Streetwise Professor

March 19, 2009

Vlad, Mahmoud & Hugo Heart Ben

Filed under: Economics,Energy,Politics — The Professor @ 7:26 pm

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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  1. […] The Inquiring Mind added an interesting post today on Vlad, Mahmoud & Hugo Heart BenHere’s a small readingFirst, to me it suggests that the Fed is deeply concerned about the prospects for the economy, and the banking system. […]

    Pingback by Topics about Banking » Vlad, Mahmoud & Hugo Heart Ben — March 19, 2009 @ 9:49 pm

  2. […] The Streetwise Professor: Vlad, Mahmoud & Hugo Heart Ben […]

    Pingback by US politics - Hamsterwheel - Page 105 - PPRuNe Forums — March 20, 2009 @ 5:11 am

  3. “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

  4. 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

  5. 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.

    The ProfessorComment by The Professor — March 20, 2009 @ 1:58 pm

  6. “Be afraid. Be very afraid.”


    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.

    Comment by penny — March 20, 2009 @ 2:30 pm

  7. 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?


    Comment by Michel — March 20, 2009 @ 3:23 pm

  8. 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

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