Friday, July 21, 2006


Has The Fed Stopped Inflation?

A pair of reports look at interest rates and currencies. "What only a few days ago seemed like a done deal is now rife with uncertainty. We are referring of course to the possibility of the Fed rate hike rate at the August FOMC meeting. Chairman Bernanke’s guarded testimony continue to resonate throughout the currency market. With the Fed signaling a more neutral rather hawkish posture, currency markets continued to sell dollars as US rate hike expectations are pared down."

"In tonight’s trading no currency has been the bigger beneficiary of this change in sentiment that the Japanese yen which up to now was the biggest victim of interest rate spread speculation. The yen fell to multi year lows against the British pound and near all time lows against euro earlier in the week but tonight yen appreciated materially with USD/JPY tumbling more than 100 points breaking the 116.00 level for the first time in five days."

"The move downward occurred despite statements by BOJ Deputy Governor Toshiro Muto that Japanese rates are likely to remain low for an extended period of time as the central bank tries to gradually normalize monetary policy to ensure that the ongoing Japanese economic recovery is not damaged in the process."

"In the currency markets however, it is not the absolute value of the carry that matters but the future direction of the interest rate spreads. If the US rate hike cycle will indeed come to a halt at 5.5%, as many market players now anticipate, while the BOJ proceeds, albeit slowly, to push rates higher yen should continue to strengthen against the greenback. Tonight’s price action may be a signal that the USD/JPY up move is finally exhausted, as traders cast their eye to the future of shrinking interest rate differentials between the two currencies."

From Bloomberg. "Federal Reserve Chairman Ben S. Bernanke's congressional testimony accentuated a split among economists about where interest rates are headed after next month. Goldman, Sachs Group Inc. expects the Fed to raise borrowing costs one more time in August, to 5.5 percent, and then stop. 'I'm very comfortable with the growth-deceleration story,' said Jan Hatzius, the firm's chief U.S. economist. By the end of next year, the firm expects the Fed to cut the benchmark rate to 4 percent."

"At Lehman Brothers Holdings Inc. in New York, chief U.S. economist Ethan Harris doesn't buy it. 'The Fed has a very optimistic view about inflation, and I think they will find out they are wrong and will have to tighten more,' he said. Lehman estimates the central bank will push its benchmark rate to 5.75 percent by year's end, from 5.25 percent currently."

"If Bernanke proves to be right in his forecast, Harris said, it would be 'the first time in history' that the Fed stopped inflation 'without imposing pain on the economy.'"

"Has the Fed Stopped Inflation?"

Hmmm, no.
Yes! The answer is no! Schiff lastest piece is right to the point.

Slower Growth will not Contain Inflation

By Peter Schiff Printer Friendly Version

July 21, 2006

When Ben Bernanke told Congress that moderating economic growth will likely contain inflationary pressures, Wall Street responded with its biggest one-day rally in nearly two years. Unfortunately for the Wall Street party boys, the Fed Chairman is likely wrong on both counts. In the first place the U.S. economy will not merely slow, but tumble, in the coming months/years, and rather than quelling inflation’s fire, the inevitable recession will actually stoke its flames.

Bernanke’s faulty logic assumes that inflation is somehow a by-product of economic growth. However, real economic growth emanates from increased productivity, which tends to hold prices down. Bernanke also dramatically underestimates the strength of the economic headwinds that will quash consumption and crush GDP growth. The rising costs of energy, adjustable rate mortgage payments, rents, insurance, food, and local taxes, combined with the reverse wealth effects associated with collapsing real estate prices will combine to produce a recession much worse than those seen in the last 30 years.

The argument that weaker growth will somehow cause consumer prices to rise more slowly focuses on the demand side of the price equation and ignores the supply side. Prices are a function of both supply and demand, and while slower growth, or an outright recessions, would certainly reduce demand, it would also work to reduce supply. The result could well be equilibrium prices that are higher during a recession than during an expansion.

