Bernanke’s tightrope act

Some analysts are saying that Fed Chair Ben Bernanke is walking a tightrope– if he does not drop interest rates quickly enough, the U.S. will be in recession, but if he goes too far, we’ll see a resurgence of inflation. I am increasingly persuaded that’s not an accurate description of the situation.

We’ve seen some quite remarkable movements in commodity markets the last two months. The graph below plots the price of 14 that I could get my hands on quickly through Webstract, with each price normalized at 100 for January 1. Every single one of these prices has risen dramatically since then. The most tame among the group has been zinc, which is up a mere 6.5% over the last two months, or 39% at an annual rate. Topping the group is wheat, up 46% over two months; I won’t try to translate that one into an annual inflation rate because I don’t want to scare you.




commodity_all_feb_08.gif


When Bernanke opined yesterday,

diminishing pressure on resources is also consistent with the projected slowing in inflation,

he evidently wasn’t referring to aluminum or barley or coffee or cocoa or copper or corn or cotton or gold or lead or oats or silver or tin or wheat or zinc.

If it were just a few commodities moving, I wouldn’t be concerned, as any of these prices can be quite sensitive to small disruptions in supply. But we are clearly looking at an aggregate phenomenon here, and it seems unreasonable to suppose that the phenomenon has nothing to do with choices by the Fed. Although I have been skeptical of Jeff Frankel’s story that low interest rates were the primary cause of the broad movements in commodity prices over the last several years, it is very plausible to me as one explanation of what we’ve seen happen over the last two months.

Bernanke’s latest statement also included the following:

The projections recently submitted by FOMC participants indicate that overall PCE inflation was expected to moderate significantly in 2008, to between 2.1 percent and 2.4 percent (the central tendency of the projections). A key assumption underlying those projections was that energy and food prices would begin to flatten out, as was implied by quotes on futures markets.

Now it is true that if you look at the time profile of futures contracts on these commodities, you don’t see an upward slope, a fact in which Bernanke has taken solace on a number of previous occasions as well. But even if there is no further increase in the price of wheat, surely it’s reasonable to anticipate increases yet to come in the price of bread and Wheaties and pasta.

I think part of the basis for Bernanke’s optimism on inflation must be the dourness of his outlook for real economic activity. The basic macroeconomic framework in Bernanke’s textbook suggests that, for given inflation expectations, if output falls below the “full-employment” level, inflation should go down, not up.

But what exactly does the theoretical full-employment level of output correspond to in the present situation? There are fundamental problems with credit markets at the moment, and these arise not from a nominal interest rate or wage rate that are too high (the usual textbook suspects), but instead from a real disruption in the basic process of financial intermediation, as if somebody had dropped a bomb on our financial system, preventing it from efficiently allocating credit. To the extent that’s the case, it may be that “full-employment GDP” would actually decline this year, and an effort to use a monetary expansion to prevent that would indeed be inflationary.

Of course, a serious problem in the market for credit is another area with which Bernanke the academic is quite familiar. But as I explained when I had an opportunity to address the Fed governors and presidents last fall, fiddling with the level of the fed funds rate is not a particularly efficacious tool for dealing with this problem. I’m not saying it’s of no help. But I think the primary way in which monetary expansion could help alleviate the current credit problems was described by Brad DeLong with remarkable clinical coolness:


Yes, the financial system is insolvent, but it has nominal liabilities and either it or its borrowers have some real assets. Print enough money and boost the price level enough, and the insolvency problem goes away without the risks entailed by putting the government in the investment and commercial banking business.

The monetary cure for our ails of course also has a downside, in that we’ll later need an artificial recession to bring the inflation back down. Greg Mankiw notes Allan Meltzer’s displeasure at this prospect:

A country that will not accept the possibility of a small recession will end up having a big one when the politicians at last respond to the public’s complaints about inflation.

I agree with Meltzer that the recent Fed rate cuts are buying us higher output at the moment at the cost of lower output in the future, for just the reason Meltzer gives. But I disagree that the recession Bernanke is trying to avoid would be a “small” one. The Fed chief must be worried that a recession in the present instance would precipitate major financial instability, in which case perhaps the choice between paying now and paying later argues in favor of latter.

