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Caroline Baum Of Bloomberg Nails It

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it took her a while.....

http://www.bloomberg.com/apps/news?pid=206...&refer=home

Feb. 27 (Bloomberg) -- The Federal Reserve has been cutting interest rates aggressively since September, a total of 225 basis points in less than five months. More than half of the reduction (125 basis points) in the benchmark overnight rate was delivered in an eight-day period in January.

This must mean that the Fed is throwing caution to the wind, recklessly easing in the face of rising inflation, flooding the system with money and laying the groundwork for the Next Great Inflation, right?

Wrong. There is nothing about the level of the federal funds rate per se that tells you whether policy is easy or tight. The Fed can pretty much put the interbank rate where it wants, passively providing the reserves the banking system demands.

A lower funds rate is generally associated with an easier monetary policy, a higher rate with a tighter one. But if there's tepid demand for credit, banks have little demand for reserves. In that case a low absolute funds rate may not reflect an easy policy.

The funds rate is a means to an end, a price (interest rate) used to deliver a quantity (of money). Right now, the quantity of credit the Fed is creating, the monetary base, is minimal.

The base, which consists of currency and bank reserves, is growing 1.2 percent on a year-over-year basis. With inflation running at 4.3 percent, well, you do the math on real base growth (or shrinkage as it turns out).

Sluggish base growth could mean one of two things: Either banks aren't in a position to extend new loans because of capital inadequacy, or businesses and households are borrowing less.

Government in Action

Either way -- dearth of demand or lack of supply -- it's hard to see how the current elevated increase in the price level can persist when the raw material of inflation is lacking.

``We all know what's happening with oil and other commodity prices,'' says Jim Glassman, senior U.S. economist at JPMorgan Chase & Co. They may be ``relative price increases.''

``In terms of the future, we're supposed to think about the monetary conditions,'' he says. ``And it doesn't seem the fuel (for inflation) is there.''

We can thank the U.S. government for some of the price pressures, at least when it comes to food. It ``legislated higher corn prices,'' Glassman says, referring to the Energy Policy Act of 2005 that established renewable-fuel standards for gasoline. Earlier this month, the Environmental Protection Agency mandated a gasoline blend consisting of at least 7.76 percent ethanol.

That translates into 9 billion gallons of renewable fuel in 2008, according to the EPA. Increased demand for ethanol drives up the price of corn, from which ethanol is derived.

Food Fight

Corn, which is the primary feedstuff for the nation's livestock, ``makes up about 3 percent of the grocery bill,'' affecting the price of everything from fructose to chickens to dairy products, Glassman says. Corn futures prices hit a record $5.47 a bushel this week, an increase of 20 percent since the start of the year. The price of corn has doubled in the past two years.

Food prices rose 4.8 percent in the year ended in January, according to the Bureau of Labor Statistics.

Higher inflation isn't just a matter of food and energy; energy prices are up almost 20 percent in the last 12 months. Core inflation has been edging higher -- from 2.1 percent in September to 2.5 percent last month -- a worrisome development for the Fed even though inflation is a lagging indicator. Policy makers have acknowledged that the downside risks to growth right now are greater than the upside risks to inflation. (Even if they don't say that in so many words, their actions speak it even louder.)

With any luck, inflation expectations won't come unhinged with growth stalling out. If they do, Fed officials will have to put their money where their mouth is or stop talking about expectations as if they have a life of their own.

Similarities to 1990s

The Fed found itself in a similar position in the early 1990s. Banks were in bad shape, a result of speculative lending on commercial real estate. By the time it was over, more U.S. banks and thrifts had gone under than at any time since the Great Depression.

Unlike today, a 3 percent federal funds rate produced a solid increase in the monetary base and narrow money. The broad monetary aggregates registered their slowest growth on record.

The Fed was providing the wherewithal -- cheap credit -- but the banks had to hunker down. They couldn't support credit growth because of inadequate capital. In other words, they said thanks, but no thanks.

Fast forward to 2008, and banks are assuming hundreds of billions of dollars of structured investment vehicles onto their balance sheets. These vehicles need to be financed and are subject to bank capital requirements, a constraint absent in their former life as off-balance-sheet vehicles.

Differences

The fact that banks are tapping the Fed's temporary auction facility instead of the interbank market has no effect on the monetary base. (Please restrain yourself from e-mailing me about the lower quality of collateral the Fed is accepting for TAF loans. I plan to address that issue in a future column.)

This may be a repeat of the 1990s cycle to the extent that real estate losses left banks holding the bag. This time around, however, the raw material for lending just ain't there.

(Caroline Baum, author of ``Just What I Said,'' is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Caroline Baum in New York at

Looking forward to shorting the hell out of commdities/going long dollars when it finally blows.

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Feb. 27 (Bloomberg) -- The Federal Reserve has been cutting interest rates aggressively since September, a total of 225 basis points in less than five months. More than half of the reduction (125 basis points) in the benchmark overnight rate was delivered in an eight-day period in January.

This must mean that the Fed is throwing caution to the wind, recklessly easing in the face of rising inflation, flooding the system with money and laying the groundwork for the Next Great Inflation, right?

Wrong. There is nothing about the level of the federal funds rate per se that tells you whether policy is easy or tight. The Fed can pretty much put the interbank rate where it wants, passively providing the reserves the banking system demands.

A lower funds rate is generally associated with an easier monetary policy, a higher rate with a tighter one. But if there's tepid demand for credit, banks have little demand for reserves. In that case a low absolute funds rate may not reflect an easy policy.

The funds rate is a means to an end, a price (interest rate) used to deliver a quantity (of money). Right now, the quantity of credit the Fed is creating, the monetary base, is minimal.

