Who Are You Going To Believe

The CRB is breaking out to a new 2 year high this morning. Chairman Bernanke says there is a 0% chance of inflation. Who are you going to believe, Ben Bernanke or your lying eyes?

From INO.com


PJ said...

Tsachy, the US economy has entered a recession. Employment has declined for six months in the household survey and has lost 1.6 million full-time jobs in that time. Inventory increases are masking the GDP data, but that means bigger production declines and employment decreases soon. Housing prices have fallen for the last four months, almost 1% in the last month alone, and the decline looks to continue accelerating. New home sales are touching all-time lows.

Europe is also entering a recession, and China is tightening as their inflation is getting out of control. We know how that ends.

Soaring commodities is based on speculation about Bernanke's commitment to inflation. But Tsachy, I know these economists. Their models tell them that just saying you will produce inflation is sufficient to achieve all the benefits of actually inflating. Bernanke was hoping he could get a "free lunch" of Keynesian stimulus from talk with little action. It's not working -- it's backfiring in fact. He knows it. That's why he's so nervous. He's painted himself into a corner.

I think these commodity bulls are going overboard. It's really China that's been driving the commodities markets, and that's mostly speculative money. I think in January the commodity markets turn down sharply.

Tsachy Mishal said...

What if the US government lowered taxes to zero and the Fed printed the money to buy government debt? Would that be inflationary?

PJ said...

Yes ...

I don't disagree, the Fed can make as much inflation as they want, that's why I got out of my bonds two months ago.

But they'd be crazy to do it. And I really think Bernanke thought he could get away with bluffing.

He's still saying that he won't monetize the debt, i.e. he'll require banks to leave huge excess reserves on deposit with the Fed. I think he's being honest here.

What he's really striving for is higher leverage in the economy. I think his QE is a device to help banks circumvent their capital requirements - by counting excess reserves as capital they can essentially operate with infinite leverage.

Leverage is akin to inflation but different, because its effects are temporary. Bernanke is engineering a temporary spurt in asset prices followed by a crash.

He hopes this will revive the economy but it won't. He thinks our problems are temporary but they aren't.

So, when push comes to shove will he inflate? They'll probably try, but I think they're going to lag behind events.

Tsachy Mishal said...

The only thing that is going to stop this money printing/ deficit spending cycle is inflation.

Anonymous said...

I'm with PJ. Oil was $145 back in July 2008, and then look what happened. Chinese demand is not sustainable. Their model is based on build the supply (factories) and the US will eventually provide the demand. Until the factories are finishing, the process of building them itself provides demand (investment boom), within China and for the commodity exporters. But what happens when all these factories are finished and the US demand doesn't materialize? Then the whole house of cards comes tumbling down.

The government has made enormous loans to build these factories, and those loans will not be paid back. But making those loans is effectively printing money. Paying the loans back would "unprint" the money. But if the loans can't get paid back, then the money will not be "unnprinted", but rather lingers in the economy until removed by taxation. When people realize how much bad debt has been created, there is going to be hyperinflation in China and a collapse of the yuan as hot money tries to get their money out of the country. The investment boom will come to a sudden stop and with it the commodities boom, and when the commodities boom stops, the Australian housing bubble collapses, etc, etc.

The ultimate solution is for the Chinese to reorganize their economy so that demand comes from their own consumers, but that reorganization will take many years. In the meantime, another wave of deflation is headed our way and the only thing that will stop it is far more expansive fiscal policy than what we have now and high protective tariffs.

We are back where we were in 2007 (or 1999), blithely sailing along as if the only thing we had to worry about was too much prosperity in our future, oblivious to the reef we're about to crash into.

PJ said...

Tsachy, private sector deleveraging can proceed very rapidly in a declining economy. There's only $900 bn in currency in circulation, so you have to print a lot of money to inflate if private debt starts declining by $3 trn or $5 trn a year.

Bernanke knows that unlimited currency printing will spark a flight from the dollar and higher interest rates, leading to more defaults on mortgages, commercial real estate, and leveraged companies. He won't be aggressive at currency printing.

I think the risk of credit defaults is what will limit matters. In Europe, the imminent risk of sovereign default is triggering austerity.

So higher rates will stop it, but they need not be driven by inflation.

Anonymous said...

Real inflation is nil thru economies of scale. You'd need $200 oil to see any real inflation. Last time wheat and oil saw their highs, pizza and the mcd dollar menu were still the same.