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Posts Tagged ‘inflation’

The Vice Chairman of the Federal Reserve, Donald Kohn, said when Speaking in Nashville on April 18, that, “The Fed is only loaning to sound borrowers, and we are not taking significant credit risk that might end up being absorbed by the taxpayer. For almost all the loans made by the Federal Reserve, we look first to sound borrowers for repayment and then to underlying collateral”.

He was supported by New York Fed Bank President William Dudley, who spoke at the same conference, and said he’s “not worried at all that a doubling in the central bank’s balance sheet to $2.19 trillion will spur inflation”.

The above comments were made in response to recent warnings by several leading economists, who fear that the huge amounts of credit now being extended will soon cause serious inflation.

Former Fed Chairman Paul Volcker, who is now head of President Barack Obama’s Economic Recovery Advisory Board, said recently at Vanderbilt University, “I don’t think the political system will tolerate the degree of activity that the Federal Reserve, in conjunction with the Treasury, has taken. I think for better or for worse we are at a point where the Federal Reserve Act, after all that has been happening in the last year or more, is going to be reviewed”.

Former St. Louis Fed President William Poole, who is now a senior economic adviser to Merk Investments LLC also expressed concerns during the Nashville conference, saying, “Central bank officials are underestimating the political forces they’re going to face once the recovery starts and we are very vulnerable to an inflation explosion”.

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By flooding the financial system with money, Federal Reserve Chairman Ben S. Bernanke is seemingly betting that the country’s highest jobless rate in 25 years, combined with the most idle factory capacity on record, will hold down inflation, and it’s textbook Keynesian economics.

If Bernanke’s gamble pays off, then he and the whole Obama administration will be viewed as saviors, but if instead, Milton Friedman’s theories prove correct, and the country lurches from the present financial crisis into rampant inflation, then they will not be so kindly remembered.

Several statements that have recently been made by experts suggest that Bernanke is batting on a very sticky wicket, and many of them have stated on record, their belief that reflation is still in its early stages, and they have pointed out that there are already signs of growing inflation.

John Brynjolfsson, who is the chief investment officer of the hedge fund Armored Wolf, said in a recent TV interview, “We’ve got at least nine innings of reflation ahead of us, ultimately ending with probably double-digit inflation”.

Allan Meltzer who is the Fed historian, and a professor of political economy at Carnegie Mellon University in Pittsburgh says, “If history is any guide, then the effort will end in tears and inflation will get higher than it was in the 1970s”.

Consumer prices rose at a year-over-year rate of 13.3% at the end of the ‘70s, mainly because political pressure from Richard Nixon’s White House prevented Chairman Arthur Burns from removing liquidity as quickly as was then necessary.

Former Fed economist John Ryding, who is the founder of RDQ Economics LLC in New York, concurs with Melzer and says that the central bank will be slow to withdraw all the excess cash it has injected into the financial system. “They pay lip service to inflation being a monetary phenomenon, but they’re too much concerned with the Keynesian explanation of inflation”.

The signs that are said to be pointing strongly to inflation are;

• A swelling Fed balance sheet that has climbed $1.2 trillion in the past year to $2.09 trillion.

• M2, which is a broad measure of the money supply that includes checking accounts and money-market mutual funds, rose in the last six months at an annual rate of 14% which is up from 6.3% a during the last decade.

• Copper is now at a five-month high and platinum reached a six-month peak on April 9th and there are those that expect oil prices to double from the present price of $52 a barrel now.

Moreover, Ken Mayland, who is the president of ClearView Economics LLC says he sees, “oil prices increasing to “$80, $90, $100 before the end of next year. All that money is going to find a home”.

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