Volcker Says U.S. Mired in Recession and Inflation is Coming

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.   

In a talk given to a small audience at the American Museum of Finance on Wednesday evening, former Federal Reserve Chair Paul Volcker stated that there was an ongoing recession in the U.S. and that we will be seeing inflation in the future because of the actions of the Fed and Treasury during the 2008 Credit Crisis.

While most of Volcker's talk centered on the current crisis in Europe, he frequently made connections to what was going on in the EU to what has taken place in the United States. His remarks about the U.S. being mired in an ongoing recession were in response to a question on whether an infrastructure bank would be a good idea. As part of his answer he stated, "We're not going to end the recession in the next month or the next year. It's going to take several years before the recession is over." The U.S. government claims that the last recession ended in June 2009and has repeatedly said that the U.S. has not fallen back into recession even though unemployment and consumer confidence have continually remained at recession levels.

When discussing the bailouts during the Credit Crisis,  Volcker remarked "people said that there will be inflation... that's true over time." Volcker was critical of pro-inflation policies. He said that "the problem with inflation is that it looks so enticing, but the historical record doesn't verify that it is." He continued, "We would be very foolish if we deliberately went out and created inflation." The Federal Reserve under Ben Bernanke has kept Fed Funds rates around zero percent for three years now, which means real interest rates have been negative. Negative interest rates are highly inflationary as is money printing. The Fed has expanded its balance sheet — one of the many ways it prints money — by over $2 trillion dollars since September 2008.

Volcker described the 2008 Credit Crisis as a "regulatory failure", but added "the Fed is only one regulator". He went on to state that "the Federal Reserve took a lot of extraordinary measures" to handle events back then and "the Fed and the Treasury did not necessarily follow the letter of the law" in attempting to control the damage to the financial system. Volcker further laid part of the blame for the Credit Crisis to proprietary trading by banks and said he was "not in favor of banks being speculative entities being supported by the U.S. government".

Paul Volcker was Chairman of the Federal Reserve from August 1979 to August 1987 and is widely credited with bringing down the high inflation of the 1970s by raising interest rates. More recently he headed the President's Economic Recovery Advisory Board, which he left in February.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21 

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Book Review: "SuperCycles" by Arun Motianey

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


It is common knowledge among market historians and even many traders that there tends to be alternating twenty-year cycles of rallies in commodities and stocks. These long-term rallies and the sell offs that follow them are referred to as secular bull and bear markets respectively. In his new book, “SuperCycles”, Arun Motianey produces an economic theory that ties together these alternating cycles putting them into an even longer-term context and places central bank monetary policy as the originator of the phenomenon.

While superficially, Motianey’s supercycles appear similar to Russian economist Nikolai Kondratiev’s long waves, they differ in important aspects. They agree that the length of the supercycle can range from forty to sixty years and that it is global in scope. Kondratiev’s long cycles were an empirical observation though, not a theoretical explanation and they included socio-political as well as economic behavior. Motianey, on the other hand, creates a model to explain why the cycles take place. Their cycles also have different beginning and end points. Kondratiev began his first cycle in 1790 and his second long wave lasted between 1850 and 1896. Motianey begins his first supercycle in 1873, in the middle of Kondratiev’s second cycle. The key for Motianey is the point where the major world economies increasingly adopted the gold standard.

Motianey’s supercycles begin with the arrival of a new monetary regime that promises price stability. The breakdown of that regime ultimately ends the supercycle many decades later. His first supercycle begins with the gold standard years in 1873 and ends in 1930 when many countries were forced to leave the gold standard because of the Great Depression. The second one is Keynesian based and it terminated  in 1979 when U.S. Fed chair Paul Volcker stopped the inflation that began with the breakdown of Bretton Woods in 1971 by imposing high interest rates. Motianey defines the current supercycle as the era of enlightened fiat money – a term that seems inherently oxymoronic. It should end somewhere around 2020 to 2030. The breakdown of our current monetary regime seems to have begun with the Credit Crisis.

In the Motianey model of supercycles, central banks and their mistakes are driving force of the deflationary and inflationary periods that seem to repeat over and over again. Instead of producing their stated goal of price stability, they wind up going too far in one direction or the other and exaggerate the price movements that would have taken place without their intervention. Motianey’s supercycles begin with a period of deflation, as occurred in the late 1800s and the 1930s, or disinflation, which characterized the 1980s. Inflation appears toward the end. Inflation in the 1910s because of World War I and in the 1970s because of the breakdown of the dollar were the two major inflationary episodes in the previous two supercycles. We are now about to head into the inflationary years in the current cycle.

