Wednesday, December 12, 2012

Bernanke to Double Down on Money Printing

Mad money printer Ben Bernanke, in addition to continuing his current $40 billion in mortgage-backed securities, is going to also purchase longer-term Treasury securities at the tune of $45 billon per month.

From the Fed statement:
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
This is very serious money printing, especially given that banks appear to be adding this money to the system rather than putting the funds in excess reserves. Prepare for strong 2103 price inflation.

Richmond Fed president  Jeffrey M. Lacker voted against the action. He opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.

The inflationists voting in favor were: were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen


  1. It's great isn't it? So predictable. Tune in the same time, next year, for more of the same.

  2. Insanity: doing the same thing over and over, but expecting a different result. The inmates are currently running the asylum.

  3. I am intrigued by the numerical threshold. Low rates are tied to 6.5% unemployment and 2.5% inflation. As 2.5% won't be hard to reach, won't that be priced in by the market and gold-negative? 6.5% may not be hard to reach the way labor force participation is dropping.

  4. This is very old news. This information has been thoroughly covered since QE Infinity was first revealed to the public.

  5. If and when the economy really does recovery, some good perspective can be had from from the 1990 edition of Free to Choose, by Milton and Rose Friedman, a paragraph concluding a chapter titled "The Anatomy of Crisis" --

    "In one respect the System [the Fed] has remained completely consistent throughout. It blames all problems on external influences beyond its control and takes credit for any and all favorable occurrences. It thereby continues to promote the myth that the private economy is unstable, while its behavior continues to document the reality that government is today the major source of economic instability."

  6. Could you be a bit more specific please and tell us what "strong price inflation" actually means? The FOMC's forecast are specific, "price inflation" (which everyone outside Austrian economics just calls inflation) of about, maybe a bit below, 2% as measured by the PCE index. I don't care about the price of gold, or the price of steak, or the price of gasoline, or the price of other individual goods.

    I would like your specific forecast for "price inflation" as measured by the PCE index (or the CPI). Don't hide behind wishy-washy terms such as "strong". What does this mean? If you think it's a big government conspiracy which downwards biases the PCE, I don't care. That's humbug in my opinion, many comments on this blog disagree apparently which puts them outside serious economic discussion, in my view. Also many don't even understand the basics of Fed policy. The [price] inflation target is for an annual increase of 2% of the whole PCE index, not just food and energy.

    So, give me your forecast, please. The FOMC just did, what's yours?? A probability distribution over a range of outcomes is fine.

    1. There's no telling for sure actually because money isnt neutral. Theres so many aspects of "price inflation" that isnt necessarily due to money printing. But due to all the signs, it will probably be in the housing sector due to the purchase of mortgage backed securites and you can already see thats happening.

      Not to mention gas, beef, and most likely precious metals due to the notion that the economy is getting worse(fiscal cliff,etc.). Wenzel isnt a psycic, he's just an economist, and all an economist can do is analyze a situation, "disect" it, and create a model based off certain possible outcomes due to the action axiom. There is no exact predictions, just identifying what are possible tendencies.

      And these indexes dont amount to much because theyre applying empirical calculations to an ever changing equilibrium where external data can change, along with the decisions of the individuals. There isnt a diagram or a formula in the world that can predict what will be bought, made, traded, etc. tomorrow. So I wouldnt put too much faith in these indexes and statistics, thats not what economics is at its true core.

    2. This comment has been removed by the author.

    3. The FOMC gives their forecasts. Good for them. How often do those forecasts turn out to have been accurate? Are you aware that PCI does not include the same basket month-over-month, as it takes into consideration "substitutes"? How can this be a reliable measure of price inflation. Are you aware that inflation originally meant influx of new money?

    4. Not understanding the difference between Monetary Inflation and Price Inflation puts you outside serious economic discussion, Anon, in my view. But I'm just a massage therapist, what do I know.

    5. In reply to the two comments above.
      If a theory can't be used to forecast in Economics, it's utterly useless. It becomes religion rather than social science. I didn't ask for an exact prediction, a probability distribution over possible outcomes of PCE inflation is fine and certainly should be doable given current information. The FOMC does it. Why can't you?

      Of course, substitution adjustments are necessary for any price index which aims to accurately reflect consumer purchasing behavior. How many black-and-white TVs do you still buy? In the 1960s they had a large weight. How about dial-up modems? Tape players? LPs? 5.25'' floppy disks? Coal-fired ovens? Cross-continent train rides? The weights in the index are based on current purchasing behavior and are regularly updated, how is that inappropriate? I would, personally, have much more problems with an index which is NOT regularly updated to allow for substitution.

