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September 14, 2012
Quantitative Appeasing. Bernanke's big bet on the Phillips Curve.
Most disturbing in the Federal Reserve's release is this language, " to support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month."
When did the Federal Reserve have a mandate to ensure inflation? They apparently decided on their own, in January of 2012. "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." Article
This seems to be new territory. A subtle but real self altered mandate from the Fed. I object. Pegging rates at zero, and attempting to establish a 2% inflation rate, is like trying to steal 2% of every saved dollar. Additionally, this 2% most assuredly removes fuel and food costs. Looks like a planned robbery.
In 1977, the Federal Reserve dual mandate was, "The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates." Article No mention of ensuring inflation here. In fact, just a few years earlier, Arthur Burns imposed wage and price controls with a 4% inflation rate.
Bernanke's Fed seems to have installed his belief in the Phillips Curve, and his certainty that it always applies, into the mandates of the Federal Reserve. He seems to believe, and has altered the mandates to reflect, that inflation guarantees employment. Quite a leap, if I may say so.
Mr. Bernanke is "all in" on his Phillips Curve bet, one that essentially rests upon the theory that inflation will bring employment. I can hardly wait. The inflation part seems well baked into the future. Experts expect 10% food inflation in the coming year. Gas prices are near $4. We are approaching the home heating season. Will this bring employment? I think not.
As before, food and energy, those nasty volatile inputs into inflation calculations will be carved out of the "real" inflation numbers. This continues to be a convenient absurdity.
The certainty that Bernanke has in the reliability of the Phillips Curve, connecting inflation and employment, is bothersome. It hasn't worked lately. One can't help but recall Einstein's observation of the insanity of doing the same thing over and over and expecting different results.
The service sector will suffer. Higher food and energy costs will reduce the disposable monies in the hands of the consumer. Add in the fake zero interest rates that steal what is another source of disposable income from the consumer and one is left with a withering service sector. Restaurants, recreation, home remodeling and other services will suffer. No spurring on of employment here.
On to the manufacturing sector which has been in steady decline for decades. The causes were more of labor costs, regulations, and taxing policy rather than monetary policy issues or the cost of money. The Federal Reserve can't solve what monetary policy did not cause.
The final sector is government. Governments enjoy borrowing at near no cost. The cheaper the cost of borrowing, prompted by the Federal Reserve, the larger the borrowing and the larger deficits. National debt grows to a point where an increase in interest rates will bankrupt the nation. There are several examples in Europe. There is about to be an example in North America. Moody's is warning.
The Government sector is the big winner....for now.
Bernanke must have been an office mate of Paul Krugman back at Princeton.
The counting of Quantitative Easings apparently will end at 3. To keep putting a higher number on each effort would be to point to the futility. The recently announced round will proceed until further notice. $40 billion a month of mortgage backed securities purchased until further notice. Mortgage backed securities? Wasn't that the problem a few years ago? But Ben is all in, like in Texas Holdem'. His reputation, our chips.
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