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Tags: robert | wiedermer | fed | policy | inflation

With Head in the Clouds, Fed Ignores Inflation Mountain

By    |   Wednesday, 01 September 2010 09:44 AM

Although not much that is newsworthy usually happens at the annual Federal Reserve conference in Jackson Hole, Wyo., something did come out of the recent summit that is worth contemplating. 

Federal Reserve Chairman Ben Bernanke essentially said that he will do whatever it takes to keep the economy from declining. 

Since the main power Mr. Bernanke has is to print money, most people read his comments to mean that he will print money as necessary to keep down unemployment and encourage higher economic growth. 

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One observer commented that he was using quantitative easing, or QE, for social policy. It’s an uncomfortably correct description. QE is the Fed’s feel-good term for buying Treasury, Freddie and Fannie bonds with printed money. 

The ease with which he is speaking about printing massive amounts of money as if it were just another stimulus package is certainly disconcerting since, in the long run it is the most financially costly stimulus you can have. Of course, in the short run, it is also the least politically and financially costly, which makes it so attractive since no vote in Congress has to be taken or money borrowed.

Despite his talk, I am not sure the Fed is ready to use the nuclear option just to combat unemployment right now. 

However, if the stock market takes a big dip of a couple thousand points and looks ready to fall further, I would truly be shocked if the Fed didn’t again start buying bonds in whatever quantities it takes — $1 trillion,$2 trillion or $3 trillion — to move the market, and the economy, back up. 

And, his talk sets the stage for using QE to further stabilize the economy after such a decline in the stock market when the unemployment and growth picture would be more precarious than it is today. If it took another $1 trillion worth of printed money to do that, the discussions at Jackson Hole tell me the Fed attitude would be, “So be it.” 

Of course, at that point, if we have already spent $2 trillion saving the stock market and then we spend another $1 trillion on stabilization, we would have printed about $5 trillion since the financial crisis of spring 2009. 

Given that our monetary base before that time was about $800 billion, that would equate to a more than 500 percent increase in the money supply.  

It would be hard not to get inflation from such an action. As I have often said, it’s not so much the money that we have already printed that will cause inflation, as it is the money we are likely to print that will cause so much inflation.

The people at the Federal Reserve are not entirely unaware of this situation.  Even Mr. Bernanke said he is concerned that if QE is used too much, people would get concerned over the Fed’s exit plan. Of course, in reality, there isn’t a very good exit plan from the printing we have already done, much less more printing in the future. 

However that concern tells me that Ben will only press the button if a major economic problem occurs, such as a big decline in the stock market that looks like it will not stop without Fed intervention.

At the same time, Ben’s ease with which he speaks of QE and the fact that little has been said by the Fed to dispel rumors that they may print as much as $5 trillion to boost the economy, tell me that they simply aren’t as concerned about printing money as they are about a massive popping of the stock-market, real-estate and consumer-spending bubbles.

I don’t think it’s just a bad economy that bothers the Fed. They seem to know that there is now more at stake than there was in the early 1980s with stock and real estate prices so much higher today. But in printing money to save the economy and the bubbles in short term, they fuel the fire of their long term destruction through inflation. 

As my co-author, Dr. David Wiedemer, recently said to me: "It seems like they want to pack the entire house full of explosives.” 

So, looking ahead to the next conference at Jackson Hole, I would wish that when the Federal Reserve officials stand on the beautiful Jackson Lake Lodge veranda and look to the spectacularly soaring Grand Teton mountains across Jackson Lake, that they would see mountains of soaring inflation coming from their discussions. 

Then, maybe something of value would actually occur at their annual conference. 

Until then, we will have Federal Reserve policy that is being made in the clouds above those beautiful mountains.

About the Author: Robert Wiedemer
Robert Wiedemer is president of the Foresight Group, a macroeconomic forecasting firm that customizes its forecasts for specific businesses and investment funds. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, Aftershock, by Clicking Here Now.

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Although not much that is newsworthy usually happens at the annual Federal Reserve conference in Jackson Hole, Wyo., something did come out of the recent summit that is worth contemplating. Federal Reserve Chairman Ben Bernanke essentially said that he will do whatever...
Wednesday, 01 September 2010 09:44 AM
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