Why the Fed is at its limits by Einhorn. He is right, but we seem destined for a process that will deliver QE until the Matrix collapases. Where is Neo when we need him? Oh yeah wrong movie. Cue the hologram (Help me Ben Bernake you are our only hope!)
Einhorn holds it Buffet does not.(I am with Einhorn long term - Buffet Short term)
A friend send me this note about the Fed's intent regarding QE2 and my view that the Fed may be purposely trying to generate moderate inflation.
"QE2 was announced in November 2010.
At that time CPI-U was running considerably under 2.0% and had declined from January 2010:
Given the example of 1937-1938 U.S. recession, I can understand the intent as being avoiding deflationary expectations or entrenchment of "too low" inflation expectations while accepting inflation risk - or even as being outright mechanical monetary stimulus (versus expectations management)."
I think he has a point, I checked the inflation calculator (his link) from start of 2010 to October 2010 (0.93%) and August (and September) 2010 to October 2010 (0.18%) so inflation was trending lower at the time. I like my friends choice of words in the characterization.
That said, here is what David Einhorn, a prominent hedge fund manager, of Greenlight Capital recently said on the issue of inflation. He is skeptical of the inflation numbers the Fed looks at and whether they are reliable indicators of what is actually happening.
"The official basket excludes most healthcare costs, which go up fast and includes a huge weighting for OER, which is a cost economists calculate, but no one actually pays. Notably, OER did not rise quickly during the housing bubble, but continues to suppress inflation in the housing bust. Finally, they exclude food and energy, because they are supposedly volatile -- and we wouldn't want that. Never mind that the CRB, which is mostly food and energy inputs has roughly doubled over the last few years."
Einhorn was responding to this post on "why we fear deflation".
"So, there is an asymmetric risk in monetary policy right now. The massive injection of base money raises the tail risk of high inflation down the road –which we know how to tame- but monetary abstinence presents the tail risk of a deflationary spiral, which central bankers do not know how to reliably reverse. " That's what my friend said.
As I said in an earlier post, "In a world where the Fed creates a problem by being too accommodative, their response to the problem is being historically accommodative, and the new big ideas (NGDP targeting and QE) are "The FED should be even more accommodative" - well this is “Inception”."
I would point out, that when the Fed was looking at their macro numbers they failed to recognize a credit bubble forming and failed to see the bubble in the housing markets(or at least the implications) and campaigned in favour of leverage restrictions being eased for FIs and against controls on the OTC market. In other words, at most of the key points of leverage to prevent the current crisis the Fed failed to act or acted counter to society's long term interests. Instead of raising rates and provoking a recession to cool the housing bubble they stood by and watched. Now we are supposed to accept their analysis that extreme extreme extreme monetary stimulus is necessary. Meh.
I still disagree with QE2, still think it was unnecessary given the problems in the banking sector had been contained. I acknowledge though that based on the numbers at the time, it may have been more of a judgement call than I had previously allowed.
We will see soon see how adept the Fed is at "taming". There are two types of people in this world...........