BEN BERNANKE: QE IS ALREADY WORKING
In an opinion piece published in the Washington Post this evening Ben Bernanke says that QE is already working, but makes an absolutely crucial admittal in the article. He says QE adds no net new money to the system (sound familiar?) and will therefore not be inflationary. He also goes on to say that he is directly targeting higher equity prices and lower interest rates:
“This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
While they have been used successfully in the United States and elsewhere, purchases of longer-term securities are a less familiar monetary policy tool than cutting short-term interest rates. That is one reason the FOMC has been cautious, balancing the costs and benefits before acting. We will review the purchase program regularly to ensure it is working as intended and to assess whether adjustments are needed as economic conditions change.
Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated. Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation.
Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable.
The Federal Reserve cannot solve all the economy’s problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector. But the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation.”
The keys here are several:
- First, notice that Mr. Bernanke admits that QE is just an asset swap. It does not add net new money to the system. Therefore, there is no reason to believe it is inflationary. I agree with the Fed Chairman. This policy will not cause inflation (wait, isn’t that the whole goal?).
- Second, he claims it has worked in the past by achieving lower interest rates. But in all three cases in the UK, Japan and the USA interest rates ROSE throughout the entirety of the programs.
- Third, the Chairman admits that he needs help. He most certainly does. In my opinion, the Fed Chairman has essentially admitted here that QE is a non-event aside from the psychological herding of investors into equities and corporate bonds. He needs fiscal help if he’s going to cause real inflation. After all, a helicopter drop isn’t even technically in his arsenal and he knows it.
Mr. Bernanke is claiming victory before the program even technically begins….This Fed Chairman will either go down as the genius of all Central Bankers or will be known as the man who caused the Federal Reserve to lose its independence.
WOW. Admitting that he wants to drive equity prices higher. This smells like a Greenspanian blunder. He will very much regret this in a few years.
That was THE plan, I said so many times here.
First ever use of profanity here – holy shit.
I don’t even know where to start – the hubris.
But what is better is that in the same opinion piece he claims that QE is working all the while disavowing it has any material impact on achieving one of its two stated goals – to drive up inflation in a noticeable way.
The whole thing reminds me of Bush on that destroyer ship: “Mission Accomplished”.
It’s better than that. He entirely admits that I am right. That QE has no inflationary impact and is really just shuffling assets around. Since we can look at past QE programs and conclude that none of them resulted in lower interest rates (lower refinancing costs) Mr. Bernanke is essentially admitting that this whole thing is a non-event.
It’s unbelievable. But he’s admitting that he hopes to change the psychology and essentially herd people into equities without making any real fundamental change in anything.
So did it push up stock prices? Are you right on that or not?
You are in denial TPC, you are in pain.
I am in pain? The market moves 2% above my basis and I am in pain?
“It’s better than that. He entirely admits that I am right. That QE has no inflationary impact and is really just shuffling assets around. Since we can look at past QE programs and conclude that none of them resulted in lower interest rates (lower refinancing costs) Mr. Bernanke is essentially admitting that this whole thing is a non-event.
It’s unbelievable. But he’s admitting that he hopes to change the psychology and essentially herd people into equities without making any real fundamental change in anything.” – TPC
So, he is really trying to use people’s lack of knowledge in order to stimulate the economy?
The question is… how long will it go before the market figures out Bernanke has no clothes on. :-O
Quite literally.
I am seriously starting to doubt Bernanke’s sanity. Or is he scared of something and it makes him desperate? What is so scary?
I can’t help but wonder how far he can drive up equity prices before there is a reckoning. Between the CB, smart people like Tepper and cheerleaders at CNBC, it seems like we could be seeing the ground work being laid for another major leg up. Look the way the market has traded over the last week. it can’t stay in the red for more than 2 hours at a time, and often less than that. The resilience is stunning and I don’t know how to describe beyond saying that it looks like a horse ready to explode from its gate.
It will be very painful to sit on the sidelines while the market goes parabolic, which seems to be the goal here.
What do you think?
It’s ludicrous to be buying stocks because of Bernanke. He is admitting that this does nothing. I don’t think he knows that (yet), but we can look at past instances and conclude as much. If this program does not reduce interest rates and does not cause inflation then what does it do? It does nothing. It’s just an asset swap.
People who buys stocks because of this will eventually get burned. Reference that Japan situation where stocks tanked 40% following that program….
I don’t disagree. I wouldn’t buy stocks either. I did buy TBT for which I’m happy and UUP for which I am not so happy. But I wouldn’t touch equities after the run they’ve just had.
