The Old Monster is Back

Since the Fed is now worried about Inflation — behind the curve as usual — I pulled this comic from Germany, circa early 2008:

Inflation_monster

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  1. Popo commented on Aug 5

    If they were actually worried about inflation, and not blowing hot air — they would have raised rates from these historically low levels. Clearly, the Fed is much more worried about deflation as it precipitates bank failures.

    The Fed’s statement today is really good old-fashioned C.Y.A. They know their low rates aren’t good for inflation — but at least they can say they were “worried about inflation” when fingers start getting pointed.

  2. JustinTheSkeptic commented on Aug 5

    Popo, what your suggesting sounds right, but how much is the enormous uptick in money supply going to push inflation? Will it make it into the system before the present deflating homes and commodities? Does anyone have some timing models available?

  3. Pat G. commented on Aug 5

    The FED continues to expect inflation to moderate then said “the inflation outlook remains highly uncertain”. Sooo, which is it? The last time consumer prices jumped as much as they did in June, year over year was in 1981. The FED rate back then was 16 not 2.

  4. KnotRP commented on Aug 5

    The Fed is trying to adjust the economic-body temperature by putting the interest-head in the oven to raise the average total temperature, which is being driven lower by the housing-feet being in the icebox.

    It’ll look like a comfortable average temperature,
    but that’s what we get when academics run real
    economies from a model in their ivory tower computer.

  5. techy commented on Aug 5

    such smart comments about what FED is doing may not be right.

    how about some suggestion on what may be the right approach.

    i think the FED is doing the best it can to balance the mess they have inherited.

    if OIL/energy/commodity price can be kept in check, i will pay more attention to economic growth than inflation.

  6. me commented on Aug 5

    Maybe I’m missing something. Deflation just seems inevitable. So why chew up what little savings there is with inflation?

  7. ConstitutionalBubba commented on Aug 5

    >>>>how about some suggestion on what may be the right approach.

    How about we return to constitutionaly correct model where a monetary dictatorship isn’t wagging the other three true and elected branches of government.

  8. Ravi Masand commented on Aug 5

    Given the gross mismanagement of our economy during the past decade – in both the public and private sectors – the only way out is to further debase our debt. That is the essence of the Fed’s game. To gradually, and stealthily, inflate our debt away. “Strong dollar”, “inflation control” etc are merely for public consumption. In today’s United States inflation is salvation.

  9. KnotRP commented on Aug 5

    The right approach?

    Real incomes will not be rising, so currency devaluation will not produce a wage-price spiral, so the debt will not be retired. It will default.

    Would you like a dead currency after your plate of bankruptcies, sir? It’s wafer thin….

  10. JustinTheSkeptic commented on Aug 5

    BR off subject but I have to say it: how the hell can CNBC claim that Cramer was on-top of the bank and credit problems when we all know that he was pumping their stocks why too late in the game??? Why doesn’t someone call him and CNBC out on it?

  11. SteveC commented on Aug 5

    The final K wave we’re in brings mostly deflation, with little bubbles of inflation. The Fed is always fighting the last war.

  12. VJ commented on Aug 5

    They must be living in those castles in the clouds:

    FED FEARS WAGE SPIRAL THAT IS LITTLE IN EVIDENCE

    The surges this year in oil and food prices could not have come at a worse moment for the typical American worker, who has not had a raise to speak of in this decade. Workers’ leverage is gone. Companies are not creating jobs. Unions that negotiated big wage increases in the 1970s are shadows of their former selves. Cost-of-living adjustments, once commonplace, have disappeared. And the movement of jobs offshore, or the threat of it, has conditioned workers to not even ask for a raise, fearing they will join the millions already laid off.

    Still, the Federal Reserve’s policy makers – its governors and the presidents of its regional banks – are convinced that wage pressures could emerge unexpectedly. That concern, and the idea that wage pressures could lead to yet higher prices and a rising inflation rate, showed up in half-a-dozen interviews with policy makers over the last week.

