Friday, August 27, 2010

Quick thoughts on Bernanke's speech

First, I like the way the market is reacting: higher bond yields, stronger equities, and a slight rise in inflation expectations. That's good, because higher bond yields and a stronger economy go hand in hand. If the economy grows by some reasonable amount, then we should expect to see lots more of this—much higher bond yields and a much stronger equity market.

Second, it's a shame that Bernanke could not muster the courage to blame profligate fiscal policy for the sluggish economy. At least he refrained from suggesting we need more spending.

Third, it's good that he is drawing a line in the sand on inflation. He will do anything to avoid deflation, but he won't even entertain the notion of trying actively (by raising the Fed's inflation target) to get inflation to rise. He wants strongly to maintain some semblance of price stability. That is reassuring to the markets. Building confidence in relative price stability is essential to help the economy recover. The market needs to know that Bernanke won't squander what the Fed has worked so hard to achieve since the inflationary 1970s.


brodero said...

GDP Numbers,,,Real Domestic Demand
came in at a strong 4.9%...Good for
Global GDP...Global GDP correlates
better with the S&P 500 than U.S. GDP...

Public Library said...

Actually, I find it very worrisome the Fed is willing to inflate at any cost rather than allow the market to naturally re-balance the disaster that was out of control fractional reserve banking.

However, I am hoping we reach the end more quickly so we can truly start fresh and reevaluate long mis-held assumptions.

John said...

I think it is remarkable how the market perked right up after his speech. I know...its friday and the shorts were taking profits ahead of the weekend..but still. Uncle Ben's still got it.

Bro, good job on the GDP number. Came in right about where you said it would.

Public Library said...

'A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy.

Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, that is, of antidemocratic policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them.

That is the political function of inflation. When governments do not think it necessary to accommodate their expenditure and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism."

- Ludwig von Mises

Benjamin Cole said...

Bernanke is still being too timid...we need an aggressive Fed, and inflation in the 4 to 5 percent range for a while.

I agree with SG, that deficit spending is too high. Reagan had it up to 6 percent of GDP, but Obama is running at 10 percent of GDP. True, Reagan wasn't fighting two inherited wars, but still Obama has reached too high.

PL, I love your comments, and maybe in a perfect world......but right now we would be better off reflating property.

Public Library said...


Printing money and forcing inflation on the populace just isn't a long-term solution. We are now in that 'longer-term' because it has gone on in earnest for 30+ years.

Bernanke believes he is smarter than everyone else. That by itself is almost reason for me to believe he will sink this country because he controls the keys to the Kingdom.

Benjamin Cole said...

PL-Well, I am hoisting a brew to you PL. But, as I cravenly beg for inflation.

Public Library said...

You must have a vested interest in raising real estate prices? Nothing wrong with that but micro decisions carried out by all lead to macro disasters.

Public Library said...

One-sided micro decisions that is...

Benjamin Cole said...


Yes I own real estate PL. I guess that biases me, but then other people own stocks, bonds, or are sitting on cash.

But, putting aside our biases, the fact is we have banks that have extended loans (leverage) in nominal dollars on property. I believe (if memory serves) we have $1.4 trillion in commercial loans coming due 2014 that are underwater.

If property reflates, those loans can be good.

Another reality is that the SBA, or anybody else, will not lend to a small business w/o collateral. That means property, usually. Who has equity when property is going down, not up?

Japan tried many things in last 20 years, but they did not try some healthy doses of inflation. They have had price stability, and some bouts of deflation in last 20 years, and a very, very strong yen. They have posted 0.8 percent annual growth, despite a good work force, terrific education, and a business culture. A rotten record.

Bring on the inflation. Investors need it, and it helps with "wage stickiness" too.