But here is the key difference: Ben Bernanke and the Federal Reserve cannot raise rates to reign in incipient hyperinflation, like Volcker did in ‘79.That's exactly the point I was trying to make in How I learned to stop worrying and love the bubble. Buy gold, buy a house, buy stocks, whatever. Just get out of Zimbabwe Ben Bucks and Timmy the Tax Cheat T-bonds.
Apart from the obvious fact that Bernanke is not half the man Paul Volcker is (both literally and figuratively), and therefore lacks the balls and the backbone to do what needs to be done, Bernanke simply does not have the room to maneuver, insofar as the Fed funds rate is concerned.
If there was a run on Treasuries, Bernanke today cannot raise interest rates to retain Treasury holders—if he did, he would wipe out all the Too Big To Fail banks, and break the Treasury of the U.S. Federal government, both of which depend on the Fed’s cheap money as completely as if it were oxygen.
Back in 1979, Volcker didn’t have this constraint. He could raise rates—but even so, he paid for it with 400 basis points of unemployment.
However, unemployment today is already at 10%, in a soft credit environment. So even if he didn’t have the TBTF banks and the Federal government on the cheap money life support, Bernanke cannot raise rates in order to stop a run on Treasuries, stop a run up on commodities, and stop incipient hyperinflation: The economy is too weak. Adding 400 basis points to the current employment situation—that is, driving U-3 unemployment to 14% or more—would cause political pandemonium, not to mention riots.
Finally, Bernanke won’t raise rates—can’t raise rates—because of a disease of the mind that he has: Due to Alan Greenspan’s pernicious, destructive influence, which I have discussed at some length, Bernanke thoroughly believes that only liquidity injections and cheap money can save the economy—he is looking for inflation. He is so terrified of the American economy circling the deflationary drain, that he is deliberately going in the other direction: He is trying to cause inflation.
70's stagflation: a preview of what's to come
I agree wholeheartedly with this Gonzalo Lira piece. Those of you interested in the subject should click over and read the whole thing. Those of you here only for the fart jokes can take away this key excerpt:
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Every company I look at today has no pricing power. In the 70's, companies had pricing power and there was under-capacity. They could use their pricing power. That caused inflation. Nowadays, what few profits there are to be made usually come from lowering costs and improving productivity.
I'm with you on owning stocks. I see that as the cheapest asset class. I have to say the most successful trade I've made this year is shorting TBT (with puts). TBT is the super inefficient ETF created just for retail speculators who want to take a leveraged bet against the long bond.
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