Saturday, May 11, 2013

Is Ben Bernanke A Beached Whale?

Brad DeLong has written a fascinating tale about the London Whale and Ben Bernanke as the super-whale, here.

He gets all the facts correct, but fails when he gets to theory and forecasting. He fails when he writes:
When workers have no pricing power, and so wage inflation is subdued, like now? [...] But, the hedge fundies say: "What if the economy recovers and starts to boom? What if inflation shoots up? The Fed could loose [sic] $500 billion on its portfolio as it moves to control inflation! Why doesn't that fear that?" 
The Fed does not fear that. That is what it is aiming for. 
The hedgies are correct here, in a sense, in their concern about price inflation. But DeLong is framing the hedgies as Keynesian in that they see a booming economy leading to price inflation. DeLong ignores something that Austrian economists would never ignore: stagflation, the possibility of an economy in recession and price inflation, simultaneously. Thus, DeLong ignores the full spectrum of scenarios under which price inflation could occur. Further, although DeLong would have us believe that there is no price inflation, the MIT Billion Prices Index says otherwise. According to MITBPI, price inflation over the last 12 months is just over 2.0%. The supposed Fed long run target is 2.0%. Thus, the Fed has no upside room.

When one realizes that MITBPI has gone from negative 2.0% to positive 2.0%, since September 2009, it is pretty bold for DeLong to declare that price inflation is not a concern, especially given that quarterly money supply (M2 NSA) growth, around the first of the year, was as high as 11.4% on an annualized basis (using 13 week averaged data). That money is just starting to work its way to the consumer level. At the same time, as I have reported in the EPJ Daily Alert, the desire to hold cash balances is declining at the individual and  corporate level, thus putting even more upward pressure on prices.

DeLong may not see Bernanke the beached whale, but maybe he is trying to just keep it a secret.

Fifty more basis points of upside action in the annual price inflation rate and it is going to be pretty difficult to hide the inflation, and the first reaction will be climbing interest rates. This will result in  the theories of Bernanke, DeLong, Krugman and a bunch of other Keynesians all being beached.

And holders of long-term bonds getting clobbered.


  1. I immediately discount anyone who cannot spell "lose".

  2. Somehow I believe they'll be rescued...