In any case, the tightrope analogy seems a misleading way to frame the issue, in that it presupposes that there exists a choice for the fed funds rate that would somehow contain both the solvency and the inflation problems. In my opinion, there is no such ideal target rate, and the notion that we can address the difficulties with a sagely chosen combination of monetary and fiscal stimulus and regulatory workout is in my mind doing more harm than good. Better for everyone to admit up front just how bad the problem is, and acknowledge that there is no cheap way out.

No, I don’t believe that Bernanke is walking a tightrope at all. But I do hope he’s checked out the net that’s supposed to catch him if he falls.



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44 thoughts on “Bernanke’s tightrope act

  1. esb

    Bernanke’s problem is that he believes that there is (and always will be) a net whereas in actuality the net has been removed. Further, his most-recent testimony is riddled with lies regarding present rates and trajectories of inflation.
    Throughout the world there has come to be a crystal-clear understanding regarding the dishonest, deceitful and duplicitous characteristics of United States central banking, investment banking and yes, even commercial banking.
    The USA is widely percieved as little better than “a country made of con men” creating “fictitious wealth” and selling valueless paper, including but not limited to the currency.
    And that, “my friends,” is the reason that literally everything (when evaluated in terms of dollars) has entered into the moonshot phase.
    Let’s just refer to it as “the runs.”

  2. esb

    Some minuscule measure of stability has been provided by the PBoC (through the purchase and holding of $ paper) as it attempts to get to and through the Summer Games without a generalized world crisis.
    But the joke that is the “rage” in financial circles in Shanghai these days is something like “why could this not be a Winter Games year … so that we could get out in time too?”

  3. Joseph

    Reading this discussion I decided to see what others think about the causes of increasing commodity prices so I type “commodity price increases” into Google and what pops of at the top of the page but this post from 2006 by James Hamilton. It seems Jim rules the internet on the economics of commodities.

  4. Anarchus

    Bernanke’s situation is more accurately described as a dilemma: the economy is decelerating hard while inflation is starting to accelerate. So Dr. B faces the choice of easing aggressively to forestall a recession AND risk allowing inflation to race out of control, or else keep Fed Funds flat (and relative to the 2-yr treasury at 1.9% FF are not cheap) to maintain price stability and perhaps see the economy nosedive into a death spiral led by failing financial institutions.
    Not unlike Woody Allen’s infamous adage: “More than any time in history mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray that we have the wisdom to choose correctly.”
    Put differently, there’s a bizarre dichotomy at present between rapidly deflating home values and rapidly inflating commodity prices. The problem with deflating home values is that they threaten to undermine the solvency of one or more major financial institutions, and nobody is brave (or stupid?) enough to take more than a step or two down that path. So yes, we’re going to get the “DeLongian Solution”, but it will be an interesting time when Dr. B tries to stuff the inflation genie back in the bottle. Many Fed Chairman before this have thought they could improve the economic outlook with “just a little whiff of inflation”, and the reputations of none have survived to tell the tale.
    If there is any predictable outcome of this, it’s that the U.S. dollar is TOAST.

  5. don

    I bet Greenspan had the same thought in the crisis following the dot-com bust and the terrorist attacks – it’s better to put the downturn off to later. He was right, at least for himself. Payback came after he was gone and it’s not clear how much blame he will get.
    Now Ben faces a similar situation. It seems strange that he should try to spur demand when the U.S. already has excess aggregate demand to the tune of 5%-6% of GDP. I can’t wait to see how this turns out.

