"We're in a nasty environment," said Tim Bond, the bank's chief equity strategist. "There is an inflation shock underway. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth."...Here's my "I told you so."
...Traders said the Fed seemed to be rowing back from rate rises. The effect was to propel oil to $138 a barrel, confirming its role as a sort of "anti-dollar" and as a market reproach to Washington's easy-money policies.
The Fed's stimulus is being transmitted to the 45-odd countries linked to the dollar around world. The result is surging commodity prices. Global inflation has jumped from 3.2pc to 5pc over the last year.
Last Fall I reported that the economy was going to be rocky in 2008. I said "I still suspect that the Federal Reserve Board under Bernanke is going to try to delay the recession, which will lead to greater inflation." I was right.
The Fed was going to have two choices. They could lower interest rates to pump up the economy, at the cost of stimulating inflation, or they could increase the interest rates to prevent inflation at the cost of letting the economy go into the tank.
They have chosen to lower interest rates for a short term pump of the economy, probably because this is an election year and one of the surest ways to replace the party holding the Presidency is to have the economy go into the tank during the election year. Greenspan ensured that the interest rate was high in 2000 when he wanted the Democratic President replaces by a Republican. Immediately after the election, he started lowering the interest rates to make Bush look good until by 2004. (See my earlier post Economics and politics of the Fed fund rate.)
Greenspan's Republican-appointed replacement, Ben Bernanke, appears to be playing the same game this year.
Here's the thing, though. The effect of pumping up the economy by lowering the interest rate is relatively fast. It's short term. But the effect of the lower interest rate to increase inflation works more slowly. It's long term. So Bernanke is making abet that he can keep the economy pumped up until after the election (meaning October) before his mismanagement puts it into the tank. From Barclay's:
Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. If it hesitates, the bond markets will take matters into their own hands. "This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility," said Mr Bond.What "the bond markets will take matters into their own hands" means is that interest rates will do what they did in the late 1970's. They will go sky high even without the fed causing it. More from Barclay's:
Traders said the Fed seemed to be rowing back from rate rises. The effect was to propel oil to $138 a barrel, confirming its role as a sort of "anti-dollar" and as a market reproach to Washington's easy-money policies.This means that the price of oil will continue to rise, one of many causes of American inflation, while the inflation will spread to the countries tied to the dollar around the world.
The Fed's stimulus is being transmitted to the 45-odd countries linked to the dollar around world. The result is surging commodity prices. Global inflation has jumped from 3.2pc to 5pc over the last year.
Mr Bond said the emerging world is now on the cusp of a serious crisis. "Inflation is out of control in Asia. Vietnam has already blown up. The policy response is to shoot the messenger, like the developed central banks in the late 1960s and 1970s," he said.
"They will have to slam on the brakes. There is going to be a deep global recession over the next three years as policy-makers try to get inflation back in the box."
Bernanke's attempt to elect McCain and continue the Republican Party in the White House is going to severely damage both America and the world economy - even more than the current President and his party have already done.
The only question is whether Bernanke's bet that he can pump up the economy until the election will work. He is going to have to raise interest rates, and it looks like it will be before the election. That's lose-lose for the republicans, but the entire Republican economic small government - no regulation policy since 1980 has led to this.
But it's also lose - lose for both America and for the world economy. We have already lost. The only remaining question is how badly and how soon it will be so obvious that even those who don't want to believe is are forced to believe.
Don't believe me? Here's more from Barclay's:
David Woo, the bank's currency chief, said the Fed's policy of benign neglect towards the dollar had been stymied by oil, which is now eating deep into the country's standard of living. "The world has changed all of a sudden. The market is going to push the Fed into a tightening stance," he said.I haven't gotten this on my own. One of the key writers I have been reading is Ian Welsh. Here is his explanation of what is happening to oil prices.
# Gazprom chief expects 'radical' change in oil price
# More comment and analysis from The Telegraph
The bank said the full damage from the global banking crisis would take another year to unfold.
I have been warning about inflation for some time, and predicting stagflation (high inflation, high unemployment). I have also noted that the problems were not going to be confined to the US and that the idea that other economies were "decoupling" was absurd.What does it mean that "Greenspan put the pedal to the metal?" Look at the low interest rates again, designed to reelect Bush. Economics and politics of the Fed fund rate.
Note also the mention of oil as an "anti-dollar". This is something Stirling, Oldman and myself were discussing as far back as 2004. Simply put, oil is the "unit of ultimate scarcity" in modern economies because it's very hard to substitute away from it. Sure, you can try, with foolishness like corn ethanol, but we're seeing where that leads. Oil makes the modern suburban economy possible. It is deeply embedded in how we make food, so much so that decades ago the late author Robert A. Heinlein came to the conclusion that the limits on food growth were based on oil, and that food wouldn't become a problem till oil became scarce. He's looking rather prescient today. The suburban economy of the US, likewise, simply requires oil to run. Suburbs and exurbs require automobiles and automobiles require oil.
At one time the dollar was backed by gold. What a lot of people failed to realize is that now the dollar has been backed by oil. Countries throughout the world wanted dollars, because dollars bought oil. As the dollar has been inflated by massive money printing, the price of oil has soared. This isn't the only cause of the increase in oil prices, but it is a significant reason. There is no reason for producers of a scarce, essential resource, to accept inflation unless you, well, have them over a barrel. For a long time the US did have them over a barrel—dollars, which were also the key currency for buying securities and various high tech devices, were more rare than oil was. Then Greenspan put the pedal to the metal. It is not a coincidence that oil prices begin to rise after Greenspan started providing huge liquidity hits in the late nineties.
