Bathing in Inflation?

Taking a warm bath in all the new money floating around may feel good now, what with the frozen credit markets, but as the economy stops cooling and begins to warm up (even ever so slightly), will the rising temperatures also cause inflation to heat up. (I think this metaphor really got away from me.)

To me, this is a key point:

Meltzer says political pressure will prevent Bernanke, 55, and fellow policy makers from withdrawing liquidity quickly enough as the economy recovers. That’s similar to the pattern that occurred back in the 1970s, he says. Then-Chairman Arthur Burns allowed excessive money-supply growth because he was unable or unwilling to resist pressure from President Richard Nixon’s White House to hold down unemployment, leading to the “great inflation” of that era, he says.

A lot of floating money may make sense now, but soon the time may be upon us when we need to start drying out this extra liquidity (run-away metaphor again...really, I shouldn't quit my day job...) Hopefully a sense of pragmatism has taken over the financial ruling class and they'll be willing to take the tough decisions to cool down inflation at the first sighting.

Bernanke Bet on Keynes Has Meltzer Seeing 1970s-Style Inflation - Bloomberg.com

Forget growth, forget inflation. The main concern...???

...plain old stability!

I remember the days of "don't worry, it'll be a mild recession" talk of a few months back. Now we're looking down the wrong end of a full on financial crisis.

I'm glad some people still have a "don't worry be happy now is the time to buy attitude" but I remain unconvinced. I thought that a few weeks ago and now feel duly chastened.

I'm not panicking or doing anything rash.

But I'm not happy either.

Catching up with moral hazard

In the U.S., we recently saw the unprecedented opening of the Federal Reserve discount window to nonbanks. By definition, unprecedented events set a precedent. And regardless of whether that window is officially opened or closed, the market now assumes that it will be open if necessary on an ad hoc basis.

Interesting OpEd in today's WSJ from Vikram Pandit of Citigroup. As he highlights, the moral hazard has already been established, the Fed will bail out failing institutions that threaten the entire financial system. We now need regulations to manage that moral hazard.

Toward a Transparent Financial System - WSJ.com

Hoping for higher rates

So here's my call.. I'd love to see interest rates begin to creep up, it would add some stability to the US markets. Higher rates would send a signal to the market that the fed is serious about shoring up the dollar and tackling any hint of inflation (well, it is more than a hint now).

So higher rates would mean strong dollar, curb in oil prices and a reduction in inflation expectations. All those things would be a huge help.

Don't think it would impact consumer lending right now because how much of it is now going on? Would hurt an already wounded housing market, though.

Has Danger to U.S. Economy 'Diminished'? : NPR

Real Time Economics : Oil Bubble? The Debate Rages

Are oil prices in a bubble? Methinks yes, sorta. I believe much of the problem is fundamentally a demand one, there is too much of it. And as a supporter of the peak-oil theory, I think everything we do on the supply side will be a temporary fix and not really worth the trouble. Indeed it will cause more trouble (climate change) and will hurry the draining of existing oil (new supplies lower prices, increases demand, and consumes whats left of the oil at faster rates.)

So where is the "sorta"? Well, I think some speculation and the low dollar/interest rates have fueled (pardon the pun) some irrational exhuberence. It maybe is not leading up to a dot-com style bubble, but a bubble none-the-less.

Here is my thought on what will pop the bubble: interest rates finally hit bottow and the Fed begins to raise them to combat inflation and support the dollar. That's my call on how the price of oil may drop. We'll see....

Real Time Economics : Oil Bubble? The Debate Rages

War on savers

Inflation is eating away at your money faster than a normal savings plan will grow it. Bottom line, it now costs money to save. Seriously, how did we get into this mess? (That's a rhetorical question).

If increasing savings in the US was difficult before, it is actually counterproductive now. There is actually no point to save. This is great news for fans of foreign deficits

Here's the money quote on how depressing the situation has become:

"As I pointed out last week, one of the few things you can do easily to avoid this trap (inflation) is to buy some of your family's non-perishable foods, like pasta and canned foods, ahead of time and in bulk. Their prices are rising much faster than your savings are growing in the bank."

Fed Move Is Tough News for Savers

That '70s Show - WSJ.com

In no way am I begging for a recession in 2008. But if we have one, however bad it may be, it surely won't be as bad as anything resembling the "s-word".

I'm all for growth, but I don't feel like that is the Fed's main responsibility, price-stability is. Sacrificing price stability in favor of growth will leave us with neither.

And it is not just me highlighting this, but also people way smarter than me.

That '70s Show - WSJ.com

Here's the money quote:

One lesson of the inflationary 1970s: A country that will not accept the possibility of a small recession will end up having a big one when the politicians at last respond to the public's complaints about inflation. Instead of paying the relatively small cost of a possible recession, the public pays the much larger cost of sustained inflation and a deeper recession. And enduring the deeper recession is the only way to convince the public that the Fed has at last decided to slow inflation.

Interest rates are down... but who's lending?

Paul Krugman wins the "downer-of-the-day" award... but he's got a point, this current credit crunch sucks worse than a bunch of the previous ones.

Which to my mind raises a question about the Fed... what is the use of cutting interest rates of no one is lending? The current economic malaise was caused by too much cheap money, not a need for more of it.

Please get fiscal policy out of the way...

I'm going to agree with Mankiw on this one, the current mess is no place for fiscal policy. I don't have high hopes for the current stimulus package.

I would even go one step farther and suggest that the Fed's monetary policy isn't helping much either.

Hepped up on goof-goof

ok.. fantatic, markets are shooting up. I hope the crash doesn't hurt so hard when the high from the interest rate cut wears off....

BBC NEWS | Business | US rates cut to avoid recession

Fed and a new paradigm?

As usual, the Big Picture succinctly puts into words what many of us may be thinking... is it really the Fed's job to be bailing out the markets? I'm hurting as much as the next guy with the markets tumbling, but it strikes me that much of the cause of the current pain is due to too much meddling in the past (excessive policies on both the monetary and fiscal fronts). Therefore, I'd be willing to go through some pain now to ensure smoother, more sustainable growth in the future.

We're had at least two bubbles in less than a decade... tech and housing (and I suppose an emerging market bubble that is biting me in the ass right now). So maybe this is the new paradigm; in search of increasingly more rapid growth, we need to also be prepared for more frequent bubbles and their subsequent bursts.



The Big Picture | Is the Fed a Paper Tiger?

Bernanke Backs Calls for Quick Action

Federal Reserve Chairman Ben Bernanke threw his support behind quick and temporary tax breaks, combined with the possibility of "substantive" rate cuts, in testimony before Congress.

Isn't that the formula that got us into this mess to begin with? If previous growth wasn't sustainable, with this new "stimulus package" aren't we just starting down a new path of unsustainable growth?


Bernanke Backs Calls for Quick Action