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Schizophrenia
still reigns at the Fed as policymakers attempt to head off an inflation
that, statistically speaking, is almost nowhere to be found. In fact,
inflation has fallen by more than half since 2007 if you measure it the way
the Fed prefers to, using a price index of personal consumption expenditures.
What is the diligent monetarist supposed to do? While some of the Fed
governors see the glass as half-empty and want to keep interest rates low,
their delusionally sunny colleagues want to tighten because they evidently
believe all of the twaddle we’ve been reading about how the economy is
in the throes of a strong recovery. Consider the following headlines
from Google’s business-news section yesterday afternoon: “Bets on
Growth Buttress Stocks” (Wall Street Journal); “Oil Surges
to 17-Month High on Signs of U.S. Economic Growth” (Bloomberg):
and, “10-Year Yields Hits 4 Percent on Signs Economy Picking Up”
(Reuters). To borrow a line from Goebbels, if the news media keep
trying to mislead us with stories like these, eventually we will come to
believe them.
Or
will we? It’s one thing for the Wall Street Journal et al.
to get all stoked about the supposedly robust pace of the recovery.
After all, the Journal’s owner, Rupert Murdoch, didn’t get
rich telling readers the world was going to hell in a hand basket. But just
because Murdoch has chosen to be a cheerleader, rather than risk circulation
and advertising revenues by giving it to us straight, doesn’t
necessarily mean that we readers have to believe such bilge. Why should we
when there is no hard evidence of a recovery in the economic lives and
businesses that we see, and hear about, all around us?
Behind
the Headlines
Could
the newspapers simply be misinterpreting the signs? It would certainly
seem that way. To take the headlines cited above, we see oil’s price
surge as having absolutely nothing to do with a pick-up in demand. Rather,
the push toward $90 a barrel represents speculative excesses in the futures
markets, exacerbated by the reluctance of traders to take short
positions. How could they, when, on any given day, a terrorist with a
missile launcher could cause the global price of crude to double instantly by
scuttling a tanker in the Strait of Hormuz? As for “bets on
growth” pushing stocks higher, it is not bullish speculation that has
been driving up shares for the last 13 months, but rather a vast excess of
liquidity in the financial system. As for the rise in T-Note yields to
four percent, we seriously doubt this is being caused by competition from
expansion-minded borrowers in the private sector; rather, it comes from the
rising fear among lenders that they will be repaid in a currency whose value
looks all but certain to fall precipitously in the years ahead.
If
the central bankers truly believe that strong economic growth is about to
trigger inflation, why do they continue to hold the federal funds rate near
zero?
Rick
Ackerman
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Rick Ackerman
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