Anthony Mirhaydari: Hiking inflation won't help, Ben

Extra11/3/2010 6:58 PM ET

Hiking inflation won't help, Ben

Continued from page 2

It's about structure

The justification for a huge amount of QE was recently taken up by economists at Goldman Sachs. The key is how much excess capacity -- including empty factories, unused machinery, unemployed workers -- there is in the economy. The Fed would inject money to try to get that excess capacity back to work.

By one common measure of the "output gap," the Goldman Sachs team estimated the Fed could potentially justify injecting an additional $4 trillion into the economy as part of its QE2 allocation.

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But because of the rise in the so-called "natural" unemployment rate -- which is the minimum unemployment rate the economy can support without seeing wage inflation -- the output gap is actually much smaller than that measure would show. (I discussed this issue in a column back in August. )

In fact, Athanasios Orphanides, a senior adviser to the Fed and the governor of the Central Bank of Cyprus, finds that a key error (.pdf file) by policymakers during the Great Inflation era was not properly accounting for the rise in the natural rate of unemployment. By this he means too much stimulus was injected in the economy to try to stir employment, and that stimulus led to inflation.

The same mistake is being made now. Estimates vary, but a recent update (.pdf file) by Federal Reserve researchers put the natural rate of unemployment as high as 8.6%. If true, then the economy is running only 1.8% beneath its potential output -- not nearly enough to justify a large QE program.

John B. Taylor of Stanford, the creator of the "Taylor Rule" formula for monetary policy used in the Goldman Sachs analysis, crunched the numbers himself and found conditions justify a Fed lending rate of 0.75% instead of the current rate of 0.2%. That's right. Taking into account the structural friction in the economy, the Fed should be mopping up all its extra dollars and raising interest rates.

Instead, Bernanke is doing the opposite. And his mistake puts us all at risk.

Anthony Mirhaydari: Hiking inflation won't help, Ben

To give you an idea of the magnitude of the problem, Meltzer finds that the Great Inflation was driven by excess money creation -- the money supply was growing faster than the economy. The effect of this is to make money worth less in real dollars. You can see in the chart above how excess monetary growth peaked around 10% in 1974 and again in 1980, before moving lower.

Right now, excess monetary growth has been above 10% since the fourth quarter of 2008, and it spent three quarters above 100% during the Fed's QE1 initiative. QE2 should result in a similar boost -- and that's downright scary.

Remember the words of the great monetarist Milton Friedman, a hero of Ben Bernanke: "Inflation is always and everywhere a monetary phenomenon."

Be sure to check out Anthony Mirhaydari's new investment advisory service, the Edge. A free trial has been extended to MSN Money readers. Log in using the following credentials. Username: "freeuser" Password: "edge"

The author can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.

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34Comments
11/07/2010 12:09 PM
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@wordfrominside  You have the answer.  The FED is trying to inflate the monetary supply with the $5 trillion you identify that we destroyed with mortgages (CDO), real estate values and wars.  Increasing the liquidity does NOT increase debt and it supposedly can be removed once the economy starts creating jobs, revenue and taxes thereby avoiding runaway inflation.  It'll be a nice trick if it works.  If not sell equities and buy the resulting 6-9% CDs.
11/05/2010 9:32 PM
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I don't quite understand what this QE strategy is going to accomplish. Mortgages, corporate debt and some kinds of personal loans (e.g. auto loans) are at record low rates already. And, none of this has caused a wave of hiring, home buying or consumer spending. Savings rates and CDs are at record lows but yet neither individual investors or corporations are pouring money into capital investments.

 

The more time that Washington spends on currencies, interest rates and other nonsense, the less time they are spending on the things that really matter: addressing the sad state of our educational system, infrastructure and lack of accountability of the people who wasted $2 TRILLION on the real estate bubble, a similar amount trading derivatives and another $1 TRILLION on two wars we cannot seem to end (face it: that money is GONE along with the time wasted on those activities).

 

It is quite apparent that monetary policy is irrelevant in solving the nation's core problems. It seems to me that all of the money that is created by QE is either going to commodity speculation (how else do you explain such high prices when much of the developed world is still in recessionary conditions), plugging holes in the balances sheets of the big financial institutions (who are desperate to meet new standards of Basel III) or are being sent overseas (causing inflation and rising currencies overseas).

