Austrian economists’ nemesis and Fed Chairman “Helicopter” Ben Bernanke certainly put the cat amongst the pigeons a few weeks ago, shocking everyone with his potential “tapering” talk and then, in an abrupt volte face, backtracking as the market, not surprisingly, began to crack. It seems that the FED just isn’t sure about what to do next and Bernanke is continuing to ‘test’ the market in an attempt to verbally manage investor’s expectations and try and find his way out of the monetary box he has created for himself.
A few weeks ago, Benny boy said that the FED would look to taper its monetary easing, most likely towards the end of this year, with the goal of completely extinguishing the current $85 billion asset purchase program by mid next year. With the US economy showing signals of progression, it seemed like a natural step. Even though he cautiously couched his statements that the central bank would “continue to monitor economic progression”, his comments undoubtedly pinpointed the end of monetary easing.
Equity markets which have been on life support from the monetary easing measures for over 4 years now and obviously took fright with the comments but the worst effects were seen in the bond market. The US government saw interest rates charged on its loans rise quite rapidly as yields on Treasuries soared. In a country where the national debt amounts to $17 trillion, a rise of a single basis point hurts a bit like sticking a nail in your back.
Once Bernanke understood the damage he’d done and wheeled out other FED Governors to patch his last comments he moved back to the fresh dovish tack, stating that inflation is low and still below the FED’s goal, adding fuel to the optimists hopes that monetary easing can continue almost indefinitely. He went even further by claiming the FED is actual failing on its dual mandate because it should drive the unemployment rate down to 5% – 6% while keeping inflation near 2%.
We understand the part relating to growth and employment, there’s no doubt the FED and the US government should promote employment and growth. But, the part relating to inflation isn’t easy to understand. Why would the FED need to implement a policy aimed at raising the inflation rate? Isn’t inflation the worst of all the taxes? The silent killer of standards of living is like a cancer in the economy.
First of all, an economy isn’t hurt by a 1% − 2% rate of inflation. It may be unhealthy to have a decade of deflation like Japan experiencec but, that’s not certainly the case in the US. 1-2% in the 90’s was in fact seen as the “goldilocks” rate. Second, the FED is actually hiding inflation from us. In fact, the US government has been trying to hide inflation since the gold standard ended. They have been tweaking the CPI rate in order to show much lower values than it would be if they were honest. According to an interesting study published here (http://www.theblaze.com/stories/2012/10/17/not-just-gas-check-out-the-drastic-price-increases-on-these-21-everyday-items/), prices have been rising more than the inflation rate is showing. The US middle class has in fact suffered a steep increase in the cost of living since 2002. Their real wages are declining. Period.
We collected data from the Bureau of Labor Statistics regarding CPI and built a table aggregating Blaze’s research. Take a careful look at it.
The aggregate change in prices (CPI) amounts to 27.6% while the average taken from our list of 20 products is 55%. While CPI is growing at 2.5% per year, our list of real products shows an increase of 4.5%. And so, Benny boy, don’t worry my friend! You are not really failing on the inflation part of your dual mandate. Just drop your inflation measure and use something real and you will be on top of your goals! And for all others – keeping shorting the hell out of US Treasuries – they are on a one way ticket and it doesn’t have “up” written on it (apart from yields that is!).
By Richard Jennings, CFA. Fund Manager Titan Investment Partners.