Oh... my... God... Bernanke isn't sane. We have a crazy man with his hand on the Fed. He's abandonded "inflation" in favor of "inflation expectations." Absolutely insane. High energy prices, food, rising healthcare, rising tuition, rising costs of govenment, deficit spending, none of it matters if people put up with it. Then with the knife fully in the back of the American middle clas and twisted several times he breaks out the salt and points to the lack of wage pressures as evidence that there is no expectation of inflation! Somebody get a rope.
46 comments:
Bernanke isn't the first to talk about inflation expectations.
FIRST & MURST
That said, I continue to despise inflation as it is reported.
Sure, core inflation is at a reasonable level - and doesn't appear to be on the brink of a huge spike.
But look at the prices of everything else! Things are getting very expensive at a rapid clip, yet are ignored by the Fed.
The theory, I guess, is that the increased prices will trickle into the core inflation rate at some point, but it strikes me as odd that the Fed takes such a retroactive approach. By the time the core inflation rate creeps up to uncomfortable levels, they will do something about it...and we'll have to wait another year to feel the benefits.
I'm glad I'm not smart enough to work for the Federal Reserve.
I'm waiting for the helicopters.
The games with inflation have become truly ridiculous--conveniently ignoring whatever factors don't agree with the "inflation is under control" theme, especially the noxious focus on "core inflation" (what Ron Peebles calls "inflation for starving pedestrians.")
But Ben will have his work cut out for him. The market didn't care what the Fed did or didn't do on the way up, and that, exactly, will be the case on the way down. Ben Bernanke might want to break open a dictionary and look up "conundrum"--that's a word that might come in handy when it becomes obvious that the new credit-inflated markets are no longer playing by all the old rules.
Then we have the comptroller of the US yesterday saying basically 'We're fucked".
Yay.
But Rob, it is our expectations for inflation that really mater. Actual inflation does feed into the expectation, but it is unexpected inflation that causes problems.
"Inflation is everywhere and always a monetary phenomenon"
- Milton Friedman
Bernanke knows this. He is just dishonest. You can fool all the poeple some of the time and some of the people all of the time...
Sweet!
The real knife in the back is the under-reported CPI. If the CPI was reported as it was historically (i.e., until 5 years ago), inflation would actually be 9-10% for the last 5 years.
Compounded over the last 5 years, this means the purchasing power of your savings has dropped 40-50% in the last 5 years. To merely keep up with inflation, your investments must return 15% (before taxes) annually.
Hedge folks, hedge. Diversify into other currencies. Euro, pound, etc. The central banks of those countries don't seem to be playing the "head in sand ostrich game" like Chopper Ben and the Fed Elves.
Keep one thing in mind though. The wealthy of this country still have a vast majority of their material wealth denominated in Euros. And they aren't going to be too happy watching their purchasing power evaporate as the dollar devalues. At some point, the wheels of influence will begin to turn to begin shoring up the dollar. Or they will all open Swiss accounts. :-)
But ultimately, its the lesser of two evils theory. Either you protect your country's currency and the very fabric of its existence or you stay in denial just to save the asses of a few moronic home buyers in over their heads.
Isn't inflation the devaluation of currency? I thought to have true inflation, you need both wage increase and price increase so the value of the currency falls.
We (not the rich) have had flat wages for going on two decades. Meanwhile, the prices of necessities are skyrocketing. In the 1970s, IIRC, wages were showing double-digit annual increases.
I have an Econ 101 question that's been bugging me for a few months about this "inflation". Is it inflation when the purchasing power of your wages decrease? Or is it just a good old-fashioned reaming of us po' folks? What historical period of inflation had both stagnant wages and major price hikes?
I have a feeling that what we're experiencing is actually worse than inflation.
"The wealthy of this country still have a vast majority of their material wealth denominated in Euros"
Meant to say "US dollars" there. :P
Is it inflation when the purchasing power of your wages decrease
"Inflation" by definition is an increase in the money supply. i.e., more liquidity added to the system.
There are other types of inflation, such as "price inflation" but that is a subset. True inflation is adding more dollars into the bucket thereby making each dollar worth less.
