Blatant Falsehood at Financial Times
[UPDATE below.]
Robin Harding of the Financial Times starts her article, “Fed Critics Run Risk Their Attacks Will Backfire,” like this:
Bigamy, grave robbing and passing false checks are pretty much the only crimes that Ben Bernanke and the Federal Reserve have not been accused of in the past few weeks.
That is a flat-out lie, Ms. Harding. Why, just this past Saturday, in my Mises Institute-sponsored private seminar in Rochester, I explained that Bernanke is going to write checks for $600 billion “drawn on thin air.” To drive home the point, I said, “It’s not as if Bernanke cut lawns all summer, building up a stockpile of $600 billion that he is now drawing down.”
So yes, I accused Bernanke of passing bad checks, insofar as that would even mean anything regarding the Federal Reserve.
UPDATE: Oh my gosh, I hadn’t even read the whole thing yet. It gets better:
Republicans in Congress decried a Fed policy that, through some voodoo, they think will not only fail to stimulate the economy but will also create inflation.
Although I took some flak from Free Advice readers in the comments, I have no regrets of my post a week ago, reminding people that stagflation is a possibility. No witchcraft needed.
If the Youtube video that is going viral is half true, the Fed and JPMorgan are colluding to hold down the price of silver. If so, let me add insider trading to the list of alleged crimes by “The Bernank.”
(see the Xtranormal video at: http://www.youtube.com/watch?v=Gl47z2g2EvI)
To have stagflation don’t you first need high inflation expectations? Given that inflation expectations are currently so low why is this a realistic concern?
Whom has a low expectation? Certainly not producers with PPI @ ~6%
Or anyone watching the increase in the supply of money. It is not a question of “if” they are inflating, it is a question of merely LOOKING at the POMO schedule. I mean they publish the schedule in advance. . . soo it is not to hard to “expect.”
I’m always baffled by people saying there is no inflation right now. Where do they shop, eat, buy electricity, gas, or anything for that matter?
Gold 1420, silver 30 year high of $30, oil at two year high of $89, food prices and most commodities climbing 10% plus. That is inflation even if you define it just by a rise in prices. We’ll start to see how much the money supply is going to start growing because QE2 in a few weeks. It is already picking up a lot of steam from the mbs being reinvested the past few months and is getting close to cracking 10%. So when we see inflation get much worse than it already is and even core inflation is rising, don’t come claiming it was a lucky guess by the Austrians.
Silver is up 100% since early Febuary and people are still crying deflation or disinflation?
You know, I can’t thank you enough for shining a light on this. Stagflation, as you so elegantly put it is not only possible, but, at this point, nearly unavoidable given the folks captaining the ship.
This was my first read here, but I assure you that I will be reading you in the future.
Thanks again for a perspective I am currently devouring by way of your archives. 🙂
Dan,
Gold and silver prices are set on a world market, so you can’t assume a higher price for gold (or silver) predicts higher U.S. inflation.
Commodity prices are up this year, but they were down last year by around 60%, and their increase this year is not out of line with what we saw throughout the 2000s. Even when you factor these increases in, the inflation rate is still only 1.2%. (For detail on these points, see here).
Is there something in Austrian economic theory that suggests inflation should occur first in commodities, or is it a “any port in a storm” kind of thing?
Gold up 24% in 2009, silver up 49% in 2009, oil up in 2009, everywhere I spend money keeps getting more expensive. I don’t care what a chart you post says, I see the inflation when I spend my money. Inflation is an increase in the money supply and we have seen a massive amount of it. Prices would be much lower today without the excessive printing. Now we are seeing inflation cause prices to rise across the board and picking up steam. What exactly can I buy that is getting cheaper?
Give it a few months and you’ll start seeing even the governments manipulated cpi figures rising.
Gold up 24% in 2009, silver up 49% in 2009, oil up in 2009, everywhere I spend money keeps getting more expensive.
As I mentioned previously, gold and silver prices are set on a world market, so I wouldn’t consider them a great indicator of U.S. inflation. For example, demand for gold in China has gone up five fold this year. That’s going to have an effect on gold prices independent of what the Fed is doing.
In June of 2008 oil was about $140 a barrel. Now it’s about $90. $90<$140.
If we are going to trade anecdotes I would say that I have not noticed the prices of things I buy getting more expensive. This, however, is a rather shaky way to determine whether there is significant inflation in the U.S. If I am looking for inflation I am liable to notice when prices have gone up but not when they have gone down, and visa versa. The benefit of looking at a price is that it looks at the issue in a more systematic way.
Give it a few months and you’ll start seeing even the governments manipulated cpi figures rising.