      I don't care what inflation originally meant, 99% of people who have taken at least a principles course in Economics understand inflation to mean a change in the rate of the general (consumer) price level. But again, I am willing to call that "price inflation" here. I don't care about the amount of money in circulation unless it affects "price inflation". It may well do so, but certainly, I believe because my models tell me so, not in the more or less direct relationship which often seems to be postulated here.

      No forecast yet, except the 4-5% (presumably for 2013) by El Gordo below. I strongly believe that the FOMC forecast for 2013 is much more accurate, we will see in a year.

    6. Hey Anon, show me where your theory predicted a close approximation of the hyperinflation in Germany, Hungary, Argentina, Zimbabwe, etc in advance. How about you show me your theory that predicted double digit inflation in the 70's in advance. If your theory didn't predict close approximations of how high inflation was going to get in these countries, in advance, then your theory is utterly useless.

      Also, when you are digging up all those correct calls central banks have made in countries that had hyperinflation or double digit inflation, can you point me to Bernanke seeing the housing bubble? I mean if a theory isn't able to predict the biggest collapse since the Great Depression it must be considered utterly useless, right?

    7. 1. Definitions exist to insure individuals discussing a particular subject reference the same concept, despite you're 'not caring what it originally meant.' Inflation and increasing price levels are not the same.
      2. Anyone sincerely interested in increasing price levels certainly 'cares' about the prices of meat, gasoline and gold, for which tofu, walking and FRNs are not 'substitutes'.
      3. Economics is not the study of constructing models to try and predict the future, Nostradamus. That's Econometrics, the religion. Economics is a subset of the science of Praxeology - the study of human action based upon the action axiom.
      4. Given your probable inability to accept the above, go to

    8. Still no forecasts here... Are you all afraid to tell me and everybody else what will happen? I and other mainstream economists have clearly, in your opinion, such an inferior understanding of how the economy works, that we can't see the obvious "strong price inflation" ahead.

      In response to Cottedam321: Of course current mainstream economic theory predicted for example the hyperinflation in Latin America in the 1980s and Zimbabwe more recently. The institutional set-up of these countries basically ensured it. The mainstream theory of central banking (dynamic inconsistency, central bank independence etc.) has advanced dramatically since the 1970s. The recent record since the early 1980s in the US on inflation has been impeccable, inflation has been predictably low and stable. Much, much more stable than under a Gold Standard.

      The housing bubble is a BIG success for Austrian economics, no doubt, and a BIG failure of mainstream macro and finance. Other schools made similar warnings, such as Post-Keynesian economists (Hyman Minsky comes to mind).

      If economics is not used to predict the future why are you harping on predicting the bubble and predicting inflation now? is useless and incorrect, substitution in the index is necessary. The current CPI or PCE are much much more accurate, nice try. And no, I don't care about individual prices but want to know the rate of change of prices for a representative basket of goods and services, why is that so hard to understand?

      99% of economists define inflation as a change of the price level of a general basket of goods and services. If you want to ensure that individuals reference the same concept, go with the generally understood definition. But, just to make sure you aren't confused I will always write "price inflation" on this blog.

      And let me repeat: still no forecasts of PCE inflation next year. Why are you all afraid to put back up your worldview with actual numbers? If you think it is all extremely uncertain, give me a probability distribution over a range of possible outcomes.

    9. You cannot simply make things up and expect people to take you seriously.

      1. Where did I harp on predicting bubbles and predicting inflation? Please link/quote.
      1a. One of the biggest issues with collectivism is that most do not realize its omnipresence. Your cavalier usage of the subject pronoun 'you' is indicative of as much.
      2. Make an argument why is useless and incorrect. The emperor declaring the sky yellow, does not make it thus. My argument against the CPI and PCE as indicators of changes in the prices of goods, which I feel I can safely state is representative of Austrians in general and readers of this blog, is they ignore essential goods that every person consumes and whose prices are and have been increasing substantially.
      2a) How can you compare the prices of baskets of goods without considering the prices of the individual goods which compose those baskets? Be as detailed as possible please.
      3. 600 years ago 99% of the world population said the Earth was flat. The validity of that statement was adequately determined. I am not confused; I was pointing out a conceptual misunderstanding of yours. Nevertheless, if your argument is to say 99% of the readers of this blog understand the concept of inflation as increasing prices, and not increases in the money supply, it can only be due to purposeful ignorance and lack of exposure to this blog.
      4. Economics is not concerned with making forecasts of PCE. Neither am I. I am only afraid you don't understand the purpose of the science of praxeology, and one of its underlying components, Economics. Economics is not used to make value judgments of human actions; rather, it's to determine how man employs purposeful means to achieve desired ends in a world of scarce/finite resources.
      5. Your worship of probability distributions is paramount to religious extremism.

