Wednesday, October 6, 2010



Yesterday, Chicago Fed President Charles Evans called for “much more (monetary) accommodation than we’ve put in place.” Specifically, he wants the Fed to expand its purchase of treasury bonds and to aim to overshoot its 2% inflation target in an effort to push down real rates in order to get households to start borrowing and spending again. He justifies this aggressive posture by pointing out that “…it’s (unemployment’s) not coming down nearly as quickly as it should” and that “…current circumstances are extraordinary.”


We’ve heard this all before. We’ve heard that what the economy needs is for people to get out there and spend money, and not only from the economic illiterates in Washington and on talk radio but also from serious and knowledgeable economists like Mr. Evans. There may be some very short term justification for such an argument; in the throes of a recession (which, if you believe the National Bureau of Economic Research, is not a condition in which the U.S. currently finds itself), a little spending is needed to jump start the economy. But, in any but the shortest of runs, the problem with the U.S. economy is not a dearth of spending and/or a surfeit of frugality. The problems from which we are supposedly currently emerging had their origins in the profligacy of not only our government but also of our citizenry. If the United States is to survive as a going economic concern, we have to learn to save again. Therefore, if any good has come from our recent economic travails, it is that people have learned to save again. The real danger, however, is not that such new found parsimony will derail the economy but that its abandonment, as Americans return to their seemingly congenital financial irresponsibility, will land us in an even deeper bowl of economic soup than the one from which we are supposed to be emerging. To have a Fed regional president bemoaning a very salubrious rediscovery of saving on the part of the American people is thus deeply disturbing.

We’ve also heard “…current circumstances are extraordinary,” or something like it, when some eminence wants to ditch traditions, practices, or sacrosanct approaches to life that served us well back in the benighted days when America was the undisputed leader of the world, before the new types of thinking that have led us over a cliff came so much into vogue. “Current circumstances are extraordinary” is an expression very much akin to “This time it’s different,” employed when expediency is about to trump well founded and grounded tradition. To have a Fed regional president plead extraordinariness in an effort to further turbocharge the printing presses is unsettling at best.

We’ve also heard about the salutary effects of just a little inflation in the past, most notably from the likes of Jimmy Carter and his lap dog at the Fed, the highly successful G. William Miller, just before we headed into the inflationary nightmare from which Paul Volcker had to save us with some very dyspeptic medicine. Once upon a time, the Fed’s sole job was to preserve the purchasing power of the dollar. But, again, that was back in the dark days, when America was great and justifiably confident in its future. New ways of thinking, about which we are supposed to exude optimism, now hold sway, seemingly in all corners of society. The old formulae which served us so well in our past are now archaic, benighted thinking. I understand (but don’t accept, perhaps due to a lack of sufficient reeducation) that. But to hear a Fed regional president, a top dog at the institution that was once supposed to keep our dollar from becoming worthless, extol the virtues of increasing an inflation target in order to get people to pee away money, largely on goods of foreign manufacture, is to justify my sour and curmudgeonly outlook on the prospects for what was once the greatest nation, and economy, in the history of the world.

With the likes of Mr. Hughes telling us that inflation is a good thing because it will induce people to borrow and spend, is there any wonder that gold reached an all time high yesterday and just about every other commodity rallied? Is anyone surprised that, as I write this, gold is up another $7.80, to $1,348.10 an ounce? Optimistic types who tell us that it is very unwise to “bet against America” will point out that stocks rallied nearly 200 Dow points yesterday on Mr. Hughes musings and consonant actions by the Bank of Japan. To those optimists, I say that’s fine; continue to buy stocks, secure in the knowledge that the monetary authorities will fortify and insure this recovery. Meanwhile, I will hold onto my longstanding and huge (for me) positions in gold and TIPS and look to add to them when such opportunities arise. The type of thinking exemplified by Mr. Hughes and his soul mates at the Bank of Japan (who at least might have some justification, in the form of a seemingly overpriced yen) behoove me to adhere to this course.


Brian said...
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Brian said...

Truly remarkable isn't it? I hear talk of "QE2" all over the place these days. Just the most non-nonsensical thing in history. No big deal...

I can't say I don't worry about gold prices despite the value of the USD ready to fall off a cliff since USTreasury-Fed beast doesn't seem to want to support it at all. In real dollar terms, the stock market had better go up pretty fast! Gold though. Scares me.

I hope all is well Mark. I have some catching up to do on here it looks like.


The Pontificator said...


Thanks for reading and commenting Brian.

Gold has gone up pretty fast and nothing goes up in a straight line, so a little pullback wouldn’t surprise me here. But I am confident that, given the monetary high jinks we have already witnessed and more to follow, that gold will be higher a year from now than it is now. I’m certainly holding my position.

Good to hear from you; hope everything is going well.