Thursday, October 07, 2010
The Fed's Inflation Target
Monetary economics guru Milton Friedman must be doing pirouettes in his grave following the Fed trial balloon that it is considering raising its inflation target from 2% to as much as 4% annually. Friedman never had much patience for Federal Reserve monetary policy maneuvers anyway, believing that its job could be better performed by computers programmed to maintain a stable currency. A steady hand and well known policy objectives would be in marked contrast to the Board's lurching overcompensations, pumping up the economy here, cooling it off there. Even the successful application of Federal Reserve tools by Alan Greenspan over a long tenure did not impress Friedman who was sure that eventually the Fed's policy biases would lead the economy in the wrong direction. The bursting of the stock market and residential real estate bubbles were two episodes that proved the wisdom of Friedman's observations.
If anything, the hubris of "Helicopter" Ben Bernanke is much worse. Fearful of deflation (a phobia resulting from his long study of the Great Depression), Ben has allowed the monetization of Federal debt, seeing the ocean of liquidity as the needed policy response to a chronically under performing economy and falling prices.
If only Ben had spent as much time studying the disastrous tenure of his predecessor Arthur Burns who assured that Jimmy Carter would only be a one term President. Burns chaired the Federal Reserve from 1970-1978, a period that spanned the Nixon recession (with price controls that failed to stem stagflation) and the Carter malaise. By the time Burns was removed and Paul Volcker was forced on Carter, with the mission of breaking inflation's back, no matter the economic cost, the stage was set for Ronald Reagan. His economic and tax policies combined with Volcker's monetary discipline to restore the US to a strong growth mode.
I think that the combination of Ben's monetary fairy dust and the Obama administration's total breakdown in fiscal discipline must result in inflation, perhaps as bad as the double digit inflation of the late 70's and early 80's. We might, in the worst case scenario, incur a period of hyperinflation a la some banana republic or Wiemar Germany. If that happens, only precious metals and disciplined currencies (Swiss Frank?) are safe places for your savings. Even equities will not be able to keep up.
It doesn't help that Treasury Secretary Geithner's response is to talk the dollar down and lecture the Chinese about currency policy. Right now, dollar boosting and a commitment to the soundness of our currency should be one of the foundations of our economic policy. But this gang that can't shoot straight wouldn't have a clue about that.
In fact, Obama's every instinct on economic policy seems wrong. We should be spending less and taxing less, not spending more and taxing more. We should be doing everything we can to expand international trade, not berating corporations about outsourcing. We should be making it more profitable to do business, not adding regulatory friction to every imaginable business transaction. And so on.
The Fed should have one objective, currency stability. It was a mistake for Congress to add the objective of maintaining econmoic growth to the Fed's burden.
The Dems will pay a heavy price on November 2nd but unimaginable damage has already been done, and conservatives can only reverse so much with Obama holding the veto pen. Still you have to start somewhere, and this will be a good step. It looks to me now that the GOP has about an 85% chance to win control of the House, and I think the Senate is coming in just about even. If it's 50-50, the Dems will still control since Biden has the tiebreaker. So I still think the GOP is only a 40-45% chance to control the Senate. That's close enough to give Progressives the willies. I'm having some fun with them, leaving comments on my buddy Mark Kleiman's blog site, www.samefacts.com.
--------------------------------------------------------------------------------
When Tea Party candidates upset a number of establishment Republicans in various primaries, it should have been expected that these relatively untested candidates would make some amateurish mistakes during the general election campaign. Sure enough, we have seen Carl Paladino and Sharon Angle make some whoppers (including today - what were you thinking Sharon?) And of course, O'Donnell has a lot of interviews on the public record that are fodder for opponents.
As these things happen, the traditionally liberal media (including the Associated Press), desperate to see things turn around, will publicize these faux pas even as they hide and protect their favored candidates from similar scrutiny. While some voters will be put off by these miscues, most have already decided whom to vote for by now. As the Dems pour on the most vitriolic attacks and outright lies about their opponents, they are having the ironic effect of galvanizing support for Tea Party amateurs. This is why you see GOP momentum building again.
