Out of Control Policy Blog

The Fed, The ECB, $5 Gasoline and Once Again, Goldman Sachs

The Fed claims to have the ability to control inflation should it ever rear its ugly head upon the economy. Inflation doves like Chicago Fed president Charles Evans and the Fed chairman himself, Ben Bernanke, have stated that should inflation ever rise outside of controllable levels they can simply rein it in by reversing policy. Well, then, how about right now.

Oil is nearing $100 per barrel having printed $96.87 in today’s trade.  Let me remind you that this is up from $75 dollars on October 4th, just one month ago. Commodities as a whole are only 11 percent off their all-time high that was hit in April of this year having far surpassed their inconceivable previous high levels in August, 2008 when oil hit $150 per barrel. Year-over-year consumer price index (CPI) is at 3.87 percent, the highest level since September, 2008, the same time commodities ended their more than 200% bubble run. We’re now right back to those levels, and trending higher. Corporate balance sheets, and more importantly, bank balance sheets are awash with cash. The markets are fueled and primed just waiting for the slightest hint of a spark so momentum traders can target the easiest areas to push-up prices.

So, what do central bankers do given our current hyperinflation springboard scenario? They drop rates and print more money.

Goldman Sachs, in a note put out to “those permissioned,” and covered by my colleague Anthony Randazzo, advocated that the Federal Reserve actually “deliver significant additional easing.” Goldman is pushing the Fed to:

“use additional asset purchases – and all other available policy instruments – to ensure that actual nominal GDP reverts to trend over the medium term…The instruments for pushing nominal GDP back to the target path could include a commitment to keep the federal funds rate low for as long as needed to put the economy well on its way back to the target path, as well as additional large-scale asset purchases.”

Other than the utter ridiculousness of advocating printing money to bring the American economy back on a trend that was set in line with a housing bubble and a commodities bubble, this policy ignores inflation stating:

“This is likely to mean greater responsiveness to output or employment relative to prices while the nominal GDP level target is in place.”

This is sheer madness. The push for output and employment growth at any cost due to price rises is economic suicide. There exists seemingly no concern about what $5 gasoline, $7 loaves of bread, or $30 cotton t-shirts would do to stall and weigh-down economic growth. Without wage inflation, which hasn’t appeared in any notable measure this entire bubble after bubble, boom-bust decade, loose monetary policy will set us right back up for another impending, and most-likely crippling, bust.

Goldman’s logic has recently infiltrated the euro zone as well. Newly appointed European Central Bank (ECB) President, Mario Draghi, previous vice-chairman and managing director at Goldman Sachs, decided to cut rates after only three days on the job. The ECB’s only responsibility is to control inflation, unlike the Fed which has the responsibility to control both prices and unemployment (both of which they are failing miserably), and even with euro zone inflation well over 3 percent, he still decided to cut the central bank’s target rate. The ECB has also been active in Italian and Spanish debt markets through its bond-buying program, albeit in a limited and temporary capacity as Draghi has so labeled it. Look for this to change to large-scale and permanent purchases as yields on both these countries’ debt head further north. Draghi has stated that the ECB cannot reduce yields for euro zone countries, but my guess is he’ll sure try the second they reach alarming levels.

Trying to restore the status quo back to levels seen prior to the financial crisis through monetary financing, whether in the U.S. or Europe, is surely to lead to dire consequences. It is nothing more than the monetization of debt and the beginnings of hyperinflation. To put Goldman’s “targeting of nominal GDP” in perspective, it would require an 8.6 percent annualized increase in economic growth (currently at about 2.5 percent and more than double the long-term trend of about 4 percent) which would add an additional $10 trillion of debt on top of the already $10 trillion of debt forecast for the next decade.

Our total debt, accrued over the entirety of America’s existence is $15 trillion. Goldman, the Fed, and now their counterparts in Europe want to more than double that amount in ten years. If the Fed believes it can rein in the levels of inflation that would arise from that kind of debt explosion, I cringe to envision the effect that trillions of dollars of asset sales and exponential interest rate rises would have on a newly recovered economy. We are truly on an unsustainable path.

James Groth is Research Associate


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