The reason things are somewhat different now than they were in the 70s is the ability for corporations to offshore expenses thereby keeping wages down in general. (Hard to argue for a wage when some guy in India can do your job for 1/2 the cost) And this mechanism has continued to erode the wages of the working and middle class. And of course, because we are a debtor nation, we have to print copious amounts of money just to stay afloat. And thanks to our bubble mentality, we fall prey to idiotic scams and schemes (dot com and real estate) thereby further eroding our purchasing power. Unfortunately, its a downward spiral.
Keep in mind that we are also funding a war for the first time in our history without issuing war bonds. $500 billion and counting.
@Tom
Thanks for the explanation!
So, to clarify...
We've got price inflation for all kinds of reasons (increased global demand for raw materials, to simplify). But, we're able to keep spending because we're a debtor country and thus demand hasn't fallen much (not to mention the highest increases have been for the most inelastic goods). And, wages have failed to keep pace because of outsourcing.
Not only that, but because our mfg is outsourced, our goods are now produced in places with currencies that are stronger than the USD, so our prices are going up for that reason too.
Is that mostly correct?
I just moved from Los Angeles to Toronto. The infrastructure decay in LA was as bad as it gets, but all the places in between LA and TO aren't much better off. Like you said, all the govt money's going to war - this infrastructure mess is going to bite us in the a** big time, and soon.
Woo hoo! Time to start stockpiling rainwater and grain alcohol.
Rob,
It all makes sense to me, he's a Bush appointee and we all know none of these folks are sane.
AnneK,
Then you are immediately experiencing the effects of currency changes. A buddy of mine in the CBO visited us a few years ago in Canada and I was telling him to invest his money in Canadian stocks because our dollar was only about $0.63 American. It's close to parity now, which is a huge (and fast) difference. Funny how I don't feel any richer, except when we order laboratory supplies from the States and no longer have to add 1/2 to the listed price.
NR
Ahhh,inflation.
Today's ridiculously overpriced home becomes tommorrow's bargain...
Put on street terms:
Remember McDonald's "2 for $2.00" campaign?
2 Big Macs or Egg McMuffins for two bucks?
Then one day, the price went to "2 for $2.42".
Same burgers...higher price.
I truly despise the leadership of this country.
So the consensus is to basically just put all our savings into Euros and hope for the best? I've been saying that for nearly a year now (or gold), but my wife wants to keep the "high-yield" EmigrantDirect account (5.05% APY, in USD).
Sigh. Maybe it would just be better to be in fantasy land with everyone else with $60k in cc debt...
Sharky, you're sounding like Cornflake.
Be ashamed. Be very, very ashamed.
"The wealthy of this country still have a vast majority of their material wealth denominated in Euros"
Meant to say "US dollars" there. :P
Umm.. not necessarily so. More than half of mine is foreign.
"Inflation" by definition is an increase in the money supply. i.e., more liquidity added to the system.
No its not. It is rated by the changes in prices of a 'basket of goods'. See CPI (Consumer Price Index). The question "Is it inflation when the purchasing power of your wages decrease" is a correct layman's definition of inflation.
Inflation can be caused by the increase in Money Supply, but the increase in Money Supply does not define inflation because several things counteract inflation like interest rates, and bank loan to asset ratios. Increases in interest rate places a downward 'pressure' on inflation while decreases in interest rates have an upward 'pressure' on inflation. In terms of Money Supply, increasing Money Supply has places an upward pressure on inflation while decreasing Money Supply has a downward pressure.
Sometimes, depending upon circumstances, one will see both increasing Money Supply AND increasing interest rates. This gets even more confusing when you factor in government deficit spending combined with interest rates.
It is not possible for the US government to arbitrarily lower the interest rates. This is because interest rates are also associated with the treasuries being used to finance the deficit spending (treasuries allow deficit spending without increasing the Money Supply). The interest rate on treasuries has to be high enough to get investors to buy them. If investors get a better yield for the same risk elsewhere, they will purchase that other investment.
The deleted comment was to fix a wild link (trailing slash problem in this blog software).
Like you said, all the govt money's going to war - this infrastructure mess is going to bite us in the a** big time, and soon.
Not really. The majority of federal spending is now for social services.. In addition, the interest payment on federal debt is catching up to what we spend on defense.
Poster 1: "Inflation is everywhere and always a monetary phenomenon."
Poster 2: "Isn't inflation the devaluation of currency?"