    10. The CPI and PCE indexes are based on representative samples of households. They do NOT exclude anything. Go to the BLS or BEA webpage, you will find all the components listed, yes including steak and gas. For "price inflation" in general just cherry-picking individual goods and ignoring others is meaningless. How about the fall in apparel prices over the last decades, why is clothing less important than food? How about the fall in prices of gas for heating since last year, why is heat less important? Of course shadowstats does exactly this cherry-picking. By basically ignoring all substitution to new, cheaper goods it overstates "price inflation" for actual households by definition and design. Note also that their latest "hyperinflation" update is about a year old, ignoring falls in gas prices which happened since.

    11. Anonymous said, "The recent record since the early 1980s in the US on inflation has been impeccable, inflation has been predictably low and stable."

      I've yet to meet a Person who thought prices haven't jumped sky high since the 1980's. At any rate, this Anonymous Person sure does make one giant assumption next: "Much, much more stable than under a Gold Standard."

      Ha, there's a chart on the internet showing prices since about 1600 until now and wow does it ever make Anonymous look, um, wrong. Absolutely wrong.
      I don't have the link but it's out there if you want to find it.

      - IndividualAudienceMember

    12. No problem, just move the goalposts as you go. Gas went up? Well heating oil went down...they're close enough. Don't bother responding to any of the other questions, you must be 'scared'.

      Being such a devout follower of the econometrics faith, I'm surprised you don't see the inherent problem in changing your measured variables anytime you perceive variance. Gas in 1900 is still gas in 2012, the price of which has risen steadily. Filet is filet, its not flank steak. Comparing apples to oranges is cherry picking.

      Your logic applied:
      Yesterday gas was worth $1. Today heating oil is worth $0.90. Tomorrow crude oil will be worth $0.85 as the trend is negative and they are all 'substitutes'.

      If you don't see the problem yet you can't be helped.

    13. Anonymous at 9.21:
      I was clearly referring to the stability of "price inflation", not unchanged prices. What is important is a stable, low but positive, rate of "price inflation". This makes it possible for businesses and households to plan long time purchases and debt. Under a gold standard you can easily see that the variation in "price inflation" would have been much much higher. "Price inflation" would have been highly negative leading to massively high real interest rates and a catastrophe for the economy.

      I realize that many readers of this blog are likely retirees who would have been one of the few interest groups benefiting from this (living on savings and fixed income). But ask any businessman if he likes "price deflation" and you will hear a different story. Rates of "price inflation" have been extraordinarily stable and low yet positive, which decades of economic research have shown to be optimal compared to the much higher variation of a hypothetical gold standard since 1980. The fall in gold prices since 1980 would first have lead to a high amount of "price inflation". The rise in prices since 2000 to a high amount of "price deflation". The opposite of stability for the economy, Fed policy has delivered on this point, the record is indeed impeccable on price stability.

      If more and more people become vegetarian, shouldn't the CPI accord for this and substitute some tofu for steak? Why stick with old weights? Nobody buys tape players anymore, why stick with old weights and put zero weight on iTunes songs? And how would you deal with quality improvements? My calculator on my desk cost $19.95 and can perform more functions more easily than one of my first desktop PCs in the 1980s. Of course these adjustments are not easy, but not making any seems an order of magnitude more silly if you are trying to measure actual price changes for consumers rather than doing an exercise in nostalgia. I could repeat your last line back at you, right?

      You can find the weight for all goods in the CPI or the PCE at the BLS or BEA websites. Check it out, construct your own index with Excel if you are doubtful. They don't ignore any essential goods and services as you claimed earlier.

      And I remain convinced that if you can't use economics to forecast or explain human behavior you are engaging in a rather useless exercise. Clearly the forecasts themselves can be uncertain and good forecasters (and econometricians) realize this. But only through forecasts can you test your theory, v. Hayek and v. Mises and Ron Paul all made forecasts, many of which actually did not turn out so well (Norway has not succumbed to serfdom quite yet, for one. The US has not seen hyperinflation since 1980 either.)

      You actually concede my main argument for the success of Fed policy. Prices have risen STEADILY. That's what the Fed promises, low and stable "price inflation" around 2% per year. You can plan for this and make your purchasing, saving and investment decisions accordingly. A gold standard would have had much much higher variation of "price inflation" and thus created crippling uncertainty for businesses and consumers.

