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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.
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Benji and crowd already went down the "we need more inflation path" a while ago... Then got really scared at the CPI, started yakking about core alone... You know the drill.
Not that I disagree at all. In fact, an inflationary spiral is the historical precedent, the most acceptable of the evils available as a band-aid for the cancer of ultimately, too much money creation.
What really scares me however, is that if Benji retreats to higher inflation land again, any possible however so very small future recapture of Federal Reserve credibility is irrevocably lost. It's the end.
And maybe that's what we rightfully deserve at this juncture. It's my guess also that's what we're gonna get, anyway.
(GS)........gimmicks and schemes........
"According to the Fed’s Dual Mandate they should be doing something about that."
This joke is on those that believe in hope and change and unicorns.
Bruce, perhaps you could complie something quantifiable of this mandate in action. So far it's a proven farce almost 4 decades long and counting.
Like I said on another thread, this dual-mandate is equivilant to FEMA claiming credit for preventing the last cat 5 storm, and DHS claiming no terrorist attacks. Claims based on nothing.
Listen or read The Creature from Jeykel Island. It explains the FED dual mandates and what they really are. We've all been Bamboozled by the FED as they support only the big banks while they force all people into serfdom debt. Politicians are hooked on free FIAT currency for their pet programs unfortunately our children must now bear the cost's. I'm still trying to figure out how to tell them one day how stupid my generation politicians are....
Who needs children when corporations are people, too?
Seriously, central planning will take care of pesky reproduction just like China.
Point is that your children will never know freedom, only corporate welfare and doing what is "good for the fascist state."
At least your kids won't be alone. Faggot Incorporated (MSM) will have divisive political traction... next those same fags are coming after your rights to breed for their behalf in the name of "equality." Expect biologic reproduction (and anything else contrary to being a fag) to be a hate crime by 2014. These are national priorities according to Faggot Inc. frequency of coverage.
You heard it here first.
Don't count me as a Fed supporter. I've said a dozen times that they have done much more harm than good.
But they do have a dual mandate. And yes, they are supposed to be doing something about unemployment. So they have to do something. This is it, IMHO.
The dual mandate is a gimmick. Something to blindly attribute which is completely marginalized by the "other" mandate. Both have the same thing in common - ripping off the people in the name of ___ (insert something good here)..
Bullshit-101 classic "heads I win, tails you lose."
> The dual mandate is a gimmick.
Agreed. The Fed's purpose has always been to devalue the currency so the politicians can spend beyond their means. This stuff about a dual mandate is just dog and pony, bread and circus theatrics.
Bruce that article was pure bunk.
No, inflation or default are pretty much the only ways out. Theoretically we could also grow our way out but that's a long shot at this point and counter to faith in central planning which is currently very much in vogue.
Besides, the CPI-tweaking idea has already been floated:
http://www.zerohedge.com/article/americas-latest-proposal-deal-its-insolvency-and-pursue-stealth-dollar-devaluation-change-cp
Young Skywalker... try or try not, there is no do.
What the Fed SAYS has no effect on inflation. What the FED and the Government DO have a major effect.
And the only measure of inflation the Fed cares about is wages. If wages aren't going up, there is no inflation, no matter what a gallon of milk or gas costs.
Outside of Boeing jets, what "exports" would be helped by a falling dollar? The US doesn't make anything (except debt) anymore.
Agreed. I don't know why people, especially here on ZH aren't talking more about this fact. Without wage inflation all this inflationary talk is moot. Ever since Reagan eviserated organized labor in the 80s there hasn't been any meaningful increase in wages. Without this you will never get largescale inflation to spark, especially given the slack labor market. Higher input prices and consumer inflation will only cause more pain for the lower 90% without doing jack shit for wages in the same group. The Fed won't get inflation if they do this, they will just get pissed off retirees and a greater concentration of wealth. Not to mention an excuse for banks to raise rates on consumer debt. Deflation and serious debt write downs are the only way this will be solved, but no one has the stomach for it.
You do realize that all this money printing and zirp allows massive leverage. The fed has built the biggest rock on top of the highest mountain in the universe. You don't 'see' that much inflation yet, since the rock is so big it's near impossible to move.
Once it does move, even slightly, it's going to rocket down that hill at an exponential rate. And no bernake will not be able to stop that inflation rock hurtling towards you in 15 minutes.
Inflation of the money supply is what's important. Because the order of how that money supply increase is handed out ( banks first) defines who gets the benefit vs who pays the bill later (man in the street, with devalued dollars). The LAST thing you see in an inflationary environment is higher consumer prices (ie the ball has started rolling). What you are neglecting is the size of the rock that's being built up, by saying there's no inflation because of lack of wage increases. If consumer prices immediately increased at the same rate as the money supply, then everyone's expectations would be inline with actual inflation, and the money supply increase would have no effect. Just think if you live on an island and magically they double everyone's wage and bank balance. Prices would double near instantaneously. Think if they double the money supply on at island again, but this time they give the money to one person on the island first. Overall prices will eventually double, but the guy who gets the free money first will be able to acquire more real assets at pre-inflation prices.
We're still at the top of the hill, God help us when that rock moves.
dude, the theory that there is no inflation without wage pressure is just busted with historical fact. I go and visit countries after currency crisis because their currency has been destroyed, they have large internal inflation, yet are cheap because in those good old days the dollr used to be worth something. recent examples: iceland, Argentina, indonesia, three places i went. there certainly was inflation in teh soviet union after the collapse while there was high unemployment.
Why this policy theory which in fact in no way fits reality keeps getting pushed out without baing deestroyed by the press amaxes me. do you think that if greece goes back to the drachma over night they will suddenly have all this wage pressure, yet prices will skyrcocket.
this sort of thing along with efficient market, etc. makes me want to puke. the fact that teh sheep believe it is evn worse. it is like 1984, if you say a like often enough it becomes truth. UGH.
as for everyone who junked lots of comments, the thought trolls have been out on force on ZH lately. you see the multi junks from anyone daring to question conventional wisdom. for those more new the the site I hope you can see through this. I am rather certain their are people paid to troll the site and junk comments in order to throw doubt into crtain things stated.
The other of this article is correct. inflation has been the real stated goal of the fed, and to have it in excess. that is the only thing that add up. deflation
would show what abuch of screw ups our economic leaders are because as the tid flows out you see all the crap left on shore. the inflation hides this. which means I just keep buying comodites when down big, and when up high short them so my longer term holdings stay in place.
great post
If you couldn't come up with any exports other than Boeing you weren't trying very hard. How about a massive amount of farm products? The Australian and Canadian wheat farmers used to enjoy a nice currency advantage in the world wheat market, but no longer.
Cheers.
Well, I work in SoCal for a manufacturer that's been here since the 1950s, and we're still going strong because we have market holds across the globe. Yes, we had to tighten our belts and become smarter and leaner, but we've had (decent) COLA increases every year.
And we export a full one-third of all our output to destinations overseas. I'm not in favor of this "race to the bottom" game the Fed's playing with our currency, but it does have the effect of making our products more affordable to our overseas customers.
Weapons manufacturer?
Welfare debit cards?
= silver consumer...