I’m just saying that the action in the market is unnerving, and looks ready to make some sort of explosive move. And since the bears have been completely incapable of holding the market in the red for more than an hour, well, you know the expression — “If they can’t take it down, it will go up.”
I agree, people who buy stocks based on the Fed’s moves now will probably be screwed later, if they blindly hold on to them indefinitely. I think that is the key… You can take advantage of the current situation from a trading perspective, selling when it becomes apparent that the gig is up. And the gig will eventually be up, but that doesn’t mean we can’t make money riding it up in the mean time. We don’t even need to buy at the very bottom or sell at the very top to do decently.
I think people who maintain a bearish outlook because of fundamental considerations, who keep talking about how things are going to crash and burn because there is no rational reason that equities should keep going up or should stay up, etc., are limiting their opportunities in the near to mid term. (I’m not accusing you of this, by the way; I don’t really know, and don’t want to presume anything.) Sometimes it leads the “fundamentally oriented” people to fight the Fed and go short too early; while it makes a lot of sense based on fundamental considerations, it seems to me that the implicit assumption is that the market is truly efficient and will soon respond to those fundamental issues, because it “should.” On the other hand, since the market isn’t really that efficient, then we can remain agnostic about what will happen, and stay long while the trend suggests it and go short (or just sell a bunch of our longs) when the trend reverses. And right now, the trend is still “up” and the Fed wants it to be “up,” so staying long means having the wind at our back, at least until the trend changes…
Good luck with that strategy. It will turn before you even realize it. How quickly people have forgotten that the SPY only flash crashed 3 weeks ago on the close. This market has no bid and anyone with size won’t be able to exit like they all think.
This market has no bid and anyone with size won’t be able to exit like they all think.
Am not sure why you think this market has no bid. From my perspective, there has been a very strong bid that has held this market up, even if it hasn’t driven it higher recently. Fundamentals say that the market has gone too far, yet it stubbornly refuses to go down except briefly. I assume you saw how, unlike previous attempts at clearing S&P 1130 when it almost immediately reversed and dropped, this last time it churned for a while, refusing to go down, and then broke out. Recently we have had predictions that the S&P would stay in a trading range 1040-1170 or so, but it has stubbornly refused to drop after clearing 1170. We’ve been in a tight range for a couple of weeks, and surely the market is coiled for either a break out or a break down; I’d rather wait and see which way it goes rather than trying to force things. Fundamentals say we should probably break down (although QE is a fundamental consideration, just not one based on economic strength), but based on the persistent bid under the market it wouldn’t surprise me if we’re in another situation where we get a break out instead. I certainly wouldn’t want to be short at the moment, but you may think differently.
A market with the kind of bid we’ve had lately don’t generally crash suddenly. Yes, they can and do have sharp sell-offs when participants get overly complacent, but that is different than a crash. Sell-offs are a fact of life. You just need to decide if you think they are the start of a new trend or an ordinary correction. Because of that ambiguity, I really doubt there will be a mass stampede to the exits at the first sign of trouble as you seem to suggest might happen. But different opinions are what make markets…
You won’t get burned “long” if you have tight stops, as long as your gain going into the overnight is larger than a potential opening gap.
You will get burned “short”. Who knows how long this could last. Six months? A year? Two years? I would not want to short 1190 all the way to 1500.
Bernanke is insane. Everybody on this board needs to call Congressman Ron Paul’s office (google it). He is going to head the monetary policy subcomitte in Congress. Tell him that this psychopath Banana Ben Bernanke must be stopped immediately.
asset swap, cute term, but completely wrong in understanding stock market movement.
You’re about two seconds from never coming back here. Stop acting like a kid. You think I’m some rookie who has never been on the wrong side of a trade?
Why do the obnoxious ones always come out AFTER the rally?
TPC,
Let her stay, and let her talk. Do not underestimate your readership, we can distinguish between superficial argument chasers and a market player who had stamina to disclose your position before the game changing event. I trust you would do the same after you decide to close it. I do not speak Japanese, but I know you are not in the hurry to close the position yet!
You think I’m some rookie who has never been on the wrong side of a trade?
I doubt very many readers (probably none at all) think this. I also don’t think most of us enjoy seeing you on the wrong side of a trade. Like you suggest, it happens to all of us and when it does it hurts.
Having said that… Recently it seems like I’ve been seeing you threaten hecklers (or sometimes just people who are disagreeing with you in a non-very-tactful way) more than I used to, like today:
You’re about two seconds from never coming back here. Stop acting like a kid.
