Walmart vs Ben Bernanke

[/dev/null]

Ben says we need to worry about Deflation so wee need to print $600B

Walmart says otherwise

 

http://www.cnbc.com/id/40135092

 

Who do you believe?

Edited November 15, 2010 by /dev/null

[Magox]

Ben says we need to worry about Deflation so wee need to print $600B

Walmart says otherwise

 

http://www.cnbc.com/id/40135092

 

Who do you believe?

“I suspect that when the Chairman thinks about reflation he has a difficult time seeing any other asset besides real estate,” said Jim Iuorio of TJM Institutional Services. “Somehow the Fed thinks that if its not ‘wage driven’ inflation that it is somehow unimportant. It’s not unimportant to people who see everything they own (homes) going down in value and everything they need (food and energy) going up in price.”

 

I agree with this completely, and it is a point that I have been trying to drive home to TPS, which is that the CPI guage is so heavily weighted with wages and housing/rentals that "real" inflation is being ignored by Fed policy makers and traditional economists and academics. In the real world we are seeing inflation and it is only going to get worse.

 

And all this is beginning to happen without significant bank lending, simply because of currency debasement policies and disallocations in the capital markets caused by a massive Federal Reserve intervention, which is distorting the markets and creating asset bubbles, primarily in areas that produce "real" inflation.

[DC Tom]

I agree with this completely, and it is a point that I have been trying to drive home to TPS, which is that the CPI guage is so heavily weighted with wages and housing/rentals that "real" inflation is being ignored by Fed policy makers and traditional economists and academics. In the real world we are seeing inflation and it is only going to get worse.

 

And all this is beginning to happen without significant bank lending, simply because of currency debasement policies and disallocations in the capital markets caused by a massive Federal Reserve intervention, which is distorting the markets and creating asset bubbles, primarily in areas that produce "real" inflation.

 

Exactly what I was trying to explain to someone today...although I didn't do nearly as good a job of it.

[TPS]

I agree with this completely, and it is a point that I have been trying to drive home to TPS, which is that the CPI guage is so heavily weighted with wages and housing/rentals that "real" inflation is being ignored by Fed policy makers and traditional economists and academics. In the real world we are seeing inflation and it is only going to get worse.

 

And all this is beginning to happen without significant bank lending, simply because of currency debasement policies and disallocations in the capital markets caused by a massive Federal Reserve intervention, which is distorting the markets and creating asset bubbles, primarily in areas that produce "real" inflation.

Not quite true. As I mentioned, the Fed also looks at PPI, which does include input costs other than wages. This has been increasing by 5% on an annual basis. Bernanke is on record as saying he didn't think firms had the ability to pass these costs on--That's Bernanke's position.

 

I have not disagreed with you about commodity prices; I have disagreed about the main source of those price increases. As I said in my article, this round of QE2 is adding fuel to that fire. I said it would probably lead to stagflation. I agree with you on all of that, I just disagree with you that the main source of increased commodity prices is demand from China and EMs--I've said it's driven by investors jumping into that market making speculation the driving force. It seems as if you must agree now, since you say that Fed intervention is causing asset bubbles.

 

Inflation can come from demand-side issues or supply-side issues. This is not a demand-side issue (hence it's happening without loan creation), it's a supply-side problem, which is being fueled by Bernanke's irresponsible actions. There is a fairly easy way to prick the bubble if policymakers wanted to, but it won't happen.

[Magox]

For the record I said EM physical commodity demand AND developed world monetary policy are causing higher prices, so lets not distort what I said.

 

What EM physical demand for commodities is doing is that it is simply raising the baseline for prices on a gradual basis. The baseline is rising upwards, so when you have these disallocations in the market caused by monetary policy, it has a tendency to create minibubbles on top of this rising baseline. If the baseline were to remain at the same levels, then this wouldn't be such a problem, but when you couple EM rising demand with currency debasement policies (specially to this magnitude), then it is only natural that as time progresses the bubbles will continue to get worse and at higher levels.

 

There will be many mini bubble bursts (or corrections if that is what you want to call them), but the baseline after each one of these bursts will most likely continue to keep climbing at higher levels. So every time a new bubble forms on top of this rising baseline, it presents major challenges and at some point, it will become a major issue both here in the U.S and overseas.