    NYTIMES LINK

    .

  13. Eric commented on Aug 5

    Justin, I wonder the same thing myself. Consider that some pundits will spend one heck of a lot of their limited existence on this planet organizing every utterance by John Thain about Merrill’s capitalization. But the notion of exposing a guy who wields influence over tens of thousands of individual investors is dismissed as just a waste of precious time. Nobody will ever expose Cramer. Too many people make too much money off of Cramerica, and even the ones who don’t want him as an enemy.

  14. lurker commented on Aug 5

    I think we better start inflating real people’s wages in a hurry (lord knows the CEOs have been inflating their own pay for worse and worse performance for years!) so people can pay their mortgage payments or the banks are not just going to be holding bad paper, they are going to be owners of ghost towns…and we sure don’t want that to happen in an election year, do we?

  15. leftback commented on Aug 5

    Deflation T-Rex is going to eat the Old Monster alive…
    No wage pressure = no inflation spiral.

    All assets are going down. Looked at JGB yields lately?
    That’s where we are going. and that’s if we are lucky.

    That Ablin guy was on TV telling people to buy junk bonds???
    Spreads are going to blow out; BKs and defaults are rising.

    Even Cramer was recommending selling into this rally..

  16. ilsm commented on Aug 5

    They gotta inflate away the debt and SS.

  17. RW commented on Aug 5

    It’s really kind of neat the way the modern definition of inflation only considers increasing prices significant when they can be attributed to worker pay and that otherwise monetary policy and credit expansion can just rock on; I mean it’s almost as if it were invented by a capitalist isn’t it …oh wait.

  18. leftback commented on Aug 5

    Anyone got any thoughts on the revisionists out there who said “this time it’s different” in the oil market and now are saying “well we always knew it was a bubble”..?? I am thinking of a specific NYT economist.

    Mainstream media is now reporting the big fall in crude oil futures….down $27 – this despite KRUGMAN stating there was NO SPECULATION in the market. He is a bright guy but sometimes he can be a complete tool for no obvious reason.

    Unfortunately by the law of MSM contrarian indicators, this means we will see a rebound in oil in the next few days. Surely the $ strengthening (based on Fed “tightening”/jawboning) is done unless ECB eases, which I do not think will happen.

    Oil will continue to decline into next year due to demand destruction but it will fluctuate, and TA suggests we are due for a bounce ….. but the peak is in for this cycle, IMO.

  19. Shane commented on Aug 5

    The final K wave we’re in brings mostly deflation, with little bubbles of inflation. The Fed is always fighting the last war.
    ——
    Ummm, sort of. Fiat currencies generally end one of three ways, debt default, hyperinflation, or conquest.

    Read Bernanke’s 2002 talk, the whole thing, it’s a blueprint for what they are doing today.

    The free-market outcome of this mess is massive deflation, however the US currency is hardly in a free-market.

    Pick your poison:
    Deflation: Potential for massive social unrest, massive deflation, setup for political changes, and big recession.
    –solution: More gov. programs to solve the problems leading to more problems

    Inflation: Try to re-inflate to combat the deflation caused by massive inflation.
    Risks: Hyperinflate, political changes, war.

    The real solution:
    1) Abolish the Fed (trying to predict and manage an economy is about as useful as trying to predict and manage weather). Actually, I apologize for insulting any meteorologist, they do a much better job.

    2) Abolish fractional reserve banking.
    2a) As far as regulation on banks, the only regulation they need is 2! Without FRB, most of this crap wouldn’t have happened! Loan money you actually have vs. I’ll loan you $100 for every $1 I have. Wow what a concept. De-leveraging is a !@#!@.

    3) Take our medicine. It’s not pleasant, nor fun, but sometimes the system needs to be purged.
    3a) For the love of all that’s good, get Congress to stay out of the mess, let the free market-true free market not this quasi-capitalist/socialist system- work.

  20. SteveC commented on Aug 5

    Another idea..The US goes to a Fed similar to Europe with single mandate.