This blog is your playground, so you get to set the rules as you see fit, but IMHO the most “grown up” thing for you to do would be to ignore intentionally provocative and insulting comments (or delete them if they’re likely to be offensive to everyone) and let your readers decide for themselves whether the person is being reasonable or acting childish. Pissing contests are usually unproductive and usually make everyone involved look less than grown-up… As your readers, I think we all respect you and think your viewpoints are well thought out, even if some of us don’t agree with all of them. I know I disagree with some of what you say, but so what; I know you are intelligent and could very well be right. Reasonable people can disagree with each other…
Marty,
you are 100% correct. Unfortunately, you’re not the one who gets the emails when people start fighting on the site and acting like kids. NEF has been causing quite a disturbance and is insulting many of the regulars.
I have banned one person the entire time I’ve run this site. But I can’t afford to put up with someone who resorts to ad hominems and attacks other users so I have to put my foot down before it spirals (which it does on many sites). We are all adults. I love the comments. But I only ask that they remain on topic and contribute positively to the conversation. This is not the place for name calling.
But I can’t afford to put up with someone who resorts to ad hominems and attacks other users so I have to put my foot down before it spirals (which it does on many sites).
Fair enough. I agree, when it gets out of hand it makes an otherwise good blog an unpleasant place to visit. On the other hand, you require readers to give an e-mail address when posting a comment. Since it seems the offenders are fairly few in number, could you possibly just send them an email saying what you post publicly? That lets you keep the high ground here, and gives the message to the person who most needs to see it. And if their email address is bogus so you can’t contact them privately, perhaps you could give one public warning that they must use a valid email address and then ban them after a single future infraction of using an invalid email address; basically, if they refuse to give their email address, they aren’t playing according to your very reasonable rules. It’s just a thought…
Thanks Marty. Unfortunately, you aren’t required to leave your email and the instigators never leave a real email address. Sorry you think I am being a pain. I just don’t want things to spiral out of control….I can’t run around being the internet police.
TPC, I don’t think you’re being a pain. I just want you to always have the high ground in these matters, although it’s just an ideal.
I would think it’s a matter of personal honor that everyone posting here should leave a valid email address. It’s just a way of taking personal responsibility for what we write. I can certainly understand why many people don’t want to leave their full name. (I don’t, for example, because my last name is pretty unique. The name I use here is my real first name, though.) But our real identity should, as a matter of principle, be accessible to you as owner of the blog.
I’m searching for a possible solution that keeps you looking above it all… If someone refuses to leave a real email address after one or two warnings from you, then obviously they are so ashamed of being held accountable for what they say that automatic banning would be a reasonable response. That is, they need not be banned for being provocative, but they can be banned for refusing to own up (to you) who they are. There is something about anonymity that seems to bring out bad behavior in some people.
I appreciate your thoughts Marty. To me, it’s not about maintaining control or staying above everyone else. It’s ensuring that everyone gets treated equally and gets treated respectfully. That’s all I ask.
If people want to point out that other people have been wrong then that’s fine. But do it by generating some productive commentary.
Ben B. keeps pointing out that,
… we are confident that we have the tools to unwind these policies at the appropriate time.
True, the Fed does have all the tools needed. The big question is whether it will use them when it should. When inflation (eventually) kicks in, will the economy be strong enough and the recovery self-sustaining enough that the Fed can effectively remove enough of the liquidity it injected? I’m very skeptical on that count. I think the Fed will move too slowly for fear of cutting off the recovery. There is also the very real possibility that the Fed loses its independence if its attempts to keep inflation under control lead to cutting off the recovery — fear of this kind of political backlash can override the better judgment of the Fed members, again leading them to be overly timid in withdrawing liquidity when they should.
It’s one thing to have the tools, and a very different thing to actually use them when it is appropriate…
Ahem….why are you taking Bernanke’s comments as gospel? He didn’t write this op-ed today……
The Fed has been very sensitive of late about rising commodity prices, as have the Fed groupies Krugman, BDL, etc. So naturally he would say “there will be no inflation”.
TPC, I love reading you, but I just don’t get why you think exchanging cash tomorrow (bonds) for cash today that MUST FIND A HOME isn’t “inflationary” in it’s effect.
The cash has to go somewhere (see Kraasting’s take – foreign equities), and Bernanke is flat out telling us he wants prices to move higher – for equities. Only, that is not “inflation”.
