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Bernanke to print more money

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 thenelli01
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http://www.npr.org/blogs/thetwo-way/2012/09/13/161072724/all-eyes-on-bernanke-will-fed-introduce-new-stimulus

He is delaying the crash and making it worse. Expect gas prices to reach $5 maybe higher and higher food prices as our dollar drops in purchase power. Of course we have a Roosevelt admirer and great depression "expert" during the worst economic situation in our history.

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Bernanke seems to be panicking. Right now -- since we're in a de-leveraging phase -- there's no appetite for loans. So, the Fed is pushing on a string. The cash mostly piles up: nobody is really eager to put it anywhere. In the end, it reluctantly flows into financial assets (including speculation in commodities), with very little impact on the "real" economy.

There's a false meme going around that the Fed is doing more than normal monetary stimulus because the government is not engaging in adequate fiscal stimulus. In truth, the natural inclination in the economy right now is credit deflation, and the Fed is barely able to fight this.

A few weeks ago, fund manager John Hussman asked: What if the Fed threw a QE-3 and nobody showed up? Nobody knows if it will be QE-3, or QE-4 or what... but one of these times, even the appetite for risk assets is going to end. All the major governments are blowing together: the Fed, the ECB and even the Chinese. So, what will they have for an encore?

I imagine Romney winning the election (I don't think he will) and doing almost the same things as a Obama -- with a few extra tax-cuts and some tweaking of regulations, but making some noise about free-markets. Then, sometime in the next 4 years, I imagine the stock market shrugging and taking another plunge. Then, I imagine people going "Once again, free-market policies caused a crash". At least there's something positive in an Obama win.

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Come on, no inflation will result from this at all. Anyone who has predicted inflation since 2008 and put their money where their mouth is has been severely burnt. What is different this time?

EDIT:

I need to clarify. Inflation will not rise above the "normal" 2% level because of this. If it does the Fed will apply the brakes by destroying the printed money (ie using the assets purchased to buy back the cash and then deleting it).

Edited by Kate87
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Come on, no inflation will result from this at all.
I agree. The CPI is unlikely to be much different as long as we continue to be in a massive credit deflation in the private sector. The one sector Bernanke is managing to impact is: financial assets, like the stock market.
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I'm not predicting the CPI to increase, I'm predicting food and gas prices to increase.

I've been envisioning a sort of stag-deflation: certain commodities rally and make some things cost more (based on lack of investment in the discovery of said commodities, or yeah, some more large-scale speculation) yet no wage leverage leading to no wage inflation, meaning no "overall" inflation to speak of--all +/- a few percentage points based on random events.

And I don't expect a "crash" which entails inflation but rather a long "ooze" entailing a long period of real-terms DEflation. Japan is our prototype here.

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Come on, no inflation will result from this at all. Anyone who has predicted inflation since 2008 and put their money where their mouth is has been severely burnt. What is different this time?

EDIT:

I need to clarify. Inflation will not rise above the "normal" 2% level because of this. If it does the Fed will apply the brakes by destroying the printed money (ie using the assets purchased to buy back the cash and then deleting it).

Depends how you did it. If you bought gold at $800, you would be feeling pretty good right now.
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I agree. The CPI is unlikely to be much different as long as we continue to be in a massive credit deflation in the private sector. The one sector Bernanke is managing to impact is: financial assets, like the stock market.

I'm not predicting the CPI to increase, I'm predicting food and gas prices to increase.

I've been envisioning a sort of stag-deflation: certain commodities rally and make some things cost more (based on lack of investment in the discovery of said commodities, or yeah, some more large-scale speculation) yet no wage leverage leading to no wage inflation, meaning no "overall" inflation to speak of--all +/- a few percentage points based on random events.

And I don't expect a "crash" which entails inflation but rather a long "ooze" entailing a long period of real-terms DEflation. Japan is our prototype here.

I agree with you Matt, but food and energy prices (and other commodities) are notoriously volatile, and will both surge and plunge with or without QE. Read about why "core inflation" is used by economists worth listening to: http://krugman.blogs.../26/core-logic/

That was written in 2010 and the post ends with Krugman predicting Japan style deflation. At that same time you had the whole right wing, including people like Schiff and other Austrians, predicting hyperinflation. Hyperinflation was consistent with their models. Japan style deflation is only consistent with a Keynsian liquidity trap style model.

