The Federal Reserve, Quantitative Easing and Hyperinflation

What Ben Bernanke's Speech Said, and What It Failed to Say

October 15, 2010

The Atlantic - Unemployment is too high, inflation is too low, and we're ready to open the monetary hoses again to flood a dry economy with more easy money. There, in a sentence, is the best summation I can manage of Fed Chair Ben Bernanke's big speech today.

For the first time, Bernanke made it clear that he is seriously considering a second round of "quantitative easing" to bring down interest rates and make it easier for families and companies to borrow money. The surest way to cure an economy of low inflation is to re-inflate with lower interest rates. Lower interest rates means cheaper access to capital, which means more capital, which means more investing and spending, which means more money chasing after goods and services, which means higher inflation.

But, short-term interest rates can't go any lower. They're already kissing the floor. So the Federal Reserve has to get creative if it wants to chase higher inflation. How the Fed does this -- for example, by buying U.S. debt or targeting higher inflation -- is important, and complicated, as my colleague Dan Indiviglio explains. But what does it mean for real people in the economy?

Let's say the Fed acts, and interest rates fall. This will make it cheaper for aspiring homeowners to buy or current homeowners to refinance. It will also make it easier for companies to borrow money to pay for new factories, new workers, and higher wages.

Here's the rub. As Daniel Gross explains, there's no guarantee that low rates will cure what's ailing us. Home sales are already slumping with record low mortgage rates. What makes us think lower borrowing rates will encourage debt-bitten families to take on more debt? Similarly, cheaper access to capital won't stir companies who still don't see adequate demand for their goods and services. If they do expand, they might choose to invest overseas, where developing countries with lower wages are growing much faster than the United States.

The upshot is this: The Federal Reserve's has exhausted its traditional inflation-boosting strategy (cut interest rates, and then cut them again), and the options it has left are sketchy. That's not a reason not to try. But it's a reason to be cautious about our optimism or certainty that the options will work.

That's one reason why I'm disappointed the speech didn't mention fiscal policy. I appreciate the invisible wall between fiscal and monetary policy. The President doesn't tell voters he'd like to see more asset purchases. The Fed chair doesn't call for specific stimulus. But why? The President doesn't mention monetary policy because he's not a monetary policy expert. But Ben Bernanke is a renowned economist with one of the most significant speaking platforms in the world. Wouldn't you like to know if he thinks we should eliminate payroll taxes, pass another stimulus, bail out state pensions, or do absolutely nothing? I would.

The Bernanke Speech

Weak Jobs Could Give Fed Inflation Target Cover

October 14, 2010

Reuters - Stubbornly high U.S. unemployment could help the Federal Reserve embrace a new tool for spurring economic growth: telling the world exactly how much inflation it wants.

The Fed may soon inject billions of new dollars into the sputtering economy, but some U.S. central bankers say this so-called "quantitative easing" strategy may do little good.

At the same time, worries persist that prices could eventually enter a downward spiral, compounding economic woes. With the jobless rate at 9.6 percent, wage gains have been sluggish, putting downward pressure on prices.

Policymakers are mulling a campaign to convince the nation it will face higher inflation down the road as a way to combat the risk of a potentially debilitating deflation.

The hope would be such a plan could spur more borrowing now. If businesses viewed the promise of higher inflation as credible, they would be more confident loans taken out today would be easier to repay in the future, when inflation will have pushed their sales revenues higher. The extra borrowing could then boost growth.

Fed officials in September discussed using a more explicit inflation target to accomplish this, according to minutes from the meeting released on Tuesday.

Some U.S. politicians have been hostile in the past to the idea of inflation targeting because such a focus appears to neglect the Fed's other mandate: keeping the country employed.

Adopting a target when inflation is high would be tough politically because it would imply a need to raise interest rates, bringing pain on companies who might cut jobs. Politicians don't like that.

But today's low inflation environment could lower the political hurdles to setting a target, said William Gavin, a vice president at the St. Louis Federal Reserve Bank.

