Monetary Policy

Commodify Your Zero Percent

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For the third straight year, Ben Bernanke brings you a lean Christmas, this time with inflation.

Proving that Ben Bernanke can even screw up the economics of Christmas, the price of a lump of coal has increased more than 63 percent in the last year and a half.

Commodity specialists Hossein Askari and Noureddine Krichene designate a new, Euro-style intellectual movement—"Bernankeism"—to try and make some sense of the chaotic set of principles guiding the Federal Reserve Bank chairman's decisions. You need to understand the scale of the Ben Bernanke project to appreciate how completely it has failed:

In the past decade, US policymaking has been dominated by fallacies built on excessive monetary expansion, near-zero interest rates, and sizeable fiscal deficits. These have turned out to be very costly for the US economy. Presidential advisor Larry Summers, who has claimed that the US economy would suffer from a lack of demand for a number of years to come, has recently echoed these same fallacies. He was oblivious to the excessive size of the budget and current account (external) deficits, both indicating excessive demand in relation to output that is financed by external borrowing. US policymaking has emphasized demand and has neglected structural and sectoral policies and policies to generally promote productivity and in turn growth and employment.

The question that matters is how much durable growth and permanent employment creation can be achieved in such a lax monetary environment? Even if one believes in Bernankeism as a way to achieve full-employment, it clearly necessitates a reversal of such expansionary monetary policy to pre-empt a renewed wave of financial failures. The economy will gyrate from booms to busts.

It would be more desirable to achieve employment in the context of sound monetary policy that would preclude such gyrations. Three years into the crisis, the economies in Europe and the US remain stagnant with renewed debt crises, indicating the inability of Bernankeism to bring about the instantaneous recovery it has long promised.

Askari and Krichene, writing in the Asia Times, focus on their own specialty—commodity prices, which give a pretty good measure of the results the dark prince of unwanted outcomes manages to perverse-engineer. Commodity prices don't show up in the Personal Consumption Expenditures data the Fed uses, but they have been going kerblangbusters:

Ben Bernanke eats children.

Since the Fed pushed interest rates to near zero in December 2008, commodity price inflation has resumed at rates rarely seen in the past. Over the last two years, under the effects of near-zero interest rates and ample dollar liquidity, gold prices have jumped from $756 an ounce in December 2008 to $1,430 in December 2010 (up 89%); crude oil from $44 per barrel to $91 (up 107%); copper from $1.29 per pound to $4.2 (up 230%); sugar from $308 a ton to $738 (up 154%), soybeans from $786 a bushel to $1,300 (up 65%); wheat from $457 a bushel to $730 (up 60%); corn from $294 a bushel to $595 (up 102%); and coffee from $1.02 a pound to $2.17 (up 113%)…

Rarely have economic growth and full-employment in the US or in other major industrial countries been associated with two-digit commodity price inflation. Durable economic growth and sustained employment creation have generally been associated with stable or declining commodity prices.

One problem with considering this broad range of commodities is that they are sourced from all over the world, and their prices do not all depend on U.S. monetary policy.  There are central banks all over the planet following The Ben Bernank's recipe for prosperity through currency devaluation. Right now, the world's greatest deliberative body is waging a long campaign against China's "unlawful practice of currency manipulation." That is, Sens. Sherrod Brown (D-Ohio) and Olympia Snowe (R-Maine), along with Treasury Secretary Tim Geithner, would like to impose sanctions on China for following the same fiscal policy as the United States.

In fact, if anybody out there claims expertise on how China actually prevents appreciation of its currency – and how this differs from the printing/bond-buying/interest-rate-finagling mechanisms available to any central bank – please pipe up in the comments. Does the People's Bank of China have access to some inscrutable currency tools not known to the Fed? Is it an ancient Chinese secret? 

The sad truth is that Bernankeism is not specifically or even primarily confined to the Fed. Bernanke may be distinguished by a certain joyless and compulsive quality in his money-printing. But he's not alone.

Which raises some interesting questions. If every currency collapsed at the same time, would that be a push? Why does less actual currency gets created when the money supply is expanding? And—as I asked exactly one year ago, when economic conditions were pretty much exactly the same as they are now—why haven't Bernanke and Krampus ever been seen together? 

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  1. “I do not believe that the solution to our problem is simply to elect the right people. The important thing is to establish a political climate of opinion which will make it politically profitable for the wrong people to do the right thing. Unless it is politically profitable for the wrong people to do the right thing, the right people will not do the right thing either, or if they try, they will shortly be out of office.”

    ….or running the Federal Reserve.

    2012 can’t get here soon enough.

  2. I’ve said it before and I will say it again. we will have deflation before hyperinflation. As commodity prices go up, people will stop consuming, rush to pay off debt, and start defaulting. Government spending/debt may be huge but it’s still not yet half of private debt. We have another round of ‘too big to fails’ to go before it’s Weimar Republic.

    1. ummm, commodity prices essentially doubling IS inflation.

      1. I never said we would have deflation before inflation. read carefully.

        1. One thing is certain: we’ll continue to have baldness. I blame Bernanke.

      2. Actually you are more correct then you think.

        Commodities as a cost of production have been dropping for decades. But at the same time labor costs has been rising.