In effect, it’s like forcing bank reserves to be lent
The lending of bank reserves requires a lender on the other end of the bargain, does it not?
This guy is good, you talk about the master of manipulation. He has been responsible for propping up the stock market and is succeeding. Everyone is buying into this and CNBC is cheerleading it on as are all of the Wall Street strategists. The financial crisis has no aftershocks! This looks to be the mother of all bubbles. Might be time to jump on board as it could grow before the ultimate collapse.
This is obscene. How can this man be allowed to do this?
While so many are concerned with QE failing, imagine if it’s successful. The moral hazard. From this point forward, anytime the economy runs into what used to be a typical cyclical downturn, there will be pressure on the Fed to use it’s new toy/weapon to fix things.
It is difficult to express how angry and frustrated this makes me. Where is the will to stop this madness? Who can stop it? How?
Where is the will to stop this madness? Who can stop it? How?
That is a great mystery. It is madness, indeed, and I can’t yet see a reasonable scenario where it will lead to anything but disaster over the long term. It is very discouraging and upsetting, and it seems like in our individual helplessness the best we can do individually is look at it opportunistically/ selfishly and think, “How can I personally benefit from the process as we inexorably head to a Very Unpleasant Future. I hate thinking that way, but if we don’t individually try to take care of the restricted situation where we actually have some individual control, then I think we’re screwed because our government representatives seem to be thinking a lot more about their own position and power than what is good for the long term future.
Somehow, as a society we seem to feel “entitled” in recent decades, and unwilling to accept that pain and personal deprivation are necessary and even valuable in restoring balance and pruning away the unhealthy branches so that what remains can grow more vigorously. And what happened to thinking that personal responsibility is a virtue to be taken seriously by everyone? I can’t help but think too many fat, easy years of relatively unfettered growth, along with a government that seems to demand little of its citizens other than its loyalty at election time, have convinced many people that the “natural” state of life is very different than what people thought more than 50 years ago. And ultimately, our Good Government is catering to these expectations, and it works! The populace keeps returning to power the same people who willingly sell out our future in their cynical knowledge that doing so is the right way to stay in power.
So, I think a big part of the problem is us as citizens, the same people who don’t bother to vote, who support going to war but don’t want to pay higher taxes to offset the cost (personal sacrifice?!), or even to read newspapers and in-depth magazines (remember them?) to understand the local, national and international situation. (Presumably, the people reading TPC’s great blog are different.) Against that backdrop, I think your question is very good: Who can stop the madness?
The world market. Eventually. That’s my guess.
What can they (the world market) do to stem it though? Dump US Treasuries?
off topic of this post.
Save to presume consumers in Europe & USA are not going to consume like pre 08′ and BB can spur exports with a low $ with Asia being the new consumer, although this is only one months data point out of Oz today, seems like China maybe slowing , OZ exports off by 2% in the month of Oct. Trade balance decreased significantly, retail sales should be at their strongest in the last qtr, big miss also.
Actual Forcast last month
AUD Retail Sales (MoM) 0.30% 0.50% 0.30%
Actual Forcast
AUD Trade Balance 1.76B 2.13B
Is this also an admiting that the US is also pursuing currency devaluation? what is the point of having meetings with other countries to say the opposite? will his actions today start the so called currency war again shortly and put more presure on China’s RMB Particularly. Increasing it’s exported goods prices to indebted consumers and increasing the costs of imports for it’s own no where near ready yet to consume populous.
Seems there are lot more balls in the air then when Greenspan was at helm, globalization was not as intrenched has it is today.
There are 2 other side effects that have far more consequence.
First depreciate the dollar. Bernanke did what politicians are unconformable to do publicly. Well, if we can export our mess, why not? It also translates into economic growth (yet to see) and high stock prices.
Second, he may implicitly monetize the entire budget deficit. This seems incredulous. But that is the truth.
Mr Bernanke lays it out:
1. No new net financial assets, no inflation because the government is not competing in the goods market and influencing price.
2. The Fed is able not only to set the interest rate but also control the yield curve, which affects both cost of capital, credit, and asset values, e.g., driving up the price of the securities that the Fed purchases.
3. The Fed is able to control liquidity through shifting the composition and term of government liabilities, which may affect nongovernment asset values, too.
All correct.
What the chairman did not say is that lowering the interest rate and flattening the yield curve also drives nongovernment to take on more risk generally in search of returns no longer available on low risk assets. In the past this has lead to imprudent risk assumption. It has also led to an increase in the global pool of hot money that rushes from one place to another in search of the next great opportunity, generating distortions in global finance that often spill over into the global economy.
