reinhart M. Belen Sbrancia (www.imf.org/external/np/seminars/eng/2011/res2/pdf/crbs.pdf) that goes into the empirical evidence more.
One of the best ways to protect yourself is via physical gold and NOT hold any fixed rate govn't instruments.
I believe that those idiots in DC will try this, but I don't think it will work for too long. For one, people can buy gold, which was not an option in the past for US citizens. Two, it is much easier (for now) to move assets out of the country (e.g. CH). Three, is the size of the US debt - I highly doubt they can manage inflation for the time required under FR to put a sizable dent in the debt.
i think inflation is good. not because I have bought a lot of gold or silver. I just think people here in the US need to consume less gas and buy less crap, which can be achieved only by inflation. Common currency unions/nations should not have trade deficits imo.
I don't know if you've noticed, but most people don't commute because it brings them pleasure. The entire US economy runs on the fallacy of cheap oil and it doesn't give two shits if your demand is inelastic.
they need to stop driving around fucking SUVs. demand is certainly not at the inelastic level at todays consumption rates.
Yes, Bernanke returns to his mantra of "targeted inflation.." Although capping COLAs and then jumping the interest rate does not sound like a reelection campaign strategy, unless of course you wait until after the suckers have voted.
The economic populists want a bit of deflation, they want home prices to drop to a level where activity picks up. Bernake is obviously on the other side of the equation. THe more deflation takes hold, the more he is inclined to try inflationary gimmicks.
Just some historical perspective, one term Presidencies are usually followed by a rough patch in the economy. Reagans first term, Clintons first term. The question then is, can Obama lose? Right now it doesn't look like it. Should Obama win, well the man has proven to be a premier backstabber to his political supporters, and a great comfort to his campaign contributors. I want to be LONG the market if Obama is reelected.
Bernanke may not be able to keep up the pace, as you suggest TARP like devices seem unlikely. Imagine more anti-small business regulations, (Environmental, and written so that those corps with fleets of attorneys can wiggle out and the little guy pays the bill, sort of like teh plan to trade carbon credits, which helps big corps, who know how to skirt the law) and he would restore confidence in the investment community. By the time he is done the Democrats who voted for him call him Pro-Business, and look for the next guy to restore Americas manufacturing.
If Romney wins for instance, the Democrats can start hating him right away. But with a GOP house and GOP President, I want to be LONG national defense. I think another Reagen style giveaway to DOD contractors would be automatic, and may be the only thing that works. This would bring back some of those border line industries, like transportation, and put people to work. The debt ceiling would be perpetually levitating, and Bernanke could gradually raise interest rates, which might make him happy.
The third alternative is a brokered election, and that would spark 2008 redux in triplicate.
All these articles I read is someone trying to fix what can't be fixed. How long does the manipulation need to go on? The only way to fix things is to let the house of cards fall where they may. People will suffer but oh well. When we come out of it, we will be a better nation.
I asked a question, How high must the U.S. debt be before everyone is satisfied it is enough? 18 trillion? 20 trillion? 25 trillion? There must be some number that everyone will be happy with and believe we should not go beyond that number. Why not raise the debt ceiling to 200 trillion? Then the politicians won't have to worry about it and can go on spending...
These fix this, fix that articles are like a never ending soap opera designed to increase pain for some, but not others. Whether by design or unintended consequences, stop the soap opera madness and just let it go. It's going to fall apart eventually. Advice on how to fix it is a waiste of time and brain power as no one that writes articles are included in the list of powers that be.
This was not about what should happen. It's about what WILL happen. Two different things in this case.
Then we don't need your long boring bullshit article(s).
What WILL happen is very simple. Bernokio will print money and pass it to insiders, keeping insiders afloat until the dollar collapses, falls from WRC status, and what's left of the American economy collapses completely.
Bernokio doesn't care about either so-called "Fed mandate", stable prices nor full employment. He doesn't care about the American economy period.
He cares only about keeping his insider cronies going (and looting) till the whole thing collapses. End of story, end of discussion.
You are a cranky old geezer.........
Then convince Tyler to publish your short boring bullshit opinions. Or just take the well-considered information and opinons for what they're worth without trying to make yourself look smarter.
You can't do "LSAP" when your chairman is "THE" SAP...
Greece is broke, as is California, Illinois, Spain, Ireland, the US,... hell, everybody is broke. Japan is fried. Just this morning, Case of Case-Schiller predicted another 20% leg down on housing. The job market is tighter than a gnat's ass, and even Moon-beam Jerry Brown realizes it's game over for government excess. Entire sectors like retailing, construction, mass media, telecommunications, are seeing margins fall to zero, but the problem is inflation?
Great higgly piggly...
Don't stop your line of thought there.
Now if you print enough money, you can transform any problem (deflation, stagflation, disinflation) into a inflation one. What keeps them from printing as much as they want? Nothing.