        Producers as a result do not raise the price of their goods ( ie goods that you find in the consumer index) instead they lay people off. Why cut commodity costs buy buying less and end up producing less when you can cut the big expense of labor?

        The result being that instead of seeing inflation of the price of washers and dryers we see 10% unemployment.

        1. also why would a producer raise prices when he knows that he will sell less. (law of supply and demand)

          Again the he will choose to lay people off to compensate for the rise of commodity costs rather then raise prices.

  3. I’ve said it before and I will say it again. we will have deflation before hyperinflation. As commodity prices go up, people will stop consuming, rush to pay off debt, and start defaulting. Government spending/debt may be huge but it’s still not yet half of private debt. We have another round of ‘too big to fails’ to go before it’s Weimar Republic.

    1. server squirrels don’t take chrismas eve off, huh.

  4. PS 98% certain tim cavanaugh wrote this article.

    1. Guest post by Tyler Durden.

  5. Haven’t we already established that “Bernankeism” is Milton Friedmanism?

    https://reason.com/archives/201…..anites-now

    1. I’m sick of people misinterpreting Friedman. Milton Friedman said (repeatedly) that money growth should match gains or losses in the GNP. Show me where Bernanke ever said anything like that. Friedman was neutral on the subject of a metallic standard.

      Why don’t you join up with Naomi Klein and complain about how he agreed with Pinochet about everything?

      1. STAND BACK!!

        The Penguin is pissed! And pretty much right.

      2. Friedman also admitted that monetarism was a failure late in his life. I can’t believe people never made a bigger deal about it. It just goes to show how much the government likes monetarism.

        1. Cite?

          Also, did he say the theory that matching monetary growth with GNP was wrong, or that it couldn’t be implemented with a Federal Bank? Those are two very different ways of being “wrong”.

          1. https://reason.com/archives/199…..oth-worlds
            This is a great interview where Friedman shows how much his views have changed. You’ve probably read it tho.

            Regarding Friedman’s k-percent rule specifically: I can’t seem to find the paper that I read. I believe it was authored by Friedman and one other in the 90s. I’ll keep looking. However, I think it may have been more along the lines of given our state, monetarism is a failure.

          2. I have no idea how to post links…

            The article in reason was called best of both worlds from 1995.

            1. <a href=” This opens the link, and the URL goes here, in between double quotes. “> Verbiage you want in hypertext goes here. </a> This closes the link.

              Note – I used HTML code to show the less than & greater than signs. If you try to put the signs (from your keyboard) in a comment, they will be interpreted as HTML, with strange results.

          3. I still can’t find the paper. I’m starting to think I may have been mistaken after just reading a rather galling research paper he wrote for the Journal of Economic Perspectives in 2005. There is this short quote though.

            “The use of quantity of money as a target has not been a success. I’m not sure that I would as of today push it as hard as I once did.”
            Financial Times [UK] (7 June 2003)

            1. The Best of Both Worlds. Although I take from your comment you might have found it already, and seen that he was mostly proud of his previous works.

              The main exception being tax withholding (although he actually introduced the idea to limit postwar inflation, and stated that it should be eliminated as soon as WWII was over.)

            2. Sorry, I didn’t see your 11:08 comment when I posted above. However, I still think you’re conflating Monetarism with Keynesianism.

  6. Significant inflation is already happening, Yonemoto.

    Commodities, energy, food prices… all way up. Wages? Not so much. Employment? Not at all.

    Everyone can use all the old metrics they want to ignore the obvious, but inflation is definitely happening. Mish has been doing it for a while… it’s true that we may have a way to go before we are the Weimar Republic, but what is going to happen web the trillions of dollars tossed out of Bernanke’s helicopter in the past few years actually find their way onto general circulation?

    The fears of deflationary spirals have always been nonsensical.

    1. I acknoweldge that there is inflation currently, and my point is that this will trigger a bigger deflation.

      Also, I never said anything about deflationary spirals. I think that is keynesian nonsense, and I happen to believe that a moderately deflationary economy (i.e. where the deflation correlates to technological progress) is the most preferable situation.

      ” but what is going to happen web the trillions of dollars tossed out of Bernanke’s helicopter in the past few years actually find their way onto general circulation?”

      listen, a trillion or two is a lot, but privately held debt is still on the order of 50s of trillions.

      1. ps, if you read my post carefully, I also acknowledge that bernanke will cause hyperinflation.

      2. It is possible to have asset deflation and price inflation at the same time.

        1. That doesn’t seem to be a very stable situation. You can only be in contango for so long.

          1. I’m no expert, but it seems the deflation is already built in, so to speak, with all of those shit mortgage securities that are marked-to-myth. We still have yet to see what the put back exposure is, and if Congress will step in.

            This ain’t over by any means. 2011 is going to be an interesting year, for sure.

            1. Agreed on 2011 being interesting, although I said that about 2010. Turns out assange was the only really interesting thing about this past year.

              Housing prices are still about 50% too high. Market way overvalued. People still borrowing money to go to college.

              I concede it’s possible the fed has been doing shit that nobody but the fed and select banks know that would outrage the public in terms of having run the printing presses, that they are planning on “easing” in to the economy to avoid the double-dip.

              1. Ok, well fair point on all of that.

      3. excuse me, 34 trillion.