"You wouldn't have the cost of having to lower the inflation rate to get to the target," Gavin told Reuters in a telephone interview.

The Fed already has announced a long-term inflation projection of 1.7 percent to 2.0 percent that acts as an informal target. In the year through August, the core personal consumption expenditures price index -- the Fed's preferred inflation gauge -- rose 1.4 percent. The core consumer price index was up a more-subdued 0.9 percent.

Setting a formal target would be an effort to underscore the Fed's commitment to do what it takes to move inflation higher, a commitment the central bank would hope affects the rate of future inflation businesses and consumers expect.

If the Fed fostered higher inflation expectations, it could impact wage and price setting in a way that could become self-fulfilling.

Many central banks around the world, including the European Central Bank, have formal targets. While it is not clear how many Fed officials support joining those ranks, they did discuss their options at their last meeting in late September.

John Williams Sees the Onset of Hyperinflation in as Little as 6 to 9 Months as Fed "Tap Dances on a Land Mine"

September 14, 2010

Zero Hedge - John Williams, arguably one of the best trackers of real, unmanipulated government data via his Shadow Stats blog, has just released a note to clients in which he warns that hyperinflation may hit as soon as 6 to 9 months from today. With so many established economists and pundits seeing nothing but deflation as far as the eye can see, and the Fed doing all in its power to halt the deleveraging cycle, both in the open and shadow economies, what is Williams' argument? Read on. Incidentally, even if some fellow bloggers disagree with Mr. Williams' assesment, we believe it is in our readers' best interest to have them make up their own mind on this most critical economic development.

SUMMARY OUTLOOK

Systemic Turmoil is Unthinkable, Unacceptable but Unavoidable. Pardon the use of the Aerosmith lyrics in the opening headers, but the image of tap-dancing on a land mine pretty much describes what the Federal Reserve and the U.S. Government have been doing in order to prevent a systemic collapse in the last couple of years.

Now, as business activity sinks anew, much expanded supportive measures will be needed to maintain short-term systemic stability. Such official actions, however, in combination with global perceptions of limited U.S. fiscal flexibility, likely will trigger massive flight from the U.S. dollar and force the Federal Reserve into heavy monetization of otherwise unwanted U.S. Treasury debt.

When that land mine explodes — probably within the next six-to-nine months, the onset of a U.S. hyperinflation will be in place, with severe economic, social and political consequences that will follow. The Hyperinflation Special Report is referenced for broad background. The general outlook is not changed.

What does this mean for US financial markets? (take a wild guess)

In these circumstances, the financial markets likely will be highly unstable and volatile. Looking at the longer term, strategies aimed at preserving wealth and assets continue to make sense. For those who have their assets denominated in U.S. dollars, physical gold and silver remain primary hedges, as do stronger currencies such as the Canadian and Australian dollars and the Swiss franc. Holding assets outside the U.S. also may have some benefits.

Source: Shadow Stats, where the full piece can be located

Interview: Marc Faber on the Federal Reserve and Hyperinflation

September 24, 2010

Hera Research Newsletter: ... With debt levels and liabilities so high, what solution is there for the United States?

Dr. Marc Faber: The solution is, basically, for the government to move out and not intervene in the economy. There are economists who will dispute that the Federal Reserve is partially responsible for the crisis; and there are economists that will still tell you that debt doesn’t matter, that deficits don't matter, and they want to continue to intervene in the free market constantly.

To these economists I respond: What about Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB)? It was an intervention by the government into the housing market and into the mortgage market and the biggest bankruptcies—bigger than Citigroup (C) and all the banks—are Fannie Mae and Freddie Mac—government-sponsored enterprises.

The same economists will tell you that the government has to intervene, and to these economists I say: Well, you have made so many mistakes already with interventions, do you think that in the future your interventions will improve anything?

Einstein defined insanity as doing the same thing over and over and expecting different results, but these economists and the Federal Reserve think that by more interventions with fiscal measures and more money printing they will improve things. No, they won’t. They will make things worse ...