  6. Ironman

    I think you’re right on with your sense that the Fed is seeking to stave off a severe recession now in favor of a more moderate one later.
    Let’s look at where we’re at today. We’ve gone through a period where housing prices have skyrocketed from their previous level of equilibrium with respect to other prices. Major financial institutions underwrote the bubble, and are now on the hook because the value of the assets against which they loaned money need to come down to move into a more stable equilibrium with other prices.
    Except they can’t. If these asset values drop as substantially as they would need to reach a stable equilibrium with respect to other prices, these institutions will (not might) fail. We’re already seeing this to an increasing extent, even with the actions the Fed has already taken.
    If you’re the Fed, here’s what you see. You have prices in housing that you cannot afford to have come down freely because the impact on financial institutions would ensure that the resulting recession would be, in understated terms, severe.
    So, with your hand on the levers of U.S. monetary policy, you choose to spark off higher inflation, because the only alternative to the widespread failure of major financial institutions stemming from falling asset values is to make all the other prices in the economy higher. That’s what you can do to establish the relative equilibrium between these prices at a new, more sustainable level.
    And that appears to be what the Fed has chosen to do.
    So, here’s how this situation plays out. The Fed’s inflationary monetary policy continues until the asset values of real estate have returned to a more sustainable level of equilibrium with other prices. That protects the U.S.’ financial institutions from mass failures. After that, the Fed gets serious about reducing inflation.
    Only now, instead of a severe recession with the worse effects tightly concentrated in the financial sector, you can now have a more moderate, but less concentrated recession. But also one that’s likely to be prolonged.
    Bernanke’s not walking a tightrope. He’s skirting the edge of the cliff.

  7. don

    Just one more thought. Perhaps Ben’s tightrope could be described as bringing about inflation, without investors catching on. If they do, long-term interest rates will rise strongly, which will severely crimp home buyers and bring down home and other asset values. Ben has a long tail of low inflationary expectations to trade off on, but how long will people be fooled by the Fed’s concentration on ‘core’ inflation, when food and commodities are so obviously rising at higher trend rates? DeLong’s solution won’t help much if they catch on too quickly.

  8. jg

    I agree with don: higher mortgage rates, fueled by the rising inflation premium, are doing nothing but reducing home sales. And, given the default rates, banks are quite reasonably tightening loan standards.
    Further inflation will kill demand, corporate profits, and jobs; there is no way that wages will keep up with higher prices.
    I agree with A- that the dollar is toast. Folks, buy your gold now or after the forthcoming stock market crash. But, do get your hands on the stuff, ’cause that is going to be the only widely accepted medium of exchange in a few years.

  9. Nemo

    Prof. Hamilton —
    I believe that “resources” in Fedspeak always means labor. So when Bernanke says, diminishing pressure on resources is also consistent with the projected slowing in inflation, he isnt talking about aluminum or barley or coffee or cocoa or copper or corn or cotton or gold or lead or oats or silver or tin or wheat or zinc; he is talking about higher unemployment (and/or lower wages).
    Once you understand that “resources” means people, and the only kind of inflation the Fed cares about is wage inflation, their statements make a lot more sense. 🙂

  10. Ivan Kitov

    Take a look at CPI table from the BLS
    http://www.bls.gov/news.release/cpi.t01.htm
    Relative importance of various goods and services indicates that the commodities you have mentioned have minor influence only.
    On the other hand, the price indices for transportation, communication, education, and housing grow at a rate below that for the core CPI
    http://inflationusa.blogspot.com/2008/02/long-term-trends-in-consumer-price.html
    Growth rate for the index for energy, while very volatile, stagnates near the core CPI rate.
    All in all, some prices go up, some stay, some go down. It is not a proper way of analysis to extract the former only.

  11. Steven k

    If the Fed errs, it should be in keeping rates too high. Congress can always deal with unemployment with fiscal spending. If congress overspends, the Fed could raise rates even higher. We would live in a world of full employment, low inflation, but very high interest rates, inducing higher saving rates and deferred consumption.
    I think the Fed needs an inflation target. Too much pressure and attention is on Bernanke and not enough is on congress. Infrastructure needs could be addressed now, helping keep unemployment low. More important than buying dud securities from investment banks at taxpayer loss.

  12. Bob

    I have several questions:
    Given the increase in infrastructure spending in India and China how can the Fed temper global demand for basic material commodities? Additionally, assuming that increasing personal incomes in developing countries creates a rise in caloric intake; what affect does that have on global demand for basic foodstuffs?
    To what extent does the recent energy bill that mandated ethanol production contribute to a rise in corn and wheat prices and what can monetary policy do about that?
    Lastly, and it ties all this up, given an increase in global demand what real affect can the Fed have? It appears to me that the culprit is aggregate supply.

