Thursday, February 17, 2011

Kelly Evans, Why Do You Ignore the Federal Reserve?

Kelly, you write in today's WSJ:
The threat of inflation is real. It is just a different threat than many realize.

Pick any U.S. price gauge, from import to producer prices or the consumer-price index due  out Thursday, and it is generally on the rise. It is important to note, though, what is fueling the gains: a jump in prices of commodities such as oil, crops, metals and other raw materials. These have risen due to strong global demand, particularly in emerging markets, and pockets of reduced supply.
I do not question that the price inflation is real. In fact, I warned about it months before you. I also grant that some of the increase in prices is coming from increased demand from emerging markets such as China, but how can you ignore the role of  the Federal Reserve in your reporting?

Since the start of 2009, the Federal Reserve has increased the money supply by $641 billion. And more is on the way! The Federal Reserve via QE2 is pumping in another $600 billion. They are adding more via re-investment of MBS cash flow that they are receiving and they will add another approx. $200 billion  as the Treasury  unwinds its  Supplemental Financing  Program  over coming weeks. It's true that some of this may end up as excess reserves, but the fact of the matter is that huge amounts of new money is also getting into the system.

How can you ignore this factor when you discuss influences on prices? Are you becoming an apologist for Ben Bernanke and crank economists such as Paul Krugman?

Keep in mind that Keynesian economists such as Krugman, who feared deflation, were calling for the Fed to print more money to battle the deflation they foresaw. Well, we got the momey printing they wanted, so why can't we say part of the price inflation is the result of this money printing, since their argument all along was that money printing would boost prices?

The fact of the matter is, Krugman was way off in his analysis of the economy. Way back in November of last year, in a column titled, Krugman's Most Embarrassing Comment Ever, I wrote:
 Yes, write this down. In November 2010, when we are on the edge of huge price inflation at the consumer level, Krugman fears deflation.

In your column, you confirm that the price inflation at the consumer level is coming. This has to be a very embarrassing time for Krugman, since he did write back in November:
Right now everyone seems to believe that rising commodity prices are telling us to beware of inflation. I think that’s dead wrong...There’s really nothing here to shake my view that deflation, not inflation, is the threat.

I called him on that forecast, within 24 hours of his posting it. He saw the demand from China back then, but he knew that wasn't enough to boost prices, but, further,  he simply failed to understand the business cycle and why capital goods and raw materials prices climb before consumer goods prices do. You are falling into the same trap. Money matters. And when it is increasing, it has an impact on prices. Or do you also think the hyper-inflation in Zimbabwe was caused because of demand for commodities from China?

1 comment:

  1. I'm afraid you're not going to find much FED bashing going on at the Wall Street Journal. The FED was created of, by, and for Wall Street.

    Keep swinging brother.