Guest Post: Fed Trapped By Inflation

Tyler Durden's picture

Submitted by Lance Roberts of Street Talk Advisors

Fed Trapped By Inflation

cpi-fed-trapped-110111There will be NO announcement of QE 3 tomorrow.   Why?   Because the Fed has trapped itself into a corner.   The first two rounds of Quantitative Easing (QE1 and 2) were viable for the Fed as inflation was running at deflationary levels in 2009 and at the bottom of their target range of 1-3% in 2010.

In both instances the implementation of asset purchase programs, which immediately juiced liquidity in the financial markets, had an immediate and pronounced effect on the level of inflation.

Today, with inflation currently approaching 4% on a year-over-year basis the Fed is not only outside its inflation mandate of 1-3% but any further cost pressures on the consumer is going to drive the economy into a recession.   As we showed recently in our post on 3rd quarter GDP with food and energy consumer more than 23% of wages and salaries there is very little wiggle room for the average American. 

Without access to credit, declining incomes on a year-over-year basis and uncertainty about employment there is tremendous strain on the consumer to make ends meet.   The Fed knows this.   They also know that without help from somewhere the economy is in trouble.  The hope is that they can "talk" the markets along.

Therefore, expect no announcement of QE 3 tomorrow but lots of talk about policy tools, potential for further action and another punt to current Administration.   However, with that there is a bigger problem brewing, and one that has been set aside due to the issues with Greece, the "Super Committee" only has 22 days left to announce the spending reduction plans before the automatic cuts take hold.    This won't be good.

Unfortunately for Ben and the Fed they are trapped between the need to "do something" to boost the financial markets and support the economy but are constrained by their mandates to keep inflationary pressures under control.   There is no help coming from a deeply divided Administration that can find no middle ground to compromise on and the automatic spending cuts are going to sap a portion of the 23% of personal incomes that are made up by government transfers.   The consumer is tapped out, the economy is much weaker than the headline numbers suggest and without liquidity assistance from the Fed you can expect the recession to take hold in 2012.  

However, we might get surprised by the Fed as they have done it before.   The real question is even if they do something will it be enough to offset the damage that has already been done.

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hambone's picture

Come on Ben, when in doubt, whip it (QE) out!!! 

You legacy is shit anyway so might as well go for worst Fed chairman can overtake Greenspan if you just try keep it up!

MarketTruth's picture

Instead of using the word inflation, the phrase that should be used is "currency devaluation". For the Federal Reserve seeks to devalue the buying power of the currency by 2% annually, or ~21% in a decade, or worse still ~43% every 20 years. Thus the Federal Reserve Debt Note (a.k.a. US Dollar) currency loses 43% of its value (buying power) in only 20 years.

Cynical Sidney's picture

bi-mandate of the fed:

1. increase inflation, increase unemployment and enslave the masses in fiat debt.

2. bailout financial criminals and the 1%

Troublehoff's picture

with very high inflation we would likley see high employment

deflation is what causes unemployment


but yes, agree, their mandate is financial slavery :)

akak's picture

deflation is what causes unemployment

Yeah, like that vicious deflation that accompanied the high unemployment of the mid and late 1970s.


Uber Vandal's picture

Zimbabwe had an inflation rate in which prices would double in but 24.7 hours (, and their unemployment rate was about 95% (

Clearly, this has all the signs of deflation. <sarc>

OT but related:

Anyone like the article about peanut butter going up 40%?


sqz's picture

There will be NO announcement of QE 3 tomorrow.   Why?   Because the Fed has trapped itself into a corner.

I don't want to laugh since the consequences to innocents will be painful to say the least, but, this is naive.

The Fed will find a way to print, especially with Bernanke at the helm - it is his academic speciality, if you read any of his papers, and he already has copious form.

Also, inflation targetting hasn't stopped Mervin King, the governer of the Bank of England, from grossly overshooting the UK's official inflation target with multiple QE programmes. Yet he does not even have a dual mandate!

Betting on Bernanke NOT printing would be like betting a full 5yr old can hold it in for an intercontinental flight!

strannick's picture

any further cost pressures on the consumer is going to drive the economy into a recession.

Well, we wouldnt want the economy driven into a recession now, would we?

flacon's picture

Which way causes the most mass casualties, meyhem, and loss of human life? Which ever way that is, that is the way they will go because that is their purpose to rid this world of the cancer of human beings. So.... can they kill people by hyperdeflation where there IS NO MONEY (only "stuff"), or can they kill people by hyperinflation where there IS ONLY MONEY (and nothing else)? Which way is the best way to kill 6 billion people? Keep in mind they also want to rid the world of chinky-eyed communist Chinese just as much as they want to kill blue cow-eyed "Euro/Ameri-peans"...



Brzezinski: "Its easier to kill a million people...than it is to control them"


GoinFawr's picture

 'incontinental' flight.

TruthInSunshine's picture

This is not 1933.

