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The Fed is Fighting the Wrong Battle Again… And Creating Yet Another Crisis

Phoenix Capital Research's picture




 

A critical element for investors to consider is that the Fed is not forward thinking when it comes to monetary policy. Indeed, if we reflect on the last 15 years, we see that the Fed has been well behind the curve on everything.

 

First and foremost, recall that Alan Greenspan was concerned about deflation after the Tech Crash (this, in part is why he hired Ben Bernanke, who was considered an expert on the Great Depression).

 

Bernanke and Greenspan, both fearing deflation (Bernanke’s first speech at the Fed was titled "Deflation: Making Sure It Doesn't Happen Here"), created one of the most extraordinary bouts of IN-flation the US has ever seen.

 

From 1999 to 2008, oil rose from $10 per barrel to over $140 per barrel. Does deflation look like it was the issue here?

 

 

Over the same time period, housing prices staged their biggest bubble in US history, rising over three standard deviations away from their historic relationship to incomes.

 

Here are food prices during the period in which Greenspan and then Bernanke saw deflation as the biggest threat to the US economy:

 

 

The message here is clear, the Greenspan/ Bernanke Fed was so far behind the economic curve, that it created one of the biggest inflationary bubbles in history in its quest to avoid deflation.

 

Indeed, by the time deflation did hit (in the epic crash of 2007-2008), the Fed was caught totally off guard. During this period, Bernanke repeatedly stating that the subprime bust was contained and that the overall spillage into the economy would be minimal.

 

Deflation reigned from late 2007 to early 2009 with the Fed effectively powerless to stop it. Then asset prices bottomed in the first half of 2009. From this point onward, generally speaking, prices have risen.

 

The Fed, however, continued to battle deflation in the post-2009 era, unveiling one extraordinary monetary policy after another. They’ve done this at a period in which stocks and oil have skyrocketed:

 

 

Home prices bottomed in 2011 and have since turned up as well (in some areas, prices now exceed their bubble peaks):

 

 

Which brings us to today. Inflation is once again rearing its head in the financial system with the cost of living rising swiftly in early 2014.

 

Rents, home prices, food prices, energy prices, you name it, they’re all rising.

 

And the Fed is once again behind the curve. Indeed, Janet Yellen and Bill Evans, two prominent members what is now the Yellen Fed (Bernanke stepped down in January), have both recently stated that inflation is too low. They’ve also emphasized that rates need to remain at or near ZERO for at least a year or two more.

 

Investors should take note of this. The Fed claims to be proactive, but its track record shows it to be way behind the curve with monetary policy for at least two decades. Barring some major development, there is little reason to believe the Yellen Fed will somehow be different (Yellen herself is a huge proponent of QE and the Fed’s other extraordinary monetary measures).

 

Which means… by the time the Fed moves to quash inflation, the latter will be a much, much bigger problem than it is today.

 

For a FREE Special Report on how to protect your portfolio from inflation, swing by

www.gainspainscapital.com

 

Best Regards

Phoenix Capital Research

 

 

 

 

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Sun, 03/16/2014 - 10:47 | 4554697 RaceToTheBottom
RaceToTheBottom's picture

Not only does inflation solve the deflation fear but it also cleans up the debt issues, at least for some....

Savers, well tough luck.

 

All by plan

Mon, 03/17/2014 - 10:33 | 4558392 Cattender
Cattender's picture

what is the Definition of Insanity IS: what was it again??? oh, yeah.. whatever the Fuck the Fed decides! LOL

Sun, 03/16/2014 - 10:27 | 4554650 dizzyfingers
dizzyfingers's picture

Banks love inflation. It's always their goal.

Sun, 03/16/2014 - 09:18 | 4554490 Racer
Racer's picture

They want and NEED inflation so they can steal from... er ...tax people even MORE

Sun, 03/16/2014 - 08:40 | 4554425 AdvancingTime
AdvancingTime's picture

Great article, it makes a lot of good points. The more and more I study derivatives it now appears the main goal of QE may have been to hold up the underlying value of assets that feed into and support the massive derivative market more than help the economy.

http://brucewilds.blogspot.com/2014/03/derivatives-house-of-cards.html

As to inflation, it lurks beneath the surface and is hidden away in the dark corners of our future. Want to know where the real cost of things is going, just look at the replacement cost from recent storms and natural disasters. More on this subject below.

http://brucewilds.blogspot.com/2013/06/inflation-lurks-beneath-and-hidde...

Sun, 03/16/2014 - 01:05 | 4554047 zstard
zstard's picture

But Bix Wier says that Alan Greenspan is really a good guy, and any day now he's going to save us by putting us back on the gold standard.

Sat, 03/15/2014 - 21:07 | 4553544 eddiebe
eddiebe's picture

Fucking wise up Graham, you really think the Fed don't know what they are doing? Are you just out of some business school where they filled your head full of crap? Too bad there are people that trust you with their money.

Sat, 03/15/2014 - 19:02 | 4553115 nakki
nakki's picture

Who writes these articles? First, maybe China and India's rise might have a little to do with the price of oil. Second perhaps the FED'S (who is it that owns the FED again) whole existence is to provide endless fiat to banks so in the long run the few once again will own the majority of everything. Its not rocket science. If you can loan out $$, and when those loans go bad just go print some more, eventually no matter what the price of stocks, real estate, PM, natural resources are or even priced in you (the banks) will own it all. Its pretty simple accumulate, distribute, accumulate again. Not to sound like a conspiracy theorist, but in reality how many central banks are there? 3 maybe 4?

Sat, 03/15/2014 - 18:41 | 4553045 moneybots
moneybots's picture

"First and foremost, recall that Alan Greenspan was concerned about deflation after the Tech Crash (this, in part is why he hired Ben Bernanke, who was considered an expert on the Great Depression)."

 

That didn't work out very well.  Bernanke put us into a depression and dug a deeper hole, loading up the FED balance sheet to over 50 to 1.

Sat, 03/15/2014 - 18:31 | 4553020 BeetleBailey
BeetleBailey's picture

Graham...I'll give ya this....despite the haranging you get here, you keep plugging away....too bad you're dead flat wrong and asinine....

Sat, 03/15/2014 - 18:23 | 4553008 New American Re...
New American Revolution's picture

Phoenix Capital's mistake is in thinking the FED is behind the curve again, when it has always been ahead of it.   Does anyone really think these sociopaths don't know what they're doing?   They are Edomites, serve a different god, and have a completely different agenda in order to attain a completely different world than the rest of humanity has in mind.   Anyone who keeps such a perspective on things is never going to be right unless it is by accident.   www.electanewcongress.com

Sun, 03/16/2014 - 10:33 | 4554668 dizzyfingers
dizzyfingers's picture

"New American Re..."

Electing a "new congress" isn't going to fix a thing. Government is the trough, pigs want to feed. Voting confirms satisfaction with status quo.

Sat, 03/15/2014 - 17:58 | 4552940 Jack4952
Jack4952's picture

Just another reason to buy even more GOLD and SILVER !

Sat, 03/15/2014 - 19:43 | 4553234 MrSteve
MrSteve's picture

Dear Fellow '49er,

you forgot to say GOLD BITCHES, remember, this is ZH!

Do NOT follow this link or you will be banned from the site!