Should the Fed Be Concerned about Low Price Inflation?

Mises Daily: Tuesday, October 26, 2010 by Frank Shostak

In its September 21 meeting, the Federal Reserve Open Market Committee expressed concern that the rate of inflation is far too low. According to the minutes some members of the FOMC have said,

that unless the pace of economic recovery strengthened or underlying inflation moved back toward a level consistent with the Committee’s mandate, they would consider it appropriate to take action soon. With respect to the statement to be released following the meeting, members agreed that it was appropriate to adjust the statement to make it clear that underlying inflation had been running below levels that the Committee judged to be consistent with its mandate for maximum employment and price stability, in part to help anchor inflation expectations. … The Committee was prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

Meanwhile, on Friday, October 15, Federal Reserve chairman Ben Bernanke hinted that the US central bank is ready to push more money into the economy in order to reverse the present slide in the growth momentum of the consumer price index. He said that the low level of inflation presented a risk of deflation. “There would appear, all else being equal, to be a case for further action,” Bernanke said at a conference sponsored by the Boston Federal Reserve Bank. Read more»

Dollar Falters as Fed Tests the Water

Peter Garnham, www.ft.com, 10/28/10

The dollar lost ground as the recent rally faltered ahead of next week’s monetary policy decision from the US Federal Reserve.

The US currency has performed strongly during the past week as investors have covered short positions on speculation that the Fed would next Wednesday take a less aggressive approach to quantitative easing than had been previously anticipated.

But the dollar fell on Thursday on news that the Fed had sent out a survey asking primary Treasury dealers of their expectations of the size and impact of further asset purchases.

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- From Money Manager Jeremy Grantham’s latest client letter

Why Easier Money Won’t Work

The Fed risks fueling a destructive bond market bubble, while any gains from a weaker dollar will come at the expense of those to whom we hope to export.

Joseph Stiglitz, Wall Street Journal Op Ed, online.wsj.com, 10/23/2010

The Federal Reserve, having done so much to create the problems in which the economy is now mired, having mistakenly thought that even after the housing bubble burst the problems were contained, and having underestimated the severity of the problem, now wants to make a contribution to preventing the economy from sinking into a Japanese-style malaise. How? As Chairman Ben Bernanke announced last week, through large-scale purchases of U.S. Treasurys—called quantitative easing, or QE.

The Fed is right to be worried.
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The US Dollar is Doomed

Puru Saxena, dailyreckoning.com, 10/22/2010
Austerity be damned, at this rate Mr. Bernanke will go down in the history books as one of the greatest money creators ever to have walked this planet! Never mind sky-high deficits and a crushing debt overhang, at its most recent FOMC meeting, the Federal Reserve all but guaranteed another round of quantitative easing.

While the American central bank did not officially expand its quantitative easing program last month, it did reiterate its willingness to institute more aggressive monetary policy measures in order to combat the risks of deflation. Furthermore, Mr. Bernanke did officially downgrade the Federal Reserve’s outlook for inflation.

The truth is that the US is insolvent and its policymakers will stop at nothing in order to avoid sovereign default. So, it should come as no surprise that at its latest meeting, the Federal Reserve downplayed the risk of inflation, thereby setting the stage for another round of money creation.

[What follows is mostly the usual material, though well summarized. However, some very valuable historical info.]

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Rebalancing the World

Doug Noland, www.prudentbear.com, 10/22/2010

The G20 ministers clearly want to avoid confrontation and…don’t dare address the U.S. as an unmitigated policy “Basket Case.”

The [current accounts] deficit will likely jump to $500bn this year – an unimaginable scenario for an economy operating at almost 10% unemployment.  History offers nothing remotely comparable to our decades of exchanging new financial claims for foreign-produced goods, services and energy.

Has faltering dollar confidence finally reached the proverbial “tipping point”?…[C]urrent market dynamics seem to dictate that this intervention ["QE2"] will only exacerbate the torrent of flows exiting the U.S. in search of higher returns in “undollars”…

Policymakers can insist on referring to “global rebalancing,” but the reality is more in line with desperate and universal inflationism.

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Doug Noland’s Credit Bubble Bulletin

www.prudentbear.com, 10/22/2010

[Selected Notes:]

October 19 – Bloomberg:  “Moves by the U.S. Federal Reserve to print cash would spur capital flows into China, hampering the Asian nation’s efforts to damp inflation and counter yuan gains, said Yu Yongding, a former central bank adviser… Cash is pouring into China to profit from economic growth that’s averaged more than 10% for the past five years and accelerating yuan gains… The nation’s foreign-exchange reserves jumped by $100 billion in September to a record $2.65 trillion, the biggest increase since Bloomberg began tracking the data in 1995, and the inflation rate hit a 22-month high of 3.5% in August.”

October 21 – Bloomberg (John Gittelsohn and Jody Shenn):  “Shoddy mortgage lending has led bankers into a two-front war, pitting them against U.S. homeowners challenging the right to foreclose and mortgage-bond investors demanding refunds that could approach $200 billion.  While federal regulators and state attorneys general have focused on flawed foreclosures, a bigger threat may be the cost to buy back faulty loans that banks bundled into securities. JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. have set aside just $10 billion in reserves to cover future buybacks.” Read more»

‘Print, Print, and Print’

Marc Faber, www.lewrockwell.com, 10/21/2010

The following is an extract from the October edition of Dr. Faber’s indispensable monthly newsletter, The Gloom, Boom and Doom Report.

No matter what central bankers and the cheerleading, mostly useless academics who surround them pronounce in their self-created aura of infinite academic “delicacy and refinement”, under the auspices of the Fed they will do precisely one thing: print, print, and print. Sadly, as Mignon McLaughlin observed, “The know-nothings are, unfortunately, seldom the do-nothings.”

I should like to emphasize once again that the US Fed will continue to monetize massively on any sign of either further economic weakness or a more meaningful (10% or so) financial and property market decline.

In the world I described above, the increased supply of dollars will flow somewhere. Read more»

The TARP ‘Success Story’

Steve Saville, www.speculative-investor.com, 10/14/2010 [Excerpt]

It is estimated that the total direct cost of the US Government’s $700B TARP (Troubled Asset Relief Program) will ‘only’ be about $100B, and that the government will actually make a profit of about $7B on the TARP funds provided to the banking industry. This $7B profit is now being touted as evidence that TARP not only helped save the economy from disaster, it did so without costing taxpayers a dime. What, then, could there be to complain about?

One complaint is that even if the transfer of hundreds of billions of TARP dollars from the US Treasury to the banking industry proves to be temporary, over the long-term there will likely be large indirect costs associated with keeping afloat businesses that deserved to fail. In essence, many bad stewards of capital were kept in place by TARP. But of even greater importance, TARP was just one part of a gargantuan operation that channeled TRILLIONS of dollars into banks and other financial corporations. When all parts of this operation are taken into account, the fact that banks were able to return the high-profile TARP money does not look like evidence of success. By way of explanation, consider the hypothetical case of Bill and Fred. Bill makes two investments in the form of a $1M loan to Fred and a $10M loan to Fred. If Fred uses part of the $10M loan to pay back the principal and interest on the $1M loan, is this evidence that Bill’s $1M investment was a success?
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