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Oh Ominous Words: Bernanke Hints at More Stimulus
Bernanke this morning (see my preview for context):
In particular, in the statement following our meeting earlier this month, we indicated that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. That is, in what the Committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years.
In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. (Emphasis added.)
Reuters’ word cloud of the speech makes it hard to find the word “inflation.” Take that Rick Perry!
Gold is up 1% right now on the day. The downbeat assessment on the economy is pushing down oil prices. There was even less than I thought in the speech, which will do nothing to help consumer sentiment. Bernanke did signal on fiscal policy and came down decidedly with the more-stimulus crowd:
Published in GeneralAlthough the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery.
<Insert standard comment about the meaning of insanity being to do the same thing over and over and expect a different result each time>
I keep thinking about an analogy with Air France 447, which crashed into the Atlantic in 2009. Although the analysis of what happened is not yet complete, it’s pretty clear that the model of what was happening that the flight crew had *in their heads* did not match the reality of what was *actually happening*. (Excessive pitch attitude leading to aerodynamic stall)
Similarly, all the talk about “monetary stimulus,” “fiscal stimulus,” etc completely misses the realities of regulatory uncertainty, bad incentives, the attack on America’s energy industry, the dysfunctional education system, etc. Just as AF447 could have been flown out of the stall if the problem had been diagnosed properly, our economy could be flown out of the stall given proper diagnosis and action.
The AF crew had only a few minutes to diagnose their problem. Our politicians, pundits, and analysts have had plenty of time and have much less excuse.
… but I did bloody tell you. =P
Rick Perry called the man what he is. Bernanke should be imprisoned for his part in this giant 100 year long scam.
I’m beginning to think that Ben and Barry talked about some quid pro quo this week.
“Barry, you keep Ron Paul marginalized and I’ll keep the presses rolling, capiche.”
I don’t think Bernanke has much to do here.
Pessimism has crowded the boat and that’s always a pretty bullish psychological position for equity markets.
Gold – for whatever reasons – appears to making a very significant top (is this the end of the commodity bull market? Hard to imagine but parabolic moves usually end badly for the longs).
Treasury yields are still low but look like they are closer to bottoming out. They will begin to move up shortly as signs of life re-appear in the economy.
Once whatever the Europeans settle what they have to settle (the Chapter 11 of Greece along with the other suspects), it’s going to be pretty clear that the S&P and the Dow are about to head for new highs.
No, I don’t think Bernanke has a lot to do here.
I believe you are sincere, Michael Kelley, but that doesn’t mean I believe you. I take the historical perspective that no troubled government of a nation in decline and deeply in debt has ever not just debased the currency to pay of its debts with cheaper money. This crowd doesn’t seem special, to me; they don’t have any great, new ideas. I believe they will try to inflate us out of debt, while ruining their citizens.
Glenn Reynolds had an interesting interview with John Allison on this subject. You have to register to watch it, but I think it is worth a couple of minutes.
That seems most real, to me.
Thanks for the link. I won’t have time to watch until the weekend but will do so.
Comparing our currency with currencies of history can only get you so far. The world has never seen anything like the velocity of the US buck. This is a brave new world.
I take this historical perspective: when pessimism is so thick you can cut it with a knife, it is time to begin getting long the stock market. This period is feeling comparable to the late 70’s when the US was getting trashed all over the place. And we had a great run coming out of that period.
Capitalism is dynamic. It will survive the Progressive challenge and move forward.
Capitalism is dynamic. It will survive the Progressive challenge and move forward.
Capitalism is dynamic indeed, but its survival depends either on freedom being a stable equilibrium (which Milton Friedman doubted, by the way, see the end of this talk I gave last month) or by it finding champions to correct the course it is on. I do not know which is correct — I’m hoping Friedman’s wrong though, because relying on Batmans or other heroes isn’t something that gives me your optimism.
Michael, I hope you are right and we are approaching bottom and it is time to go long on equities. I hope you are right but don’t think you are. less than 1% first half growth, a global financial system that is extremely weak with huge toxic assets remaining after the (first) shock, strong inflationary actions that have yet to produce strong inflation but will, Unsustainable debt throughout the west (including Japan) with no credible plan to solve, structural high unemployment, a two year commitment to trash the currency – I believe our worst days are ahead of us and it will be a very turbulent ride.
The 70s had very high levels of inflation that have not hit yet…..but will. Gold is no where near it’s 70s high in real terms. Whether it crashes before a few fiat currencies remains to be seen. I am comfortable with my exposure and waiting for the right time to short treasuries.
I agree that capitalism will survive. I simply see a lot more pain before things get substantially better.
michael kelley
Thanks for the link.
I don’t know about relying on Batman. I could, however, tell you a few Chuck Norris jokes.
And yes, Freedom is the pivotal element.
And it is unstable. And that boom-bust cycle the instability produces is not to be shunned nor controlled but embraced. Our risings and our fallings are what create the next great wave. The instability is the source of our cultural mobility. In one sense, the instability is what produces Freedom.
Things are currently very unstable for the Progressives and the Rational Administrators. Their collapse is imminent if for no other reason than this: the bond market at one point will lock them out.
Steve, I have been hoping for a more frightening sell off in order to get an all clear signal.
To know that a market is truly bottoming out, it’s nice to see them throw some maidens into the volcano (think Lehman or Bear Stearns). I would like to see some European banks go under to create peak fear. In that scenario, gold has some more upward spikes coming but this most recent straight up move in bullion looks more like a climactic, blow off top being made (let me apologize for publicly calling a top in a commodity market. It’s a fool’s bet to short a parabolic but I cannot resist).
I think the double digit inflation of the 70’s was created by the enormous wave of consumption created by the Baby Boomers coming on line and raising their families. Demographically, we are nowhere near that situation and a long term chart of bond yields from their peaks in the early 80’s tells that story.
Michael,
We’ll see. GDP growth numbers are at a level that historically has always preceded a recession – and so a substantial drop in equities. Credit default swap prices seem to be saying that, independent of stock rallies, the credit market expects another Lehmans. I don’t see anything in the Euro crisis that would lead to an optimistic outcome – and that wave would role onto our shores big time. To steal Mauldin”s phrase, Japan is a bug in search of a windshield – and will have global impact when it hits. The USA has been trashing the dollar for a decade, Bernake has recently committed to two more years of same + saying that Congress had better start acting responsibly as the Fed can’t do it all. Does anyone have faith in a reasonable outcome from our gang of 12?
I struggle to see grounds for optimism in this mess.