As the U.S. economy contracts, the Federal budget deficit will grow and the perceived appeal of U.S. financial assets will be lost. As a result, foreign capital will flee at precisely the time it is needed the most. This will put additional upward pressure on interest rates, further increasing mortgage rates, suppressing real estate prices and consumer spending. More importantly, it will also cause the dollar to fall, making imports more expensive and pushing up raw material prices, thereby increasing production costs for domestic manufactures as well. As the dollar loses value relative to other currencies, foreigners will be able to outbid Americans for scarce consumer goods. As a result fewer products will be imported into the U.S. and more of America’s domestic production will be exported. Therefore, despite the fact that financially strapped Americans will be consuming much less, they will be paying much higher prices for the privilege of doing so.

Interestingly, in response to a direct question from Congressman Ron Paul, Bernanke actually admitted that growth was unrelated to inflation. Unfortunately, the Congressman missed the opportunity to press Bernanke to explain the inconsistency between that admission and the implication in his prepared remarks that the Fed might pause in its rate hikes based solely on the expectation that a slowing economy would contain inflation.

Another interesting admission was Bernanke's forecasts that oil prices will stay around $75 to $80 dollars per barrel for the next several years. This is tantamount to an admission that the Fed’s exclusion of energy prices from inflation measurements over the past several years was a mistake. Remember, the Fed's long held justification for favoring "core" inflation over "headline" was the belief that high oil prices were a temporary fluke.

Bernanke went on to say that he continues to favor the “core” because the futures markets were predicting stable oil prices. This makes no sense at all. Futures markets reflect forecasts, not facts, and have had a very poor track record predicting oil prices. However, if the futures markets are correct, then why not use the actual CPI, which will reflect the stable oil prices the futures markets are forecasting. If on the other hand the futures markets are wrong, and energy prices continue to rise, what is the justification for excluding them given the Fed’s new position that high oil prices are here to stay?

The bottom line is that the Fed’s perceived battle against inflation has already been lost, and the biggest casualty will be the American standard of living. Those who are hoping for an economic slowdown to contain inflation are in for a rude awakening. They will get a whole lot more than they bargained for when it comes to the former, and no relief whatsoever with respect to the latter.
The Fed cannot repeal the laws of monetary gravity.
Don't you just love Schiff?

No one has yet to convince me we're not headed for depression and a currency crisis.
No one has yet to convince me we're not headed for depression and a currency crisis.
# posted by TJ & The Bear : 2:13 PM

DITTO! But I'm all ears.
Is Iran near pricing oil in Euro's as opposed to Dollar's?? Every time this has happened in the past the U.S. has attacked, most times through military venues, but also through economic ones.

Can't find any news on it,they were gonna do it in April but woused out.

Without Oil priced in Dollars, the Dollar loose's one of it's main venues as the world's reserve currency.

This is an avenue where the Fed does more than Jaw bone at the White House. The Middle East is closer to a powder keg than most know.
Ben Bernanke is playing the game of chasing inflation, which he will never win. Whether this is willful or not, we don't know. But we do know (or predict) that Bernanke is ceding control of the economy and that the ultimate outcome will be disastrous.

Bernanke convinces me as an ostrich-dove. $$$ and the economy is doomed.
DITTO! But I'm all ears.

Same here. I'm always wondering what I don't know. If anything, the past few years have taught me that I don't know quite a bit, and certainly not everything that I should.
Just google iranian oil bourse and russian oil bourse (they're doing it also..actually already did 1 Jul..striking coincidence that oil's up and mid east issues all at the same time as the Russian's price oil in rubles). There are a few articles about it.

As for tin foil hats go, with the financial disaster looming, do you really think the gov't doesn't have an economic plan ready to fall in place that is deemed secret due to national security? If you don't, then I guess you never heard of the Manhattan project or the F-117. Both of those were kept secret for a very long time with many, many people working on it. Naaah, not possible for the economic plan.

I've no doubt that they have contingencies for everything; however, developing weapons is one thing, controlling an entire economy is quite another.

The original legislation for creation of FEMA was deemed a "blueprint for tyranny". In the event of a national emergency, the constitution would essentially be suspended, martial law would prevail, etc. Would it work? Briefly. [Note that this was before global terrorism, bird flu, etc.]

Despite the fact that our rights have already been severely curtailed, there's a sense of freedom that won't easily be surrendered for an extended period of time. Don't forget that we have the largest number of privately held firearms in the world, and the words "live free or die" still mean something to a significant number of Americans.

