Faber & Greenspan: Shills for Fed Snake Oil
Adrian Ash, July 1st, 2009
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Adrian Ash - BullionVault
"Just how can the Fed credibly promise to be irresponsible...?"
HERE'S A THOUGHT - that tiny handful of investors and analysts warning how Fed policy risks hyper-inflation are in fact doing the central bank's work.
The Fed wants you to believe hyperinflation is looming. Or at least, it should want that, if doubling its balance-sheet - purchasing and lending against investment junk - is going to work the wonders that modern central-bank theory says it can. And the Fed certainly wants you to believe it will stop at nothing to avoid deflation ("whatever means necessary" as the chairman put it back in 2002).
So anyone touting the hyperinflation risk in public is playing the shill, a decoy - seemingly unconnected - proclaiming the miracle powers of Dr.Ben Bernanke's snake oil to CNBC anchors at every chance.
In fact, they're doing the Fed's work better than the Federal Reserve itself. Really.
"The major danger with a zero lower bound for the interest rate," said Swedish policy-wonk Lars Svensson (also a Princeton colleague of the Fed chief and his credit-bubble associate Paul Krugman) in a speech earlier this year, "is that inflation expectations will be too low and even negative, and that the real interest rate will thus become too high."
With it so far? Slashing interest rates to the very minimum of 0% suggests inflation has vanished, at least in the central bank's eyes. But that, in turn, reduces the rate of inflation expected by consumers, investors and business. Central banks are credible forecasters, you see. At least in central-bank eyes. So in Svensson's philosophy, the zero-rate solution to falling inflation proves self-fulfilling as people hoard cash and sit tight in bonds.
"It is thus necessary to...to counteract expectations of falling inflation, and preferably to create expectations of higher inflation," Svensson went on. But "as Paul Krugman put it" says the Riksbank's deputy governor, "How will the central bank 'credibly promise to be irresponsible'...?
Heaven knows the Fed's trying. (So's Krugman, to no one's surprise.) But while it's embraced credible recklessness, the Fed's stop short of French kissing it.
Why so coy...?
"We have a very serious recession, we have a 9.4% unemployment rate," said San Fran Fed governor Janet Yellen in a speech in California on Tuesday. "If we were not at zero, we would be lowering the funds rate...We should want to do more."
Just how much further would the Fed go - all the way to hyperinflation perhaps? Racing to first base, "The vigorous policy actions of the Fed and other central banks, combined with sizable fiscal stimulus here and abroad, have sent a clear message that deflation won't be tolerated," Yellen said.
"Based on measures of inflation expectations," she went on, an apparently reading straight from Svensson, "the public appears confident that the Fed will adopt policies that will maintain a low, positive rate of inflation. Evidently, the credibility that the Fed and other central banks have built over the past few decades in bringing inflation down has spilled over into a belief that we won't allow inflation to get too low either."