  21. maynardGkeynes commented on Aug 5

    Inflation will result from dollar depreciation.

  22. Shane commented on Aug 5

    “No wage pressure = no inflation spiral.”

    Not to be insulting, but I swear some people need to go back to school. Where did this BS get started about no wage pressure = no inflation spiral.

    It is called a REDUCTION in the standard of living. What do people think . . . we’re going to have inflation so we can keep living the same lifestyle??

    My goodness . . . 1970 american’s spent around 14% of their income on food, it is somewhere around 7% today. Meaning food prices could easily DOUBLE without any meaningful wage increases.

    Inflation is ALL about the money supply, it has NOTHING to do with wages. Wages do not come into play with inflation! There is NO SUCH THING as wage price spiral! They are the result rather than the cause of inflation.

    If Zimbabwe stopped printing money cold turkey, things would stabilize REAL quick, real fast.

    The Fed is pushing on a string. They are seriously concerned about the massive credit destruction in banking/housing. So they are trying to keep rates low and keep banks borrowing to offset the destruction. The problem is all the new money being created to take place of the old money is not going to the same location as the old money. It’s going into commodities. While oil is above the so-called inflation adjusted highs, the vast majority of commodities are not.

    So in the end, the Fed is trying to re-inflate, without inflating, and that is a lost cause.

    They run the real risk that if they open the spigots too much, they will lose control, and if they don’t open it enough many of their banking buddies go belly-up.

  23. leftback commented on Aug 5

    Shane:

    Yes. I know. “Inflation is always and everywhere a monetary phenomenon…” and it’s about the amount of credit and the velocity of money, and prices are simply a representation of what has happened in the past…

    But if I might interject – if you had lived in the UK in the 1970s you would surely understand the regenerative effect of the “wage-price cycle” is very powerful in amplifying inflation. As you point out this is only true under a permissive regime that is ready to print money. Like Zimbabwe. I am hoping we are smarter than that these days.

    BTW, Japan tried to prevent deflation but could not. Why should the US be any diferent?

  24. stormrunner commented on Aug 5

    >>it’s a blueprint for what they are doing today.

    It’s theory, not a blue print. After reading Pimco’s Mc-furball’s (gag) article on the “paradox of deleveraging/thrift” and the presumption that the Government should dilute the money supply backstopping the consumer in deflationary cycles, this is ludicrous aiding and abbeting of government sanctioned theft, followed by more theft, rape of your dollars purchase power via dilution. This is not economic management just plain old fascist fiat wealth redistribution. One can not inflate away debt if the holder of said debt receives only consumables inflation, followed by wage deflation or worse under/un employment

    http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2008/07/28/the-paradox-of-deleveraging.aspx

  25. Pat G. commented on Aug 5

    leftback:

    Your “wage-price cycle” will occur when corporations pass on expenses which have increased to consumers. So far most U.S. corporations have been eating them due to the poor economy but you can bet they’re coming.

  26. stormrunner commented on Aug 5

    >>If Zimbabwe stopped printing money cold turkey, things would stabilize REAL quick, real fast.

    Exactly the printers would actually have to produce something of real value in order to eat, other than “paper”. Our debt-note/credit expansion is in reverse we may not have been printing as much currency as in the Zimbabwe example but the “worthless contract” paper generation, previously fully convertible to the former debt-notes can’t be significantly behind and the previous holders of that paper have already cashed out for real tangible hoarding of productive assets making everything that much more expensive for those late to the party.

  27. leftback commented on Aug 5

    Pat G said:

    > ..”Your “wage-price cycle” will occur when corporations pass on expenses which have increased to consumers. So far most U.S. corporations have been eating them due to the poor economy but you can bet they’re coming…”

    But if the economy continues to weaken, how can producers pass through costs to consumers who are not buying? Outside of food there is not going to be much opprtunity to do so.

    This is so NOT the 1970s, this is a different animal. The only thing that will end up being expensive is credit…..