When you pay $5.00 plus per gallon for gas, consider it your contribution to the Bush reelection fund. As your food bill rises, that too is your contribution to the Bush reelection fund. As your rent goes up and you are unable to get a loan to buy a home, that is your contribution to the maintenance in power of the Republican Party conservatives. As your pay fails to keep up with the increased costs you face, that, too, is the direct result of the Bush Tax Cuts and their low interest rates designed to reelect Bush - and designed by Ben Bernanke to elect John McCain this year.
The American economy is no longer a free market if it ever was. This is today much the same battle as was fought from 1800 until the Civil War about creating a Bank of the United States that would give control of the economy to unregulated bankers. It is now a tool used by Republicans and their controlling bankers and big business CEO's to maintain and increase their political power. Their power and wealth matters. The way the rest of us live or don't live doesn't. If you are one of them, I pray for less power to you. For the rest of us, it's time to make that prayer come true.
Remember that this November, and be damned sure you vote. If you want to vote for the Democrat, make sure in advance of voting day that you are registered and have the required documentation to vote. Voters Registration are being denied as I write, and no notice is being provided to the registrant. You won't know until you try to vote and are turned away. Individuals are being required to present a picture ID issued by the government to vote, and in Arizona, you have to present proof of citizenship. These are Republican requirements that affect primarily Democratic voters.
So check now to be sure you are registered and have the required picture ID and proof of citizenship in order to vote. I'm an election judge, and if you don't have the legally required documentation I will turn you away. Your provisional vote will not be counted. Election day is too late.
When you do vote, if the Republicans let you, remember that the Republicans have put the economy into the tank so that whey will maintain power. They are incompetent at running the government, but they are very very good at stealing elections and corruptly stealing money from the government.
For some of my earlier posts on the economy click "economics" on the list of labels below.
By the way, I have been focused above on the problems of the contradiction of keeping the economy running at a reasonable level vs. letting inflation run rampant. Ian Welsh's article makes really significant point on the threat of simultaneous inflation and deflation. The two economic events can occur simultaneously. Here's what he has to say about that possibility:
Finally there's this bit on the threat of deflation, which I think is worthy of commentary:As everything I have written earlier has pointed out, the wealthy and the bankers expect the rest of us to pick up the tab for their failures an losses while they get richer from taking risks that succeed.
A small chorus of City bankers dissent from the view that inflation is the chief danger in the US and other rich OECD countries. The teams at Société Générale, Dresdner Kleinwort, and Banque AIG all warn that deflation may loom as housing markets crumble under record levels of household debt.
Bernard Connolly, global strategist at Banque AIG, said inflation targeting by central banks had become a "totemism that threatens to crush the world economy".
He said it would be madness to throw millions out of work by deflating part of the economy to offset a rise in imported fuel and food prices. Real wages are being squeezed by oil, come what may. It may be healthier for society to let it happen gently.
The threat of deflation has been looming for some time due to the housing crisis and how housing is tied to the money stock. It isn't actually a contradiction to be concerned with both inflation and deflation. What I've been expecting for a long time was first stagflation and then deflation (with an outside chance at hyperinflation, if the response by central banks is blown badly). Moreover, both can occur simultaneously, in a very nasty squeeze. There's no real contradiction in having food and fuel prices rise while prices for other items crash.
However notice the words "real wages are being squeezed by oil, come what may." Those words should send a chill of fear down your spine. Both because of their undeniable truth, and because of what they imply, which is that the world's elites intend for the peons to pay for this by having their real wages slashed in half. In fact, while it's inevitable there be some decline in real wages (I would guesstimate about 20%), there's a lot that could be done to mitigate such declines and to spread the pain around. But spreading the pain around means the rich would take an even bigger hit than they're going to take, and that's not acceptable. What will happen instead is that Bernanke and other central bankers will continue to provide huge sums of money in an attempt to bail the rich out of their losses and to avoid real, serious restructuring and regulation of the financial industry, despite the fact that the finance sector has a huge portion of the responsibility for this crisis, as it has for multiple bubbles over the last 30 years.
In the end though, what Barclays is saying is more interesting because Barclays is saying it than because it's great analysis. It isn't. It would have been good analysis a year ago. it would have been great analysis 3 years ago. There are bloggers who did most of this analysis 3 or even 4 years ago. Still, where the conventional wisdom is is important, because the conventional wisdom tells you what actions are now considered possible. And the debate right now doesn't include heavy re-regulation, or taking over banks, or even allowing banks to fail and go into government receivership. It doesn't include huge incentives for conservation of oil. It doesn't include the possibility of currency controls. What it comes down to is a simple debate between brute monetary policy approaches - easy money, or expensive money. High interest rates, or lower interest rates. Squeeze inflation out and suffer the consequences or don't squeeze it out and let inflation destroy real wages, wiping out all the gains of the post-war period.
Welcome to the world created by the rich when they think they can be rich while ordinary people become more poor. Welcome to the world that gets created when people think that they can have prosperity now and put the bill off till tomorrow.
Why not? With the conservative Republicans in power implementing the Reagan Revolution, the wealthy and the bankers are in the position to get rich from the upside risk and hand off the losses from the downturns to the rest of us. That's a great position for any financial person to be in.
But I'm sure that none of you mind making the Bush family, Dick Cheney, and the already wealthy bankers of J.P. Morgan, Citibank, and Bank of America more wealthy as the rest of us suck up the costs. Because that's the conservative way.
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