Folks like Bob have been saying this for years. Inflation is always just over the horizon. At some point you have to look at all the false predictions and start wondering whether there might be a flaw in your reasoning.
Incidentally, I can understand skepticism about government figures. However, there are a number of groups (e.g. Google) that are developing their own price indexes. Google’s index is comprehensive of prices on the web “shows a “very clear deflationary trend” for web-traded goods in the US since Christmas.”
No doubt this just proves that Google is part of the giant lizard conspiracy to enslave us all.
@Blackadder & Dan: the Fed recently switched from the PCE-deflator to the CPI as its measure of inflation. The PCE-deflator shows that inflation is in the Fed’s unwritten stable price range. The CPI shows lower deflation because it gives twice the weight to housing. Given the toxic assets that are still on the books of the banks, I don’t think the change was a coincidence.
Anecdotally, most people I know who have opinion have very high inflation expectations.
Anecdotally, most people I know who have opinion have very high inflation expectations.
How could Nixon have won re-election? No one I know voted for him.
The reason I said to give a few months is because we have seen a dramatic change in monetary policy. The fed had stopped m2 growth for most of this year and i dtopped buying gol and silver as the economy looked on the verge of a pull back. Then the fed started reinvesting money from mbs and that has already caused three week m2 supply figures to grow at about 7.5%. 13 week is at over 6%. I boight more silver at the end of febuary not because demand was increasing but as a hedge against the coming inflation This increase in m2 is a dramatic increase from where it was before the program. Now the fed is buying long term debt from sources that won’t have an option of parking the money at the fed. This is another $80 billion a month on top of the $30 billion a month from mbs reinvestment. We will see how big an effect this will have in the next few weeks. This will be even more inflationary if banks start loaning this new money out and cause a multiplier effect. This also doesn’t count the more than a trillion sitting as excess reserves. You don’t see inflation because you aren’t paying attention. People on fixed incomes who are getting squeezed see it as their money buys less and less.
Explain to me how this is deflationary. http://www.economicpolicyjournal.com/2010/11/paging-paul-krugman-16-cost-of-12-days.html
The reason I said to give a few months is because we have seen a dramatic change in monetary policy.
Here is the monetary base chart that Bob and others keep citing to show that we are in for massive inflation. The big jump in the monetary base happened in 2008. The Fed’s recent actions are not even at the same level. At the time people were saying that hyperinflation was right around the corner. It didn’t happen. Throughout the year the due date for inflation kept being pushed off and the predictions of the ultimate inflation rate declined, until finally Bob said “If the non-seasonally adjusted CPI rises at less than a 5% annualized rate in 4q 2009, I will admit I have been a fool for my warnings, and that I clearly don’t know what I am talking about.” I believe the actual number was something like 2%.
We will see how big an effect this will have in the next few weeks.
What happens in a few weeks when you don’t see big increases in inflation? Do you conclude that you were wrong, or do you come up with some post hoc rationalization for how you were right, but you just miscalculated how long it would take for the inflation to kick in (or come up with some conspiracy theory about how the government is suppressing the true numbers)?
Whoops. Forgot the link. Monetary base chart is here.
First off I brought up M2 money supply growth. Here is a chart for that. http://federalreserve.gov/releases/h6/Current/
There is a difference between money supply and monetary base. The trillion dollars in excess reserves is why you didn’t see massive inflation from this massive increase in the monetary base. It doesn’t mean that this won’t eventually lead to massive inflation, but that as long as the banks are parking this money at the fed it will not be inflationary.
Now what is important to understand is the difference in what is happening now and what happened then. Robert Wenzel at EPJ has been all over this. The first round of QE went into the big banks who just parked the money at the fed and are collecting interest. This money has yet to filter into the economy and thus is not inflationary.
M2 is different than the monetary base as it shows the money available in the economy to buy goods and services and invest. This number rising will indeed result in higher prices. Unless you see a massive boom in production taking place to offset the new money chasing all the goods, I just don’t see that happening. So M2 was growing at 2.5% or so for the 6 months prior to August and now at 6.4% over the last 13 weeks and 7% or so the last 3 weeks. The big jump in the growth of M2 recently began because the Fed decided to reinvest mbs payments back into the economy. Now on top of $30 billion/mnth mbs reinvestments they are buying an additional $80 billion/mnth in long term debt. This money will not go to the largest banks. It will go to a variety of different people and most will not even have as an option to park money at the Fed. This is the big change you are missing.
M2 is likely to move over 10% in short order, I don’t know how long it will take but I wouldn’t expect it to take more than 3 or 4 months. In a few weeks though you will start to see how big an effect this bond buying will have on M2. If it starts to make big jumps from here we will be over 10% growth in no time. If there is a multiplier effect on this new money, it will be even worse. If the excess reserves start coming out as well then the dollar is toast.
