Vlad, Mahmoud & Hugo Heart Ben
Commodities have rallied strongly on the Fed’s surprise move to quantitative easing (“QE”) on steroids. Gold and oil in particular have moved up substantially.
This is a big favor to commodity producers, and Russia in particular. This will materially aid these countries, and help them address their severe economic challenges.
As to whether it’s good news for us in the US, color me skeptical. Very skeptical. This, to me, seems to be a recipe for stagflation, if not immediately, then in the near to medium term.
A couple of quick thoughts.
First, to me it suggests that the Fed is deeply concerned about the prospects for the economy, and the banking system. This action was extreme, and unexpected. I doubt the Fed would have acted in this fashion if it was confident that the economy was beginning to turn around.
Relatedly, it is very plausible that the Fed’s action reflects its view on the political situation, and in particular the efficacy of fiscal policy and the likelihood of a sane plan to fix the banking system. In brief, it is a very big thumbs down on both. That is probably a very astute judgment. To say that Congress is a clown show is a deep insult to clowns. The administration, and Treasury in particular, have so buggered the banking issue that it is unlikely that anything constructive will come out of its fire drill. Indeed, the AIG fallout, and the colossal mishandling of that situation have so politicized the banking policy response that it will be a miracle just short of the Resurrection if anything positive develops on that front.
And Congress has made things infinitely worse. Nancy Pelosi (please, has there ever been anybody dumber in a position of power?) today remarked that nobody would “be able to hide behind contracts.” Great. That’s sure to make anybody thinking of getting involved in TALF or TARP or any successor programs designed to attract private capital into the banking sector or the purchase of toxic assets to think once, twice, thrice–and then say “No thanks.” These people are traders. They are not going to enter into a position short a legislative put with Nancy and Obama and other demagogues in charge.
Second, the long term consequence of this are troubling, hence my stagflation forecast. With a sober, constructive policy response to the banking process, and the normal equilibrating process of the economy, it is likely that later this year or next the economy would make solid improvement. With a dysfunctional banking system, and huge/immense/gargantuan policy risks, I think that recovery is problematic. But the injection of huge quantities of money will ultimately prove inflationary.
Moreover, it is extremely difficult to wring inflationary expectations from the economy once they become entrenched. It basically took the entire decade of the 1980s–and a recession nearly as severe as the present one–to do that. Moreover, there is considerable room for skepticism that a future Fed will have the political will to do this again.
Therefore, I think that there is a high probability that the coming decade will be one of low growth in output, and high growth in prices. That’s why I’m buying more TIPS.
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“It basically took the entire decade of the 1980s–and a recession nearly as severe as the present one–to do that.” — I know this was before my time, but I have heard that the 70s were wild and 60s were filled with unrest. So, the period of calm and growth during the nineties and early 2000s were just exceptions to the rule?
Comment by Surya — March 20, 2009 @ 7:52 am
Sweet. Zombie banks and stagflation, I can’t think of a worse case scenario. After every recession it has been the financials that lead the market back. I can’t think of any other sector as a replacement.
Obama, Pelosi, Reid, Frank, Dodd, it’s criminal that they are the clown posse dealing with a crisis of this magnitude. Your are right they are an insult to hard working tax paying clowns.
Comment by penny — March 20, 2009 @ 8:17 am
IMO, the blame is very much bipartisan. I’ll paraphrase something that was said on Chris Matthew’s Hardball last night: Pelosi may have just made one of the smartest chess moves of her career by putting forth a Bill that has zero chance in the Senate and will never get past the Supreme Court. In doing so, she trapped House Republicans into voting for a 90% tax hike, thus proving they lied to their constituents as most stated they would never interfere with business, executive salaries and most importantly, they all said they ‘would never vote for a tax hike.’ So Pelosi may be an idiot but her staff certainly knows how to play the game- And again, the blame is bipartisan.
Comment by rtyb — March 20, 2009 @ 12:07 pm
R–
Bipartisan, no doubt. They’re all idiots. Matthews gives Pelosi too much credit. That argument won’t do any damage to Republicans who voted for it.