What models are you using to make your predictions? And what features of that model lead you to (belatedly) predict Japan style deflation when the printing presses are in full motion?

Edited by Kate87
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They started "the printing presses" about five years ago now and the folks predicting inflation got their butts kicked in the marketplace (except for gold, which made its own wind so to speak).

I've predicted flat inflation (or slight real-terms deflation) since the crisis started fwiw. Ten year t-bills are at 1.8% or something so the market agrees with me.

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Most people who predict hyperinflation use some variant of the "Linear Quantity Theory of Money" and the concept of a "Multiplier" being used by banks. Both these ideas are false on inspection. A further complication is the way the term "inflation" is used in multiple senses.

Reinhart and Rogoff have explored financial/banking crises where the government responded with monetary stimulus, lowered rates, and credit creation. There are historical precedents where this has lead to very high price-rises, but other cases (slightly more numerous) where this has led to a second drop in asset prices, major write-downs on loans (basically credit deflation).

The typical interpretation of the Quantity Theory of Money takes the view that there are two important things: on the one hand, there is money; and, on the other hand there are goods traded. This model leads people to think: more money is being created, so prices of goods will go up.

In fact, there are issues with both sides of that equation. On the money side, money can be increased while credit is being reduced, and vice versa. [This is where the multiplier-theory prevents people from pulling back the curtain and understanding the actual process.] On the goods side, as the Austrians have long explained, even if new money is created and goes into goods, it does not go into all goods evenly. This was pretty clear during the housing boom: prices of homes were shooting up while prices of many day-to-day goods were rising slowly. The same thing happens in a credit-driven stock-market boom. Again, on the money-side, credit gets created as a layer over "high-powered money", and in today's economies it is the driving force because it is a much larger aggregate. However, after new money flows into assets causing a boom, one can have a crash in those types of assets when expectations are disappointed. When that happens, if there is a lot fo credit being backed by those assets, the creditors often end up writing off the credit. To the extent that credit is a money-substitute, this means a destruction/deflation of money-substitutes.]

[Ludwig von Mises criticized the Linear Quantity Theory of Money, but many Austrian-sympathizers still continue to apply it.]

At this point, it seems that prices of regular day-to-day goods -- food, energy, housing and health-care -- will not rise much above the historical norm. Low interest rates on "safe" assets are pushing the marginal savings into stocks. So, that is one place where we have an asset boom. Precious metals like gold and silver are good in times of uncertainty: these can shoot up in times of high deflation just as they can in times of high inflation. This seems ridiculous if one uses the Quantity Theory of Money. However, hugely deflationary episodes often come by a bust of an asset bubble. After an initial shock, people start to look for alternate assets -- like precious metals. [Of course, there is a "goods/usage demand" for these as well, which can move in the opposite direction if Indians start making a virtue of cutting back on their trousseau's gold content.] Other commodities -- like copper or oil -- are not primarily seen as stores of value; so, I doubt these will shoot sky high unless China pulls off what appears to be impossible.

Obviously these are all just best guess. How these things unravel is mostly a political question. This means we can predict it only the way we can predict history: where we can almost never predict a major turning point when a large proportion of the populace is convinced that they have to change direction.

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No inflation? You should swing through a grocery store. My ice cream got demoted from 1/2 gallon to 1 & 1/2 quarts, bacon from 16 oz to 12 oz, and the less we say about a bag of chips the better. A $100 at my local Meijer's gets less mileage than it use to, that is for sure.

No, it's not hyperinflation and I'm not ready to hit the panic button yet, but we are in a depressed economy where deflation should be going on so the visable increase in costs and the way they are passed along is alarming. Don’t even get me on a role about the trucking business I might add.

Just because we haven't hit banana-republic levels yet doesn't mean we are not experiencing inflation.

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No inflation?
Price do go up every year, as they have done for decades. According to the government, the $100 you spend today would have bought you about 30% more 10 years ago, in 2002. That's about 3% price rise a year. If we assume that prices are actually rising (say) about 5% each year, that's a 60% rise in ten years. Anecdotal evidence shows that prices have not risen much more than that. They will likely continue to do so.
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Sprial, the best way to get an "eyeballing it" view of overall systemic price inflation is to look to very complicated things like cars, industrial machines, or very simple services you contract out (e.g. your maid or gardener--although you need to back out merit raises and the like).