Bruce, your scenario (explicit inflation trigered by the Fed without adequate wage and social security adjustments) simply won't be allowed to happen. Why? With the current status quo, one party will be blamed for the elections and will lose. But, #1 there's only 50% chance that your party will be blamed, and #2 - whoever gets voted out, will likely be voted in in 2/4/6 years.
However, if the inflation really takes hold, the politicians will be facing the ' Egypt scenario" , and The Bernank - he'll be facing the "Mussolini" ending.
So, for a politicians the choice is simple: why risk uprooting the sytem that made them rich, powerful, and (in their own heads) important, when with the status quo the worst that can happen is a temporaty changing the seat in Congress to a lobbying job, and getting reelected in 2 years?
The politicians will be sorry, for allowing the Bernank to order the inflation, that hasn't been delivered yet, due to the current low velocity of money. If he orders more to be delivered, I almost feel sorry for the incumbents, and the fed.
Being a codger, I can remember the tenor of political discussion during the last bout of stagflation, prior to Tall Paul Volker's reign at the fed. People were getting pissed, and they were pointing their fingers in the right directions, namely the Congress, and the President. Believe me, nothing else would have convinced Carter to appoint Volker, and Congress to approve him, allowing him to run mortgage rates up to 19 and 20 percent.
Because of websites like this, Ron Paul's educational efforts, and increased federal interference with the economy (if you tinker with it and it breaks you get blamed), the politicians will be held responsible immediately. Maybe this is what the tea partiers, Paulites, and other assorted Libertarians need to gain power.
Maybe it would be worth it. Let's stock up on popcorn, and PMs, and watch. It will be entertaining, whatever happens.
PS These capcha problems are getting easier, I don't have to bring up the calculator any more.
due to the current low velocity of money
Just FYI: the velocity of money chart is very misleading because the banks have $1T+ sitting in reserves at the Fed. QE1 and 2 have completely skewed the velocity chart. Before the crises, normal Fed reserves were less than $20B, often closer to $10B.
If you look at currency in circulation chart, you will see that the supply of money diffused through the system exhibits normal growth.
I guess what I'm trying to say is that we could still experience significant inflation while the velocity chart misleadingly shows a total collapse. That $1T just sitting there skews the metrics.
Monetary base was 800B, right? Is there a distinction between base and reserves?
The Feds are going to keep this zombie economy going as long as they can, and then when thay and all their banker cronies realize that the jig is really up, they will beat down gold and silver prices as low as they can and then they will soak up as much PM's as possible before they let it all collapse. They don't care about recovery, all they care about is satiating greed.
+100
Bruce,
The losses have to be taken. Either we allow the debt to clear or we risk the collapse of the currency trying to prop it up.
Countries around the world are going to tire of the bullshit the US is running. We will lose reserve currency status.
A minor quibble -- how do you get wage inflation when we have massive unemployment? No doubt workers will desire a raise but they will not get it. Doesn't really matter for the end result, because rising commodity prices will kill everyone.
1. Stategic squatters. They convert mortgage costs into income.
2. Gov't money equivalents: SNAP comes to mind first but we may see fuel stamps before this has run it's course.
3. Price controls on health care.
4. Tax cuts or tax holidays, tax credits for buying things etc.
Fuel stamps! Holy shit.
That was clear to see for some time now. Inflation it will be.
If you think about it $100 trillion unfunded liabilities is a lot to inflate away, and counterbalance a few trillions balance sheet deflation.
Only question left is will they openly cut COLA, or do it in a hidden way by manipulating the CPI some more.
Very relevant to this discussion:
http://money.msn.com/exchange-traded-fund/the-feds-next-move-stealth-sti...
Almost scared me into going out and buying a piece of dirt!
I can't believe that not only did I read this drivel, I read the drivel that passes as comments.
For the past year we've had nothing BUT inflation...in everything we need ...like food, commodities. We've had nothing but deflation in everything called assets. Companies are getting killed on margins, look at Chipotlas the latest example. Has any of that made a difference...in anything ?And you think that the .gov cutting transfer payments (ie snap, ss et al) and increasing taxes is going to put any money in the economy to cause inflation ? Why would unemployed and broke people keep paying for anything not strictly a necessity ?
If your scenario is attempted, look for much more unemployment, more mortgage and other consumer debt defaults, fewer cars and other non-essential consumer items sold, and a further fall in tax receipts. Look at the Dallas Fed report this morning. We've reached the end of the line on what simple Fed jawboning can do. You can't get inflation out of a declining economy; you only can get it, in this situation, out of a declining dollar. The Chinese factories are already feeling the pinch of fewer Christmas orders and runaway inflation. If Greece decides to go for more austerity, you'll get a major slowing of their economy even further with Spain and Ireland right behind.
The Fed has nowhere to turn, and that prick Geithner is going to be on bended knee soon enough. And, heresy of all heresies, you really don't want to be fully invested in gold during a depression.
Deficits can cause inflation.
Duh! You never want to be fully invested in just one thing, ever.
Good post, except I question this:
"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)"
The inflation we've experienced over the past year or two has not boosted existing values. Just the opposite has happened, which suggests over-supply and lack of jobs/capital are much more important in housing values than things like the price of copper.