[TPS]

For the record I said EM physical commodity demand AND developed world monetary policy are causing higher prices, so lets not distort what I said.

 

What EM physical demand for commodities is doing is that it is simply raising the baseline for prices on a gradual basis. The baseline is rising upwards, so when you have these disallocations in the market caused by monetary policy, it has a tendency to create minibubbles on top of this rising baseline. If the baseline were to remain at the same levels, then this wouldn't be such a problem, but when you couple EM rising demand with currency debasement policies (specially to this magnitude), then it is only natural that as time progresses the bubbles will continue to get worse and at higher levels.

 

There will be many mini bubble bursts (or corrections if that is what you want to call them), but the baseline after each one of these bursts will most likely continue to keep climbing at higher levels. So every time a new bubble forms on top of this rising baseline, it presents major challenges and at some point, it will become a major issue both here in the U.S and overseas.

Is that a convoluted way to say that you agree with me?

[Magox]

Is that a convoluted way to say that you agree with me?

[Magox]

An interview this morning with Dudley who is the New York Fed chief

 

This is the problem with our Fed, they see things on certain issues from an inside the box way of thinking.

 

 

Dudley, a former Goldman Sachs [GS 167.22 1.39 (+0.84%) ] economist, also rejected the widely held view that the Fed is really printing money. "What we're doing is, when we buy Treasury securities, we are increasing the amount of reserves in the banking system. For those reserves to actually create money, the banks actually have to lend those reserves out.

 

The problem with the U.S. economy now is that there is insufficient lending and he doesn't expect the Fed's purchase program to solve that problem because there are ample reserves in the system. He expects the current program to help the economy by lowering interest rates for businesses and consumers.

 

He misses the point, technically much of the money that was created from the fed isn't directly going into the broader economy. We have established that point before, but even he himself admits that the plan is to force money out of bonds into the economy, via stock appreciation which therefore causes more confidence in the market, which leads to more spending, which then goes to retail stores, which leads to more profits, which then leads to hopefully more jobs. A virtuous circle of sorts. So even though the money that was created from the Fed didn't directly go into these areas, indirectly it did. So I would say that his defense of this not being a "money printing" exercise is an intellectually dishonest argument to make.

 

He goes on to say:

 

Dudley, in a CNBC interview, directly responded to comments from the German Finance Minister ahead of the G20 meeting last week that the U.S. central bank was working to "artificially lower the value of the dollar."

 

"I think that's very off base because I think that the goal of our policy is a very simple one, to ease financial conditions," Dudley said. The Fed is "not trying to push the dollar to any particular level. What we're trying to do through our large-scale asset purchase programs is to remove Treasurys from the market and force private investors into other assets."

 

I made this exact point before any of them publicly went on the record of this admission.

 

Also, another point, I spoke about this before, corporate bond offerings have been flying. Corporations are now tapping into these low yielding bonds. Why is this happening? Obviously it is largely happening because of the Fed's money creation policies, which is causing investors to move out of bonds, which therefore is moving money into Corporate bonds, which is causing yields to go lower, which is adding incentive for corporations to tap into those cheap interest rates. This is a form of lending. Once again, the Fed isn't directly financing these companies, but if it wasn't for QE policies this wouldn't occur, not to this degree anyway.

 

He also says that he rejects the notion that they are attempting to debase the dollar. I call bull ****. Of course he can't publicly say this, could you imagine the reaction of the markets or even worse our foreign bondholders? It would absolutely undermine the credibility of the Fed and create even more tension world wide. But let's just give him the benefit of the doubt for a second, that they aren't attempting to debase the value of the dollar, doesn't he believe that it is logical that investors will think otherwise? Doesn't he believe that it is certainly possible that the value of the dollar will drop? Hasn't he noticed that the only reason why the S&P is up this year is because of multinational companies that export goods and services overseas? If you take out the multinationals, the S&P would be down for the year. Now, considering that I know this, he must surely know this as well. He must honestly believe that a key to producing jobs is to support our exporting sector. Of course he knows this and of course a weaker dollar is supportive of our exporting sector of the economy. And they have explicity stated that they have a dual mandate, and part of that mandate is JOBS!! So even though he says that they aren't attempting to push down the dollar to any certain level, I think we all know that they are intending for it go lower.