    2. Yes, mish is living in a fantasy-land where his astute prediction of deflation will be forever true. The only way this can be possible is if the US defaults on its debt, which is so unlikely it would be almost more tempting to bet that the LHC will devour the world. However, what he was correct about is that private debt is so much of a bigger entity than public debt, that until we hit some sort of a tipping point the government to a degree is pushing on a string. We’re not far from that tipping point, but we’re not there *yet*. At least a year or two till we get there, I think.

    3. Anyone who owns a home that heats with oil or gas and grocery shops for the last 5 years can tell you inflation is occurring. The Fed baskets and model assumptions are flawed and we’re about to see just how flawed they are.

      The fears of deflationary spirals have always been nonsensical.
      I love you, marry me.

      Is mentioning the Weimar Republic the new Godwin?

      1. Irving Fisher’s debt deflation was wrong… But then again we are following Keynes’ incorrect theories so why not follow Fisher’s.

        1. Irving Fisher was right up to a point.

          1. Debt liquidation and distress selling.
          2. Contraction of the money supply as bank loans are paid off.
          3. A fall in the level of asset prices.
          4. A still greater fall in the net worth of businesses, precipitating bankruptcies.
          5. A fall in profits.
          6. A reduction in output, in trade and in employment.
          7. Pessimism and loss of confidence.
          8. Hoarding of money.
          9. A fall in nominal interest rates and a rise in deflation adjusted interest rates.

          It’s at #8 that he jumps the shark. People don’t hoard money. That’s like saying you won’t buy the iphone now because apple will drop the price in a year. And come a year’s time you won’t buy it again because the price still has a ways to go.

          1. the debt liquidation will stop when asset prices have returned to what they should have been, plus or minus a social revaluation and of course lopping off a bit extra because the market likes to overshoot a little bit.

          2. Funny thing about models. Their useless unless all your assumptions and all steps hold true.

            He could have been right all the way up to the very last assumption, and if that is wrong the model is wrong. There is no partial credit in modeling, just endless revisions.

  7. IT’S THE DEFLATION!!!! WE NEED TO CONTROL THE DEFLATION!!!

    – said the man with the nice beard.

    Broccoli Man says, “buy the fucking dip, you fucking idiot, and you can make money, too.”

    http://www.youtube.com/watch?v=jllJ-HeErjU

    1. Deflation – a monetary event – needs to be separated from lowering prices. I’ve made this point, to be told there’s no difference.

      Here’s the difference: monetary deflation, like monetary inflation, can continue as long as the people in charge of the money supply take money out of, or put money in to, the economy. (Respectively).

      House prices won’t keep falling forever. Absent a crop plant being eradicated from the face of the earth, or a metallic commodity going “peak”, commodity prices can’t keep rising forever. However, some dumbass at a central bank (let’s call him “Ben”) can keep printing money, (or its modern equivalent, buying bonds with air dollars.) Alternatively, he could continue taking money out of the money supply as long as he wanted.

      Rising prices throughout the economy can occur when a commodity that is nearly ubiquitous in our economy (oil is a good example, iron pretty close) rises sharply. As all of the companies who use oil experience the rise in price, it “trickles down” into the economy, and they start raising their prices to cover their rising costs. Since nearly everyone uses oil in some way, a rise in oil prices can certainly seem like inflation. However, once companies have factored in the new price, they will stop raising prices. There is a natural “brake” on rising prices from commodities or goods that modern inflation or deflation doesn’t have.

      I pointed out on a previous thread that there were a few instances of inflation with a gold or metallic standard: when the cyanide process for mining gold was developed, millions of tons of low-grade ore suddenly became profitable to mine. Tons of gold flooded the market. Since gold was the currency at the time, this resulted in “inflation”. (I feel it’s fair to call it that, since the commodity being discussed was also the one being used as money.) The money supply was outstripping the growth in GNP by a large rate. However, the inflation stopped once all the known sources of low-grade gold ore were exhausted.

      Spain in the 1500’s imported tons of gold from the New World. They also used a gold standard at the time, and they experienced a crippling inflation for a while. Eventually, all of the gold was brought to Europe, and their economy went back to normal.

      On a somewhat lighter note, as a child I remember seeing ads for “German Emergency Money” – money used locally during the Weimar Republic to replace the German Central banks’ notes during their hyperinflation. More recently, I’ve seen this on Ebay, proving that the entrepreneurial spirit is hard to kill. (Myself, I have a set of 10, 20, 50, 100 trillion dollars in mint condition).

      1. Myself, I have a set of 10, 20, 50, 100 trillion dollars in mint condition

        Tee-hee

  8. “In fact, if anybody out there claims expertise on how China actually prevents appreciation of its currency ? and how this differs from the printing/bond-buying/interest-rate-finagling mechanisms available to any central bank ? please pipe up in the comments.”

    This is well known stuff. It can’t be news to you, but I’ll spell it out anyway, ’cause you asked, and I’m a literal minded geek.

    China pegs its currency to the dollar primarily by recycling its trade surplus dollars into US dollar denominated assets. In the past these included large amounts of US “agency” paper (Fannie and Freddie bonds) in addition to Treasury debt. Nowadays, it’s mostly Treasury debt.

    China does something similar with the Euro.