My concern about Pelosi isn’t so much the bill itself, egregious as it is. Instead, it is her remark about hiding behind contracts. As I’ll expand on later when I have a moment, in the current environment such words have an extremely sinister and chilling meaning. Who will want to do anything with the government (e.g., anything related to transactions that involve government money, such as the purchase of toxic assets, the acceptance of government equity investments) if that puts every prospective and retrospective contract at risk.
Be afraid. Be very afraid. As the immortal judge Gideon Tucker said in 1866, “No man’s life, liberty, or property are safe while the Legislature is in session.” That has never been more true than today.
Comment by The Professor — March 20, 2009 @ 1:58 pm
“Be afraid. Be very afraid.”
Indeed.
Terence Corcoran summed up the AIG debacle and the cliff we are heading off lead by the most frivolous and incompetent politicians to come our way in a life time:
The AIG bonus firestorm is a diversion from real issues , but it puts the ghastly political classes who make U.S. law on display for what they are: ageing self-serving demagogues who have spent decades warping the U.S. political system for their own ends. We see the system up close, law-making that is riddled with slapdash, incompetence and gamesmanship.
One test of whether we are witnessing the end of America is how many more times Americans put up with congressional show trials of individual business people and their employees, slandering and vilifying them for their actions and motives. And for how long will they tolerate a President who berates business and corporations as dens of crime and malfeasance? If the majority of Americans come to accept the caricatures of business as true, then America is closer to the end of its life as a global leader, as a champion of markets and individualism.
Reform of health care, environmental policy, education, energy, banking, regulation — every nook and cranny of the U.S. economy has been put on alert for major change. Expansion of government spending, plunging the U.S. into unprecedented deficits, is without parallel. In economic policy, through regulation and control of energy output, financial services and monetary expansion, the U.S. government has embarked on a fundamental reshaping of America. It is designed, in short, to bring on the end of America.
http://network.nationalpost.com/np/blogs/fpcomment/archive/2009/03/19/terence-corcoran-is-this-the-end-of-america.aspx
Comment by penny — March 20, 2009 @ 2:30 pm
Penny,
Interesting article. That jump in monetary base is astounding (the graph in the article). The graph shows a doubling of the currency in circulation in a matter of weeks. What will this mean in terms of inflation in the coming years?
Michel
Comment by Michel — March 20, 2009 @ 3:23 pm
Michel and Penny, what is more alarming than the direct inflation is – what would happen when holders of US debt start shifting it for other assets, like the Chinese premier has hinted? This is likely to happen sooner than later.
Nerobama indeed!
Comment by Surya — March 20, 2009 @ 6:23 pm
Nancy Pelosi’s comment about contracts was asinine but I’m not worried about it as it carries zero weight. As Janet Tavakoli stated, this is whole AIG ‘outrage’ is nothing more than one big dog and pony show on the Hill… No one is going to roll back on the contracts without some serious intervention from our courts who would most likely stop all of it. I’ll give credit to the President for at least understanding this much… Everyone here is very educated and analytical (with me being the exception perhaps;) but think about the masses for a minute. They are not so wise to what is going on and the members of the House realize this and have little choice but to pander to their constituents. Well, I also think it’s fair to say that most Congressmen and women are intellectually on par or lower than those within their districts. So although I don’t agree with the way they’re handling the AIG bonus situation on the Hill, I do understand that their phone lines have been jammed, email accounts flooded, etc with constituents demanding they do something. One must never forget that the average American has very little understanding of what is or isn’t constitutional. The previous administration used this ignorance to its advantage and I’m afraid this one is doing the same… Or at least they are allowing Congress to push the limits for PR reasons?? Anyway, I am one of those (and there are many of us) who aren’t as willing to scream about this administration’s handling of the situation just yet without a sound alternative presented. And ultimately, both sides need to accept responsibility before I’m satisfied.
Comment by rtyb — March 20, 2009 @ 6:27 pm
Surya, my response is: Where are you going to go? Who is doing it better? Our inflation and unemployment still pale in comparison to most of the world. Our constitution, our courts… We will make it through this. I think there is a whole lot of anti-American sentiment out there (AND some neocons) who are secretly hoping for our demise but sadly for them, it’s not going to happen and btw- where the US goes, so goes the world so they should really be careful about what they wish for. I look at what is going on in France (and Russia) right now, and I think, you know- we’re going to be okay. Really we are.
Comment by rtyb — March 20, 2009 @ 6:35 pm