I am not predicting double digit inflation within the next few weeks but I think everyone will have a good idea of what to expect in the next few weeks. I believe by January we will know how bad this is going to get. I would expect the deflation camp to be totally discredited next year.
The monetary base PROVES the inflation. It already happened (in the trillions) and will continue, on the POMO schedule until June.
The price inflation you can not seem to find is in … bonds.
I am surprised it was so hard to find as that what the Fed buys with the newly created money.
The bond market will eventually spring leaks, entering the economy unevenly. Consumer prices are effected last in this process (which has not even begun) of which, the CPI is a useless, lagged out indicator.
Explain to me how this is deflationary. http://www.economicpolicyjournal.com/2010/11/paging-paul-krugman-16-cost-of-12-days.html
The link is about the Christmas Price Index, which charts the prices of the various items mentioned in the song The Twelve Days of Christmas. The Christmas Price Index isn’t meant as a serious means of determining the level of inflation and if you look at past years it often diverges sharply from the overall inflation rate (in 1995, for example, the index showed 21.72% *deflation*.
If you look at the methodology of how the XPI (“Xmas Price Index”) is calculated, you’ll see that it isn’t a good way of estimating inflation. If someone told you that the best way to estimate inflation was to look at: 1) the price of labor, 2) the price of gold, and 3) the price of various kinds of birds, you would say that person is crazy (at least I hope you would). Yet that’s exactly what the XPI does.
In particular, including the price of labor as a major element in the index is silly, as according to Keynesians and Monetarists the big problem with deflation is that wages don’t fall with prices, which results in unemployment. If a Keynesian says there is deflation pointing out that wages haven’t fallen is not much of a refutation. Nor is it very plausible to say that an increase in the minimum wage (which would increase the price of the maids a milking) is inflationary.
Gold up 100% from the bottom in ’08
Silver up well over 200% from the bottom
Oil up 300% from the bottom in early “09
Cotton up over 200% from the bottom
Sugar up over 100% from the bottom
Stocks way up from the bottom
Food prices rising
Energy bills rising
Health care costs rising
12 days of Christmas rising
All commodities rising
Yeah well those aren’t good indicators of inflation, they are just everything we spend our money on.
Check out economicpolicyjournal.com for updates on the latest M2 numbers and if they continue to rise then asset prices will continue to move higher. How bad it will get will depend on the multiplier effect, but Bernanke himself said that he is ready to back that up with QE3.
Take a step back and analyze what is going on. The States are broke, the federal government is borrowing a trillion+ a year, unfunded liabilities that can’t be paid, fannie and freddie, all the wars, and on and on. If you don’t think inflation is coming then do you think they can pay this debt off, will default, or can it just go on forever? The US is broke. Of course we are going to see inflation. They will print until they drop the dollar like a stone. They can never pay this debt off and can’t pay for the entitlements or the wars. It’s inflation or default.
You haven’t seen any dramatic inflation across the board yet because the banks have been busy rebuilding their accounts by sweeping their junk assets under the rug and getting paid interest to just sit on the money and loan it to the government. This will eventually be inflationary as those trillion+ funds are going to be lent out at some point. This new round of printing is different and you have to understand that to see why this will be inflationary as soon as its spent. These funds won’t be stockpiled. There is going to be more money chasing the same amount of goods. If the economy starts to gain traction because of this and banks loan out QE2 and cause a multiplier effect then its going to get ugly. Then when the excess reserves start pouring out Dr. Murphy is going to sit back and say, “remember when gold was $1400 and people were worried about deflation with Helicopter Ben in charge?”
Dan,
It’s not surprising that prices rise from the bottom. That’s kind of what “from the bottom” means in this context.
Tell you what, though. January is right around the corner. We’ll know shortly whether your predictions pan out.
“It’s not surprising that prices rise from the bottom. That’s kind of what “from the bottom” means in this context.”
Maybe you didn’t see how much they have risen from the bottom. Hitting record highs and 30 year highs. It’s not like asset prices are just creeping along. When did doubling your money on silver in 10 months become a sign of a deflationary economy? Oh yeah, commodities are suddenly not an indicator of inflation. I guess China and the rest of the world are just buying all that gold for jewelry.
We’ll see in a few weeks, just keep your eyes on the money supply figures.
Dan,
Commodities fell around 60% in 2009, so the fact that they have rebounded is hardly shocking. Many of the items you list are not even at 3 year highs, let alone 30 year or all time highs. Oil, for example, was at around $140 a barrel in June of 2008. Now it’s at around $90. And bear in mind, in most cases all it means for an item to be an at all time high is for it to have regained the price it was at in the summer of 2008.