    The difference between China and the rest of the developed world is that China runs a trade surplus. It doesn’t need to print, it just needs to refrain from importing and instead buy (paper) claims against developed economies (like the US) instead of _stuff_ from those economies.

    This provides a “bid” for dollar denominated assets, and hence for the dollar itself. And by bidding the dollar (and the Euro, and the Yen) up, they keep their own currency down.

    Further, the renminbi is not freely convertible. (There is a market in non-deliverable forwards – a currency derivative – I think that’s how the renminbi ETF’s work – but that’s irrelevant to and beyond the scope of this discussion. The entire subject of renminbi conversion is evolving and complex. But basically, if you think the renminbi is undervalued and will appreciate, go open a FX trading account and try to buy some. You can’t. This is profoundly different from the case with the USD/GBP/EUR/JPY/CHF…)

    Also: the Chinese central bank “sterilizes” the renminbi that it does issue to buy the from exporters – it then turns around and issues debt, taking the renminbi currency right back out of circulation. In this way, it keeps inflation in China down, and thus can afford to keep its own internal interest rates relatively low. This in turn discourages “hot money” flows (which are proscribed anyway for most of the world – see above – but with a really strong interest rate incentive, hot money finds a way…)

    None of this is news, or even that controversial. But you asked “how is what China is doing different from what we’re doing to keep our currency from appreciating”.

    In one sense, it’s not different – what China is doing is also preserving a _structural_ imbalance in its economy – the mirror opposite of our own structural imbalance.

    But the mechanisms employed in creating that imbalance (in favor of exports, and in suppression of internal consumption) share nothing with those of Britain and the US are doing (buying bonds with digitally created currency), Europe (using term repos – not buying bonds technically, it’s more like “rent to own”…) and Japan and Switzerland (buy dollars and euros with digitally created yen and francs).

    So. Look.

    I yield to nobody in my general dissatisfaction (!) with the current political class.

    But with the issue of “currency manipulation”, the horror is not that the politicians have no case, but that they do.

    1. If the Chinese government wants to screw their own people over by devaluing their currency so that Americans can buy cheaper stuff at Wal-Mart, why should the US want to stop that? American consumers are being made better off at the expense of the Chinese people.

      1. The argument constantly used against this is that “American businesses will be shut down by cheaper goods subsidized by the Chinese (or 15/20 years ago, the Japanese) government. Personally, I think you’re right – if someone wants to give you something for free, or sell it to you at a big discount, you’d be stupid not to take it.

        1. re: BakedPenguin

          Think about how some drug dealers try to get people addicted to drugs by giving them away and then screw them once they are addicted. I can’t understand how people can think that a quasi-centrally planned economy with over 1 billion people couldn’t produce massive negative effects within ours with the help of “free” trade. Not even a true free market could handle distortions on that scale without negative effects. Things like drugs and easy credit cause people to do stupid things. It really doesn’t help when almost all of society is raving about how good that thing(easy credit) is.

          1. Oh, I’ve heard this one before. Change China to Wal-Mart and US to mom and pop stores, and you’ve got the favorite argument of every liberal in America about why big box stores are the worst thing ever.

            1. Often retards are mad at the right things for the wrong reasons.

              I don’t think Wal-Mart is bad. The corporatist welfare state and the society that fostered it are bad. Wal-Mart was just the best market player given the circumstances.

              1. How did the corporatist welfare state lead to Wal Mart doing what it does? I really want to hear your explanation for this.

          2. AoC: do you then favor a tariff scheme against countries that subsidize certain goods?

            I can understand that people in certain industries feel that it’s brutally unfair for other countries to subsidize products like the ones they make, and then sell them to Americans for cheap. But does that give them the right to stop other Americans from buying those products? Are you saying the government should step in and deliberately increase the price of those products?

            What about products that aren’t currently made in the US, but could be made, if only we had a tariff scheme to encourage them? Where does it end?

            1. I can’t say I know what to do. I’m very much against tariffs. However, I also don’t think that people should be allowed to profit off of slave labor even if it’s in other countries. I can’t say there would a right way to stop it or that stopping it would even be the best for the slaves. Considering how much government intervention there is now, I would want that to shrink significantly before we should even begin to think about the government doing something to solve this mess.

              I’d like to believe that with a free market monetary system, the US economy would be far more robust and maybe things like this wouldn’t happen or wouldn’t be as bad.

              1. I don’t understand what would be so bad about a tariff if we instituted a flat corporate tax and pegged the tariff to exactly the same value.

              2. I also don’t think that people should be allowed to profit off of slave labor even if it’s in other countries.

                And that includes the people doing the slaving. Don’t they understand that they’re exploiting themselves for the gains of America and the Chinese Ruling Party? It’s not like they can pull themselves out of poverty by working hard for low wages, that’s what welfare is for.

                Why they can’t get a decent 9-5 white-collar job like us Americans is beyond me.

                1. wylie, to be fair, I think he might have been talking about political prisoners. I don’t think it’s hyperbole to use the term ‘slave’ in that context.

              3. “However, I also don’t think that people should be allowed to profit off of slave labor even if it’s in other countries.”

