Posted on 10/28/2010 2:58:30 PM PDT by blam
ECRI Warns QE2 May Cause Inflation Nightmare
by: Kirk Lindstrom
October 28, 2010
ECRI says there will be no double dip recession and Fed's planned QE2, a second round of quantitative easing, could lead to unintended "worse nightmare" of high inflation.
Earlier Thursday, Lakshman Achuthan, ECRI's co-founder and chief operating officer. and Anirvan Banerji,ECRI's co-founder and chief research officer, wrote:
"The much-feared double-dip recession is not going to happen."
"That is the message from leading business cycle indicators, which are unmistakably veering away from the recession track, following the patterns seen in post-World War II slowdowns that didn't lead to recession." After completing an exhaustive review of key drivers of the business cycle, ranging from credit to inventories and measures of labor market conditions, we can forecast with confidence that the economy will avoid a double dip.
But ECRI warned there is bad news for growth and jobs But the bad news is that a revival in economic growth is not yet in sight.
The slowing of economic growth that began in mid-2010 will continue through early 2011. Thus, private sector job growth, which is already easing, will slow further, keeping the double-dip debate alive.
Even worse, the Fed could be behind the curve yet again with QE2 leading to unintended inflation down the road. The problem with QE2. The worse news is that, even without the nightmare of a new recession, an uglier scenario may still lie ahead in the form of unintended consequences of such Fed stimulus.
ECRI warns that the Fed, using its rear-view mirror indicators, may be goosing the economy with an inflationary stimulus program when it isn't needed and worse, just before the economy could get better.
Because monetary policy acts with "long and variable lags," the Fed should, in principle, rely on forward-looking measures to time its actions.
Yet, in practice, it does pretty much the opposite, relying on backward-looking statistics like core inflation and hard-to-assess measures of the so-called output gap, including estimates of "full employment."
In mid-2003, the last time "core" inflation was this low, the Fed cut rates to just 1% and kept it there for a year, contributing in no small measure to the inflation of the housing bubble that ended so disastrously.
In fact, the Fed is about to launch QE2 because it believes inflation to be too low, which really means they are willing to go to new extremes to head off the risk of deflation.
Yet, over the last two centuries the U.S. economy has seen sustained deflation only when it has mostly been in recession -- a scenario that our analysis rules out for now.
If the Fed goes ahead with its planned QE2 program, then the question for us investors will be "where is the next bubble forming?"
Today, the car that is the U.S. economy is crawling uphill, slowing as its engine sputters. With politicians fighting about whether to use a screwdriver or a spanner wrench to fix the motor, the Fed is convinced we'll end up using neither.
Determined not to let the car start rolling back disastrously downhill, yet unaware that the road is about to level off, the Fed is strapping an untested rocket onto the car in hopes of blasting it over the top.
The Fed, looking out the rear-view mirror to steer the car, won't know when we're approaching a bend in the road, though we're now high up in the mountains, with a dangerous abyss below.
If the Fed goes ahead with its planned QE2 program, then the question for us investors will likely be "where is the next bubble forming?" The very high returns for my individual TIPS and TIPS funds these past two years, plus the large gains in gold and commodities, despite low CPI inflation, might be signaling what lies ahead.
Silver bitchez!
Man, I am REALLY looking forward to seeing this year’s Black Friday numbers. I think, especially with foreclosuregate, these guys who think we are climbing out of this thing are smoking pure crack.
There are two different bad outcomes. Inflation and hyperinflation.
If you look at commodities right now, it is obvious that we are going to be having inflation, or even strong inflation, based on both prices and shortages across a whole range of food items. The US cattle herds are at their lowest numbers since 1973, for example.
And there is an insane government policy to convert a lot of our food corn into ethanol, so it can be added to gasoline.
However, coming from a completely different direction, this inflation can be turned into hyperinflation, resulting in sudden, high price increases *and* sudden shortages, both at the same time.
Hyperinflation will happen when and if the current flight to government bonds stops and reverses. Having nowhere left to go, a huge amount of money goes into physical commodities. Not just on paper, but ownership of large amounts of food.
Food production and retail sale are carefully balanced, so that producers make just enough for the market. But if a speculator enters the game and out bids retailers for a lot of food, suddenly the price of that food jumps, *and* there is not enough left for the retail market.
Price jumps at the same time as shortages, drives up retail prices by huge leaps, and thus you have hyperinflation.
Ooh. I bought six 100% cotton long sleeve shirts today. Good investment.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.