  13. Anarchus

    Oddly enough, when the Fed aggressively EASES monetary policy in the U.S., at the margin they’re unfortunately STIMULATING demand in China, because the Yuan is flexibly tied to the dollar . . . it’s been allowed to appreciate slowly against the dollar, but probably not nearly fast enough to offset the recent Fed stimulus.
    China and India and other developing countries are definitely upgrading their diets with protein and that is adding to the pressure on food prices. Also, the really bad Chinese winter has decimated their rapeseed crop, which is bad news for food prices, and on top of that, Congress in its wisdom increased the ethanol mandate recently which fuels demand for corn. (Wheat is pretty much marching to a separate beat from corn and soybeans but that’s another story).
    I’d be interested in how much the professor thinks we should distinguish between “cost-push” and “demand-pull” inflation. To pick a couple of specific examples, the reason that oil and copper prices have risen so fast over the past 3 years IMHO is that there’s been very little supply-response to higher prices, in large part because with both commodities no one has found any extra large virgin “mega-fields” in the past 5 years.
    With all the so called “soft commodities”, the U.S. has historically been in a position where productive farm capacity was substantially greater than domestic and international demand, but given the steady drumbeat of residential and commercial development over the past 30-40 years the excess has been whittled away. The analysts I talk to have estimated that last year the U.S. planted pretty close to 100% of the 330 million acres available last year and that there’s only an additional 6-7 million acres available to be planted this year and a lot of the extra acres (not surprisingly) consists of poor quality land that won’t produce anywhere near average crop yields.
    The major source of extra acreage globally is in Brazil (and to a lesser extent Argentina) and there are environmental issues with rapidly expanding in those countries – not to mention but that those incremental acres are pretty specifically suitable for soybeans only and not for corn.
    Short the dollar, and buy the Powershares Agricultural ETF (ticker “DBA”) if you want a walk on the truly wild side.

  14. spencer

    Nemo’s point that the Fed means labor when it talks about resources is very good– compare average hourly earnings growth to fed funds.
    Commodities have a good, but not perfect record of leading inflation because they signal tight world wide demand-supply balances. But commodities are an ever falling share of final costs while wages are an every growing share of final costs. Unit labor costs are still low enough that firms can generally absorb higher commodity prices and still sustain good profits growth. Most of the current profits weakness is from the financial sector where commodities do not play a role.

  15. fred

    These wild commodity price swings are the last gasp of the hedge funds trying to make up for losses due to the housing bubble collapse. I.e. yet another bubble which will eventually collapse. Low interest rates facilitate this latest bubble, but at the end of the day, low interest rates can’t keep a bubble permanently inflated, as we saw with the housing bubble.
    The US is merely leading the rest of the world into recession. Think the housing bubble was bad in the US? Take a look at Britain and Spain… Europe and Asia are going to slow down eventually, and when they do, we can expect an end to inflation everywhere. (Assuming the governments don’t go wild with bailouts so as to keep asset prices high.)

  16. Anarchus

    Spencer: In parsing Bernanke-speak and reflecting on a chart of average hourly earnings growth versus Fed Funds, shouldn’t we be concerned that average hourly earnings are a lagging indicator while Fed Funds are a leading indicator?
    It seems to me that Fed policy conducted using such a standard under current conditions is all but guaranteed to generate Arthur Burns/G. William Miller style inflation at some point in 2009-2010?

  17. esb

    Notice that the Fed con men are out in force today attempting to control “expectations” of inflation (which has just undergone a “real” breakout) in a last futile attempt to free themselves from the appearance of insanity as they implement their “1% solution.”
    Fortunately, not even a mouse is listening to their deceitful, dishonest and duplicitous lies any longer.
    In US central banking, inflation is the tool, employment is the goal.
    And lies form the substance of speeches.

  18. PrefBlog

    Is the US Banking System Really Insolvent?

    There seem to be a lot of people who will answer the headline question: “Yes!”
    I recently responded to Menzie Chinn’s “Crony Capitalism” post, and highlighted my doubts there … now Econbrowser’s James Hamilton…

  19. DickF

    If you don’t understand what is going on with commodities it is highly probable that you do not understand monetary policy. This is falling right in line with the understanding of a lot of classical economists. Bernanke is so confused he doesn’t understand that he is confused and so he lies… uh, I mean obfuscates the truth to try to cover it up.