                If you are implying that labor in China isn’t voluntary, I disagree. Until you are unable to quit without being threatened with violence, slavery has not occurred. Just because an economy is controlled, that doesn’t mean that its labor is “slave labor.”

                1. Also, the scope of control each individual has over their economic lives has grown in China, not decreased. Once again, I am not saying that the Chinese economy is anywhere a free market state. I’m not even suggesting that their economy is similar to our own. I simply believe that China’s economic growth has primarily resulted from the opening of markets, not the closing of them. Always forgotten in these discussion accusing the Chinese of engaging in “slave labor” is the fact that the Chinese economy today is freer than it has been in decades. Far from the ideal, but it has been an improvement.

            2. do you then favor a tariff scheme against countries that subsidize certain goods?

              My simple tariff scheme would place a tariff on a country’s imports equal to there highest tariff on any of our (USA’s) exports. Hopefully that would bring tariffs down in all trades. The ideal would would be a free market between individuals regardless of lines on a map. Yes I know know I am responding to a post that is 2 days old. When you write as bad as I do its a feature that not many read it. More of writing down my thoughts while reading some very interesting comments.

      2. Yeah, I mean the Chinese are really shooting themselves in the foot with this policy! I mean, look at their recent economic growth compared to ours…er, maybe you shouldn’t, you might end up doubting your cherished economic axioms…

        1. That’s exactly what people were saying about the Japanese in 1985-1989.

          They had discovered a “new way”! Their combined public-private partnerships were going to lead to a new model in how economies were handled!

          How’d that work out for them?

        2. The average Chinese worker can barely afford common household goods because their government is forcing them to subsidize purchases by Americans, but hey, look at that economic growth rate (which considering the reliability of Chinese statistics may not even be real)! Granted things are better than they were during the Great Famine, but they could be better.

          1. Chinese laborers may receive lower wages but they are also compensated with free housing, free education, and free healthcare. Geez.

        3. Why don’t you take a look at food, energy, and housing prices relative to the average salary in China?

        4. Oh, and like a typical Keynesian, you will be caught completely by surprise when their gargantuan housing bubble implodes.

          1. Central planning works!

            http://www.businessinsider.com…..-12?slop=1

          2. Central planning works!

            http://www.businessinsider.com…..-12?slop=1

      3. In the 1830s the Santa Anna government in Mexico began debasing their coins. Gresham’s law takes effect and silver floods into America. This along with other events relating to specie led the base money supply in the US to more than double in a few years. Good for America, right? Wrong. The massive inflation fueled an unsustainable boom and led to a very severe bust. However, it was far more complex than I could even begin to describe in this post.

        The PRC’s actions have caused severe distortions and structural imbalances within the US economy. Corporate oligopolies and the FIRE sector have benefited at the expense of the rest of the economy. The illusory rising tide financed largely by debt has prevented people from realizing so far.

        The point is that foreign government fuck ups, even ones that may seem to be good for America, often have disastrous effects. Read a few books on banking, money, and currency through out America’s history. Rothbard is pretty good. It’s incredible and there is no shortage of events that can help one to understand our current times. Pols and pundits couldn’t give two shits though.

        1. All very true, but I still don’t think that doubling down on statism ourselves is going to solve the problem. Economic isolation certainly hasn’t led to much reform in countries such as Cuba, Iran, and North Korea. In fact, economic isolation has arguably emboldened the dictators of such countries. Quality of life in China has dramatically increased as a free market has crept in. True, it isn’t ideal, but US government action aimed at “punishing” China and “protecting” US producers will have all sorts of other negative effect and may even set us back on our main goal of encouraging true, free markets around the world.

    2. I think it’s worth mentioning that the Chinese money supply compared to Chinese GDP is approximately 4vtimes that of the US. If hyperinflation is going to set in, it will probably be in Asia first.

    3. This is a really, really a great comment! I have one small bone to pick:

      “The difference between China and the rest of the developed world is that China runs a trade surplus. IT DOESN’T NEED TO PRINT,”

      This is not quite correct; China does need to print RMB to maintain its peg (and so indeed it does). China’s trade surplus means that it’s exporters wind up with a bunch of dollars in their hands. As you say, the RMB is not truly freely convertible – so exporters need to exchange their excess dollars with the PBOC for RMB. In doing so, the Chinese government is essentially printing money (go find the statistics on the increase in RMB growth in the last two years, they make us look like pikers. See this article, for instance, by Andy Xie, for numbers – http://english.caing.com/2010-…..377_1.html)

      This printing reduces the pressure for the RMB to appreciate and enables the government to keep the currency peg. As you also say, the government has used these dollars to buy treasuries. But it is not the buying of treasuries (which are just an asset) that maintains the peg, but the printing of RMB. In the past, the Chinese government has internally sterilized the increased quantity of RMB by keeping high reserve ratios on banks and heavy curbs on lending. What is different in the last two years is that the government has lifted this sterilization (they went all Krugman). This has unleashed a wave of wage, commodity and asset (especially home) inflation in China (despite the fact that export production and related growth, which had been the driver of the economy in the last several years, took a big hit in the last two years).

      The difference between our money printing and China’s isn’t the trade surplus – it is that we truly are sterilizing our money printing by doing everything to encourage bankers to cut back on lending and to increase reserves, and the Chinese are not. If we ever truly go “Krugman” and let the money flow through the way the Chinese have, look out.

