Not deflation but more disinflation should lead to QE2
With implied inflation rates in the TIPS moving lower to levels last seen in mid ’09, Fed Pres Bullard (Mr. We’re Turning Japanese) is speaking on the economy. While he currently believes that new QE is now not necessary with “core inflation at low but manageable levels and the economy expected to continue to expand,” he doesn’t want to wait for actual deflation before embarking on another round of money printing. He believes all it will take is “increased disinflation risk” and the “purchase size should be in proportion to the size of any deterioration in the outlook.” “One key goal of the program is to keep core inflation in the US from falling close to levels observed in Japan.” Sorry to beat this horse again but he basically believes that if demand weakens further, the Fed must create inflation to raise the cost of goods and services. The law of supply and demand has a different opinion.
Tweet
Facebook
Reddit
Digg this!
August 19th, 2010 at 2:37 pm
The financial sector’s distortion of supply and demand during the 2000′s was far far far more dangerous than anything the Fed is trying to do now. You’re blaming the janitor for the mess he’s trying to clean up.
August 19th, 2010 at 3:05 pm
Can you ask the law of supply and demand what he’s having for dinner tonight?
Why do the people who hold all of America’s wealth struggle so fiercely to rationalize their wealth by deifying concepts invented by humans?
August 19th, 2010 at 3:38 pm
Annnd what will the Fed do when QE2 does the same thing that QE1 did – or more accurately, didn’t do? Will they roll out QE3 and QE4?
Or will they develop the intelligence to stand back and say “You know, this isn’t working….”
August 19th, 2010 at 10:25 pm
A 50 year long expansion in credit, which was helped along by securitization, has led the master builder dilemma on grand scale. The master builder dilemma occurs when entrepreneurs and consumers alike (metaphorically) think they have enough bricks to build a house. At some point they realize they don’t have enough bricks (pull back in lending) and have to make some difficult decisions as to how they should not proceed. The builder thinks to himself, man if I had only known, I would have build my home a little smaller.
Currently master builders are confused. Do I expand my business? Do I build a home or do I rent? Do go back to school/get retrained or is my housing construction job going to come back? Do (corporations) buy back shares our build up cash?
Some of the decisions will ultimately end in malinvestment due to the utter confusion that manipulated time preferences for money have caused (interest rates).
The US has not been a free market since the late 1800′s when the railroads went bust and the US was forced off its prior attempt fiat currency’s (the Greenback). I am a believer that we need quick forest fire (1920 recession) and not an ice age (the Great Depression). Monetarist’s and Keynesians prefer the ice age therefore Austrians are still out numbered. The Fed’s recency bias has falsely led them to believe they can manage us out of this crisis. Essentially the monetary authorities are saying they can manipulate us like puppets and control how we allocate our capital. Decades of false conclusions by the Fed have now culminated into another DEPRESSION. Now the bill is coming due. The question is how much of our liberty will used to pay?
August 19th, 2010 at 10:29 pm
[...] The below respons was published on The Big Picture Blog in response to Not deflation but more disinflation should lead to QE2. [...]
August 20th, 2010 at 7:10 am
Not allowing economies to deflate is like always putting more air in your tire. We all know what happens then – POP! Where have the release valves in our economy gone to? Oh I know! The Banker’s back rooms. There must be an implicit agreement that those losses will never see the light of day? No wonder everything the FED is doing just pushes on the proverbial string. It appears to me that the only way out has been through consumerism, but how can that work this time when the workers who have jobs, have no real buying power, i.e. PPP – parity purchasing power ala China, India, etc. They can even upgrade to a new cell phone. No, lets let Bernanke keep pumping our system full of air.