Tuesday, January 27, 2009

How can you be all-in if you still got chips

No Pimco’s Bill Gross, the Fed is not All-In

I’m going to address an issue here that I think its crucial for the US macro picture going forward

If you look the last FOMC statement and minutes the Fed is not yet on full blown panic mode yet, they still say stuff like "the Committee expects inflation to moderate further in coming quarters" "disinflationary effects" "further moderate reductions in inflation expectations caused the staff to reduce its forecast for both core and overall PCE inflation" "Several participants observed that monitoring measures of inflation expectations for signs of disinflationary dynamics would be especially important going forward."

This indicates that the D word(deflation) is still feared, the fed still got hopes the market itself wont jump(or at least that they could exacerbate) in deflationary expectations because of the careful fed language. The fed is somewhat still in some kind of denial phase with regards to deflation

The reason I say the fed is not all in is because they still haven’t gone "Bernanke 2002", if you read the "Deflation, making sure it doesn’t happen here" speech just by noticing the language(starting by the no apologies D word title) and things like "U.S. dollars have value only to the extent that they are strictly limited in supply" "By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services" "We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

This "US dollar can became garbage at our will" attitude we still haven’t seen from the current Federal Reserve.

In Bernanke’s book "Essays on the Great Depression" he points out an interesting fact which I think its relevant for monetary policy today, countries that went OFF the gold standard(thus removing limitations to print more money) in the 30’s didn’t necessarily saw an increase in their money supplies right away(it only happened later), in fact in the first 2 years the countries on gold and off gold showed little difference in the collapse of their M1s, yet the amount of deflation was smaller in the countries that were OFF the gold standard.

Bernanke theorizes that the reason for that was going off the gold standard(through a devaluation, ending convertibility of paper money) initiated inflationary expectations in the economy, as people get worried the government is about to print or devalue more, which lead people to spend early and spend often.

I believe the same dynamic will be necessary to get the US out of this deflation trap, the fed has hinted sometimes they are printing money with statements like "we will fund our purchases with creation of bank reserves" but Bernanke as recently as Jan 13 lse speech went out of his way in a speech in London to explain why lots of the fed moves are not inflationary and how the people who accuse the fed of money printing are wrong, he explained how they would unwound all the facilities and cut down the monetary base. He still being a apologetic money creator

That’s not how a guy whos all in sounds like. We need to remember the fed is a bureaucracy, they where a bit slow to get in the massive easing, they are also being a bit slow to tell the world "US dollars are garbage, we’ve got printing presses and we will not be afraid of using them", they only have began thinking about an inflation target as a way to make people worried about money printing, ultimately I think they will go there(there meaning, managing expectations) big time because deflationary mindsets will keep sweeping the nation as gas drops to $1 and the output gap stays large and the huge credit bubble gets unwound, so even if some ultra deflation bears are right that banks wont lend and the money printing wont be multiplied through the financial system, all it takes for deflation to stop is for people to get worried dollars will be printed out of existence, money velocity will go up and inflation will come back, the austrian economist portfolio would benefit from this

The next FOMC statement should be interesting because I think they will more and more start hinting they want people worried about inflation but I think the key indicator is the Core CPI(the core PCE as well), when Ben made his speech in 2002, the yoy core CPI had tanked for more than 12 months by then, there was a War hurting comsumer spending, fiscal packages had failed, there was no hope the fed could try lean on, they had already agreed there was a train coming and had to do something, today the core cpi is only starting to tank and is still quite positive y-o-y, there still some hopes attached to the large fiscal package, once they get the final confirmation by a collapsing core CPI we will see the fed mouthpieces(like Bernanke was in 2002) go out and make ‘speeches’ on how dollars will be printed and if inflation comes ‘so be it’, they will try to get a false image the fed doesn’t care about inflation to get Joe and Jane to buy goods and services and I think the fed will succeed. As for right now the fed is still too hopeful deflation will be quick or that the stimulus will work or the commodity parabolic move is still fresh in their memories(what they refer as 'significant uncertainty remains'), reality will change their minds

1 comment:

  1. bernanke is a money printing idiot