Dems are damned if they do and damned if they don't. Take the subject of debates. I think Andrew Cuomo is smart not to debate Paladino. He has a big lead and can only lose in the expectations game. However, it does feed the overall impression that he is spending the campaign in hiding. On the other hand, we see what happens when a Blumenthal debates McMahon. Aside from the fact that McMahon won on points, any such debate will usually make the non-establishment candidate look more acceptable than (s)he has been portrayed, and make it easier for people who agree with her policies to vote for her.
As Sean Hannity would say, 26 days to Independence Day.
---------------------------------------------------------------------------------
My hat is off to Governor Christie for crashing the tunnel project. It's about time a public official acknowledged that there is a project that we simply can't afford and chose to cut our losses rather than just raise taxes or worse, kick the can down the road by floating yet another bond issue.
By the way, we can't afford Obamacare either. It's about time Republican candidates began talking about that fact. More than 60% of the electorate agrees by the way.
-----------------------------------------------------------------------------
Another prediction - The Republicans will regain control of the New York State Senate.
Meanwhile, has anyone seen ad number one from U.S. Senate candidate Dioguardi? Is D'Amato sabotaging his campaign too? They are making it all too easy for Gillibrand to return, basically providing her mentor Chuck Schumer with a second vote.
-----------------------------------------------------------------------------------
On Sept. 29, we sold 100 shares of Lubrizoil (LZ) at 106.10, a nice gain from the 30.50 we paid on March 10, 2004. On October 1, we bought 100 shares of Goldman Sachs Preferred (GS.PR.D) at 21.44 for the IRA. On Oct 4, we bought 800 shares of FSI International (FSII) for 2.73, a value buy. Today, we bought 100 shares of FLIR at 25.01, a zero buy.
As per our opening item, the market is moving with gold and oil, and in direct opposition to the dollar. In other words, equities are being traded as an inflation play. Another interesting point is that the public has been largely out of the market, and is not interested. When was the last time somebody gave you a stock tip at a cocktail party (not counting other redwavemusings readers)? I'll bet Cramer's ratings are down too. When you see stock mutual fund inflows increasing (and bond fund inflows decreasing) and start to hear more chatter about stocks, that is likely to be a sell signal. The public is always wrong.
If anything, the hubris of "Helicopter" Ben Bernanke is much worse. Fearful of deflation (a phobia resulting from his long study of the Great Depression), Ben has allowed the monetization of Federal debt, seeing the ocean of liquidity as the needed policy response to a chronically under performing economy and falling prices.
If only Ben had spent as much time studying the disastrous tenure of his predecessor Arthur Burns who assured that Jimmy Carter would only be a one term President. Burns chaired the Federal Reserve from 1970-1978, a period that spanned the Nixon recession (with price controls that failed to stem stagflation) and the Carter malaise. By the time Burns was removed and Paul Volcker was forced on Carter, with the mission of breaking inflation's back, no matter the economic cost, the stage was set for Ronald Reagan. His economic and tax policies combined with Volcker's monetary discipline to restore the US to a strong growth mode.
I think that the combination of Ben's monetary fairy dust and the Obama administration's total breakdown in fiscal discipline must result in inflation, perhaps as bad as the double digit inflation of the late 70's and early 80's. We might, in the worst case scenario, incur a period of hyperinflation a la some banana republic or Wiemar Germany. If that happens, only precious metals and disciplined currencies (Swiss Frank?) are safe places for your savings. Even equities will not be able to keep up.
It doesn't help that Treasury Secretary Geithner's response is to talk the dollar down and lecture the Chinese about currency policy. Right now, dollar boosting and a commitment to the soundness of our currency should be one of the foundations of our economic policy. But this gang that can't shoot straight wouldn't have a clue about that.