Poster 3: "Is it inflation when the purchasing power of your wages decrease?"
Poster 4: "Inflation by definition is an increase in the money supply."
Poster 5: "No its not. It is rated by the changes in prices of a 'basket of goods'."
For those who find this confusing, it may help to point out that there are multiple schools of thought in economics. Those schools each have their own way of defining what exactly "inflation" is.
Every time I hear a complaint about defense spending I ask which federal budget of any Democratic President prior to Carter do ther critics suggest we adopt? Kennedy allocated more than twice the share of budget to defense than we do now. People don't get this. There was a peace dividend and we spent it twice over. Killing and opressing and yes, even defending is cheap. Keeping them alive, treating them unequally, and subsidizing bad behavior; That's expensive.
Rob mentioned he was working on a "mark to market" post . . . looks like the ratings might be catching up with reality, albeit slowly:
Banking Shares Fall After S&P Warns It May Cut Credit Ratings on Risky Home Loans
"Shares of major Wall Street banks fell Tuesday after Standard & Poor's said it may cut the credit rating on more than $12 billion in bonds backed by risky home mortgages."
"Some of the 612 classes of bonds, known as residential mortgage-backed securities, that the ratings agency is considering downgrading were sold by big-name investment banks such as Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co."
PV,
There are so many similar releases today I'm having trouble reading them nevermind putting forth my own opinion.
One nasty bit that I'm looking at is when HBs have land divisions and construction divisions and sales divisions and they sell to themselves. Is that a comparable market transaction? When things were hot, it didn't matter as they were off the books at even higher prices before the next quarter recorded but now?
The best article I've found so far is this one (WSJ is free today):
S&P Puts Subprime-Backed Debt
On Notice of Possible Downgrade
"Standard & Poor's said it expects the majority of the 612 classes of mortgage-backed securities it put under review Tuesday to be downgraded "beginning in the next few days.""
"In a press release, the rating agency also said it is reviewing the credit ratings of collateralized debt obligations -- complex securities that have been under the spotlight since two Bear Stearns Cos. hedge funds stumbled recently -- that contain any of the affected mortgage bonds facing downgrade."
. . .
"The announcement about the potential downgrades sent shivers through the credit markets, as such action could spark broader selling of these mortgage bonds and a repricing of these assets that are difficult to trade."
Yikes.
Waiting to hear about court. My take:
1) Mark Villasenor might request an adjournment.
If Casey did not retain counsel then:
90% - Mark becomes Casey's bitch (Mark pays costs, motion dismissed, pwned).
10% - Mark's motion is dismissed but his nonsense civil action proceeds.
If Casey retained counsel:
99% - Mark becomes Casey's bitch (Mark pays costs, motion dismissed, pwned).
1% - Mark's motion is dismissed but his nonsense civil action proceeds.
In all cases I believe the judge will go on the record and state his opinions of Mark's actions. I have been involved with these sort of matters before and in one case the judge went on the record for several minutes (after ruling to dismiss) the reasons for the decision and opinion of the applicant.
As a reminder, MITLossPro said: "You wanna see me hot, pal, you wanna see me really go the guns on you? Believe me, you little shit-for-brains, you've got a think coming, if you wanna keep this up. You wanna keep it up, Casey, because I got news, I got goddamn news for you. You got a problem. You got a real big problem. Because I'm going to go for your fucking throat if you keep it up. Do you understand? Do I make myself clear? Yes or no. "
http://www.caseypedia.com/wiki/Foreclosure_Fridays_Live_5#LossMitPro_.28Mark_Villase.C3.B1or.29
====
I doubt any judge will take him seriously after that.
Ah, lookee.. a Troll!! he even has a name!
So what does that have to do with Money Supply, Subprime Downgrades, Inflation?.. begging relevance here!!
John,
Try the Casey thread. Simple, delete this one and repost over there. Or would you prefer I reseat you in the whing section of EN myself?