  9. Since the Fed pushed interest rates to near zero in December 2008, commodity price inflation has resumed at rates rarely seen in the past.

    Part of that is currency devaluation.

    But another part of that is that commodity prices fell substantially as serial bubbles in grains and oil popped in 2008, and then everything (save gold) tanked in the wake of the financial meltdown. A lot of the gains that Askari and Krichene talk about the in excerpt are a dead cat bounce.

    And the other part of it is that commodity prices are forward looking; demand looks like its being restored, and globalization is continuing apace.

    Which raises some interesting questions. If every currency collapsed at the same time, would that be a push?

    You’d basically see a repeat of what happened in the fall of 2008; an equity market collapse, and without intervention, a deflationary death spiral.

    Also, what Lewy said about how China does with their currency; it in addition serves a form of seignorage that the govt is able to make some money on. This article from James Fallows also explains it, much like Lewy did
    http://www.theatlantic.com/mag…..on/6582/3/

    1. The crash(es) in 2008 were also as the result of bubbles. Note the run-ups prior to 2008: Corn, Rice

    2. Sorry for all the links. I should have thought to just give you the main Website: commodity charts.

  10. One thing about the “new” way the Fed introduces inflation – it requires that the velocity of money be decent before inflation can enter the system. There is a bottleneck that’s currently occurring because inflation is achieved through the banking system.

    With banks and corporations sitting on their cash (or investing it in the stock market), inflation just isn’t happening. When inflation was created by printing money, it went out to far too many entities for this to happen.

    1. I almost agree but,

      Inflation is happening: stocks, bonds, commodities

      Deflation is happening: shadow banking industry, assets

      could call it biflation.

      The FED is introducing inflation through the monetization of US debt, expectations of it’s actions, and causing shadow banking and corporate money to flow to emerging markets seeking higher yields.

      Open complex adaptive systems are so damn complicated….

      1. Penguin was referring to monetary inflation, not price inflation. IE, the real one.

        1. In case I wasnt clear, monetary inflation is the real one.

        2. The main point I was trying to make is that looking at monetary inflation is nearly useless when viewed through a binary metric at the aggregate. The use of this is largely the fault of Keynes whose macro theories always assume money flowing neurally. It doesn’t.

          Looking at where the money is going and the effects it is having is very important.

    2. Exactly. The huge increase in M0 wont lead to an increase in M2 until the velocity of money recovers. And, IMO, when it does, the inflation will restrain the velocity dropping us back into a recession. I think we have committed already to being Japan post 1990.

  11. This just in: Ben Bernanke responsible for hemorrhoids!

  12. my point is that this will trigger a bigger deflation.

    “You keep using this word…” et c.

    1. Hey look, I’m proposing a testable here. 2~3~6 months of inflation. Followed by 1-2 years of deflation. Followed by hyperinflation. That third one depends on the actions of the feds. We will see if I’m right.

  13. “Commodity prices don’t show up in the Personal Consumption Expenditures data the Fed uses, but they have been going kerblangbusters”

    What do you consume that doesn’t use commodities. Commodity prices show up in the PCE in the way they impact the price of goods. If steel prices go up, then auto manufacturers will raise prices on cars and it will hit the PCE. If coal prices are rising, then home electric bills will go up and it will hit the PCE. Unless you’re buying stuff that doesn’t require commodities or energy to make or transport, commodity prices are already baked in.

    1. Don’t forget that most utilities have to go before a board prior to raising prices. Also, many of them invest in those evul, evul derivatives to hedge against price shocks.

      Furthermore, IIRC, enery & food prices are excluded in CPI calculations because their prices are “too volatile.”

      1. They’re only excluded in core CPI (and the Fed generally looks at PCE, which doesn’t necessarily exclude energy and food). The CPI including everything only rose 1.1% on an annual basis in November. That’s pretty low.

        Also, while utilities may be able to hedge away a lot of their volatility, it’s still going to be baked into every other factor of life that uses energy. People feel the increase in commodities through all of their other economic interactions.

        1. Mo, given the massive monetary expansion, do you believe the low inflation is the result of a very low velocity of money, or some other factor?

          1. I believe it is due to a low velocity of money, partially due to the housing crisis, corporations sitting on piles of cash (though the M&A market has been thawing) and banks being reluctant to lend. However, I think low aggregate demand is a bigger concern than inflation (hyper or even elevated) and the TIPS spread seems to bear that out. The thing is all of the concerns of the Fed tossing oodles of money into the money supply seem to operate on the assumption that the Fed can’t reverse it’s actions and suck money back out of the money supply or raise rates to slow things down if the velocity of money speeds up too much.

            1. Cause they’re really great at that! Man, thank goodness the federal reserve is there to prevent bubbles from getting out of hand!

        2. “The CPI including everything only rose 1.1% on an annual basis in November. That’s pretty low.”

          THis is the problem that I have with the pro inflation crowd: they assume that low inflation represents a “stable” economy. IN fact, in a “stable” and unmolested economy, deflation was the norm. A 1% inflation rate may seem small, but what if the “real” rate of inflation should be -4%? IN that scenario, 1% inflation represents a 5% change in real inflation.