In fact, Obama's every instinct on economic policy seems wrong. We should be spending less and taxing less, not spending more and taxing more. We should be doing everything we can to expand international trade, not berating corporations about outsourcing. We should be making it more profitable to do business, not adding regulatory friction to every imaginable business transaction. And so on.
The Fed should have one objective, currency stability. It was a mistake for Congress to add the objective of maintaining econmoic growth to the Fed's burden.
The Dems will pay a heavy price on November 2nd but unimaginable damage has already been done, and conservatives can only reverse so much with Obama holding the veto pen. Still you have to start somewhere, and this will be a good step. It looks to me now that the GOP has about an 85% chance to win control of the House, and I think the Senate is coming in just about even. If it's 50-50, the Dems will still control since Biden has the tiebreaker. So I still think the GOP is only a 40-45% chance to control the Senate. That's close enough to give Progressives the willies. I'm having some fun with them, leaving comments on my buddy Mark Kleiman's blog site, www.samefacts.com.
--------------------------------------------------------------------------------
When Tea Party candidates upset a number of establishment Republicans in various primaries, it should have been expected that these relatively untested candidates would make some amateurish mistakes during the general election campaign. Sure enough, we have seen Carl Paladino and Sharon Angle make some whoppers (including today - what were you thinking Sharon?) And of course, O'Donnell has a lot of interviews on the public record that are fodder for opponents.
As these things happen, the traditionally liberal media (including the Associated Press), desperate to see things turn around, will publicize these faux pas even as they hide and protect their favored candidates from similar scrutiny. While some voters will be put off by these miscues, most have already decided whom to vote for by now. As the Dems pour on the most vitriolic attacks and outright lies about their opponents, they are having the ironic effect of galvanizing support for Tea Party amateurs. This is why you see GOP momentum building again.
Dems are damned if they do and damned if they don't. Take the subject of debates. I think Andrew Cuomo is smart not to debate Paladino. He has a big lead and can only lose in the expectations game. However, it does feed the overall impression that he is spending the campaign in hiding. On the other hand, we see what happens when a Blumenthal debates McMahon. Aside from the fact that McMahon won on points, any such debate will usually make the non-establishment candidate look more acceptable than (s)he has been portrayed, and make it easier for people who agree with her policies to vote for her.
As Sean Hannity would say, 26 days to Independence Day.
---------------------------------------------------------------------------------
My hat is off to Governor Christie for crashing the tunnel project. It's about time a public official acknowledged that there is a project that we simply can't afford and chose to cut our losses rather than just raise taxes or worse, kick the can down the road by floating yet another bond issue.
By the way, we can't afford Obamacare either. It's about time Republican candidates began talking about that fact. More than 60% of the electorate agrees by the way.
-----------------------------------------------------------------------------
Another prediction - The Republicans will regain control of the New York State Senate.
Meanwhile, has anyone seen ad number one from U.S. Senate candidate Dioguardi? Is D'Amato sabotaging his campaign too? They are making it all too easy for Gillibrand to return, basically providing her mentor Chuck Schumer with a second vote.
-----------------------------------------------------------------------------------
On Sept. 29, we sold 100 shares of Lubrizoil (LZ) at 106.10, a nice gain from the 30.50 we paid on March 10, 2004. On October 1, we bought 100 shares of Goldman Sachs Preferred (GS.PR.D) at 21.44 for the IRA. On Oct 4, we bought 800 shares of FSI International (FSII) for 2.73, a value buy. Today, we bought 100 shares of FLIR at 25.01, a zero buy.
As per our opening item, the market is moving with gold and oil, and in direct opposition to the dollar. In other words, equities are being traded as an inflation play. Another interesting point is that the public has been largely out of the market, and is not interested. When was the last time somebody gave you a stock tip at a cocktail party (not counting other redwavemusings readers)? I'll bet Cramer's ratings are down too. When you see stock mutual fund inflows increasing (and bond fund inflows decreasing) and start to hear more chatter about stocks, that is likely to be a sell signal. The public is always wrong.