Things like food can be subject to all sorts of dynamics in terms of supply, and looking at things like ice cream is difficult since now days people buy the exotic organic ice-goat's milk hand made by hippies in the mountains of Virginia--because its way cooler than plain old "ice cream" we used to buy years ago. I suspect the smaller portions/same price is the ice cream companies finding out that consumers won't notice and will pay the same. We have an epidemic of obesity here in the USA so its hard to find solid ground when you're talking about food prices: we're so far beyond basic subsistence that prices are tied much closer to people's whims and marketer's skill.

So if you look at things that way, you'll probably find a little bit of inflation, yes--but not of the kind that has any meaningful effects on anybody's lives...

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You are both right, some of that is based on market factors or regulation.

But I'm still buying less with my $100. Combine that with the fact I know that the current inflation index of 4 to 5% during a depressed economy is poor, but worse it has been skewed lower since the 90’s when Clinton’s Treasure Department and Greenspan changed how the basket of goods used to calculate inflation was changed to use “substitution of goods”. If I remember it right, it was done to “properly reflect buying trends” but Boskin from Bush Sr.’s administration and Greenspan got the debate started so entitlement programs tied to inflation could have their growth and future obligations slowed since annual inflation reporting would be lowered.

Like I said, I’m not claiming the sky is falling but I do think it is worth keeping an eye on it. Poor inflation reporting + uncontrolled printing + record spending = money returning to the intrinsic value of what it is printed on. The only real issue is the speed.

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You are both right, some of that is based on market factors or regulation.

But I'm still buying less with my $100. Combine that with the fact I know that the current inflation index of 4 to 5% during a depressed economy is poor, but worse it has been skewed lower since the 90’s when Clinton’s Treasure Department and Greenspan changed how the basket of goods used to calculate inflation was changed to use “substitution of goods”. If I remember it right, it was done to “properly reflect buying trends” but Boskin from Bush Sr.’s administration and Greenspan got the debate started so entitlement programs tied to inflation could have their growth and future obligations slowed since annual inflation reporting would be lowered.

Like I said, I’m not claiming the sky is falling but I do think it is worth keeping an eye on it. Poor inflation reporting + uncontrolled printing + record spending = money returning to the intrinsic value of what it is printed on. The only real issue is the speed.

The Billion Prices Project is a great case study in how hard it is to accurately track inflation with any kind of accuracy. I got a little excited about this until I thought it through: simply scraping every price on the Internet doesn't tell you how many people buy which thing and how many they buy. Not knowing that could make the study wildly inaccurate.

In short, I'd give any of these measurements a +/- 5% error bar in the short run. Fortunately inflation at this level isn't likely to matter too much to you.

Inflation of the dangerous sort will be apparent without sensitive instruments to listen for it.

Attempting to predict its imminent arrival may be possible using a ton of science, but as in large Earthquakes--in which small tremors may mean nothing whatsoever--trying to measure "microinflation" very well may not help at all.

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... ... the Fed will apply the brakes by destroying the printed money (ie using the assets purchased to buy back the cash and then deleting it).
This may be years, even decades in the future, but what is simple in theory is not simple in practice. Invariably, the Fed will be faced with a choice at a point where it is loathe to raise interest rates by flooding the market with paper. It will then postpone acting. If some large part of the economy takes on a new life -- e.g. domestic energy and domestic manufacturing -- the Fed might feel it has the leeway to raise rates. Otherwise, the natural reacting of people following poor principles is to double-down till they can no longer do so.

"How did you go bankrupt?"

"Two ways. Gradually, then suddenly."

If policy-makers keep doubling down, the U.S. can probably go on for years, with the stock market crashing and recovering while the real economy experiences very slow growth, and entitlements and debt grow faster than GDP. The next time it is desperate, the Fed could announce that it will buy something other than MBS: some type of special program for business-loans; the next time, it could emulate the Japanese central bank and start buying stocks.

The point is: unwinding is unlikely to be easy because the Fed would have doubled-down a few times since now and then, and because that means that unwinding will be politically painful.

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