Motianey does nevertheless examine three possible outcomes in his book for the next decade or so. He thinks deflation is highly unlikely as this would indicate a premature ending to the third supercycle and it would make it the only one without an inflationary episode. Motianey considers two ways governments might handle inflation – with indexation and without. While Motianey thinks indexing could be a good idea, history indicates it rarely if ever works out as I pointed out when I interviewed him at the February meeting of the New York Investing meetup (http://investing.meetup.com/21). Brazil implemented a completely comprehensive indexation system starting in the 1960s and this only served to entrench inflation and many years later eventually led to hyperinflation. The U.S. already has minor indexation in Social Security cost of living increases and of tax brackets. An expansion of indexation is actually quite likely to take place; it is not a good idea however.

Motianey is an engaging writer and “Supercycles” should be considered a must read for economic junkies. His ideas are fresh and innovative and he attempts to avoid the dogma that frequently leads those in the profession astray. I highly recommend it for those who want to gain greater perspective on the Credit Crisis and where we might be heading in its aftermath.

Disclosure: McGraw-Hill provided a copy of the book for review purposes.

NEXT:

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Twilight of Ben Bernanke

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Fed Chair Ben Bernanke survived the U.S. Senate vote for his reappointment, but it was touch and go for a while. The vote was 70 to 30 - an unprecedented lack of support for a sitting head of the Federal Open Market Committee. The previous lowest level of support was for Paul Volcker in 1983. His vote was 84 to 16, much better than Bernanke's. Volcker failed to get support for another nomination however. He was out in the next term. Bernanke will be lucky if he lasts even that long.

Opposition to Bernanke first arose in the blogosphere and then spread through the politically activist communities on both the Left and the Right. Even with that, the senate might still have engaged in its usual rubber stamp support for the president's nominee for Fed Chair.  The surprise upset in the Massachusetts special election for Ted Kennedy's seat indicated how angry the public was about the handling of the economy and that no senator could expect automatic voter support this fall. The one-third of senators up for reelection in November seemed particularly reluctant to support Bernanke. The White House had to get involved to salvage Bernanke's nomination. Without pressure from the president and congressional leadership, he might have gone under.

The government PR machine has been trying to turn Bernanke's first term at the head of the Fed from the fiasco it has been into a great triumph. They came up with the tag line that 'he saved the U.S. from another depression'. Obama and a number of Democratic leaders repeated this outrageous claim over and over again. There is only limited proof that this might be the case. The U.S. economy still faces a depression or at the very least an ongoing recessionary period that could last for years. The White House and the Fed may indeed be oblivious to this idea, since they both seem to believe their own press releases rather than the hard evidence that indicates otherwise. In truth, Bernanke is one of the most incompetent leaders the Fed has ever had. He failed to see the Credit Crisis coming, he failed to react quickly when it did, and when he did he took questionable actions that benefited Wall Street at the expense of Main Street. Bernanke's associates, Tim Geithner and Henry Paulson, the current and former Treasury Secretaries, also claim they did a great job handling the Credit Crisis and that they too saved the U.S. from another depression.

Why Obama submitted Bernanke's name for reappointment is indeed a mystery - at least if you believe his rhetoric about 'change you can believe in'. Bernanke was originally appointed by George Bush and is a Republican. Obama constantly complains about the big mess with the economy that George Bush left him to untangle. Yet, Obama renominates, with obsequious praise, the key architect of the Bush economy. Did he even look for someone else to fill the position?  My guess is he didn't. The rap about why senators should support Bernanke has included 'no one else would probably have done a better job handling the Credit Crisis' (an indirect admission that Bernanke didn't perform well) and 'someone else wouldn't be much different as Fed Chair'. While Washington is willing to accept mediocrity and substandard performance in top government positions, the American public seems to finally be getting fed up with Beltway incompetence.

Bernanke's loss of power is not just due to his poor handling of the economy and financial system. He is a complete contrast to the politically savvy Alan Greenspan, who survived for 19 years as Fed Chair, through both Republican and Democratic administrations. Bernanke seems to be politically tone-deaf. The Fed's actions at this month's meeting, which ended on Wednesday, included an announcement that it was closing down a number of its programs that provide liquidity to the system. Stocks gyrated wildly after the announcement and the market could easily have gone into a tailspin. Not exactly a wise move for a Fed Chair ever and particularly not smart the day before a vote for renomination where senators are looking for a reason not to support you.

Bernanke also seems to have confused the idea that the Fed should be independent with the Fed should be above the law. This imperial view does not sit well with the American public. Bernanke's renomination will only further empower the forces that want to audit the Fed and reign it in. From now on, he is Barack Obama's Fed Chair and not George Bush's. Bernanke's reappointment is likely to be one more decision that president Obama will regret having made. And if he doesn't, the voters will probably make sure he does.

Disclosure: None.
NEXT: U.S. 4th Quarter GDP - Slower Decline Leads to Growth


Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.