February 29th, 2008 at 4:11 pm
Lots of chatter on CNBC about main street prices going up. Hardware, fast food, 1 dollar bagels et-al. Looking like main street clamoring about inflation which would translate into hawkish pressure on the Fed vs wall-street’s wanting more easing due to credit crises, stock market.
Any opinions on how this plays out politically? Doesn’t joe 6-pack look at gas prices and food prices and blame it on bush and the republicans which opens it up for Obama.
Most Congressmen know the voters hate inflation more than they care about unemployment. There are a lot of Ron Paul types out there when it comes to inflation, and the questions to Bernanke showed a rapidly increasing concern.
I’ve suggested this will accelerate, with the Fed soon being blamed for higher food and energy prices via the apparent weak dollar/inflate your way out of debt policy. The charts line up well enough to ‘prove’ that Fed policy caused the weak dollar, and the inflation and mainstream theory that believes all that stuff is a function of interest rates can’t deny it either.
The story ‘the record tells’ is that the Fed tried to bail out Wall st with rate cuts knowing that the majority of people working on main street would be impoverished as their purchasing power eroded and wages remained ‘well anchored.’ And if the Fed had thought wages were not well anchored they never would have cut rates. The Fed has made it clear the main channel for inflation expectations is workers demanding higher pay, and they have repeated said they haven’t yet seen signs of this so it’s still safe to cut rates, drive the dollar down and imported prices up, without triggering a wage/inflation response.
Additionally, in Bernanke’s latest testimony, he further specifically stated and repeated that he didn’t want domestic consumption to go up, but rather exports and investment. The channel for this has been higher prices for consumers keeping real consumption down, and the weaker dollar policy driving exports higher, which leads to investment in the export sector, and domestic consumption remains subdued.
Note my posts with subtitles ‘this is what an export economy looks like.’
From last week’s testimony:
It depends on how the inflation — as you say, on how — if it becomes entrenched.
If inflation expectations were to rise and that were to lead to a wage/price spiral, for example,…
…we want to make sure the economy is growing in a stable and healthy way which will attract foreign investment.
Foreign investment, I should emphasize, continues to be strong. We’re not seeing any shifts — significant shifts out of dollars among official holders, for example.
And I anticipate that it will continue — that we’ll continue to have the capital inflows we need.
The idea that we ‘need’ foreign investment is also an error that supports his notion of what the US economy ‘should’ look like.
And soon after from Bernanke:
With respect to inflation, I think our principal tool would be the interest rate.
And does this sound possible?:
So, what I’d like to see, essentially, is a reduction in the risks — the downside risk which I’ve talked about, particularly the risk that a worsening economy will make the credit market situation worse.
And if inflation was a problem then, what is it now?:
When we lowered interest rates on the last day of October, that morning we received a GDP report for the third quarter, 3.9 percent, which was substantially revised to 4.9 percent, and inflation was a problem.
So, in fact, I think as we look back on this episode, we will see that the Fed lowered interest rates faster and more proactively in this episode probably than any other previous episode.
As you point out, the unemployment rate is still below 5 percent.
Again, this can all be construed as bailing out the financial sector via a weak dollar/high inflation policy at the expense of working people who’s ‘inflation expectations/wage demands are well anchored.
It also can mean that if wages do start to rise the game is up and policy turns to rate hikes.
Well, if inflation were to — higher inflation were to become well embedded in inflation expectations and wages and other parts of the economy, it would be difficult, and we don’t really have new methods.