  20. C Thomson

    Punish them, O Lord. Ravish them for their sins, lies and forecasts. Woe and shame. Spare not an economist, nay not even a Bulgarian PhD student. Cast them down!

  21. Alphaeus

    One of the problems understanding Bernanke is that it is impossible to know if his statements and the Fed’s decisions are intended to avert recession, tame inflation, or alter the public’s, the government’s, and foreign investors’ expectations of the same. And these attempts to influence our rational expectations may just result in irrational fears. Which is to say, total confusion.

  22. Stuart Staniford

    In the early 1990s, Sweden had a banking crisis where the entire
    banking sector basically became insolvent following a credit/asset price boom. The government became involved in a bail out, recapitalizing some banks that needed it to the tune of about 4% of GDP.
    It’s an interesting case study – here are some references:
    http://www.riksbank.se/templates/speech.aspx?id=1722
    http://www.sns.se/document/securum_eng.pdf
    http://www.sns.se/document/occasional_paper_82.pdf
    It appears to me that we may well have some/most of the US financial system insolvent before too much longer. In that case, the US government/Federal reserve is going to have to rescue the system. It seems like the goal should be to shaft the shareholders to prevent moral hazard, but protect the depositors to prevent bank runs and collapse of the financial system with devastating effects on the real economy.
    The Swede’s managed to accomplish this in a fairly transparent manner.
    I am unclear on the institutional barriers that prevent the Fed from addressing the solvency issues without other government involvement. Can the Fed not simply exchange reserves for newly issued stock, at whatever the market value of the stock then is? If an institution was badly insolvent this would dilute the existing stockholders to nothing, but that’s as it should be. The Fed would end up owning the institutions, but probably would then split it up into a “good bank” and a “bad bank”, and then selling off the stock in the former and the assets of the latter once the situation had settled down.

  23. esb

    Stuart Staniford:
    They should not use that trick until as much SWF money as possible is pulled into bank equities, so as to perfect the circle of “petrodollar recycling and destruction.”
    Handled properly, that con just might work.
    Moving equity from the original malefactors over to the Gulf states, then (implicitly) to the Treasury, and then back to the original malefactors (albeit somewhat differently organized).
    However, this requires a series of mini-panics so as to set up the SWFs for the crash and then the hit. Let’s get on with it.
    Wait a moment … that’s exactly what is already underway. Jeeeeeez.
    Hank Paulson, I rescind all of the bad things that I have said about you over the months!
    It took me 120 days to catch on to the (inevitable) endgame.
    Slowing down in my old age.

  24. Anarchus

    Stuart, not to channel Bill Clinton here, but I think it depends on what your definition of “insolvent” is – just because honest mark-to-market assets are less than liabilities doesn’t ensure insolvency – back in the early-mid 1980s lots of the money center banks probably had negative equity if you marked their Latin American loans to a fair value, but bank managements and the government were able to convince investors to buy into the charade that the naked emperors weren’t really naked and with the eventual help of principal-pay guarantees called Brady bonds the problem was gradually worked off.
    As the professor’s quote from Brad DeLong suggests, the best possible solution may be for the Fed to print money until home prices stabilize and begin to appreciate – because after all, financed correctly homes are still 70%-80% leveraged and they’re made out of real commodity stuff – concrete and bricks and PVC and rebar and lumber and copper and gypsum wallboard, and all those prices are rising fast ALREADY.
    In part because he chose to watch the data rather than anticipating events, Bernanke’s Fed got so far behind the curve that only a panicked catch-up flood of liquidity can prevent widespread insolvencies from busting out . . . and Bernanke’s figuring that by tightening quickly a year or 18 months down the road he’ll be able to stuff the inflation genie back in the bottle at just the right moment. IMHO, he’ll be dead wrong, again. In the meantime, the dollar goes down and we may eventually end up with a Jimmy Carter/G. William Miller style currency crisis.
    Makes me wonder, who’ll they name the ROOSA Bonds after, this time around?

  25. c thomson

    The Lord heard me! ‘A walk over the coals.’ Wish I’d thought of that!
    Smite them, O Lord. Waste not thy time on the trite. Curse and smite them!