  28. KnotRP commented on Aug 5

    > Your “wage-price cycle” will occur when corporations pass on expenses which have increased to consumers.

    Not this time. This time, corporations will eventually be forced to raise prices on a consumer with flat wages,
    which will cause consumers to reduce their shopping
    list to keep it under budget.

    Unless we go to montly stimulus checks, which would probably finally cause our lender/currency-peggers to flee…

  29. rickrude commented on Aug 5

    well, all that tough talk worked again today,
    slamming the commodities and spiking the financials. Good work, Hot air without substance worked atleast for another day

  30. Stuart commented on Aug 5

    One of these days it will be refreshing to hear someone in the MSM comment that oil prices do not cause inflation. Someday. Poor ole Milton.

  31. techy commented on Aug 5

    i have a feeling that this rally may continue for few more days unless of course we get some bad news from financials or oil goes up 5%.

    but there is a catch, this rally started with financials which are based on short covering forced by the sec…and as far as i can feel, financials are not done writing down unless housing recovers…which is not happening till atleast next year(or another 10% down).

    so long term i am still bearish…but short term, is it possible we can get 10% upmove like it happened march-may?

  32. Stuart commented on Aug 5

    RE: Bill Gross comments below. No kidding…… They actually stressed alot of the economic slowdown today in their comments, acknowledging much of the obvious. Credit is being destroyed, obliterated. In this environment they dare not restrict it further, else GD2 on its way. Not a chance in hell they risk that, especially before an upcoming election or anytime shortly after unless Ben wants to set a landspeed record for getting his butt canned by the new guy, whomever that may be. C’mon folks, lets get real here. We all know what would happen to home affordability if they raised rates and what the repercussions would be when we’re facing tsunami of other credit woes in Alt-A, prime, CC, HELOCS, Auto, student loans….etc etc etc.. Raise rates, go for it. Our Grandkids’s grandkids would be still paying for it. Sometimes I wonder how some of these talking heads make it to TV. They must know somebody.

    CNBC
    Gross: Fed Can’t Raise Rates
    Tuesday August 5, 3:57 pm ET

    The Federal Reserve’s decision to hold the line on interest rates was the only move the central bank could make considering the state of the US economy, PIMCO chief Bill Gross said on CNBC.
    Reacting to the Fed’s move to hold its key interest rate at 2 percent, Gross called talk of rate hikes “comical.”

    “We’re in a recession. When has the Fed ever raised rates in a recession?” he said. “Unemployment is headed toward 6 percent, mortgage rates on home buyers are at 7 percent, and these guys want to raise rates?”

    Gross said the central bank has a responsibility now to provide liquidity.

    “We’re in an asset deflation of near-historic proportions. That calls for the use of the government’s balance sheet and not for the Federal Reserve to raise interest rates,” he said. “To the extent that the central banks now must prevent that deflation, interest rates don’t go up, they go down.”

    However, Gross said the Fed cannot lower its key rate, but rather he called on central banks across the world to examine their monetary policy.

    “In the US, 2 percent is pretty much the floor. I think the Fed made that clear,” he said. “They’re going to provide liquidity in different forms and fashions.”

    As for investments at this point in the market, Gross advised against junk bonds and toward government-backed securities.

    “We want to stay under the umbrella to the extent that we have an umbrella that shelters large banks and to the extent that we have an umbrella that shelters the agencies, Fannie (NYSE:FNM – News) and Freddie (NYSE:FRE – News), that’s where you want to be,” he said. “Why mess with junk bonds? Let’s stick to high quality and stay under that umbrella. Let’s stay dry.”

  33. MarkTX commented on Aug 5

    To anyone in the US who gives a FUCK

    The FED/GOV just keeps raping you.

    Sit back and enjoy!!!!!

  34. 7Ty Eight commented on Aug 6

    Yupp, seven year itch, what goes around comes around, Go Go Greenspanzilla, it’s those hey, hey ______.con pre-’00 bubble mania days all over again! Shall we play healthcare.con this time? Everyone needs a doctor sooner or later.

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