 

 

 

He also disagreed with another point of criticism: that the Fed's policy would lead to inflation. Dudley contended that new tools the Fed has put in place to withdraw excess cash from the banking system when the economy rebounds would head off inflation, including paying higher interest rates on the excess reserves banks are now holding. "We are very confident of our ability to exit when the time comes, in terms of the tools. We also are very confident of our will to exit," Dudley said.

 

So he basically infers that inflation can only be accomplished through bank lending. That is what you say TPS.

 

One has to ask, if the money that was printed through the Fed had never occured, this money that is sitting in bonds, would it have moved into "other assets"?

 

Of course it wouldn't have.

 

So now, where will this money go? Obviously money will go to where the fundamentals are more favorable. Obviously EM economies offer more growth than developing economies, so naturally this will create bubbles in these economies. Another area that makes sense is commodities. Commodities do well in a currency debasement environment, plus EM economies have an insatiable appetite for commodities, so this will be another area that makes sense. So, if commodities go higher, is that inflationary?

 

Of course it is.

 

If asset bubbles are created in China and China goes through bouts of uncomfortable inflation will they pass that cost on to the U.S? So if they pass that cost to the U.S aren't we importing inflation?

 

Of course.

 

Also, Dudley says that he is "very confident" that when the time comes that they will be able to fight inflation and reduce the balance sheet of the Fed in a significant manner because of the new tools they have, including paying higher interest rates on the excess reserves banks are now holding.

 

hmmm, sounds nice. But in order to do this successfully they will have to offer a sufficient amount of interest payed on those reserves to entice that money to come back to the Fed. I don't believe this will work simply because I believe that inflation expectations will make it awfully difficult for that money to repatriate back to the Fed. The interest payed has to be more attractive than the opportunities that will come about from those inflation expectations.

 

The reason why the FED consistently gets it wrong when it comes to managing asset bubbles is because they underestimate the "animal spirits" of the markets. The nature of money is greedy. The nature of money is to chase after profits. Considering we have the lowest interest rates on record, and the expansion of the largest balance sheet we have ever seen, it is only natural that when some confidence starts coming back to the economy, the "animal spirits" will be unleashed once again. Money from banks will flow at a more brisk pace, which will create more jobs, higher stock values, more consumer spending etc. etc.

 

Of course the risks that come along with this is higher inflation. So even though the more well-to-do folks will be able to absorb these higher prices, specially considering they are winners in the "wealth effect" strategy of the fed, the lower to middle class will be the big losers.

 

However, there will be a breaking point for higher prices. At what level do prices begin to have an appreciable NET negative effect on growth?

 

What will the Fed do if their inflation guages tell them that inflation is unacceptably too low and unemployment is too high yet prices of commodities start becoming a real problem for normal every day people? Talk about a conundrum.

 

Inflation is already at elevated levels in the EM economies and we are now starting to see even England is now seeing it filter into their economy. How will policy makers react to this? On one hand we have slow growth, on the other hand we have heightened commodity prices. It's not a pretty picture and I do not believe the Fed will be able to effectively manage this scenario.

Edited November 16, 2010 by Magox

[TPS]

So he basically infers that inflation can only be accomplished through bank lending. That is what you say TPS.

 

He obviously doesn't know what he's talking about then...

 

The Fed is focused on demand-side inflation which comes from spending by households, businesses, and govt. As I mentioned, the bernanke doesn't think firms have the pricing power to pass rising input costs along--they don't think supply-side inflation will be a problem. I'm not so sure about this belief--I lean toward your view here.

 

As for low i rates and corp bond issues, it's no different than mortgage refis--corps are taking advantage and locking into historically low rates--who wouldn't? You do realize they are simply repaying one bond with another, yes? It will reduce their interest expense.

 

Agree on the $. they can't say it, but that has to be part of the policy to stimulate.

 

I didn't know you were such a Keynesian? All of this "animal spirits" talk....