11/04/2010 8:09 PM
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Why can't people who are intelligent like the guy who wrote this article work for the government?  Sustaining these low interest rates  and printing money that has no gold behind it just prolongs the problem.  Somehow I survived the '70s  and 80's and even bought a car at 18% rate because I needed it at the time.  I don't remember running out of food  or money just because my car loan was 18%.  I did by a less expensive car. Of course we did not have a TV in every room, and constantly update our tech gadgets or buy houses we could not afford.  THe level of consumerism is also unsustainable.  There is no  free money tree unless you can manage to use chpt 7, 11 and foreclosure to let the rest of us pay for your bad decisions.  WE all have to spend wisely and live within our means. Many people in our country are just as guilty of creating this mess as the government.  Did you really think that by some act of magic that suddenly you qualified for a mcmansion?  Spending wisely -- It's not always fun, but when you lose a job in tough times you might actually have money to live on until things turn around. It's called self reliance. Its called working more than one job when you need to , always having a rainy day fund instead of the latest tennis shoes.  IF one lives like that at some point you become financially stable and suddenly what the government does or does not do has little affect on your lifestyle or daily life because you were smart enough to spend wisely. And that is the true meaning of freedom and the opportunity this country gives us.
11/04/2010 6:58 PM
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Fed Chairman Bernanke announcement of 600b plus in Tsy purchases, sent several signals on the 3rd..
1. To Wall Street speculators that its ok to borrow indirectly from the Fed to buy commodities. Sock it to the people (main street). Already crude prices have risen about $7 per bbl and gasoline some 10 cents per gallon..
2. To the Obama administration that wider trillion plus deficits are ok because the Fed stands ready to "monetize"
a slap in the face to Main Street. Struggling to pay rents and mortgages, now will have to choose between the high price of gasoline and food on the table. Some will lose their only mode of transport..
These and other outrageous "ivory tower" decisions by academics with no "reality connection", warrants impeachment… Indeed I hope Congress will wake up and abolish the FED and instead mandate a 3% interest rate on deposits. This will "hurt" the Soros and Buffett’s of this world BUT will be a boon to the retired, their savings fast disappearing under zero rates and bank charges.. and will have zero impact on the high 11% interest rate currently charged

11/04/2010 6:45 PM
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Running a small business as I do - I do not see low inflation. Everything I buy and every service I use continues to go up in price much more than the 1 % as stated by the Fed. Bernanke is living in a bubble. We just had our currency devalued again by our Fed - that is a the real tax on your income.

Ben - leave it alone.   

11/04/2010 5:25 PM
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It's interesting because some people actually think it matters what party has control.  Who picks our candidates we get to vote for?  They're all just puppets from the guys with the big bucks running the show.  You could point at faults in each party throughout history.

 

As an advisor my clients are happy because we had a decent past few years of returns.  We missed most of the downturn of the market during the bubble collapse and my clients have been heavily invested in physical gold for the last 4 years.  However, right now isn't the time to jump and down because the market will fall because we lack the fundamentals.  Good luck everyone

11/04/2010 5:00 PM
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Instead, the current problem facing the economy is deeply entrenched unemployment caused by structural factors ....

 

No, it's caused by the failure of management to hire workers.

 

Bush drove the US economy"car"  off the cliff! Republicans insist that the car was un scratched and running fine while it went down, so it must be the Dems fault if it's broke.

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The U.S. economy needs jobs.  In the current environment, practically any every tangible product sold must be produced in Asia.  Competitive forces demand this.

 

Bernanke needs to trash the dollar to change that dynamic.

 

No inflation means no jobs and he knows it.

11/04/2010 4:10 PM
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Smile

 

When was the last time you could get a personal loan (it's actually worse than that because the bank/broker borrowers give the fed worthless income streams from underwater MBSs as collateral) without any collateral?

 

Yesterday! Every credit card mail offer  has a 0% offer for new accounts.

11/04/2010 4:05 PM
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Core inflations is near zero....


With 14.8 million Americans unemployed, factories operating well short of capacity, and inflation well below the range the Fed would prefer, some officials at the central bank see the risk of a vicious deflationary cycle where consumers hold off on purchases, choking off economic growth. [Reuters]

 

 

Bernanke wants the FED to stimulate more demand - that is how hiring for jobs happens.

11/04/2010 4:01 PM
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Bernanke has a very narrow definition of the 'economy'. His friends live and function in that economy. He cares NOTHING for anyone outside that economy. Wall Street banker/brokers populate that economy. They are also the ones who are responsible for 70 to 80% of trading on Wall Street. It's a speculative circle jerk which brings in a few suckers to the table. The real economy (99.9% of our country's economic activity) is excluded from Bernanke's concerns. The proof is that ONLY the crooks in Bernanke's economy can borrow at 0% interest. When was the last time you could get a personal loan (it's actually worse than that because the bank/broker borrowers give the fed worthless income streams from underwater MBSs as collateral) without any collateral?