AnneK,
Yes, you got it. And nice to see a fellow Canadian from my neck of the woods online. (I am orignally from Brantford, Ontario, now living in California)
I've been in the USA for almost ten years now. When I arrived, the exchange rate between US dollars versus Canadian dollars was about 60 cents on the dollar. Now its around 95 cents on the dollar. So you can get an idea of how much inflation has eroded the purchasing power of the US currency. The majority of that devaluation was under El Presidente Stupido and his idiotic spending. Compounded by the fact that the Fed is so fixated on fighting delfationary pressures, that they create massive amounts of inflation to compensate. Ben Bernake was someone who firmly believed that the Great Depression could have been averted if massive amounts of liquidity had been injected into the system rather than a tightening of monetary policy. (Which is what happened in 1931) Now while that concept has merit, Ben is somewhat one dimensional with his thinking and doesn't look into the ramifications of that type of liquidity "flush". The consequence of course is inflation and a larger reliance on credit.
I think he assumed the system would absorb the liquid injection but I think he (and Greenspan) neglected to factor in what type of a credit bubble would be created by simultaneously lowering interest rates at the same time as pumping money into the system. Hence, we have a nice credit bubble of nightmarish proportions, exacerbated by the housing bubble.
Personally, I don't necessarily disagree with the notion of adding liquidity to the system, but in my opinion, lowering rates to the 1% level was the real idiotic move. So here we are.
How things will play out, only God knows. (And maybe Casey. Sweet!)
I tend to simplify things a bit sometimes, but in general, the supply of money needs to be kept on par with the supply of goods and services. The problem is that the Fed didn't--and still doesn't--look at the full range of goods and services, there are major sectors that they simply ignore. It's clear that there's too much money from the massive run-ups in prices of housing, stocks, oil, food, gold, etc., but since the Fed is fixated on the price of big-screen TVs at Best Buy they can't see it.
Not until Ben Bernanke's child gets admitted to college and he walks into student accounts and the person behinds the desk says "$55,000 please", will he FINALLY figure out that maybe, just maybe, inflation has been hiding in places where they weren't looking for it.
The majority of that devaluation was under El Presidente Stupido and his idiotic spending. Compounded by the fact that the Fed is so fixated on fighting delfationary pressures, that they create massive amounts of inflation to compensate.
Actually, currency deflation is due to balance of trade. Since the US is a debtor nation (not talking gov. here), and most people seem to have to have that new european import, new chinese cheap goods.. even if it breaks their piggy bank (personal fiscal responsibility here guys, can't blame it all on the guy in the hot seat), we have been buying products built in foreign countries. This increases demand for their currency with respect to the US dollar. What is helping the Canadian dollar is their fuel and natural gas exports. China has been buying US treasuries to offset the US's negative balance of trade.
Now while that concept has merit, Ben is somewhat one dimensional with his thinking and doesn't look into the ramifications of that type of liquidity "flush". The consequence of course is inflation and a larger reliance on credit.
Actually he was aware of it.. and if you check back, you will notice that it wasn't Bernanke that dropped the rates. Bernanke's term at the head of the fed started at 2/1/2006. The lowest interest rates we have had were around Sept 2003.
I think he assumed the system would absorb the liquid injection but I think he (and Greenspan) neglected to factor in what type of a credit bubble would be created by simultaneously lowering interest rates at the same time as pumping money into the system. Hence, we have a nice credit bubble of nightmarish proportions, exacerbated by the housing bubble.
Not accurate. The interest rates stared increasing after Sept 2003, and they increased very rapidly. The item they did overlook was the effect of securitization of debt. The securitization of debt made it such that the originating lender was not really responsible for the debt being bad. The ownership of the debt was passed off as an investment. The originator wipes their hands of it and collects a fat fee. This lowered lending standards. If you compare Real Estate prices to interest rates, you will notice that the real increase in prices occurred after 2003, a time when interest rates were heading up.
Not until Ben Bernanke's child gets admitted to college and he walks into student accounts and the person behinds the desk says "$55,000 please", will he FINALLY figure out that maybe, just maybe, inflation has been hiding in places where they weren't looking for it.
Actually, they are aware of it. The problem is that some items move in direct relationship to interest rates more than inflation. Oddly, this includes items that are critical to living like house prices and auto prices. This is why some of these are removed from the CPI. CPI needs to be divorced from any one direct cause like interest rates. Because everybody's lifestyle is different, they will be affected differently by inflation. For example; if a person chooses to drive a gas guzzling SUV and drive over 1 hour to/from work each day means they will be more sensitive to increases in fuel prices (and auto prices because of wearing out vehicles sooner) than someone who drives 15 minutes to/from work in a Prius. (not factoring in depreciation here either). So then, do we include fuel in the core CPI and if so, how do we weight it?