Can the Fed avoid the consequences experienced in the past this time around? To be determined.
But the Fed has already essentially admitted that its monetary policy drives up assets beyond where they would be otherwise, i.e., above actual market value. Is that included in the Fed’s mandate? Is Bernanke paying enough attention to the law of unintended consequences? Is the Fed climbing out on a limb?
Everyone was cheering Greenspan on as the wizard of Wall Street, too, until the whole thing blew up. Is Bernanke headed for a repeat, or can he avoid the moral hazard of the Greenspan put?
He’s added a whole new risk to the game. So we all know this is essentially an attempt to prop up the markets. So, if it fails he will have lost all credibility. There will be people talking about whether the Fed should be independent, etc. I can only imagine what the consequences will be.
Unfortunately, I can’t see how this ends well. If creating economic prosperity were as easy as buying up govt bonds then Japan would be the king of the world. Common sense should tell everyone that there is something very bad in our future. When? Who knows, but the ramifications of this sort of psychological tinkering are bound to be disastrous. And this is coming from someone who (I think) is generally pretty level headed. Personally, I will be calling for Bernanke’s immediate resignation if this fails (not that I matter, but you know)….
So now you admit the intent was to drive up markets? See, TPC, you were arguing against me on the same topic just days ago. I think you are talking your book more than objective analysis, you are misleading your followers.
Listen up. I know you’re having a huge amount of trouble soaking this up. I could care less what stocks do in the short-term. If their moves are not backed by fundamentals than none of it matters. That has been and remains my entire point.
Some of the responses to this post demonstrate a flair for the dramatic. It is apparent that the group of elected officials leaned on him to “make things right”, while they pursued ideological policies that were out touch with reality and did not help/improve the current economic environment.
He is now being more blunt, for the benefit of the newly elected, and letting them know in more simple terms that the best he can do is keep the ship from sinking further by way of maintaining, or artificially inflating, prices and keeping mortgage rates within an acceptable range. His primary message seems to be that if we are to make some real progress towards a recovery, the elected officials need to jump in and help him bail water with effective policy decisions.
Given the shocking impact last night’s elections had on the collective morale of our elected officials, I am surprised he wasn’t more direct in his speech. They claim to now be listening. Let’s see how they respond.
I would be more inclined to agree with you if Bernanke wasn’t already advocating austerity. In a speech just weeks ago he said:
“Failing to address our unsustainable fiscal situation exposes our country to serious economic costs and risks. In the short run, as I have noted, concerns and uncertainty about exploding future deficits could make households, businesses, and investors more cautious about spending, capital investment, and hiring. In the longer term, a rising level of government debt relative to national income is likely to put upward pressure on interest rates and thus inhibit capital formation, productivity, and economic growth. Larger government deficits increase our reliance on foreign lenders, all else being equal, implying that the share of U.S. national income devoted to paying interest to foreign investors will increase over time.”
I am not under the impression that Bernanke wants aid from Congress. In fact, he appears to be saying the exact opposite. His comments this evening are double talk. He has said he wants to implement QE2 to raise inflation, but then he says it’s not inflationary. He says that past cases of QE can lower interest rates, but all the evidence shows that QE does not result in lower rates….None of his comments add up.
He’s trying to prop up the equity market while also creating a backdoor bank bailout. Let’s stop sugar coating it.
Again, you said a few days ago that I was wrong, QE 2 is to lower interest rate, not prop up stock market. You changed too quickly, didn’t you?
I don’t blame you on this, I had the same experience when I was on the wrong side of the trade, I would try to find anything to justify my position/opinion, sometimes rather silly when I look back.
Time to play along, TPC, after all you are a stock investor, not a savior.
Here is an honest inquiry re the assertion that “QE will not cause inflation.”
At what point does psychology play an important, or possibly even a dominant, role in the equation?
As a (possibly weak) analogy, consider the impact of technical analysis on the market. To the best of my knowledge, Fibonacci analysis is pure mumbo jumbo. And yet, if enough forex traders pay attention to Fib levels and act on them, then the impact of such becomes a self-fulfilling prophecy in terms of actual support and resistance levels, buy points etc. influenced in the market.
Or consider the documented impact of Voodoo curses among certain African communities. The person being cursed can become so emotionally and psychologically distressed — as a result of their belief alone — that actual sickness (or even death) can result!