 

And yes, the fed can always reverse its actions to try and restrain inflation. Plus, I don't think the dudley means they will try to pull reserves back by paying higher interest on them, rather it would help maintain the excess they already hold--as I've said a million times, it's close to $1 trillion. Again, all of these actions help restrain demand-side inflation. They are in a fix with commodities. The only way you can prick that bubble is with higher interest rates, but that ain't gonna happen.

[TPS]

He obviously doesn't know what he's talking about then...

 

The Fed is focused on demand-side inflation which comes from spending by households, businesses, and govt. As I mentioned, the bernanke doesn't think firms have the pricing power to pass rising input costs along--they don't think supply-side inflation will be a problem. I'm not so sure about this belief--I lean toward your view here.

 

As for low i rates and corp bond issues, it's no different than mortgage refis--corps are taking advantage and locking into historically low rates--who wouldn't? You do realize they are simply repaying one bond with another, yes? It will reduce their interest expense.

 

Agree on the $. they can't say it, but that has to be part of the policy to stimulate.

 

I didn't know you were such a Keynesian? All of this "animal spirits" talk....

 

And yes, the fed can always reverse its actions to try and restrain inflation. Plus, I don't think the dudley means they will try to pull reserves back by paying higher interest on them, rather it would help maintain the excess they already hold--as I've said a million times, it's close to $1 trillion. Again, all of these actions help restrain demand-side inflation. They are in a fix with commodities. The only way you can prick that bubble is with higher interest rates, but that ain't gonna happen.

 

Here's a good piece on the input cost issue--article from Bloomberg on Cotton prices. Also, the PPI came in less than forecast, so that probably makes the fed happy.

 

cotton prices

[Magox]

He obviously doesn't know what he's talking about then...

 

I just believe he is posturing for public support with an intellectually dishonest argument.

 

The Fed is focused on demand-side inflation which comes from spending by households, businesses, and govt. As I mentioned, the bernanke doesn't think firms have the pricing power to pass rising input costs along--they don't think supply-side inflation will be a problem. I'm not so sure about this belief--I lean toward your view here.

 

Agreed, hold on, am I agreeing with myself?

 

As for low i rates and corp bond issues, it's no different than mortgage refis--corps are taking advantage and locking into historically low rates--who wouldn't? You do realize they are simply repaying one bond with another, yes? It will reduce their interest expense.

 

Of course I do, that is why I said it.

 

Agree on the $. they can't say it, but that has to be part of the policy to stimulate.

 

Yuppers

 

I didn't know you were such a Keynesian? All of this "animal spirits" talk....

 

First of all, I am not endorsing these policies, I am giving my opinion of what I believe will happen.

 

Keynes once said:

 

"Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."

 

I believe what I said perfectly applies to Keynes interpretation don't you?

 

Having said that, Keynesian economics is not the only way "animal spirits" can be invoked. You can achieve this through elimination of nonsensical regulations or through explicit government backstops, or accounting tricks like the elimination of mark to market, or supply side economics. Basically anything that brings out over exuberance in the market place.

 

And yes, the fed can always reverse its actions to try and restrain inflation. Plus, I don't think the dudley means they will try to pull reserves back by paying higher interest on them, rather it would help maintain the excess they already hold--as I've said a million times, it's close to $1 trillion. Again, all of these actions help restrain demand-side inflation. They are in a fix with commodities. The only way you can prick that bubble is with higher interest rates, but that ain't gonna happen.

 

Depends, if markets regain that all elusive "animal spirit" side of them, then banking lending behavior may very well change. And yes, elevated commodity prices do pose a large problem for the fed.

[TPS]

I believe what I said perfectly applies to Keynes interpretation don't you?

 

Having said that, Keynesian economics is not the only way "animal spirits" can be invoked. You can achieve this through elimination of nonsensical regulations or through explicit government backstops, or accounting tricks like the elimination of mark to market, or supply side economics. Basically anything that brings out over exuberance in the market place.

Wasn't criticizing you about the Keynes quote, just surprised when someone, who is usually "critical of so-called Keynesian economics," quotes him.

 

To be clear, I am also critical of the bastardized version of keynesian economics that is preached in academia. I follow Minsky's interpretation of Keynes, which describes the economy as one that is never in a stationary equilibrium, rather it's an inherent cyclical process.

 

Keynes also said (from the same chapter, 12), "Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlwind of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done."