    14. You need to do quite a bit more to support your claim that a little inflation is good. There is nothing intuitive or logical about such a statement. A "little" inflation steals money from those that earned it a "little" bit at a time. Moreover it would seem difficult historically to attempt a "little" bit of inflation, and keep it "little" for a protracted period of time. See: early US, Civil War US, Weimar Germany, Argentina, Zimbabwe, and many many others.

      Inflation is the dishonest way to tax.

    15. How is it dishonest if you know it is coming? You know that the purchasing power (in terms of goods and services) of your dollars under your mattress will lose about 2% each year. If you don't like this, put your money in other investments. Lenders and borrowers can plan with 2% "price inflation", why can't you? Buy for example Treasury Inflation Protected Bonds (TIPS) and you'll be compensated for any rise in the CPI. Maybe you think gold will do better, what's stopping you?

      Over the last thirty years (and counting), the record in the US has been impeccable on this, creating very very little variation of "price inflation" under this regime.

      You can google "benefits of low and stable inflation" or "optimal inflation" and will find hundreds of academic papers written by Federal Reserve economists and many others on the topic. Did you? One of the main reasons is the zero-lower bound for nominal interest rates, which we have currently reached. This complicates the transmission mechanism of monetary policy. Another reason is that there is quite a bit of empirical evidence for downward wage rigidity, or money illusion more generally. You're correct, this is not intuitive, but nonetheless pretty uncontroversial among mainstream economists.

    16. Since the genesis of the Federal Reserve the rate of inflation has not been your arbitrarily desired 2%, it has actually been closer to 3%, so your approach fails from the getgo.

      It is dishonest because it is *not ever* fixed, and it is always changing. Do you deny that excess reserves are dropping and required reserves are increasing? Do you not think that this will introduce price inflation into the overall economy?

      Even if you disagree, assume for a moment that I am correct and that we begin to see massive price inflation. What can the federal reserve do? Sell treasuries in order to drain money from the system? What happens to the federal government if the federal reserve is forced to liquidate a pile of treasury debt? Can the United States even survive that financial hit?

      You have yet to justify why a sound currency is not desirable. The logical and intuitive desire of most people is to earn a dollar and have it worth that same dollar when they go to spend it without having to resort to risking it in some paper investment to keep pace with the government mandated 2% (but actually 3% or more) annual theft rate. That is *exactly* why people put so much money in the stock market, and got destroyed in 2008. You find that to be a stable and fair system?

      Recommending someone search google, instead of offering an explanation on your own complete with citations, screams that you are an ignoramus who is simply talking out of his ass. You must have written 10 posts on this forum over the past few days, you couldn't spare two paragraphs to attempt to justify your position?

      And FYI, you will find very few individuals that support an annual theft in the value of their money, once they realize that over a 100 year period at 2% inflation something that cost $1 will now cost $7.103. At the actual inflation rate of 3% it will cost $18.659. You won't find many takers for your $18 candy bar.

    17. First off, thanks for the ad hominem attacks ("ignoramus talking out of his ass", real classy here) which clearly enhance the power of your arguments.

      You say there are few individuals who support the position. Not true, if you could actually bother looking at google, you would see the hundreds of papers cropping up. If you look at some other comments which you seem to be aware of, I outlined there two of the main reasons for a target inflation rate which is slightly positive. The reasons are the Zero-Lower-Bound for nominal interest rates and downward wage rigidities. The latter is an empirical fact the former a policy conundrum at this very moment. So for these reasons specifically, a target of 2% "price inflation" was shown many times over in countless papers to be more desirable compared to a 0% target for "price inflation". A recent paper on this is for example Coibion and Gorodnichenko in REStud. Please also see the many citations in it for further discussion.

      Regardless, the target itself is almost of second-order importance, much more important is stable and low variance "price inflation". This makes the US-dollar at the moment a VERY sound currency which is desired as the ultimate safe asset around the world (except for much of the audience of this blog and like minded peers who seem to prefer gold).

      I don't believe we will see "massive price inflation", that's why I have been clamoring for somebody, anybody to make a forecast about what this actually means for next year. You don't make one either. No, I don't believe that there will be massive "price inflation". "Price inflation" will be close to the target of 2% for the PCE index (INCLUDING food and energy). If there was "price inflation" which moved significantly higher than the 2% target, the Federal Reserve has many tools to fight it. Reducing its balance sheet, increasing interest rates on reserves are two new tools along with the ordinary one of a higher fed funds target rate. I am absolutely confident that the Fed can and will use these tools to prevent any sustained increase in "price inflation" above 2%. Yes, the government can survive, because the Fed would only have to do these policies once the economy (and thus tax revenue) sufficiently recovers.

