Monetary Policy

Inflation is Icumen In, Bernanke Sing Goddamn

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Ambrose Evans-Pritchard in the UK Telegraph writes of the Royal Bank of Scotland Group's expectations that Ben "Deflation Never" Bernanke is gonna do whatever it takes to keep it at bay, as signs of creeping slowdowns in world trade and business get more prominent:

The ECRI leading indicator produced by the Economic Cycle Research Institute plummeted yet again last week to -6.9, pointing to contraction in the US by the end of the year. It is dropping faster that at any time in the post-War era.

The latest data from the CPB Netherlands Bureau shows that world trade slid 1.7pc in May, with the biggest fall in Asia. The Baltic Dry Index measuring freight rates on bulk goods has dropped 40pc in a month….

Andrew Roberts, credit chief at RBS, is advising clients to read the Bernanke text [an eight-year old Bernanke speech in which he hyped the Federal Reserve's ability to defeat deflation with more and more dollars "at essentially no cost"] very closely because the Fed is soon going to have to the pull the lever on "monster" quantitative easing (QE)".

"We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable," he said in a note to investors…..

A recent paper by the San Francisco Fed argues that interest rates should now be minus 5pc under the bank's "rule of thumb" measure of capacity use and unemployment. The rate is currently minus 2pc when QE is factored in. You could conclude, very crudely, that the Fed must therefore buy another $2 trillion of bonds, and even more if Europe's EMU debacle goes from bad to worse. I suspect that this hints at the Bernanke view….

Societe Generale's uber-bear Albert Edwards said the Fed and other central banks will be forced to print more money whatever they now say, given the "stinking fiscal mess" across the developed world. "The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant," he said.

Apropos of nothing, recent gold price data. (Hasn't been below $1,000 in eight months or so.) See Reason magazine's October 2009 roundtable on inflation expectations for more background on these matters.