For those who may have missed it, the reference to Ben Bernake as the Ben Bernank, comes from the cartoon video from Wall Street Window called "Quantitative Easing Explained". Check it out, funny and sad. (embed below)
The Ben Bernank's basic plan is to fight deflation by creating inflation. Economists know that deflation is a notoriously difficult foe to battle, especially in the aftermath of a crack-up credit bubble. Japan has spent 20 years discovering this truth.
Today though we see some initial signs of success - oil prices are at 26 month highs and interest rates are headed higher. Good news, right?
Before providing some back-up support, lets recap the Ben Bernank's goal - inflation.
While the CPI has shown scant evidence of inflation we should remember a couple of things. First, the CPI is heavily weighted with a housing component (which has not been inflationary of late). Second, statistical "games" have been played with the index (over the last 2 decades) to keep the CPI level depressed as it influences a range of other inflationary adjustments through out the economy.
Even so we can expect to see measured inflation start to reflect reality in the months ahead...just as planned by the Ben Bernank.
Point of evidence #1: Higher gas prices
Americans are getting a sour holiday surprise at the gas pump, where prices are the highest they've been in over two years. They may even hit a national average of $3 a gallon by January.
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The national average for a gallon of regular gasoline was $2.958 on Monday, according to the Energy Department's Energy Information Administration. That's about 10 cents higher than a week ago and 32 cents more than a year ago.
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"The U.S. has never spent Christmas with a $3-a-gallon average price for fuel," Oil Price Information Service said. The national average now is the highest since October, 2008,
Higher oil prices have a number of effects. First, they cut into discretionary spending as people are forced to spend more on gas (like a tax). Second, they feed inflation into the rest of the economy. Third, they exacerbate the trade deficit, and with 1/2 of the trade deficit already due to oil imports this is not good news for the balance of payments (though it is good news for Saudi Arabia).
Point of evidence #2: Interest rates. Here we have a very interesting game being played. The Fed's goal in announcing QE2 was to try and keep interest rates low to help the economy (by making spending easier and saving less rewarding). But interest rates also have a component that reflects inflationary expectations. If people begin to expect inflation it will be reflected in higher rates, barring QE3, QE4, etc. This morning we saw 10 year rates on Treasuries go to 3.13% (a break, significantly of its 200 day moving average) and 30 years above 4.30%.
Higher rates do a few of things, not many of them positive for the economy
a) they increase funding costs for the federal government. The government has been able to keep funding costs low by issuing a lot of short term debt (interest rates lower), but this can quickly "go bad" if rates spike.
b) the cost of mortgages is related to the 10 year bond. As rates move up, mortgage rates could do too. Not great news for housing.
c) As rates on longer term bonds move up, their prices drop, causing paper losses for bond investors. This can trigger a spike as investors try to avoid further losses.
d) higher rates make existing floating rate debt more expensive to manage and discourage consumption (that is paid for by debt).
Point of evidence #3. Higher stock and commodity prices. The S&P500 is at its high for the last two years and commodity prices are very strong. Commodity price rises will eventually feed inflation into the economy (through for example higher grain prices, or higher copper prices). The interesting thing is that it does not look like commodity prices are being driven by demand/supply issues. Instead they seem to be being driven by the flood of money injected by the Fed. The same can be said for stock prices.
As the Fed injects money into the economy, it has to go somewhere (you sell your $1 million bond to the fed as part of the Fed's quantitative easing and now you have $1 million you have to put somewhere). If you are chasing returns you could put money into commodities or stocks - helping to provide demand to drive prices higher. (And with the overall economic demand being depressed, there is not much reason to invest in a new business - so money tends to go into "speculation").
The stock market issue is also interesting. In theory the Ben Bernank is trying to generate a "wealth effect" where people feel better off because their stocks have gone up in value and as a result may spend more. And yes, stocks have gone up, but curiously on horribly light volume (usually a sign of a questionable move). In addition individuals continue to take money out of domestic equity funds (every week for over 6 months) and insiders continue to sell at record rates when compared to their buys.
Point of Evidence #4: China is squealing. Because China continues to peg its currency to the dollar it has a few big problems when the US prints more dollars.
a) To maintain the peg it buys dollars (like it needs more) from its exporters and issues them with new Chinese currency, helping to fuel internal inflation. This is showing up anecdotallly in local food prices, which make up a big percentage of Chinese worker spending (as Wikileaks reported, even the man tipped to be China's next premier says don't trust government statistics).
b) The cost of imports of commodities is rising (as they are priced in US dollars, to which their currency is pegged), also generating inflation.
c) Chinese producers are having a hard time as their margins are squeezed by higher material and labor costs (local inflation), but at the same time they are having a difficult time getting price increases. This can not continue indefinitely.
Essentially one of the things the Fed is trying to do is break the peg with the Chinese currency by making the cost to China of maintaining it (internal inflation) to expensive to bear.
So it is working - Inflation is bubbling - Hooray!!!!
Well YES .... and No.
We are starting to see signs of inflation (and if you do the shopping in your house these have been evident for some time, especially with reduced package sizes), but unfortunately these signs will soon be evidence of the mess the economy is in.
As gas prices rise and interest rates rise and food prices rise, these will all act as brakes on real economic expansion.
Unfortunately the techniques being used to resuscitate the economy have done little to fix the underlying problems, primarily of course, too much debt.
Instead of forcing holders of bad debt to write off these debts as noncollectable, what the Fed and federal government have essentially done is to take this debt onto their balance sheets. The people who made the stupid loans in the first place get their money back, and the sheeple get fleeced.
So now the only way out is to try to blow up another bubble. Inflate, inflate, inflate, and hope that inflation will take care of the debt.
So for now the plan is working as planned. Whether it is working for you is another question entirely. And whether the Fed will be able to keep inflation "under control" is a question for the future. And whether you can get real consumption growth driven solely by more money, when debt levels are so high, is a question I think the Fed will find gives a different answer than they expect (or at least say they expect).
Remember the Fed has been wrong so many times we have lost count. They missed the internet bubble, they missed the housing bubble, they thought the subprime mess was "contained". Now they assure us that they will be able to control the inflation they are trying to create. I for one have lots of confidence (/snark)
Unfortunately the Fed had little choice. The alternative would have been real restructuring of the economy and real haircuts for the banksters and their financiers, and that was never in the cards.
Bonus: Joke of the week from Ben Yarrow on Twitter.
Freedom of Speech - priceless. For everything else, there's MasterCard