Fausta's Blog

American and Latin American Politics, Society, and Culture

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Fed: Lower your expectations even more

The Fed lowers economic expectations for 2011 and the economic forecast isn’t pretty: Moderate growth will continue (it’s currently at 2.5%), the unemployment rate will likely go down to 9% a year from now, and inflation may rear its ugly head if unemployment goes to 6% range – hardly surprising considering how the Fed has been printing money like crazy, including its latest move, the QE2, Ben Bernanke’s brainchild.

QE stands for “quantitative easing”, the cruise-evoking euphemism for what amounts to a second spendulus stimulus. We’re already seeing how well the first stimulus worked, considering how Obama’s argument was that we needed the stimulus to keep unemployment at 8%.

Yeah, right.

The QE2 is that plan to buy $600 billion Treasury bonds in the hope of increasing growth and keep interest rates low. Skeptics like myself see it as paying off your MasterCard with your Visa.

The Fed is not without its dissenters,

the document also leaves little doubt that several Fed officials remain uneasy with the action. Some anticipated that they would have only a “limited” effect on the pace of recovery, arguing the action should only be taken if the odds of deflation “increased materially.”

And several “noted concern” that the action “could put unwanted downward pressure on the dollar’s value in foreign exchange markets” or “an undesirably large increase inflation.”

Commodity prices have already increased following the Fed’s QE2 proposal. The move is a deliberate devaluation of the dollar.

One can’t expect the Fed to come up with a more optimistic forecast right now. For starters, the data doesn’t lend itself to a rosy outlook. While unemployment figures may improve on a month-to-month basis, employers have many reasons to continue to remain reluctant to add to payrolls. Also, the Fed’s new quantitative easing plan would come under more fire if they make optimistic predictions that don’t pan out.

How will this economic outlook affect politics in 2011? Paul Mirengoff takes a look and sees the probability of the Democrats moving away from a hard-left agenda.

I hope Paul is correct, but as a pessimist, I also see it as an opportunity for the Dems to justify a hard-left agenda, blaming everything that can possibly go wrong (which it will), on the Republican Congress, right in time for the 2012 election, when unemployment supposedly will be at 8%.

Cross-posted at Hot Air.

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Why Bernake’s plan won’t work

Not that I’m obsessing about the QE2, but yes,
J.D. Foster explains Why Bernanke’s QE Justifications Don’t Wash

In a recent article, Bernanke argued that inflation was very low, perhaps too low, and that “very low inflation can morph into deflation (falling prices and wages), which can contribute to long periods of economic stagnation.” He also argued that “there is considerable spare capacity” in the economy, which normally puts downward pressure on prices. Both statements are clearly true.

In an earlier speech, Bernanke said that growth in 2011 was unlikely to be “much above its longer-term trend,” which means that the “unemployment rate will decline only slowly.” True again.

The conflict in these two statements may not be immediately obvious, but consider: If the economy is growing near its trend rate in 2011, as Bernanke suggests, then there is little to no risk of deflation. Strong growth is a powerful antidote to deflation worries. Either the deflation risk is vastly overstated and QE is therefore unjustifiable, or Bernanke believes growth in 2011 will continue to be anemic at best.

The economy has averaged less than 1 percent annualized growth in recent quarters, once transitory inventory and federal spending surges are weeded out. What Bernanke is silently worried about is the possibility that Congress will allow all the 2001 and 2003 tax relief to expire at the end of the year, or that Congress will allow those provisions most important to the economy to expire — e.g., the lower tax rates on small businesses and the lower rates on capital gains and dividends. Slamming a sputtering economy with a major tax hike threatens to induce another recession, and with inflation already near zero, the possibility of deflation becomes very real. But Bernanke can’t or won’t say so.

Bernanke’s QE justifications don’t wash. If the economy is expected to muddle through, let alone accelerate, then there is no reason to embark on a highly risky, highly controversial new round of quantitative easing.

Why won’t Bernanke be transparent in this? Because he also worries about the Fed’s independence.

Foster is not alone in his skepticism: A group of prominent Republican-leaning economists, coordinating with Republican lawmakers and political strategists, is launching a campaign this week calling on Fed Chairman Ben Bernanke to drop his plan to buy $600 billion in additional U.S. Treasury bonds.

The proposed QE2 already is having the effect of raising commodity prices. As the CareBears were asking, “so what is deflating right now?”

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Argentina’s debt, and QE2: 15 Minutes on Latin America

In today’s podcast at 11AM Eastern,
Inflation Fuels Record Central Bank Debt Sale: Argentina Credit

Argentina’s central bank is selling a record amount of notes linked to deposit rates to curb money supply growth and inflation.

The central bank sold this week 2.2 billion pesos ($555.5 million) of nobacs, the most since the auctions began in April 2005. The securities pay 250 basis points, or 2.5 percentage points, more than the 10.88 percent badlar rate. Six-month futures show the rate will climb to 12 percent, compared with a one-month London interbank offered rate of 0.25 percent.

Meanwhile, in the USA, Here’s Why QE2 Could Threaten The Dollar’s Status As The Global Reserve Currency

With QE2, the Fed will buy $600 billion worth of longer term treasuries (and will “reinvest” another $300 billion of revenues from the previous QE1). The only plausible scenario in which this can prove useful is by “beggaring thy neighbor”. Bernanke has talked openly of his desire to raise inflation expectations, and that in combination with lowering interest rates could make America a less attractive investment option. If so, the dollar could depreciate, increasing US competitiveness in traded goods and services. This could boost exports and depress imports.

The QE2 is “quantitative easing”, that is, the the Fed’s move to buy an additional $600 billion in government securities which will flood the economy with more printed money. Enter the era of dollar devaluation.
(h/t MOTUS)

The dollar run begins?

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