So, back to QE… call it the “Voodoo Placebo Effect.” Even if the technical impacts of QE are nil and the logic is spurious, much as Fibonacci levels are spurious, a wide enough spread of deliberate actions in conjunction with false beliefs can have an inflationary impact on the market (or so I am suggesting here).
A possible logic chain:
1) Widespread belief that QE impact is inflationary leads to
2) Widespread action to protect against dollar debasement, which fuels
3) A persistent rise in the price of commodities and precious metals, creating
4) A self-reinforcing feedback loop reinforcing 1), with the final result of
5) Companies facing significantly higher material input costs, which are
6) Correctly labeled as inflationary! (Or perhaps stagflationary.)
Can you see how it is theoretically possible for this logic chain, or feedback loop if you will, to come into play solely on the strength of widespread belief, and thus create an observably inflationary result indpendent of whether the actual math and mechanisms add up or not?
And can you further see how, when a certain contingent charge that we are headed for “inflationary recession” or even “inflationary depression” based on the Fed’s actions, a combination of rising paper asset prices and commodity prices juxtaposed with growing employment malaise means they may well have an empirically supported point, independent of whether MMT has the facts right or not?
Really appreciate your thoughts and contributions, and especially your willingness to push back against status quo beliefs. Just looking to further enrich the discussion here…
JS
There’s two important components here. The first is that this is not a helicopter drop. He is not adding new financial assets to the pvt sector. He is simply expanding the monetary base. That creates the potential for inflation (if borrowing expands), but it’s not a near-term concern.
So we don’t have new money in the system which means the inflation could only come from a pick-up in output. But output is weak. End demand is weak. The consumer can only take on so much spending at this point. There simply aren’t enough jobs, wage increases, etc to sustain very high prices. Widespread cost push inflation can’t occur in this sort of environment.
So all we’re really doing is hurting corporate margins in all of this because he is driving investors to bid up commodities.
I wish there was a free lunch here. I wish that economic prosperity was as easy as buying up govt bonds. But that’s just not how the real world works. How long can this party go on? Who knows. But Bernanke will come out of this one with egg on his face.
So we don’t have new money in the system which means the inflation could only come from a pick-up in output. But output is weak. End demand is weak. The consumer can only take on so much spending at this point. There simply aren’t enough jobs, wage increases, etc to sustain very high prices.
So, if a producer’s input costs keep rising to the point that profit vanishes, then would that producer maintain costs anyway because end demand is weak? What happens if they would lose money on every sale? Surely, not all consumers have the same intolerance for higher prices; if the producer raises prices then they won’t sell as much, but at least they will make a profit on what they do sell, assuming their production costs scale down enough with decreased volume. So I don’t understand why weak end-demand alone is enough to prevent price increases.
Second, obviously not all countries are in the same situation as the U.S., and the foreign producers that export to the US may be unwilling to completely absorb the combination of higher input costs and adjustments due to exchange rates as the dollar declines relative to their currency. They are businesses and need to stay profitable, even if it means fewer sales. Again, that would suggest to me that inflation can occur in the face of a weak US consumer.
Third, I don’t see how it is valid to continue to ignore food and energy from the inflation rate determination as our government wishes to do. While it makes some sense to leave those items out of the equation due to their inherent price volatility, it makes no sense to me to disregard them when the cause for their increasing prices becomes structural in origin. And I think of a persistently depreciating currency as a structural issue, not mere seasonal volatility. Energy costs will obviously rise with a falling dollar, but so will food costs since farmers can and will raise prices for many crops to reflect world market prices after adjusting for exchange rates (i.e., farmers can sell their grains, etc. on the world market if it will make them richer than selling them at home).
I think the argument that a weak consumer will suppress inflation is strongest when considering the service industries, since input costs are presumably more domestically determined, and labor is paid in dollars. Since the service economy employs a majority of the US workforce, lack of inflation in services will keep overall wage increases under control even with a falling dollar (if inflation kicks in very significantly, that will produce its own wage pressures, though). But we don’t live on services alone, and (imported and domestically produced) manufactured goods are where inflation can arise even with a weak, indebted consumer.
Just my $.02.
–
“I think the argument that a weak consumer will suppress inflation is strongest when considering the service industries, since input costs are presumably more domestically determined, and labor is paid in dollars. Since the service economy employs a majority of the US workforce, lack of inflation in services will keep overall wage increases under control even with a falling dollar (if inflation kicks in very significantly, that will produce its own wage pressures, though). But we don’t live on services alone, and (imported and domestically produced) manufactured goods are where inflation can arise even with a weak, indebted consumer.” – Marty
–
If energy prices rise, so too will the price of shipping goods abroad, which will detract from the farmer’s global profits. I am not sure how strong of an effect this is though.
