Last week, the ECB began its purchase of €60 billion ($64.2 billion) a month in Eurozone government bonds, with total purchases expected to eventually exceed €1 trillion.
Archive for the ‘Inflation’ Category
“When real interest rates start to move up, that’s when the crisis could hit.”
So the Federal Reserve Board spent six years and boosted its bond portfolio to $4 trillion in an effort to boost the rate of inflation to 2%.
How did that go? Not so well.
This week, the U.S. Bureau of Labor Statistics (BLS) reported that the Consumer Price Index for All Urban Consumers (CPI-U) declined 0.7% in January on a seasonally adjusted basis. It was the third consecutive month of decline; over the past year, the “all-items index” decreased 0.1% before seasonal adjustment.
In other words, the U.S. has joined Europe and is in deflation mode. It’s the first time the CPI hit negative territory for the year since the beginning of the financial crisis in 2009. Imagine how low prices would be if the Fed didn’t buy all those bonds!
That dropping oil prices caused U.S. deflation underscores the foolishness of the Fed fantasy about a 2% inflation rate.
As David Stockman’s Contra Corner put it, “the CPI measure of inflation is so distorted by imputations, geometric means, hedonic adjustments and numerous other artifices, that targeting to 2% versus 1% or even a zero rate of short-term measured consumer price inflation is a completely arbitrary, unreliable and unachievable undertaking. Yet, (Fed Chair Janet) Yellen’s latest exercise in monetary pettifoggery is apparently driven by just that purpose … ”
“Oh, no!” you’ve probably been thinking. “The cost of filling my gas tank dropped again!”
Falling prices are a good thing for the cash-strapped American consumer, whose income on-average has fallen to where it was in 1994, as we’ve reported. But behind every silver lining, there’s a black cloud and leave it to us to find it.
Deflation is typically a sign that all is not well with the economy. Prices drop when the economy is so weak that consumer demand drops. When prices drop, profits decrease, stock prices drop, and unemployment and bankruptcies increase. Consumers put off purchases and wait for prices to fall further, which contributes to even further deflation. Deflation was an issue during the Great Depression and every period of deflation has been accompanied by a recession.
Raúl Ilargi Meijer of The Automatic Earth says deflation “eats societies alive,” explaining that “Deflation is not lower prices. Deflation is people not spending, then stores lowering their prices because nobody’s buying, then companies firing their employees, and then going broke. Rinse and repeat. Less spending leads to lower prices leads to more unemployment leads to less spending power.”
We’ve explained in the past how the federal government puts a yellow smiley face on its unemployment figures by excluding Americans who have given up looking for work and including part-time workers as if they are fully employed.
Similarly, the Congressional Budget Office estimates the cost of a tax increase or tax reduction under the assumption that the increase will have no impact on taxpayer behavior – so tax cuts have no economic benefit and tax increases produce revenue without harming the economy.
So we shouldn’t be surprised that the Consumer Price Index (CPI), which measures inflation, rigs the numbers by excluding increases in the cost of food and energy.
The Federal Reserve Board’s $3.5 trillion in bond buying failed to boost inflation to the target rate of 2%, but the Fed could have accomplished its goal without buying a single bond. All it had to do was change the method used for calculating CPI.
It will take more than higher prices to cure what ails the European economy, but Wall Street reacted to the European Central Bank’s inflation-boosting efforts by setting new records yesterday.
Action by the ECB has been widely anticipated since last month, when ECB President Mario Draghi announced that the ECB would be “comfortable acting” at this month’s meeting. With a report this week that Eurozone inflation was just 0.5%, action by the ECB was all but certain. The ECB’s target rate of inflation is just under 2%.
Anticipation of ECB action has been helping to prop up the U.S. market at a time when the Federal Reserve Board is winding down its quantitative easing program by reducing its purchase of bonds by $10 billion per month. Apparently, as long as someone is following easy money policies, the markets are happy.
The actions announced by ECB President Mario Draghi did not include bond buying (although there are no Eurozone bonds). That’s in keeping with previous actions by Draghi, who previously relied on “forward guidance” to boost European markets and achieve monetary goals.
With the Federal Reserve Board celebrating its 100th birthday, it’s a good time to look back on the past century to see how The Fed has fared.