  14. They assume that because of how “kerblangbusters” commodities are going up without it showing up in consumer prices. Most people seem to believe that corporations are currently eating their margins and lowering quality and/or weight of their products rather than raise prices.

    1. Lowering weight would show up in CPI. If 16 oz of food a year ago costs the same as 15.5 oz today, that’s 3% price inflation. The food CPI index has only gone up 1% in the last year, though gasoline has gone up quite a bit more.

      Also, corporate profit margins (for S&P 500 firms) are at 7.2%, significantly higher than a year ago and right around historic averages for “recovered” economies. So the actual numbers don’t seem to back up the beliefs.

      1. Well, I think CPI is most likely bullshit either way.

        The S&P500;, being so heavily weighted toward financial, tech, and health care companies, is a terrible sample.

      2. “Also, corporate profit margins (for S&P 500 firms) are at 7.2%, significantly higher than a year ago and right around historic averages for “recovered” economies. So the actual numbers don’t seem to back up the beliefs.”

        Much of the increased profits are the result of cutting costs. Considering that companies have been cutting cost left and right, and they haven’t been hiring or taking speculative risks, the fact that we are experiencing inflation at all, at a time when deflation should be the norm, is a bad sign.

  15. We should just have the Ministry of Plenty establish fair prices for commodities.

    And houses.

    And cars.

    And socks.

  16. On the first day of Christmas Bernanke gave to me, a can of shaving cream.

    On the second day of Christmas Bernanke gave to me, a two-dip recession and a can of shaving cream.

    On the third day of Christmas Bernanke gave to me, three percent interest, a two-dip recession, and a can of shaving cream.

    On the fourth day of Christmas Bernanke gave to me, four federal bailouts, three percent interest, a two-dip recession, and a can of shaving cream.

    On the fifth day of Christmas Bernanke gave to me, a fivefold gooooold increaaaase… four federal bailouts, three percent interest, a two-dip recession, and a can of shaving cream.

    On the sixth day of Christmas Bernanke gave to me, six republican senators, a fivefold gooooold increaaaase… four federal bailouts, three percent interest, a two-dip recession, and a can of shaving cream.

    On the seventh day of Christmas Bernanke gave to me, seven credit default swaps, six republican senators, a fivefold gooooold increaaaase… four federal bailouts, three percent interest, a two-dip recession, and a can of shaving cream.

    On the eighth day of Christmas Bernanke gave to me, eight scheduled POMOs, seven credit default swaps, six republican senators, a fivefold gooooold increaaaase… four federal bailouts, three percent interest, a two-dip recession, and a can of shaving cream.

    On the ninth day of Christmas Bernanke gave to me, nine trillion in debt, eight scheduled POMOs, seven credit default swaps, six republican senators, a fivefold gooooold increaaaase… four federal bailouts, three percent interest, a two-dip recession, and a can of shaving cream.

    On the tenth day of Christmas Bernanke gave to me, ten percent unemployment, nine trillion in debt, eight scheduled POMOs, seven credit default swaps, six republican senators, a fivefold gooooold increaaaase… four federal bailouts, three percent interest, a two-dip recession, and a can of shaving cream.

    On the eleventh day of Christmas Bernanke gave to me, an eleven thousand DOW Jones, ten percent unemployment, nine trillion in debt, eight scheduled POMOs, seven credit default swaps, six republican senators, a fivefold gooooold increaaaase… four federal bailouts, three percent interest, a two-dip recession, and a can of shaving cream.

    On the twelvth day of Christmas Bernanke gave to me, twelve Ron Paul hearings, an eleven thousand DOW Jones, ten percent unemployment, nine trillion in debt, eight scheduled POMOs, seven credit default swaps, six republican senators, a fivefold gooooold increaaaase… four federal bailouts, three percent interest, a two-dip recession, and a caa-aaaan oooo-ooof shaaa-aaaving creaaaaam.

  17. Alan Greenspan is a monetarist, Ben Bernanke is a monetarist, the Bank of Canada is run by monetarists, and the European Central Bank is run by monetarists. I know that Milton Friedman changed his views on banking from supporting a central bank to supporting free banking, but his monetary policy proposals from his “younger” years are being implemented on a massive scale in nearly ever industrialized country on this planet. I have absolutely no idea why so many libertarians on this website have a problem with admitting that manipulating interest rates is a bad idea; the Austro-libertarians have known this fact since the early 1900s.

    Milton Friedman was a great man who brought free market dialogue back into the public eye again, and his proposals on tariffs and regulation should be implemented by every country on this planet. As I’ve stated in a different thread, his books were so influential that they were circulated underground in the Soviet Union. But he was wrong on business cycles, and he was wrong on monetary policy until he corrected himself later in his life. But the problem is that monetarists today do support what Friedman once recanted, and it appears many people on this site do as well, and that is definitely a problem.

    1. agreed about greenspan bank of canada and the ECB, but seriously, you don’t think helicopter ben has basically become a keynesian? “Price stability” is clearly not a goal of his.

      “I have absolutely no idea why so many libertarians on this website have a problem with admitting that manipulating interest rates is a bad idea”

      Probably the same reason why environmentalists have a problem with admitting that having an exponentially growing money supply is a bad idea.