Do you have a blog or e-mail, Marty?
No blog, but I do have an email address.
This is for my personal email:
(tysanner) AT (pacbell) DOT (net)
(Address is partly obfuscated to guard against spam-bots. Remove parentheses and use the usual substitutions: AT -> @, DOT -> .)
No disagreement in theory — but in practice (psychology impacting real world buying and selling choices), look at the scoreboard the morning after:
Crude up 2%, gold up 2.45%, copper up 2.6% (all premarket circa 830 EST)
Someone out there believes… or is cynical enough to act as if they do…
p.s. “So all we’re really doing is hurting corporate margins in all of this because he is driving investors to bid up commodities.”
Yes, precisely! Which, at some point, has real world inflationary impact… no?
It’s only inflationary because of psychology though. When the corporations can’t sell the extra goods that they make, they will be truly hurting. End-demand is the issue here, not the money supply.
That article is amazing. Any student of history knows the terrible track record of government propping up equity prices. Japan at one point bought bank shares only to have them fall a further 40%, leaving the central bank with an embarrassing loss. Every bubble begins with a misconception and the idea that QE is some sort of new, proven tool just doesn’t add up. The Japanese model proves it!
My proprietary momentum tool hasn’t confirmed this move to challenge the April highs, and it appears to be rolling over. These market turns happen on a dime, but make no mistake that we’re close and most likely won’t surpass the April highs, certainly not in any meaningful way. I think we’re no more than a few weeks away from a significant top. You should be looking for a place to short, not squeezing the last few points out of this rally.
As for Bernanke, at least we’ll know where to point the figure when equities fall. The European problems simply aren’t going away as Irish credit default swaps hit record highs. The unemployment report should be interesting, we can only ignore the real economy for so long.
My greatest concern here is that Ben Bernanke is just making it all up as he goes along. I don’t think that he really knows or understands what the consequences will be beyond the short-term. Worse, he really doesn’t care. He’s running the world’s biggest central banking experiment on the U.S. economy!
Bernanke’s famous “Helicopter Ben” speech can be found here:
http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm
In this famous speech given on November 21, 2002, Bernanke stated that “the U.S. government has a technology, called a printing press… that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
Yet in his Washington Post op-ed, he states that: “Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation.”
In essence:
(1) The printing press did not do what he thought it would do, either increase currency in circulation or result in higher inflation;
(2) But it sure did increase stock prices;
(3) So even though it didn’t work like he thought it would work, the stock market appreciation was an interesting by-product, so we’ll go just go ahead and do it again anyway.
I am VERY concerned about what lies in our future.
Couldn’t it be put that way:
- Ben is trying to stabilise paper asset prices
- Ben is trying to stabilise home prices
- Ben then need Govt to take the lead and SPEND, to reduce the output gap and restart the machine
Given the uncertainty about govt actions, and given the margin compression thesis TPC brougth to our attention, Ben actions may end up being dangerous…
… and by “SPEND”, you mean cut taxes.
TPC is in very big pain, that’s my conclusion. Take it easy man, it’s only money after all, we still get to do what like to do, life is short.
In my opinion, the Fed Chairman has essentially admitted here that QE is a non-event aside from the psychological herding of investors into equities and corporate bonds.
To be fair, that isn’t quite what he’s saying. His claims are that lower interest rates will spur business investment (“Lower corporate bond rates will encourage investment”) and that the ability for businesses to use that financing to spur growth is raising expectations, which is driving (presumably rational) increases in equities prices. He is also arguing that cheaper money will help consumers to refinance their debt (implying that lower payments will lead to increased consumption) and that the aforementioned rising stock prices will create confidence that supports consumption.
I go back to my argument that Bernanke’s latest strategy seems to be to try to drive growth from the supply side. Since the business sector has a better balance sheet than does the average American consumer, Bernanke’s hope is that cheap money will encourage expansion efforts, which will lower unemployment, which will feed aggregate demand.
In the absence of a genuine fiscal policy and a legislated purge of consumer debt, this is the best thing that we’ve got. (Bernanke doesn’t have a lot of tools in his toolkit, but he’s trying to make use of most of the ones that he has.) It’s not a bad plan on the whole, although I suspect that the results will be more tepid than dramatic.
That article is just the fuel Ron Paul needs to make a move to shut down the Fed. Propping up the markets is a violation of their charter and is evidence of their manipulation of the market. How can anyone trust what we do here anymore? Tell me that isn’t a long term negative. There is no real price discovery anymore.