The Bernank should shove his self-proclaimed expertise on The Great Depression, which took place on a stage vastly different than our global economic and political stage now, up his ass.

Each time The Bernank juices the prices of commodities, creates artificial bubbles and malinvestment/misinvestment and distorts the normal price/demand curve (to a massive degree, I might add), he not only adds more fog to what's already a very opaque environment, which Mr. Market despises, but he destroys organic purchasing power by businesses and consumers.

The Bernank's obsession with stemming deflation at a time when real wages are stagnating or falling for the majority of the population, unemployment and underemployment are at least twice the officially proclaimed rates using more accurate measuring methodologies than the antiquated BLS implements, and at a time when we the causes of our economic malaise are structural, rather than cyclical, is one of the most dangerous and misplaced obsessions that any central banker has ever held.

A compelling argument can be made that deflation would SPUR consumption and additional demand for goods and services, even given that further deflationary expectations may take hold, as real purchasing power would sustain a significant boost (and consumer psychology would be buoyed by the fact that instead of seeing what they own or are on the hook for deflate or stagnate, while prices for necessities of daily living rise, they'd at least catch a significant break on the cost of living, which would spur more discretionary purchases, leading to labor demand and higher demand for goods and services).

rosiescenario's picture you are saying if people see prices of goods declining they will be incentivized to buy? They will be incentivized to sit on their hands. Of course most of what is purchased is made abroad, so maybe the Chinese would be hurt the most in that sort of environment.

TruthInSunshine's picture

I am saying that if deflation allows consumers to purchase more of what they need to live in terms of inflexible goods/services (e.g. food, energy, medical care, etc.), it frees up more purchasing power for the purchase of broader baskets of goods and services, while giving them a psychological boost in terms of relieving the choke point of laboring under the belief that they need to white knuckle each and every penny in preparing for higher living costs tomorrow and next year (as they now fear).

Why is this the case? Because real wages are either stagnant or deflating for the majority of Americans (in fact, Americans have 'delevered' their consumption by an average annual rate of $7,300 since 2007).

Additionally, and equally as important, given that labor is cheap and getting cheaper (while commodities and capex expenditures have either risen or stayed flat - they certainly haven't declined), businesses will see a significant boost in margins via deflation in the price of what they need to purchase to produce goods and services, which will incentivize hiring and expansion (as demand for their now more affordable goods and services picks up).

The general assumption that deflation is net negative, and that it leads to the postponement of purchases is a great fallacy, as a good chunk of what is purchased right now, and what has risen the most in terms of real cost (due in large part to The Bernank's idiotic goosing of the money supply and monetary easing generally speaking) is eating up a greater amounts of disposable incomes, allowing for less purchasing power across the broader spectrum of goods and services.

The Bernank's inflationary policies are crowding out both consumers' propensity to spend, instilling a very nervouse consumer mentality, and putting tremendous pressure on providers of goods and services, while discouraging many business segments from investing in expansion or hiring.

Finally, the inflation that Bernanke has sewn has created an atmosphere, at this juncture, which is creating the very conditions which allow for his very argument that banks and the financial sector of the economy are particularly vulnerable (and they are, as their is a great deal of insolvency in the banking sector) that warrants his policies that transfer taxpayer dollars (and consumer dollars, as dollars are fungible - whether via taxes or inflation) to the banking/financial sector of the economy in the form of subsidization (QE/TARP/ZIRP).

A dollar taken from consumers/businesses via inflation or monetary policies, and transferred to financial firms and the banking sector is a dollar that can't be spent elsewhere in the economy.

HoofHearted's picture

Yes, but in a deflationary environment, it is much harder for the Bernank to keep kicking the can down the road on a $210 trillion fiscal debt (according to the numbers of Professor Kotlikoff).

pavman's picture

They'll just keep playing hot potato with the other central banks.  Notice we didn't do QE3, we did the twist, but shortly there after the UK did QE.  So its just a matter of time before the potatoe comes back to our shores.

Messianic's picture

Lol, go ahead and explain why inflation creates employment.


Who let the macro 101 student out of their cage...

Troublehoff's picture

I think that would be 48% over 20 years assuming inflation runs at 2%:

1.02 to the power of 20 = 1.4859474

however, as real inflation is probably running at around 7%, that would be almost 100% inflation in ten years!

1.07 to the power of 10 = 1.96715136

and therefore, prices would quadrouple over 20 year

peekcrackers's picture

Ben has already  started quantitative easing ..  stimulus measure dubbed "Operation Twist

changing the composition of the government bonds . also fed funds rate will remain between 0% and 0.25%,

Got stimulus

Zero Hero's picture

The original poster was talking about <b>currency devaluation</b> as opposed to <b>inflation</b>.

2% currency devaluation per year => 33% currency devaluation in 20 years.

So at that rate, if you get 100kg of rice for $100, then in 20 years you will only get 67kg for $100.


But inflation is a better way of looking at it as it makes more sense to think of how much money you will require to buy the things you need, rather than what you will be able to buy with the money that you have (though unfortunately that may be how it pans out).