The base, which consists of currency and bank reserves, is growing 1.2 percent on a year-over-year basis. With inflation running at 4.3 percent, well, you do the math on real base growth (or shrinkage as it turns out).

Thanks for this. A couple of questions:

What is the UK equivalent of the Fed Funds rate?

And, what is the UK base growth (or shrinkage) rate?

Peter.

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Guest DissipatedYouthIsValuable
Thanks for this. A couple of questions:

What is the UK equivalent of the Fed Funds rate?

And, what is the UK base growth (or shrinkage) rate?

Peter.

As you well know, Britain prides itself on transparency and openness when it comes to facts.

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Caroline Baum got it once again @ss-backwards.

"Look, inflation is at 50% per year, the monetary base grows only with annually 49%. Panic! The real base shrinks! Let's print even more money, so that everything gets better."

Then, she should have a look at M3, a much better money supply measure than what she's looking at.

The fact that banks are tapping the Fed's temporary auction facility instead of the interbank market has no effect on the monetary base. (Please restrain yourself from e-mailing me about the lower quality of collateral the Fed is accepting for TAF loans. I plan to address that issue in a future column.)

Boy! Yeah, TAF just doesn't matter, does it? :blink::blink:

She should just stop writing this column. Gets it consistently wrong. She's a perfect contra-indicator.

Edited by Goldfinger

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I think a lot of the reason some prices are still rising is prices are backwards looking, also there hasn't

been much forced liquidation yet. Banks and funds are still holding stuff on their balance sheet at pre crunch levels, so no-ones force to raise cash. Even though markets are illiquid, or vastly devalued. Anyway, housing got hit first by credit markets, other markets are getting hits too, such as stocks. I think commodities will be hit when the economy slows and forced liquidation sets in. Because thats really the source of our price inflation.

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Caroline Baum got it once again @ss-backwards.

"Look, inflation is at 50% per year, the monetary base grows only with annually 49%. Panic! The real base shrinks! Let's print even more money, so that everything gets better."

Then, she should have a look at M3, a much better money supply measure than what she's looking at.

Boy! Yeah, TAF just doesn't matter, does it? :blink::blink:

She should just stop writing this column. Gets it consistently wrong. She's a perfect contra-indicator.

Fed Policy is deflation. If you look at the real rate of borrowing in the US economy, it is SOARING. Mortgage rates are up by roughly .25% in the last 5 days alone. A recession coupled with tight credit will remove the excess liquidity out of the market in the form of deflated asset prices just like Warren Buffett warned many many months ago.

This why Ben can keeping dropping rates. The more he drops the higher the rates go in the real world. He boosts exports, restrains imports and brings the books slowly back to balance. A recessionary trend keeps the lid on inflation. If he pulls this one off he will be given a Nobel Prize for economics.

THe question is: do I sell my gold and take the profits now or do I keep going with the herd and buy more and more in the belief that it is different this time and that there is greater demand than supply?

Edited by Realistbear

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Then why is it a well known fact that basically all past US recessions came along with increased inflation?

Source: http://goldnews.bullionvault.com/inflation..._gold_020920082

RB, don't delude yourself.

"Goldnews?" :blink:

Deflation in the United States

Major deflations
There have been three significant periods of deflation in the United States.
The first was the recession of 1836, when the currency in the United States contracted by about 30%, a contraction which is only matched by the Great Depression. This "deflation" satisfies both definitions, that of a decrease in prices and a decrease in the available quantity of money.
The second was after the Civil War, sometimes called The Great Deflation.
"The Great Sag of 1873-96 could be near the top of the list. Its scope was global. It featured cost-cutting and productivity-enhancing technologies. It flummoxed the experts with its persistence, and it resisted attempts by politicians to understand it, let alone reverse it. It delivered a generation’s worth of rising bond prices, as well as the usual losses to unwary creditors via defaults and early calls. Between 1875 and 1896, according to Milton Friedman, prices fell in the United States by 1.7% a year, and in Britain by 0.8% a year.[4]
The third was between 1930-1933 when the rate of deflation was approximately 10 percent/year
. The first was possibly spurred by the deliberate policy in retiring paper money printed during the Civil War; the second was part of America's slide into the Great Depression, where banks failed and unemployment peaked at 25%. Both were world-wide phenomena.
The deflation of the Great Depression, as in 1836, did not begin because of any sudden rise or surplus in output. It occurred because there was an enormous contraction of credit (money), bankruptcies creating an environment where cash was in frantic demand, and the Federal Reserve did not adequately accommodate that demand, so even sound banks toppled one-by-one (because they were unable to meet the sudden demand for cash— see Fractional-reserve banking). From the standpoint of the Fisher equation (see above), there was a concommitant drop both in money supply (credit) and the velocity of money which was so profound that price deflation took hold despite the increases in money supply spurred by the Federal Reserve.
Minor deflations
Throughout the history of the United States, inflation has approached zero and dipped below for short periods of time (negative inflation is deflation). This was quite common in the 19th century and in the 20th century before World War II.

Wiki

The period 1930-33 saw massive deflation. The period was recessionary and inflation was nowhere to be seen. I think we are in a similar place today. Delusional? Or is it really reality and time to dump inflated assets?

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Then why is it a well known fact that basically all past US recessions came along with increased inflation?

Source: http://goldnews.bullionvault.com/inflation..._gold_020920082

RB, don't delude yourself.

um well that graph clearly shows inflation peaks just prior or during a recession. Whichever way you interpret it its clear inflation won't be soaring from here, however many blanket assumptions you try to make.

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  • 294 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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