      People know this target, or should know it. If they prefer to keep cash lying around in vaults or under mattresses that's their (irrational) choice. I am personally very happy with my asset portfolio including government bonds and stocks. The returns have more than compensated for any inflation since 2008. And didn't all of you buy gold in 2002 when Ron Paul suggested it? Why are you complaining? That was a great investment! Of course over the last year or so that has not worked out so well and I personally believe gold to fall over the next two years to about $1,500 at least (when there are TV spots advertising gold bars for your home safe, it's pretty clear that's the peak, but we'll see).

      I don't understand your last point. This is happening as we speak. People today buy $1.49 bottles of Coke which used to cost a nickel in 1950. Wages go up as well over this time period. There are millions of takers for the $1.80 candy bar today which cost dime 50 years ago. I just bought one today, maybe you did too? Absolutely no dishonesty or theft, particularly since 1980. Federal Reserve policy did indeed fail the country in the 1930s by failing to prevent "price deflation" and in the 1970s by failing to prevent modest and above target "price inflation". I don't think this failure to be likely again in the next decade. What's your forecast?

  7. I know the term "pump and dump" normally applies to stock fraud but it applies so well in this case.

    The question is who is going to dump the dollar first?

    My money is China first, banksters second, and Joe Six Pack tries but by then it's too late. Of course there's always a small group of "in the know" people that made the right decisions before all of them....


  8. THIS time it will work because.......well it will work. The PhDs have this under control!

  9. Firstly,

    The $45B figure says it is 'initial' because it is totally obvious that it will be greater than $45B. The committee simply can't announce the figure because it isn't sure how much revenue higher taxes from the 'fiscal cliff' will generate, what the T-Bill demand in 2013 will be, and what the foreign reaction to this monetization will be.

    Secondly, the reason why they aren't sure, other than future events being by nature uncertain, is that there is a TITANIC-full of wishful thinking going on.

    How much revenue will higher rates generate? Not much. In real terms it will likely go down since productivity has marginal costs while foregone productivity has none. The rich will restructure, and possibly produce less. The middle class will lower their productivity and join the parasite class where possible. The Democrats are seeking a Milton-esque solution, "It is better to rule in Hell..."

    T-Bill demand will evaporate from foreigners. Domestic T-Bill demand will expand only in proportion with the force applied to mandate T-Bill purchases barring some foreign events that lead to a 'least ugliest' calculation on the part of investors.

    As to the inflation... I don't think it is possible to settle on a number. It will be a situation that demands the question, "Is the boat sinking? Or is the water rising?" The economy will be shrinking in response to the reduced productivity resulting from evaporating gains for new projects. At the same time the money supply will be rising.

    The inflation will hit when businesses realize that they can borrow money cheaper than they can produce viable business lines, while their cash is simultaneously shrinking. The tax situation will retard this response.

    So what 'strong' inflation could you see?

    Well I'd say that 7% is a given at first. With the substitutions in the CPI it will likely show 4-5%. However, the problem is that when lending picks up it could immediately bump up well into double-digits without warning.

    The point is that productivity in real terms is shrinking at the same time that the currency is expanding, and extremely anti-productivity policies are being put in place.

    So, best case you get double-digit inflation in real terms within 36 or so months. Worst case the world gets out of dollars fast.

    Again - barring another 'least ugly' situation as we had in comparison to the Euro last year.

  10. Just wait till next month when Boston Fed Marxist Rosengren gets to vote.
    He is going to be a Krugman dream Banksta.

  11. Why is Ben so focused on 2% CPI increase? My taxes are already going up by more than 2% next year, so as far as I am concerned, Ben has already reached his goal and should desist from printing more money.

    1. You do know the difference between monetary and fiscal policy, right? Also you realize that higher income taxes do not translate into "price inflation", right?

    2. I said, "as far as I am concerned". This is completely true given that I have a meager amount of savings and it makes no difference to me whether Ben reduces my future income via increased prices, or whether the govt reduces my future income via increased taxes.

      Also, what do you think the Govt does with the extra taxes? Put them in a savings account for use on a rainy day? Or does it use the money to spend on various projects, and cause price inflation in those sectors? So, you are almost certainly incorrect in asserting that higher taxes won't translate into price inflation.

      Lastly, why are the monetary and fiscal policy at loggerheads with each other? One will cause people to cut down on spending while the other will cause people to go out and spend recklessly? Is it because Ben Bernanke does not understand monetary and fiscal policy? Maybe Ben should advocate for a wealth tax, eh?

  12. Substitution is BAD for a simple reason. If you substitute cheaper chicken for expensive beef, then you are lying about what is true inflation. Interesting how some people say substitution is good, when, obviously it is very deceitful and unethical.