Not accurate. The interest rates stared increasing after Sept 2003, and they increased very rapidly. The item they did overlook was the effect of securitization of debt. The securitization of debt made it such that the originating lender was not really responsible for the debt being bad. The ownership of the debt was passed off as an investment
I agree with the latter part of that statement. However, I disagree that the lowering of rates had no effect on the corresponding increase in debt derivatives.
And sorry, I am somewhat combining Alan Greenspan and Ben Bernake into the same individual. It was Alan that lowered the rates. And I believe he went too far thereby exacerbating the inflationary pressures that were already existing (or soon to exist) due to the liquidity injection.
The problem I am seeing with Ben is he is in a state of perpetual denial with regards to the true nature of inflation. He knows it exists and this core inflation rubbish is just smoke and mirrors to hide the true nature of the problem. They also conveniently "retired" the M3 money supply statistics deeming them "un-necessary" which is also suspect.
With regards to my definition of inflation, it is accurate based on the monetarists viewpoint. The Keynesian model follows more with your definition.
My notion is that you cannot have inflation without an increase in the money supply. Individual price values could vary upwards, but if the money pool is static, there would be corresponding decreases in price levels in other areas thereby keeping the inflation rate at zero. Only through cash injection can one actually create true inflation and currency devaluation.
I've no problem with money supply tracking expansion of the economy so it isn't purely the number of dolars in circulation. That said the biggest swindle in modern history has to be the M3 being dropped. A starting point: http://www.shadowstats.com/cgi-bin/sgs?
M3 seems to be running about 13% and the economy about 2% for an 11% inflation.
That said the biggest swindle in modern history has to be the M3 being dropped
Based on the conduct of this administration, is it really shocking?
But for those in the know, how difficult is it to gauge just how rapidly our currency is devaluing? Take a look at US dollars to gold or US dollars to either the Euro or Pound.
Now this credit bubble is global and we all know that the central banks across the pond are also pumping their money supply as well. So it gives a good perspective on just how out of wack we have become here in the USA.
The problem now for Ben is he is no longer capable of averting some type of major calamity. He needs to keep the spigots open to fuel the giant debt machine. But he knows he will eventually need to raise interest rates to compensate for the currency devaluation. But how does one do that knowing it would drive a stake through housing's proverbial heart? Its a "lose-lose" situation. (Or "loose-loose" it you are Casey)
My assertion is he will need to sacrifice housing in the end. Because the majority of our debt is held by Japan and China, at some point they are going to stop buying our treasuries and holding rapidly devaluing US dollars. The Fed needs to sell treasuries to keep us afloat. So they will raise the benchmark rates to whatever they need to in order to sell those bonds.
Most people with short memories still forget that we are still at unusual lows for interest rates. Especially mortgage rates. Historically, they were usually in the 7-9% range. And in all likelihood, they will revert back to that. So for those nitwits with ARM or I/O ARM mortgages at teaser rates of 3-4% will suddenly see their mortgage payments double. The lucky early ones may be able to refi. (Assuming they have equity) But in the end, the balloon will pop. I have no doubt. Its not a question of if, but simply a question of when.
My notion is that you cannot have inflation without an increase in the money supply.
You contradict an earlier statement that the low interest rates of Greenspan caused a large part of inflation.
Note: Money supply and liquidity are not exactly the same (but they are related).
That said the biggest swindle in modern history has to be the M3 being dropped.
I agree. I was going to go into more detail on Money Supply when I was writing about it.. but I got worried that covering M0, M1, M2 and M3 would start to make readers start sawing logs.. (or trying to find something to shut me up with).
I also think that Ben knows there is inflation, but he is having to walk a very fine line. He has to see how the housing slump is going to affect the economy as well as CDOs, Credit Default Swaps and the resulting hedge funds collapsing. To stave off that, he might need to lower interest rates.. but can't (investors in treasuries will want enough return to offset the dollars fall in exchange rates). I think this explains the sidesteps that Benanke is doing. A good portion of the economy relies on perception. People feel there is a bad problem and they will drastically curtail their spending, resulting in possible recession (Not saying that people shouldn't manage their spending better though). The future I sort of see is increasing rates and increasing Money Supply.