I will repost my comments from another pragcap post, as this discussion seems more robust.
The Fed has taken every opportunity to vehemently oppose any sort of oversight of their actions, using the excuse of “politicizing” the Fed–despite the fact that they are an unelected body seemingly responsible to no one. Yet Bernanke has been more than willing to politicize the Fed when it serves his own purposes. First, he and his members have open dialogue with “friends” on Wall Street to avoid unpleasant surprises (or is it simply to help out old friends?). Second, Bernanke sent out a questionnaire to the Street so that he could effectively game the QE2 announcement to live up to expectations. And now he writes an op ed in the Washington Post.
Beyond politicization, The Fed has effectively usurped the power of the purse from Congress by issuing blanket guarantees of private assets–particularly egregious in the case of FNM/FRE where there was not political will to guarantee them through the constitutionally required Congressional route. While there are not direct inflationary effects of QE2 through changes in money supply, Bernanke has clearly managed to spur rampant commodity inflation (i.e., asset speculation) which will have a similar deleterious effect on savers and consumers.
Yet, as American people, we have no recourse to vote against the Fed since they are an unelected body with little to no oversight. Where is the outrage by those who (rightly in my opinion) are up in arms over the Federal government’s unabated expansion and penchant for bailouts and socialization of private losses? This is clearly just as serious of an issue, if not more. And to all of the cynical cheerleaders on Wall St who support QE2 simply because it helps them pad their annual bonus after a lackluster year through the first three quarters, I have a message: When the wheels come off this time, you will be forced to deal with the consequences on your own. Wall St. had the best of both worlds when the previous bubbles have blown up; this time you will fail and suffer like the prudent have been for a decade and counting.
All I can say about this low interest rate good for housing bullshit is to apply for a loan to buy a house today or ask for a refi today. Then you will know how easy or how hard it is. Talking is cheap. The banks DON’T want to lend!
I am not sure I buy the argument the QE does not have the potential to be highly inflationary. If deficit spending adds $1000 to bank accounts, and the treasury sells $1000 in bonds,I can see how that results in no net addition to the money supply, until the interest and principal is paid back over time. But when the Fed buys back those bonds with QE, it restores the original $100BN to the banks and we have an immediate net increase of $1000. Unless that money stays in the bank vault, it will result in an additional $1000 in money in circulation, bidding up prices. How can that not be inflationary (at least in the long term)?
How can that not be inflationary (at least in the long term)?
As unemployment declines and growth improves, the Fed will raise interest rates, effectively destroying money in the process. Since the short-term rate is currently at the zero bound, there will be quite a bit money destroyed through rate increases, far more than normal.
Most inflation comes through wage growth, which isn’t an issue until the economy nears full employment. With unemployment currently in the 9′s, this isn’t going to be an issue for years to come, and again, rates will rise and money will be destroyed as unemployment falls.
The possible risk would arise is if commodity prices keep climbing in response to the weakened dollar, perceived US instability, etc., as was (partly) the case during the 70s stagflation. But I suspect that this is a mini-bubble of sorts of commodities that is due for correction, just as the big commodity bubble of the 2008 was due for correction, so these recent short-term increases should not be permanent and the inflation effects limited.
But what if unemployment does not go down and growth stays stagnant?
Also, I thought that since wages are the price of labor, wage growth, like other price increases, is a symptom of inflation, not the cause of it. inflation is a monetary phenomenon is it not?
But what if unemployment does not go down and growth stays stagnant?
Then barring a return of commodity-fueled stagflation, it is unlikely that there would be any inflation effects.
inflation is a monetary phenomenon is it not?
Austrians and pure monetarists would claim that it is. The rest of us would claim otherwise.
If you want to see an obvious example of the debunking of the purists’ view of the quantity theory of money, then all you need to do is to look at Japan. Honestly, it’s hard for anyone to argue that inflation is purely a monetary phenomenon when we have Japan’s “lost decade” and, most recently, the US to provide examples that make it clear that such views of quantity theory are simplistic and not applicable in the real world. It may be true in the extreme cases, such as with Weimar, but it is certainly not true in the case of moderate money printing.
well, its already looking, just look to the price of oil.
Ben, good luck with saving the banks as the oil is going over 100 bucks and people wont be paying their debts again.
there is no free lunch.
that idiot will rather destroy real economy in order to save the banks.
did small mistake in previous post. instead of looking should be working
“well, its already working, just look to the price of oil.”