09/23/10 Laguna Beach, California – The Federal Open Market Committee (FOMC) is worried. Very worried. It is worried that it is not destroying the dollar fast enough.
“Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability,” the FOMC declared Tuesday. “Inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.” In other words, as every Ivy-League-educated economist understands very well, the Fed must nourish inflation if it is to have any hope of reviving the economy.
Possessing merely a bachelor’s degree from UCLA, your California editor naively maintains his low-brow economic ideas. He still suspects – poor, brutish lad – that debasing the currency is an ill-advised means toward a dubious end. Rather than debasing the dollar to repel the natural forces of creative destruction, as Chairman Bernanke and his colleagues advocate, your editor suspects that the best means toward sustainable economic growth is to allow failing enterprises to fail, so that stronger enterprises may take their place. (And leave the poor greenback alone, please).
But the Ivy League intelligentsia sees it differently. The intelligentsia embraces an agenda of mere expedience, dressed in the eloquent vernacular of financial euphemisms. To wit: “Money-printing” is now “quantitative easing,” while “throwing spaghetti against the wall and seeing what sticks” is now a “policy measure.”
Harvard grad, Ben Bernanke, insists that the Federal Reserve’s most important near-term mission is to combat deflationary pressures by any and all “policy measures” available. The mission, in other words, is to produce inflation. (We’re not making this up). In the FOMC’s own words, “The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”
Your California editor is from Missouri on this one. The US economy does not need more inflation; it needs less intervention, coddling and do-gooding by central bankers and legislators. The US economy needs to suffer whatever wounds it must suffer, so that it may heal and resume growing. There is no shortcut…and there will be no shortcut, no matter how many Treasury bonds the Fed buys, nor how many FOMC meetings it convenes.
And by the looks of things, the US economy still has a bit of suffering left to do. Housing prices and sales volumes continue to fall, foreclosures continue to soar, unemployment refuses to drop and business spending refuses to rise. Instead, we Americans are, collectively, retreating into our foxholes and trying to fortify our personal finances. We are saving more and borrowing less. But at the same time, our government is going on an unprecedented borrowing and spending binge…which makes all of us poorer, no matter what we do.
These conditions – private sector caution, household frugality and government profligacy – rarely produce national prosperity. Instead, some form of stagnation usually results. We should not be surprised, therefore, if the US economy continues to muddle along for a while…and maybe for a long while.
Eric Fry
for The Daily Reckoning
Eric Fry
Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling. Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research — institutional research products dedicated to international investment opportunities and short selling.
Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts. His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
Start your 100% FREE subscription to The Daily Reckoning today and you’ll get a free research report, “How to Survive the Fall of Social Security.” Simply enter your email address below to get your free report and join over 495,000 worldwide Daily Reckoning subscribers!
We Respect Your Privacy and We will
Never Share or Sell Your Email Address
A supertanker takes time to respond to it’s propeller going full blast, but once it does it will respond. And will not stop instantly.
My guess is that the “inflationary inertia” signal will be seen, but much like the supertanker it will not be able to stop accelerating at whim.
The puzzle is how much inertia is being applied (a lot!), the implied velocity we see so far (nothing…or even still slipping backwards) versus the pent up potential velocity once it gets going (how fast will it go before we can stop it or slow it down).
These captains of the S.S. Currency will wait to see adequate inflation before they consider any speed other then “full ahead”.
Time will tell if the analogy fits. But at least it is a fun analogy.
I’ll wager the FEDS primary mandate is/has been/always will be profits for their shareholders.
I would love to see some brand new freshly printed government greenbacks! Wouldn’t it be cool for the government to have all that money and no debt!!!
Hi Andy
I can’t possibly get your scientific theory when applied on economy. This is much more complicated than quantum theory when applied on physic.
I really appreciate if you will elaborate.
The analogy made sense to me. They can go ahead and try everything to cause inflation, and since there aren’t immediate results they compound their efforts, not realizing (or caring) that these things take time. By the time they get the results they want, they have too many balls rolling to stop, and things get out of hand.