    2. Tncm, I think we’re talking past each other. Admittedly, it’s been a long time since I read Friedman’s first works, but I think when Monetarism was first introduced, interest rates were not how the money supply was dealt with by the Fed. You’re right that interest rates shouldn’t be fiddled with, because they’re stronger signals about what is happening in the economy than small increases in the money supply, especially when those increases only mirror increases in real GNP.

      What I mainly objected to was the wholesale Keynes=Friedman bullshit. Friedman’s goal was (as Yonemoto pointed out) to maintain price stability – to make sure that prices didn’t rise or fall due to monetary events. He did not want to “stimulate” the economy, regardless of any collateral damage a la Keynes.

      As I’ve stated several times, I am not against a metallic or tabular standard. But it should also be recognized that a metallic or bi-metallic standard will also impose costs.

      1. bimetallic standard is awful, because you get people playing the arbitrage between gold and silver resulting in instability because the legal value ratio may have nothing to do with the real value ratio.

        Although, it might be possible to gain stability by defining the dollar as X gold PLUS Y silver instead of X gold OR Y silver.

        1. A side benefit is that coins like the one euro look pretty cool.

          http://en.wikipedia.org/wiki/One_euro

          1. A side benefit is that coins like the one euro look pretty cool.

            Yeah, I liked Britain’s 2 pound coin.

            As Episiarch and dbcooper pointed out on the “penny” thread, however, all those coins get pretty heavy.

            1. Well, sure, but people would still use paper money, checks, and electronic money.

        2. Yes, if you define a dollar as a definite weight of either metal, arbitrage would happen.

          For whatever reason, I was thinking of a Fed-less economy that still primarily used paper money, but which would have to be legally redeemed (by banks) in either silver or gold. The mint would print the dollars, and apportion them to banks according to the amount of gold and silver they had. Banks would be free to choose, but they would have to inform their customers what metals they used. I think this would allow flexibility, while getting rid of the vast majority of problems related to Fed bank interventionism.

          1. On the subject of bimetallic currencies, there wouldn’t be an arbitrage problem if the market was allowed to set the exchange rate between the two. Obviously, if the government sets the rate, the whole thing will collapse in upon itself.

            If we had a Federal Reserve that demanded that banks hold 100% of their reserves on hand in gold, then that would severely hamper the central banks power to manipulate interest rates and create business cycles. But it would be far better if we simply allowed a free market in banking.

        3. The arbitrage isn’t much of a problem if both the gold and silver trade at market rates. Arbitrage only becomes a problem when governments attach arbitrary values to both metals.

          1. If the value of a dollar was an ounce of gold and 5 ounces of silver, and somebody flooded the market with gold, cutting its value in half, a dollar would simply be worth 5 ounces of silver and 0.5 ounces of gold. The only way that arbitrage could actually lead to Gresham’s law coming into effect would be if the government created an exchange value that didn’t fluctuate with the values of the metals.

  18. The Krampus gets a bad rap. He simply rewards the kids on the bad list and punishes the kids on the good list. Thus explaining, incidentally, the problem of evil.

  19. Whenever I see one of this discussions about “stimulating” the economy with fiscal policy, inflation, deflation etc I just have to rather loudly ask:

    You know that money isn’t anything real, right?

    Even though we talk about money as if it was a real commodity, money, even gold, is useless in an of itself. It’s only function is to communicate the relative values of real commodities and human action so that we can coordinate our productive behavior over the entire planet. Money is information. The flow of money is the flow of information. Hell, most of the “money” in the world today is nothing but entries in computer database. It is as real as geld in a video game.

    Getting money isn’t the actual goal of a healthy economy. The actual goal of a healthy economy is creating the real goods and services that people need.

    Why do we does anyone believe that raising the money “supply” will do any good? Nothing real is being changed. Creating more phantom bits in computers doesn’t grow more food, doesn’t produce more mineral resources, doesn’t give anyone new skills.

    Any attempt to “manage” the economy by screwing around with the money supply or the financial system is doomed to failure because such screwing around only introduce static into the information the money carries. Inflation and deflation communicate false signals about the relative value of real goods and services. People make real production decisions based on false information and the entire local or planetary production grows increasingly uncoordinated. Any apparent local or immediate gains are utterly temporary if they are not outright illusionary. Eventually, the real, material price must be paid.

    Stimulating the economy by dicking with the money is simply an attempt to trick people into making bad economic decisions. The stimulators hope that if enough people make enough bad decisions in a short enough time, the economy will just kind of magically fire up again.

    We got into this mess in the first place by jamming the price signals that regulated how much housing we built and where we built it. What makes anyone think we get out of the mess by more jamming?

    The best you can do with monetary policy of any kind is do no damage to material wealth creation. Financial policy should be exclusively focused on making sure that the monetary/financial system transmits its information accurately.

    Anything else we do will just make things worse.

    1. “stimulating” “inflating” “human action” “services that people need” “phantom bits” “screwing around” “dicking” “stimulators” “jamming” “more jamming”

  20. Proving that Ben Bernanke can even screw up the economics of Christmas, the price of a lump of coal has increased more than 63 percent in the last year and a half.

    An old used sock filled with dirt and dropped on Bernanke’s doorstep would be the cheapest present, not to mention the best.

  21. but there is no inflation.

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