UP Forester's picture

Much easier to figure out using ye olde "Rule of 70" that I learned in (gasp) public high school.

skepticCarl's picture

Foreseter, you obviously cut that econ class and improperly copied someone's notes, incorrectly, if they refered to the "rule of 72".

Wolf-Avatar's picture

Actually, skepticCarl ... I took two seconds to look it up on google.

There is a rule of 69, 70, AND 72.

Google is your friend.

Let them eat iPads's picture

Instead of inflation they should use something more positive - like "appreciation".

Example: "Appreciation is running at 3.4% this month".

Ah, that's much better.

rosiescenario's picture

Yes..."Boy am I glad I "invested" in that case of peanut butter last month....look at its appreciation"


This is far better than using terms like "inflation" or "devaluation" which carry such a negative emotional charge with them.


You should have a great future in D.C.

iamgogi's picture

inflation, as measured by the CPI is 0%, if you strip everything out of it. I read there is deflation now, because the CPI has only my old TV in it

common_sense's picture

Mmmm Bernanke is waiting for the comment of Greenspan saying that "Europe is the problem, in USA all financials are undercontrol"

oh yes, say it Alan, say it pleasssssssssssssssssssssseeee!!

Bernanke is with the finger ready in the button of the PRINTER !!!



CashCowEquity's picture

print, print, print

you have no choice or the BEARS Win



WestVillageIdiot's picture

If this little prick didn't have his Heidelberg set to "Turbo Speed" this game would already look like the Bears-Patriots Super Bowl.  Fridge Perry would be going in for his 11th touchdown right now. 

Bernanke licks the sweat off a dead man's balls (credit "Good Morning Vietnam" for that line). 

Racer's picture

The Fed care about the average American?????????????

Sorry I just fell backwards off my chair and have done myself a serious injury!

WestVillageIdiot's picture

What is the problem?  Why can't you believe that?  Of course The Fed cares about the average American.  They care how much blood they can extract from every average American there is. 

UP Forester's picture

They only care about themselves.  When you have nothing, you have nothing to lose, and there are a lot of people about to lose it.  Never corner an animal, especially when a lot of the "animals" have had military training and a lot of weapons.

agent default's picture

Either default on the debt or on the currency Ben.  Your choice.

WestVillageIdiot's picture

"The two greatest words in the English language, De-Fault."
-  Homer Simpson

homersimpson's picture

Excuse me, I am misquoted. I think the two greatest words are "Do-Nut." Or "Duff Beer."

FeetOnTheGround's picture

No, WestVillageIdiot was correct - it's: "de-fault!"

That's because it's present ANYWHERE there's lending."Do-Nut" and "Duff Beer" are regional.

bsdetector's picture

You know more printing is coming. There is no other way for the status quo to continue in power unless the printing commences. Ben warming up the choppers and about to play the ride of the valkyries while the shorts are humming the Bruce Cockburn song- "If I had a rocket launcher." These are interesting times. I wish some of our leaders would just admit things have failed. Let the debt bubble burst so that prices and values can come down and then we can be on our way again. A little deflation is probably a good thing right now.

Mark123's picture

Keep in mind that those with cash in a safe place do extremely well under deflation.  When the time is right we will get deflation because they can do this in a heartbeat by merely tightening up on credit.  They just want to make sure they are positioned right before flipping the switch.

espirit's picture

When "If I had a rocket launcher" comes to mind, my first thought is who or what is on the #1 playing card.

Fight Club, bitchez.

Alea Iactaest's picture

WASHINGTON | Tue Nov 1, 2011 6:54pm EDT

(Reuters) - The Federal Reserve looks set to take a breather from monetary stimulus measures on Wednesday, even if financial market turbulence heightens the chances of action later.

rosiescenario's picture

"A little deflation is probably a good thing right now."


Ah, so you did not buy your pm's like everyone else here?


My boat is loaded with pm mining stocks and IMHO, a great deal of inflation sounds promising.

Dingleberry's picture

"Inflation?...sniff.....sniff........I DON'T SMELL NO STINKING INFLATION!"

-Ben Bernanke, Chairman, Federal Reserve of the United States of America

Racer's picture

He couldn't smell an inflating rotting corpse  laden with a megaton of exploding stinkbombs stuck up his nose

FunkyMonkeyBoy's picture

On one hand you have a nation full of citizens with the right to bear arms to fight against threats to their liberty, both foreign and domestic...

... and on the other hand, you have the mass genocidal maniac, Ben Bernank announcing where he will physically be on the planet once a quarter.


Fate's picture

I stopped reading at " going to drive the economy into a recession."

WestVillageIdiot's picture

How about if we change that to, "drive the real economy deeper into the current recession plaguing middle America"?  Better?

JPM Hater001's picture

Sorry, but accuracy is important here.

Change that to, "Come out of the recession ditch and land squarely in the muddy field of depression on the other side."