It was a riff off a WSJ reporter Jon Hilsenrath piece. The Hilsenrath piece sounded to me like the Fed was very concerned about the economy.
Three days later I reported on the drop in the ECRI Index and wrote:
The ECRI continues to be one of my favorite indicators for tracking the economy. It tends to be much more timely and accurate than government data. This sudden drop in the index suggests imminent trouble over a broad swath of the economy.Based on a new report from Ambrose Evans-Pritchard, my analysis does not appear to be that far off from the reality of the situation. Pritchard writes:
Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so.To date, Fed asset purchases have not had much impact on the economy since banks have simply kept the money on deposit with the Fed as excess reserves. However, an addition of another $2.6 trillion in assets by the Fed would most certainly see some of, if not all of the funds, enter the system. Further, as these Funds enter the system, it could very well cause banks to start to put to work the trillion they have sitting on the sidelines. The money supply (M2)would explode.
Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion.
If Pritchard is anywhere near accurate on his reporting here, and keep in mind that my analysis of the situation earlier this month seemed to be heading in the direction of Pritchard's report, then we may very well be about to head into one of the most inflationary periods in American history.
The only drag on Bernanke's mad money printing plan seems to be the presidents of the Fed regional banks, but Bernanke is doing what he can to dilute their influence. Here's Pritchard again:
[Bernanke and other Fed governors] certain to face intense skepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts... Mr Bernanke is so worried about the chemistry of the Fed's voting body – the Federal Open Market Committee (FOMC) – that he has persuaded vice-chairman Don Kohn to delay retirement until Janet Yellen has been confirmed by the Senate to take over his post. Mr Kohn has been a key architect of the Fed's emergency policies. He was due to step down this week after 40 years at the institution, depriving Mr Bernanke of a formidable ally in policy circles.Bottom line: If such an asset purchase campaign is launched, the inflationary ramifications would be extremely severe. You would see near immediate upward spikes in the stock market and gold. Housing would follow. Then the consumer price inflation would start. Severe double-digit inflation.
How likely is Bernanke to begin such a campaign?
I have argued in the past that Bernanke does not have the "trader's touch" that Greenspan had. Greenspan's money manipulations are largely responsible for the current overall downturn and the housing crash, but on a short-term basis, Greenspan had the "touch" to add just enough money to fuel the economy and not go stark raving mad on the money printing side.
Bernanke does not appear to have this touch, he swings from near zero money printing, as is the case now and also in the summer of 2008, to extreme money printing as was the case between September 2008 and March 2009, when the money supply (M2) climbed at annual rate of near 15%. Thus, a $2.6 trillion asset purchase by the Fed under Bernanke would not surprise me. The man swings extreme, and the current negative numbers on the economy, which I am sure he understands means major problems ahead, must scare the bejesus out of him.
The Fed has not started any major asset purchases, yet. But the situation needs to be monitored closely. Any indications that Bernanke is indeed conducting massive quantitative easing operations will mean that its time to get in aggressive inflation protection mode.