Oct 31, 2010
A Fed paper released in September, which we luckily missed as otherwise it would have led to the collective death through uncontrollable foaming in the mouth of the entire Zero Hedge staff, was “Oil Shocks and the Zero Bound on Nominal Interest Rates“, in which author Martin Bodenstein (an econ Ph.D.) argues that oil price shocks (i.e., surges in the price of oil such as the one we are about to experience courtesy of a fresh trillion in liquidity about to be unleashed by the Fed) are… wait for it… beneficial to GDP and stimulative to the interest-rate sensitive parts of the economy. To wit: “In fact, if the increase in oil prices is gradual, the persistent rise in inflation can cause a GDP expansion.“. Yes you read that right. The Fed is stealthily floating the idea that a surge in oil prices will be for the greater good. In essence, the Fed is telegraphing that while it acknowledges that oil is about to jump to over $100, it won’t be as bad as those with a functioning brain dare to claim. And, as we show below, it will actually be a very good thing! While we would probably get a massive lethal subdural hemorrhage if told to argue a view so blatantly and stupefyingly demented, insane and, simply said, wrong, as that espoused by Bodenstein, we are glad that Sean Corrigan of Diapason has gone the extra mile to not only expose the Fed charlatans for their voodoo gimmickry in this narrow topic, and brings up an even more critical idea, which is that the Fed “actually welcomes the current surge in the prices of many of the staples of everyday life; that it actually exults in the drain being exerted on family budgets; that it revels in the squeeze on profit margins being suffered by already-struggling small businesses, because it imagines this will serve to lower the reckoning of the ethereal construct of a generalized, future real interest rate and that this alone will serve to shower riches upon all who are presently suffering, in comparison for the present woes.”
That nobody has reached this conclusion before is explainable – it is something only the brain of an illogical, demented, perverted genocidal madman’s brain can come up with. Which is why we are now convinced the Fed is hoping for not only mild inflation, but an outright surge in prices. And since the Fed is confident that it can stop hyperinflation (as did that other idiot Rudy von Havenstein), the only logical outcome is that real, prevailing hyperinflation is what is imminent as this is precisely what the intermediate goal of Fed policy ultimately is!
From Sean Corrigan’s Material Evidence October 28 note.
In a self-immolating exercise in reductio ad absurdum, this superficial reasoning has led the Fed right up against the so-called ‘zero-bound” in nominal rates (one which a dedicated inflationist could, in any case, make a great deal less constraining if $1 trillion in excess bank reserves did not accrued positive interest). Ergo, the only way the Doves feel they can deliver more “stimulus” via lower real rates is (a) to force down yields at longer and longer maturities – and rational capital allocation and return on invested income, go hang! – or (b) to push up either the rate of price appreciation itself, or, at the least, expectations thereof. Nominal rates down and/or prices up = real rates down -> spending up is the alpha and omega of their plan.
This last has even been taken to the ludicrous extremes that an FRB discussion paper last month, entitled ‘Oil shocks and the Zero Bound, purports to argue that while higher oil prices normally lower output by pushing up inflation, once under conditions of ZIRP, the higher oil price raises inflation expectations, reduces the prospective real interest rate, and therefore stimulates the interest-rate sensitive parts of the economy!!!!
Oh, Brave New World! Here we are supposed to concur in the notion that a man whose job is at risk because his employer can no longer afford the dearer diesel he needs to run the factory, and whose commute to that work has suddenly become that much more expensive, too, will be inspired both by this heightened anxiety for his livelihood, as well as by his shrunken disposable cash flow, to take out a loan – which he would otherwise never have countenanced contracting – in order to buy a newly-built house at his lower real yield!!!!
Additionally, in this Bread from Stones scenario, we are supposed to imagine that an erstwhile despairing entrepreneur gets out of bed one morning and cries, “Hallelujah! The cost of coffee is up, cotton prices are surging, copper wire has just become exorbitant – I better go start a business before it’s too late!”