It's one thing to have a plan to tame a tiger, another to actually do so. Remember, the tiger has teeth and usually has other plans.

p.s.: Our forefathers heatedly debated the order of the first two amendments. They knew (as I do) that "the right of the people to bear arms" is the only thing that secures all our other freedoms.
I agree. My point is that if we can agree the housing bubble crashing is currently happening, with the amount of leverage involved, it will be severe. Gold will skyrocket, but not from speculating on borrowed money, but from people realizing it is a quick and easy way to attempt to ensure your savings from vanishing from an insolvent bank or crashing market. It will happen quickly.

The folks on the housing bubble blog routinely say how it is the responsibility of the folks taking the loans. They believed the realtors saying values can only go up. It is their own fault. I hate to say it, but we'll see how smug they are when their savings vanish in front of their eyes. Will their same beliefs hold true when they realize they trusted the bank in thinking a bank couldn't fail? Savings and Loans failed in a localized area due to a localized phenomenon (predominately TX). What will this one look like?

The handwriting is there for all to see. You can't have an economy based on debt created through housing, have that source crash, and not have it ripple through the institution that created it. You don't want to be looking for a seat when the music stops in the housing debacle, and you won't want to be looking for a seat when the music ultimately stops from it's aftermath.
What will this one look like?

Not pretty, that much we agree on. It still amazes me how many at THBBB see the bubble but don't see the havoc it will wreak on all of us.

Is THBBB down? If so, for how long?
Kerk: Great points. I've been wondering the same thing about the posters over there. They all seem to be in general agreement that the credit bubble is going to come crashing down (and the price of houses with it), but it doesn't seem like many are taking steps to weather the crash. If they did, I imagine this blog would see more action.
Exactly. With the exception of a few items (cars for example), folks invest in something based on an expectation of future gains. Why put money into something if the value of it is decreasing unless purchasing it to consume. In my case, I'm not purchasing PMs with the hope that it rises (although I have a very firm belief that it will due to ongoing circumstances). I'm purchasing them to store the wealth of my savings. Sure, gold very well could go down in price. If it does, I still feel it is the best way to preserve what I have. It seems as if folks are putting all their faith in lending institutions and Treasuries much the same way as unsuspecting home buyers have put their faith in realtor beliefs.

With what has gone on in the housing market with expectations of continuing gains, a plethora of homes have been added. They don't get consumed in the same way that oil does. Once the realization that real estate is actually decreasing, all 2nd, 3rd, 4th, etc homes will be coming on the market. It financially just doesn't make any sense to hold them and pay taxes on a depreciating asset. I don't feel we've gotten there yet, but when we do, it will be more apparent to folks that there savings in CDs, TBills, etc are suddenly becoming vulnerable. I don't want to be looking to purchase PMs then.
Kerk, Cowboy...

Make no mistake, this blog will someday surpass THBB in popularity as the magnitude of the problem dawns on everyone.

There are quite a number of us over there, though, in the so-called "depression camp". Our numbers are growing, too. It's taking time but we're getting the message across.
I see a comment up above about nobody getting prepared. How would you prepare? If it were a deflationary event, save as much as possible. If it was inflationary, would not owning assets be best? Have some of your assets in physical gold, silver and ???? in usable denominations (I think they are called rounds). Spread you cash out in different accounts to the FDIC limits (assuming things did not get too ugly). Just curious what measure in addition to the above you would consider prudent.

Thanks in advance
MarknearSeattle, Mark I think most of us are obviously bullish on Pm's here , and yes buy the cheapest bullion
you can get. has done well for me.Check there wholesale tab as there are some deals sometimes.
As to Defl/Infl. I think either way is bearish for the dollar. We need 2b./day foreign just to maintain it. 9T.deficit. When the economy slows I think dollar drops from RE tanking etc. will cause alot of pensions / IRA's/hedgefunds to implode.
Buy alittle bullion ,maybe a few spec miner stocks ,and see what happens. an aside Gold is down this morn by $15 yet silver is only down 5¢. Is that saying the shortage is becoming apparent? ..AKA less of a mirror than past trends...
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