My thoughts too
I DON'T THINK THIS WILL WORK!!
But I do think that Bernanke will try it.
And there is no possible way the Fed can create meaningful wage inflation. This is the true nature of the bind.
I think this statement hits at the heart of the matter, and is a primary reason the whole dual mandate objectives are DOA.
After 2 years of some of the easiest monetary accomodation on earth, we are still hovering around 17% on U-6 unemployment. What's finally hitting home to Bernanke is that structural unemployment is a persistent and potentially huge political issue-- and no amount of money printing will make the issue go away.
It's one thing to create wage inflation at 4% unemployment. It's entirely another to create it at unemployment levels easily double that.
Not that 3% targeting inflation has anything to do with promoting "price stability", mind you.
They are NOT in a bind... they are playing a game of hide and seek which allows them to pretend they are in a bind...After all they are still in a virtual democracy...
my ass crack of a state senator has written me repeatedly over the last 5 or 6 months that he will support the elimination of the dual mandate for the fed. i wont say who he is but he sits on the banking committee, is photogenic and often carted out for a sound bite and his name rhymes with dorker.
"...and his name rhymes with dorker."
Porker? Senator Porker?
But he's so smart, he can spell his 1st name backwards without even thinking about it! ;-)
The shadow housing inventory will keep that market looking for aa bottom for years to come..
Bruce,
I follow the logic of your argument on an in vitro basis - the problem in this would play out differently in vivo.
The FED has backed itself into a corner both here and abroad. The QE's have rewarded the guilty for their previous malfeasance. If there are no consequences for bad behavior, it will continue. Increased inflation piles on top of moral hazard by saying, "If some inflation is good, more inflation is better." I don't see us going all Zimbabwe in a year. I would, however, expect 12%/annum inflation a year from now and spiraling upwards.
This approach does not solve any problems here - it dooms the Democrats who pursue it and the Republicans who enable it. This isn't an effective "kick the can" approach since it will go BOOM before November 2012. Especially if you tell those living on programs with COLAs, "Don't worry! This way things will get much worse for you a little more slowly."
Outside the U.S. it would be far less welcome than more QE because it makes places like China (which is already seeing significant social unrest due to inflation) see their economies start building in even higher rates of inflation in line with what we have seen over the last few years.
Obama has gone into "bunker mentality" if the LAT article about making decisions "based on his gut" is accurate. Reference point is the new ICE policy of complete non-enforcement of immigration laws. Reid and Pelosi are bothing seeing their Democratic political bases crumbling beneath them according to a number of political articles. Try selling "Carter 2.0" to Democrats elected in red and purple states - I'd wager even money that their caucuses would select new leaders within 30 days of that plan being announced.
I haven't turned optimisitic. This does not end well. The best solution is to remove the myth from the markets (i.e. the FED and associated idiocies {i.e. no mark to market}) so they can crash, reboot, and start over.
Screw the F.U.D. (fear, uncertainty and doubt) sellers.
If the markets had been allowed to crash in March of 2009, we would better off today in terms of our future outlook.
barliman
"I would, however, expect 12%/annum inflation a year from now and spiraling upwards."
I am seeing 50% inflation on numerous food items in the last 12 months (excluding loss leaders) ...
The consumer will simply stop purchasing non-essentials, and opt out.
Acute stagflation (biflation) as far as the eye can see ...
Well said.
Magical thinking. The Fed has thrown trillions into creating inflation for three years now, proving that:
1. Bernanke the Jew is an idiot, and
2. Money sitting in the big banks has no impact on the real economy.
The great deflation/depression is just beginning. Got popcorn?
Fuehrerkopf, I beg to disagree. Bernanke is not an idiot. You may of course question his motives.
I respectfully have to disagree with some of your points Bruce. Democrats are open to some spending cuts, but they want some tax breaks to go the way of the dodo, which cuts into the political funding for some very high up Repubs.
Inflation is already well above what the goverment reports and the adjustments to spending programs won't be carried over to governmental salaries, that one you can take to the bank.
Playing with the numbers doesn't negate what is happening on the ground. Inflation running well over your "smidge over 3%" is going to continue to grind the economy into the dirt, regardless of what the government reports. Businesses have no way to improve exports because the basics haven't changed. They can still produce it cheaper overseas and ship it to your door than you can produce it locally with Union labor.
There will be an 11th hour compromise IMHO, but it will involve sham "savings" of trillions of dollars over a ten year period based on hopium estimates of future growth (Like boosting revenues by 50% by 2014 while spending barely moves).
We will get the raise in the "debt limit" and immediately chew up a quarter of it paying back the federal pensions that were drawn down. The key here is to push this off the front burner till after the next presidential elections and let the next president deal with the hot potato. It also gives the lifer politicians the chance to sock away a few more millions in "donations" before the pot boils.
Fair enough. Just a question. What were those cuts the Dems are willing to accept? I must have missed that part.
SS, Medicare? Unless those are on the list, there is no cuts. Just a show pony.