  26. Shiraz

    It strikes me that the perfect guy to ask about the game plan for Bernanke at the moment would be Paul Volcker. I think he would have a pretty good idea what the strategy is for Bernanke from here, and a pretty good idea of what happens if he gets it wrong…;-)
    Maybe an in depth interview with the same already exists? If not, i’d definitely like to see it in print…

  27. Buzzcut

    Keep it simple stupid.
    There was a bubble in Asian financial assets. It popped. The fed printed money.
    This created a bubble in stocks. It popped. The fed printed money.
    This created a bubble in housing. It popped. The fed printed money.
    This created a bubble in commodities.
    What am I missing? Is it that simple?

  28. Charles

    The “tightrope” is between mass homelessness plus banking collapse vs. inflation. It’s a no-brainer as to which side policy makers will err on.
    DeLong is right to be clinically cool. Panicking helps nothing. But for some reason no one is looking at the fiscal side of the equation. It is much cheaper for the government to temporarily pay the resets than for the government to buy the houses.
    Why is everyone on the left/center/moderate right demanding that we take the expensive solution of bailing out the banks directly, while everyone on the far right is demanding the even more expensive solution of kicking millions of people into the street?

  29. Anonymous

    Buzzcut:
    You forgot the Y2K printing, intended to “cushion” the economy from the collapse of civilization feared by AG on 1January2000.
    In a democracy, all roads lead to the printing press.
    Somewhere in a cave, Osama Bin Laden is no doubt lamenting his rejection of a suggestion to “just target the Marriner S. Eccles Building.”

  30. andiron

    people are getting nervous with just US credit bust…the credit bubble engulfed the entire world ..the realestate bubble is widespread (UK,Auatralia,Canada,Chindia,Spain,Singapore…)
    This thing is just starting.

  31. E. Poole

    Is ‘clinically cool’ a clever substitute for ‘cynically concise’?

    DeLong is only right if people are fooled. As don suggests DeLong’s solution won’t help much if [agents] catch on too quickly.

    I gather that consistently fooling people is not a controversial idea in this forum? I’m open to the notion but I believe it is tougher pull off in the Information Age.

    I too wonder if recent surges in commodity prices are to a large extent driven by expectations of more expansionary American monetary policy. Prior surges were clearly driven by real demand and supply factors. However, Chinese smelters and others were reported to be delaying contract negotiations for purchases of ore concentrate in the hopes that a weakening US economy would force metal prices lower. That strategy may have been abandoned as it became clear that future growth had been underestimated.

    US monetary policy will not make it any easier for China to manage its growth rate.

    The yield curve is upward sloping, the overnight market is liquid. It is sad to see the US reacting like a fragile developing economy. Perhaps ‘necessary’ but sad.

    However, if we assume the US financial system has some kind of comparative or absolute advantage in the global economy, then I suppose these massive subsidies and bail-outs can be viewed as strategic profit-shifting subsidies. Presumably the sunk capital is worth something.

    Good piece and thanks for the cordial discussion. -Erik

  32. Anarchus

    I don’t think I agree with Don that if the bond market vigilantes go on the warpath and crank up long-term interest rates that “long-term interest rates will rise strongly, which will severely crimp home buyers and bring down home and other asset values.”
    Just because long rates go up doesn’t mean that home buyers will be crimped and that home values will suffer — because in this era, variable rate mortgages are tied to LIBOR, or 12-month t-bills or the 11th district cost of funds index, and those rates will remain affordable as long as the Fed keeps lots of short-term liquidity sloshing around the system.
    To be sure, the inflation of the 1960s and 1970s was unanticipated rather than anticipated and in the information and blogging age this time will likely be different. That said, if I were Dr. Bernanke (and let me assure you, I am not) I would WANT LONG-TERM RATES to rise in advance of increasing inflation – because the idea behind the Delongean Gambit is to ease so aggressively that you raise the overall price level to the point where home prices stop going down and start to rise. And IF long-term rates go up a lot and the yield curve goes to an astonishing positive slope with low short rates and very high long rates, fixed rate mortgage issuance would shut down AND the overall U.S. economy wouldn’t get the same stimulus effect, BUT housing prices could still benefit greatly. I’m starting to think that’s the outcome to root for — because ultimately you might get less cumulative overall price level inflation even as variable-rate financed housing stock reflates meaningfully.
    Comments, professor?

