Thursday, February 21, 2008



Yesterday, I heard Alan Skrainka, chief market strategist for Edward D. Jones, state that, despite the big January CPI increase announced yesterday (0.4% overall, 0.3% core), inflation would not be a problem because the economy is slowing down. Hmm… Skrainka seems to be a pretty sharp guy, and E.D. Jones is a firm for which I have a measure of respect. But how could Mr. Skrainka make such a statement? Doesn’t he remember the late ‘70s when stagflation was the most salient feature of the U.S. and, to a large extent, the world, economy?

This morning, learned experts on CNBC were, unlike Ed Skrainka, discussing the possibility of stagflation, and largely dismissing that possibility. This morning’s Wall Street Journal featured a page A1 article on stagflation. Perhaps its most interesting aspect was a quote from UC Berkeley economist Christina Romer, to wit:

“The reason we’re so unlikely to see a repeat (of stagflation) is we’re not adding irresponsible policy.”

On what grounds does Professor Romer make such a statement? Ben Bernanke is proving to be the most irresponsible Fed chairman since Bill Miller (I suspect that, given sufficient historical perspective, Alan Greenspan will vie for that title, but that is grist for another post.). As I have said in numerous posts in the past (See, inter alia, AND ANOTHER THING…, 10/31/07, AN EVER VIGILANT CENTRAL BANK, 11/8/07, “NOW, NOW, KIDS…DADDY WILL MAKE EVERYTHING RIGHT. YOU JUST WAIT AND SEE.”, 12/12/07, “SHINE YOUR SHOES, MR. STREET?”, 12/15/07), Obsequious Ben appears to see it as his mission to provide sucre to the tough guy free marketeers on Wall Street whenever it looks like those financial swashbucklers will suffer so much as a stubbed toe. Virtually all the reductions he has made in the fed funds rate have been made in response to market declines or even mere harbingers of market declines. Ironically, today the Journal ran a story on page A2 concerning the minutes of a Fed January 9 conference call, convened between scheduled meetings on December 11 and January 29-30. The article noted that the conference call was convened (if that is the right verb) in response to an unexpected jump in unemployment. On the call, a cut in rates was discussed, but such a reduction was not implemented because the Fed was “reluctant to appear overly responsive to a single economic report.” But this reluctance to appear “overly responsive” did not stop the Fed from cutting the fed funds rate by 75 basis points on January 22 after European markets plunged on January 21. (Our markets were closed for the Dr. King holiday on January 21.) This was not an isolated incident, but was typical of the Fed: the markets fall, Obsequious Ben, who apparently judges his performance by the volume of cheers from Wall Street, cuts rates or comes up with some Rube Goldberg scheme to make the financial denizens who have done so much to bollix up our economy feel better.

It’s not as if Obsequious Ben is alone in this desire to make everything right for the kids on Wall Street. On ABC’s This Week last Sunday, self proclaimed free marketeer and presumptive Republican nominee John McCain (Did you know he was a POW in Vietnam?) said “I would have liked to have seen faster rate cuts and earlier than they were done by him.” (Sic) Mr. McCain (Did you know he was a POW in Vietnam?) also was non-committal when asked whether he would reappoint Dr. Bernanke to another term as Fed Chairman. Don’t count on Barack Obama or Hillary Clinton to be any less eager than Mr. McCain (Did you know he was a POW in Vietnam?) for Dr. Bernanke to debase the currency, either. When one combines Obsequious Ben’s natural tendency to want to ingratiate himself with anyone on Wall Street or Washington with the pols’ calling for a seemingly painless Fed provided solution to our economic difficulties, one can guess where short term rates, and inflation, are headed.

Soaring commodity prices, a weak dollar (Yes, I know the greenback has been strong of late, but, in the big picture it remains very weak.) are clearly signs of inchoate inflation. When one throws an irresponsible Fed, headed by a man seemingly obsessed with the approval of those he considers to be important, into the mix, the possibilities for stagflation are very real, despite the assurances to the contrary given by the same experts who told us the “sub-prime mortgage” problem was a mere blip, isolated to one sector of the financial markets one sector of the economic spectrum.

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