Well, yes, perhaps in those particular industries assuming he has the aptitude, the means, and the ability to persuade someone to finance his eureka moment – but in any other line of business? Really?!?
Here we must force ourselves to pass over the objection that oil-driven inflation and lowered output are not necessarily such unfailingly automatic bed-fellows (see the late Boom) with only the brief observation that this confluence generally originates from either the second-order effects of a prolonged, frictional price disco-ordination, or from CB action to rein in a generalized price rise which only its own, previously over-accommodative policy could ever have allowed to occur in the first place (Hint: with an unchanged supply of money, more spent on one item implies less spent on another).
Instead, we return our focus to this Laputan piece of pseudo-scientific mumbo-jumbo for what it reveals about the muddle-headedness which informs both the ineffable Bernanke Fed and its far too numerous counterparts elsewhere.
In confounding cause with effect, in sacrificing the micro to the macro, in falling victim to any number of category errors and logical non sequiturs; in pursuing, with unthinking mathematical rigour, a set of utterly unreasonable premises to the point of an untenable – indeed, a highly damaging-conclusion, we have a prime example of everything that is wrong in mainstream economics and a glaring illumination of why the state interference which this typically seeks to justify has proven so counter-productive to this-or, indeed, to any other recovery of the past 80 years.
Perniciously, Mssrs Bodenstein, Guerrieri, and Gust even argue that the increasing material scarcity of an oil “shock” can be even more effective at dissolving the ‘zero-bound’-and so-err-lessening the general material scarcity being suffered in the slump- if the price rise progresses at such a steady pace that people expect it to continue for some fairly protracted period and if the monetary authority now makes it unequivocally clear that it will not respond to this rise in its habitual manner.
In other words, this strongly insinuates that the Bernanke Fed actually welcomes the current surge in the prices of many of the staples of everyday life; that it actually exults in the drain being exerted on family budgets; that it revels in the squeeze on profit margins being suffered by already-struggling small businesses, because it imagines this will serve to lower the reckoning of the ethereal construct of a generalized, future real real interest rate and that this alone will serve to shower riches upon all who are presently suffering, in comparison for the present woes.
Pushing this line of argument up to the hilt, it also leads to the idea that the Fed-having already stretched credulity by consulting the less than disinterested counsel of the primary dealers regarding the size of its next assault on the free market-should also start buying baskets of commodities! Truly, that way madness lies-the madness of Wallace and Warren and Roosevelt’s depression-prolonging circus of restrictionist and inflationist cranks.
Never mind that it is not the general, but the specific estimation that his own, uniquely-determined, residual entrepreneurial income (i.e., the one left to him after deducting the costs of, e.g., his now pricier commodity inputs, Mr Bernanke) will exceed his tangible, pecuniary interest costs (not his airy-fairy, abstract, modelled ones) which incentivises the business leader to act, but even under Blackhawk Ben’s own, Neo-Keynesian framework, there is something of a paradox at work here.
This lies in the fact that, however implicit it may be in the obscurantism of the Beelzebub of Bloomsbury’s magnum opus, in an economy locked into partial idleness (and a rather more widespread wastefulness) by the vicissitudes of a market-hindering institutional and political setting, the lubricative effect of a monetary debasement only comes about when that inflation is unanticipated.
Put another way, it is only when people who have been withholding previously saleable supplies of goods and labor from a now inconducive marketplace are tricked into releasing them at unchanged nominal-but lower real-prices that a purposeful dose of inflation can hope to offer any palliative effect. Conversely, if they do recognize what is afoot; if they do not succumb to so-called ‘money illusion’, then they will simply seek to reprice their services to offset the change and so no discernible impact on output or employment will result.
Yet here we have Bernanke and his breathless battalions of banknote bundlers about to embark upon the perilously disruptive process of engaging in a gross manipulation of asset values, interest rate settings, and currency parities by telling people explicitly that prices will both rise and rise more rapidly and for longer, and all with the Fed’s unreserved blessing and encouragement!
In other less poetic words, hyperinflation is coming, and Bernanke is welcoming it with open arms.
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