Saturday, December 24, 2011

Bernanke's Christmas Gift to Obama Has Arrived

Stocks hit a 5-month high on the last trading day before Christmas and new data on the housing market and with regard to unemployment suggest the most watched economic indicators will soon be flashing green for recovery.

This manipulated economic boom will, of course, cheer the President as it will boost his re-election bid, but, note well, most of the rest of us will all end up paying for the Bernanke inspired money goosed economy, with higher prices on everything.

Prices have been nowhere near Krugman's deflationary expectations. Over the last 12 months, the headline CPI index increased 3.4 percent. But this will look like happy days compared to what is coming. Stock players and tech and oil workers will soon start spending the money gains they are seeing. Money gains they have because they are first in line when Bernanke prints. They are going to be bidding for consumer goods against the rest of us---and they are going to have the money to do it. In other words, most of us will have to scrimp and budget carefully, as Bernanke printed money flows elsewhere.

So yeah, the macro-economic numbers will look good, but down deep we will all be paying for this central bank distorted economy.

Merry Christmas.


  1. Why is there such a long lag between the reduction of interest rates by the Fed and signs of inflation? George Reisman's section on money in his "Capitalism" cleared up the issue of money and expectation for me. It's the velocity. Velocity and expectations are highly correlated. Velocity stays low during a recession because of lagging expectations even as the money supply grows at a good rate. Low velocity stifles the effect of increased money.

    But at some point expectations flip and velocity reinforces money supply growth instead of suppressing its effect. When that happens, Katy bar the door!

    As you have been writing, velocity has flipped!

  2. "But at some point expectations flip and velocity reinforces money supply growth instead of suppressing its effect. When that happens, Katy bar the door!"

    But it's silly to just assume the fed will let velocity go out of control and keep the money supply growing. Notice how there's an inverse correlation between velocity and money supply growth the past 20 years.

    This isn't just a coincidence. The Fed slows down money supply growth when velocity increases and increases money supply growth when velocity decreases. This as the effect of more or less stabilizing nominal GDP growth to around 5%. If the Fed continues this trend, it's hard to see how inflation will get out of control with that low amount of NGDP growth. In the 70s with high inflation, NGDP growth was in double digit levels, but so far in the recession it has been under 5%, hence the comparatively low inflation.

  3. A little holiday humor: Here is the only (regrettably doctored) image of Bernanke's self-righteously smug, yet utterly clueless, face that I have ever been able to tolerate: Drunken Ben Bernanke Tells Everyone At Neighborhood Bar How Screwed U.S. Economy Really Is. It's not easy to make me laugh anymore, but this photo cracked me for the longest time when I first saw it, mostly because it makes him (and his "thrilled" audience) look human -- in the lowest-common-denominator sense of the word. ;-)

    Maybe it also appeals to me because I used to be a bartender long, long ago.