Trapped or not?

W

WINEX_IHB

New member
There is a growing perception that the Fed is trapped. The economy is rapidly weakening, but any rate cuts are likely to fuel inflation. I don't know how familiar everyone here is with ECRI, but I tend to value their work highly.





This is just out this morning:





http://www.reuters.com/article/marketsNews/idUKNAT00357920080104?rpc=44





<pre> NEW YORK, Jan 4 (Reuters) - U.S. inflation pressures
reached a 31 month-low in December due mostly to
disinflationary moves in measures of commodity prices, loans,
jobs and interest rates, a report said on Friday, paving the
way to further interest rate cuts by the U.S. Federal
Reserve.</pre>

<pre> The Economic Cycle Research Institute's U.S. Future
Inflation Gauge (USFIG), designed to anticipate cyclical swings
in the rate of inflation, fell to 117.1 in December from 119.8
in November, revised from 119.7. The figure has not been this
low since May 2005, when it hit 116.4.</pre>

<pre> "The fact that average hourly earnings growth rose in
December is irrelevant engaging the future direction of
inflation," said Lakshman Achuthan, managing director at ECRI.</pre>

<pre> "With the USFIG falling to a 31-month low, forward looking
inflation pressures are plummeting. Therefore, policymakers
need not be concerned about runaway inflation in 2008."</pre>

<pre> The index's downtick was partly offset by an inflationary
move in a measure of vendor performance, the report said.</pre>

<pre> The FIG's annualized growth rate, which smooths out monthly
fluctuations, fell to minus 4.6 percent from minus 0.7 in
November revised up from negative 0.9.</pre>
 
paul volcker is often forgotten from common knowledge while alan greenspan, despite recent criticisms, is widely credited for the the strong economy of the decade and half. but it was volcker who set the stage for the next 20 yrs with his tough love approach. large scale economic problems often take years if not decades to develop even though there are hints of the problems. optimism, politics, or short-term short-sightedness are hard to overcome. the so-called soft landing is just another way of pushing problems further ahead in the future in hopes that some economic miracle will resolve the problem later.
 
Volker's job by comparision was easier. He had a stagnated economy and runaway inflation. He could pick a dragon to slay. It was inflation.



Bernanke didn't hold a gun to these lenders and private equity people and get them to write a bunch of bad loans, but they did. Now nobody in the banking industry has any faith in anything, so lending continues to dry up. He can't fix that part, and inflation really isn't a problem.



I think the word "trapped" is very appropriate for the Fed's situation.
 
no_vaseline,





Do you remember the recession of the early 80s? There was nothing easy about what Volker did. Alan Greenspan consistently took the easy way out and now we will all have to pay the price. Bernanke is going to have to deal with the same situation Volker did. The question is will he have the courage to raise interest rates to quell the inflation he is now creating.
 
I was a young kid in the 80s so have no clue about the decisions Volker was making or how the economy was doing considering my only concern was how many He-Man and GI Joes I could fit in my mouth...kidding. Anyways my question is do people think AG was smart enough to keep pushing out his problems till he felt like there was nothing left he could do to prolong the pain we are now experiencing or was he just really dumb and got lucky.....sorry the last piece came out really country.
 
AG knew exactly what he was doing... spurring investment with cheap interest rates. What he couldn't control was who invested what with whom and under what terms. He faced the same problem that BB faces now, complete lack of control of the actors in the market. At best, he can set the table for dinner, but he ain't shopping, he ain't cooking, and whether the end result is Filet Mignon or boiled shoeleather, he has to eat it with the rest of us. The difference between them is that Greenspan started in a much better spot, because Volker had drastically reduced the supply of money and jacked up the interest rates. Coincidentally, that may be what Ben is forced to do....or his successor.
 
<p>IR:</p>

<p>Yes. I do. Vivdly. Volker in the process of breaking the back of inflation busted more farmers than the great depression. He also busted the RE market.</p>

<p>In the 1970's the USDA began a program of "Get Big or Get Out" and encouraged growers to pick a side. 18% ARM mortgages and 20% operating lines of credit were pretty standard in 1981 and 1982. Commidity prices went straight south. Guess what happened to growers and anybody in a farming town who worked at the local coffee shop/tractor dealership/parts house?</p>

<p>Volker had his choice of two shit sandwiches and chose to the one with inflation on it's plate, knowing full well what it's requsite costs would be. Bernanke doesn't have it that tough (yet), but it's worse because the stiuation isn't as severe so it isn't as easy to pick a poison. </p>

<p>And Greenspan, by his own admission, didn't have it nearly as rough as either of those two. Ending of the cold war and the revolution in worker output thanks to the IT revolution made his job easy. At one point in his book, Greenspan remarks about the late nineties - specifically, getting up in the morning and looking in the mirror and remembering that "It isn't supposed to be like this. It's not this easy."</p>

<p>I am of the opinion this current problem isn't the fault of Greenspan. It's the fault of loose lending, all over the world, in every field where money is lent.</p>
 
<p>Vasey,</p>

<p> completely agree with you on the loose lending practices. You don't lend people money they can never possible pay back. Its just insane. You know what they say about making your bed....</p>

<p>-bix</p>
 
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