  33. RebelEconomist

    I would trace the cycle of easing bailouts back to the 1987 crash and the thrifts crisis (low for long, steep curve).
    I believe that this pattern has created cumulative, double-sided macroeconomic/cultural moral hazard. Cumulative because easing is prompted by sharp falls in asset prices, regardless of level (eg the Fed eased in 1998 despite previously warning about irrational exuberance and narrow credit spreads). Double-sided because, despite the Fed’s idea that they “take out insurance”, they actually appropriate the cost from holders of nominal claims, which acts as a disincentive to save in interest-bearing assets. Macroeconomic/cultural as well as institutional, hence folk wisdom like “houses never fall in price”, “buy stocks on dips” etc.
    This has to end somewhere. Engineering surprise inflation would just put off the problem for another cycle. No matter how piously the authorities promise to do things differently in future, they will be expected to take the same way out until they prove their credibility or are forced to stop by the markets. It can either end here, or in Argentina.

  34. RebelEconomist

    This comment from Bloomberg says it all:
    “The reality is there’s not a lot we can do” other than buy high-risk securities to close a pension shortfall in a short period, said Chris McDonough, chief investment officer of the Philadelphia Pensions Department. The sixth-largest U.S. city will probably also issue debt, he said.
    http://www.bloomberg.com/apps/news?pid=20601009&sid=aQk6lwrk_9lA&refer=bond
    How about being honest, either with pensioners and say that the city can no longer afford the benefits they expect, or with the voters and say that taxes must rise to pay for past pensions promises? And then paying down municipal debt while credit spreads are wide?
    No, lets have some “audacity of hope” instead!

  35. Anarchus

    well, there’s a reason why “I’m from the government – I’m here to help” has been added to the list of greatest lies of all time (along with “I’ll respect you in the morning”, “My commute is only 10 minutes” and a bunch of others too colorful to mention on a family oriented blog) . . . . . . . I saw a survey 5-6 years ago where a greater percentage of Americans believed that alien life forms regularly visited Earth than believed that they’d collect 100% of the social security benefits “promised” them by the U.S. federal government.

  36. EconLog

    Hamilton: Trade-offs, Not Tightropes

    James Hamilton is one of the few macroeconomists whose short-run forecasts never sound like quackery. His latest analysis is full…

  37. Anon

    Follow-up: March 11th, crude oil hits $110/barrel. Apparently the world didn’t get the memo that everything is under control, inflation is in check, and the dollar is strong.

  38. binaryoptions

    Phenomena #1: Crop acreage is nearing full capacity; more developed economies are shifting to more meat-based diets, putting pressure on feed-related commodities; transportation, storage and distribution of food has higher associated costs due to increse in energy costs; biofuel is pushing demand food-based products like soy and corn; the underlying trend in US dollar weakness puts pressure US-based food prices (not so for importers from other countries with a strong currency).
    Pheneomena #2:
    When Bernake was talking about “resouces” thats Fedspeak for “capital inputs”. It means anything passed along the price chain to the the final end-user, namely wages and “factory inputs”. Wages are elastic; there is no consumer-price growth because wages are elastic; national companies have simply purchased cheaper labour overseas. I’m not oversimplyingt this fact: goto your charts are graph “emerging market” wages to their currency value and you will see why their values have gone up. Wealth leaves this country in the form of stagnant wages and higher deficiets, the former the result of global labour competion, the latter the result of US borrowing at lud. low interest rates. Now, YOU AND ME will pay for this in the form of higher prices by a devalued dollar and lower US interest rates. Hopefully, other countries will buy our underlying educational, entertainment, and comm. prop infrastrucutres and pay for my retirement. I know the US won’t
    Phen #3:
    Housing assets prices: pure illusion. Goto your graphs and look up rising housing costs with securization of mortages, and then look up collatorized debt obligations in contrast to one of the lowest fixed-rate interest environments, and then the feedback loop of those sales to unleased a mamouth amount of unsecuired lower-rated credit all due to the influence of banks to sell off those loans to the street. This Phen. supported an entire economic infrastructure, but puts Mr. B in a bit of a bind: Lower rates, increase commod. & energy inflation; raise rates, increase/aggravate fixed-income related rates tied to home ownership.

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