We’ve been critical of The Fed’s quantitative easing program, but that accounts for only the past five years of Fed history. How has it fared in the previous 95 years? Overall, has its work improved life for Americans or has it been a negative force?
The Fed’s role is to ensure the safety and soundness of financial institutions, stability of financial markets, and equitable treatment of consumers in financial transactions. But its activities are primarily focused on using America’s money supply to manage inflation, unemployment and interest rates.
If The Fed has performed its job well, America’s standard of living should be greatly improved today when compared with, say, 1938, when the country was still recovering from The Great Depression.
But MyBudget360 made some surprising discoveries when it compared 1938 prices with today’s prices after using the U.S. Bureau of Labor Statistics inflation calculator to adjust for inflation.
It’s time to start thinking about New Year’s resolutions. It’s an American tradition to resolve to lose weight, exercise regularly, be nicer, work harder and give up everything you enjoy.
But who are we kidding? Such resolutions are made to be broken. So this year, why not make a resolution and keep it? This year, resolve to pay attention to bonds.
That’s right. Boring old bonds. They don’t have the flash that stocks do, they lack the immediate thrill that cash can provide because of its liquidity and they’re not as mysterious as alternatives. Yet, if you give them a chance, bonds can play a major role in ensuring that your retirement will be secure.
Bonds are not without risk – especially in a rising interest rate environment – but they can help you protect your principal, produce income and add to your total return.
Amidst a government shutdown, a debt-ceiling crisis and other assorted financial turmoil, President Obama this week nominated Janet L. Yellen to chair the Federal Reserve Board.
As a Keynesian economist and academician who served as second-in-command at The Fed, her boost to the top spot was about as predictable as another budget crisis in Washington. She still needs to be confirmed by the U.S. Senate, but confirmation there is also as predictable as another budget crisis in Washington.
So what can we expect from the first woman to ascend to one of the most powerful positions in the free world?
The presses will keep rolling. Current Chairman Ben Bernanke has become the King of Quantitative Easing, but he has been in denial about it. His roots are as a monetarist. You wouldn’t know it by his record as chairman, but he is a follower of Milton Friedman.
Ms. Yellen, conversely, is a true believer. As an “unreconstructed Keynesian,” which we assume is the opposite of a reconstructed Keynesian, she believes that stimulus is a cure-all. If the government spends more and the Fed prints more, evidence to the contrary, the economy will boom.
As such, we can expect a continuation of QE. The King is dead, long live the Queen.
With The Fed’s bond portfolio exceeding $10 trillion, The Fed is running out of government bonds to buy, but Chairwoman Yellen said she’s confident the U.S. Treasury will pick up the pace at which it issues new bonds.
Chairwoman Yellen praised the quantitative easing program, which she said has managed to bring the unemployment rate down to 6.8% from a peak of nearly 10% in just 12 years. QE has also helped the economy grow at a rate of nearly 2% a year.
During a brief press conference, for the first time since the quantitative easing program began, she was asked, “How does buying bonds create jobs?”
She explained that QE obviously decreased unemployment, since the unemployment rate exceeded 9% when QE began and is now approaching 6.5%.
The Fed’s quantitative easing program has been like that endless tub of popcorn or vat of soda that those with large appetites buy at the theater. It goes on and on, but at some point, enough is enough. Are you really ever going to refill that?
The Federal Reserve Board has gorged on bonds for years now and some board members are finally losing their appetite for continuing, according to minutes from the last meeting of the Federal Open Market Committee.
The supersized QE3, the third round of quantitative easing, was supposed to continue until the unemployment rate dropped to a reasonable number. The only problem is that buying bonds doesn’t produce jobs.
Even accounting for Storm Sandy’s impact, job growth remains stalled, with the unemployment rate stuck at 7.8%. While the rate is significantly lower than it was in 2009 (9.9%), it is nowhere near the 5.0% rate of 2007. More troubling, much of the rate drop is due to people either dropping out of the workforce or taking low-paying part-time jobs.
That doesn’t mean that quantitative easing is without consequences. The sudden nervousness of some Fed members reflects the fear that buying $85 billion in Treasuries and agency paper will destroy the dollar.