You contradict an earlier statement that the low interest rates of Greenspan caused a large part of inflation.
My apologies if I worded that incorrectly. The lower interest rates helped fuel the usage of credit but did not directly lead to inflation. The infusion of the available money is still needed.
I think the lower interest rates had more to do with the creation of the speculative frenzy and the introduction of the "exotic loan instruments" that helped fuel the housing bubble. (And the overall credit bubble)
Although your statement with regards to the way loans are repackaged is spot on. The lack of accountability in the lending institutions has now placed a tremendous strain on whichever investment trust is left holding the bag.
I am curious if a government bailout is even possible at this stage. We aren't talking billions of dollars here. We are talking trillions. Doesn't seem feasible to me that any government intervention is likely or even possible.
The future I sort of see is increasing rates and increasing Money Supply
Agree and agree.
Now the question is, are we going to see a repeat of the interest rate trends of the late 70s and early 80s where we hit numbers as high as 15%? That would probably break the economy's back. But between 7-9% is highly likely to me. Which could push mortgage rates to upwards of 10%. Ouch.
Tomsay:
"So for those nitwits with ARM or I/O ARM mortgages at teaser rates of 3-4% will suddenly see their mortgage payments double."
And what happens then?
Realistically,they don't spend that much of their monthly take on other goods and services,right?
Hello,recession!
"The lucky early ones may be able to refi."
I think that that, realistically,is what is going to happen.
It should be remembered that we are the biggest customer for an entire slew of nations...and NONE of them...not one,would want to see us in a recession.
It wouldn't surprise me at all to see folks refinancing their home with Chinese or Euro mortgages.
They already do,in an indirect and roundabout way...
As long as we can keep employment strong...there's a whole lot riding on our humble monthly take-home "nut".
And devaluing our currency, making our hogwash cheaper overseas, is a good way to do that.
I am curious if a government bailout is even possible at this stage. We aren't talking billions of dollars here. We are talking trillions. Doesn't seem feasible to me that any government intervention is likely or even possible.
I don't think a bailout would go over well. The vaporization of equity that a lot of loans were based against needs to be rectified. My crystal ball seems to be stating stagflation caused by increasing Money Supply to prevent recession and increasing interest rates to simultaneously suppress inflation.
My crystal ball is not always right, but what it is telling me about this being a scary situation rings true with other things I am seeing.
I wondered about the 1970(s) situation, which was stagflation. I have turned the problem around, looking at all sides, and it looks like it might occur. It would not kill the economy, but any profit that relies on leverage is going to get hammered. There are several companies that have clean books with little debt. These should do ok.
What will be interesting will be the currency effects. Increasing Money Supply should hammer the dollar.
It wouldn't surprise me at all to see folks refinancing their home with Chinese or Euro mortgages.
The problem here is if the dollar devalues against these currencies, the EU and China would not want to lend in Dollars. The amount they finance will get hammered by the devaluation.
And devaluing our currency, making our hogwash cheaper overseas, is a good way to do that.
Bingo.. and that is why companies with good balance sheets should do ok.
I wondered about the 1970(s) situation, which was stagflation. I have turned the problem around, looking at all sides, and it looks like it might occur.
I've thought about that too but I still see today's scenario as different. Fix debt was easier to pay off at higher interest rates in the 70s due to wage increases. We were still an exporter nation where "Made in America" still meant something in the 70s. Nowadays, with all the outsourcing (including white collar jobs), I don't see increased wages in the entire inflation scenario. Compounded by the fact that the amount of debt per individual nowadays on a per capita basis is much higher.
In the end, all we can do is wait at this stage.
Tom:
"Nowadays, with all the outsourcing (including white collar jobs), I don't see increased wages in the entire inflation scenario. "
Why not? Increased wages paid in devalued dollars?
Devaluation oughtto make it cheaper for companies to bring jobs back onshore.
If we've learned nothing else, haven't we learned that Capital has NO loyalty to the Nation-State?
I've noticed that while the "US" automakers scrambled to offshore their production, BMW,Honda,Toyota and Hyundai have been scrambling to open assembly plants here.
dammit, this thread has been up for a little over 11 hours and no reference to the movie. "i'm mad as hell and i'm not going to take any more"
Post a Comment