Economy

In justifying the massive money printing operations of the Fed, Bernanke used inflation data to bolster his case that the Fed’s actions are both prudent and worth continuing.

Here’s what he said:

In keeping with our focus on commodities I am going to take another quick peek at them here.

Is the stock market topping? Will deflation return soon? Is oil about to tank?

As we continue to wrestle with the various policy gyrations that are complicating the macro picture, we’re going to continue to keep our eyes firmly on market activity for clues.

Our old friend, the Continuous Commodity Index (CCI) has made a new closing high today. If it does not soon turn down, it will give traders a powerful motivation to run it up even higher, as it will have broken out from a potential double-top formation.

“Things” are getting more expensive. That is a fact. Energy, metals, and the ‘softs’ (grains and cotton) are all headed higher, both in the US and elsewhere across the world.

True, the new daily closing high for the CCI is by a whisker, but it’s a new high nonetheless:

The US federal government is barreling towards a certain fiscal train wreck. While there is much being gleefully reported about the return of the shoppers…er, consumers…uh, patriotic citizens…spending more than they have, there is almost no hope of growth returning fast enough to offset the amount of budgetary deterioration that now seems to be baked into the cake.

The news is full of stories about how the bond market seems to be defying the Fed. While it is not yet clear what the drivers of the recent sell-off in bonds truly are, the action bears watching.

As I mentioned previously, there are both innocent and sinister explanations for why bonds might be selling off. The innocent explanation involves a return to economic health that is being discounted in the bond market. The idea here is that a return to economic health will include both the cessation of Fed bond buying activity (QE II) and higher interest rates. Under this scenario, which is supported by recent economic data, one does not want to be holding bonds, which will only lose value over time. Best to beat the rush and sell them now.

The sinister explanation involves the idea that the Fed is losing control of the market and is not as powerful as some might have thought. This is the angle that the WSJ is playing up today:

Don’t Be Fooled: Inflation Has The Upper Hand

Wednesday, December 8, 2010

Executive Summary

• Money supply (M2) has been steadily growing for a decade, and banks hold an unprecedented amount of excess reserves that could enter the market at any time.
• Credit growth is flatlining.
• Debt in the household & financial sectors (the big enchilada) exhibits the deflationary trends that are pre-occupying the Fed.
• Federal government credit is exploding upwards as a result.
• Corporate and state debt are increasing, but at more moderate rates.
• Energy costs are high and getting higher = inflationary.
• Confidence in paper currencies is plummeting = potentially hyperinflationary.
• Forecast for the future…

Part I

All the world was waiting to see what form of budgetary punishment would be visited upon the Irish people as a consequence of banking mistakes and the perceived “need” by the European political class to assure that no bank investors shouldered any of the losses.

While the proposed budget may not be capital punishment, it is not far off.