Tuesday, February 16, 2010

Even the Tough Talkers on the Fed Are Inflationists

In reporting Fed Governor (Kansas City Fed) Thomas Hoenig's speech today, Bloomberg.com restates the obvious: Hoenig Says Fed’s Objectives Threatened by U.S. Debt.

Well, duh!

“It is a fact that the current outlook for fiscal policy poses a threat to the Federal Reserve’s ability to achieve its dual objectives of price stability and maximum sustainable long- term growth, and therefore is a threat to its independence as well,” Hoenig said today in a speech in Washington. . . .

Hoenig criticized a comment published last week from Olivier Blanchard, the International Monetary Fund’s chief economist, that central banks should increase their targets for inflation.

“While this may sound like a reasonable theory from a credible economist, my concern is that it rationalizes solutions to short-term problems that too often take an economy down the wrong path,” Hoenig said.

Governor Hoenig believes in a slower rate of debasement of the currency than some, such as Drs. Blanchard or Krugman, that's all.

But it's all a matter of degree; how best to shear the sheep(le). Dr. Hoenig is just less of a money-printer than is Dr. Blanchard. But as the title of the article suggests, the Fed has no choice, like it or not, but to cooperate in whatever deficit financing the powers that be decree. If money printing AKA quantitative easing is required, Dr. Hoenig is with the program.

Meanwhile, gold went from strength to strength today, though at the end of the day, the retail vehicle GTU mildly outperformed GLD even though GTU is at a generous premium to NAV of 7.5% and thus reflects small investor optimism. More importantly, gold has been more consistent than stocks during this period of credit shenanigans. Closing prices from the ends of 2007, 2008 and 2009 and then today's close for GLD are (in USD):

82.46, 86.52, 107.31, 109.66.

For the SPY ETF that tracks the S&P 500, the same numbers are:

146.21, 88.97, 111.44, 109.74.

Stocks, which should be stabilized via dividends and being able to roll with inflation/deflation, have been far more volatile than gold, although gold scares the average investor more.

The debt monster is coming to eat us up.

If the Fed stopped enabling the Feds, they couldn't run giant deficits without end.

Meanwhile, Gallup continues to show essentially no job creation that is visible to average workers--in the 26th month since the official beginning of the Great Recession/depression.

Deficits have ceased to stimulate. Polls show that the public "gets it". Does the Fed?

I think not.

Interim rallies associated with money printing and post-depression natural rebounds, it will take some really good fortune such as an end to foreign wars and some hot new truly useful technologies (cheap distributable green energy sources, etc.) to fundamentally help matters heal here. We can hope for the best while dealing with that that is.

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