WE are the ones paying for this thievery with our children and grandchildren's taxes. Every single time the fed loans at 0% to a crook that buys treasuries at 3%, YOU are paying for his profit. Geithner is aiding and abetting the destruction of the middle class in the USA.

I laugh every time I hear this crap about 'keeping interest rates low at the fed'. ****?

 

Other posters here have shed light on the CPI manipulation and blatant lies about the actual unemployment we are experiencing at depression levels. And the author of this article has the chutzpah to claim that Bernanke's policies are 'working'!

The only thing that is 'working' is the continued criminal connivance of our government with the fed for the IMF style trashing of the USA.

11/04/2010 2:36 PM
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Seems to me that we will continue the bubble and bust in this country as long as we allow the FED (and the big banking families) to control monetary policy. Ben is out of tricks and we still have about 17% real unemployment...... commodities anyone????

11/04/2010 2:26 PM
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It's one of the rare days Anthony got its sense right.  Helicopter strategy works for normal recession but not for big bubble especially assets type.

 

Each round of QE add cost to Amercan labor in the form of taxes by all disguise that their products could not compete not only in exports but also in home ground that its citizen has to settle with inferior imports.

 

Ben is surely not stupid.  The only way his could is to print money, effectively lower the US dollar to create "jobs' for the unemployed whose economic output only worth a faction of yesterday's dollar.

 

Everybody knows  but we deny the reality as human being all do.

11/04/2010 1:41 PM
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Time to buy oil!!!!!!!!!!!!!!!!!!
11/04/2010 1:01 PM
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I can't figure out if the writer is a putz or a Democrat.  Natural unemployment is 8.6%?!?!?  Maybe in socialist Europe?!!  Germany just got a tingle up and down their legs when it lowered to 7% there....  I guess we were just lucky from about 2000 forward until we became the Obamanation.
11/04/2010 12:42 PM
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Sorry, but if you want ot give away $600 like W, please CUT other spending by a like amount.  $600 x 120 million is about 720 Billion...
11/04/2010 12:39 PM
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Ben,

 

Can we really debase our way to prosperity?   If we can why don't we print 20 trillion...  The fed has become a political arm of the Donkey Party.  Time to fire Ben...

11/04/2010 12:37 PM
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Jes...

 

arguing Palin is stupid, when our President thinks there are 57 states?  He is a complete moron compared to Palin...

 

I do not think there has been a President this dumb in my lifetime. 

 

Maybe if he had a clue, but it is so obvious he doesn't.  Only Donkey party people cannot see the emperor has no clothes...

11/04/2010 12:34 PM
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Sure it will help..it will help those selling the bonds(i.e. special interests rubbing shoulders with the feds). For the rest of us, however, we will see a resurgence of commodity prices. Couple this with a further weakening dollar and rising unemployment, and we should see our nations 2nd great depression very soon.

Fastback49 summed it up pretty well.

11/04/2010 12:20 PM
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People need to understand a major deception about inflationary figures, and how it's reported. Another way to understand inflation is to consider it the devaluation of your dollar. The Department of Labor measures different inflation indicators including the CPI or Consumer Price Index. Unfortunately, this index and others do not match up with the reality of actual goods we purchase. You and I might purchase a new car, and say new cars rose in price by 6.5%, but the inflation measures have other commodities in them such as raw aluminum, iron and rubber. All of which may have rose about 2.2%, say. Well which did you purchase? The car or raw materials? A: the car. So which inflationary rate applies to you: 2.2 or 6.5%? A: 6.5%

 

Again, you bought gasoline or cracked/refined oil. But the inflation index people say, "Light sweet crude only rose 3.3% this year". However, gasoline rose 11%. Which figure applies to you? Again, you buy electricity piped into your house which rose 7%, but the coal used to run your local power plant rose only 2%.

 

And a bigger deception is that when certain commodities run too high, the Department of Labor of Bureau Statititics (or whatever) throws them out! Clothing, gasoline & food run say 7, 9, and 12%. So they say, "these commodities have far exceeded the median bell curve of average blah blah blah... so they are not included in this year's statistic." Not included!?!?! So we are wearing worn out clothes, we ALL decided to drive our bikes to work, and go on a year long fast! Really? Really?

 

Don't be deceived.

 

There are a lot of online personal inflation calculators available  to show you what your real, personal inflationary rate is.

 

Pass the raw aluminum please...

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