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The Fed embraces inflation

A top Fed official warns of the hazards of printing money to solve economic problems. He's right -- and yet the nation's central bank keeps running the press at top speed.
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By Bill Fleckenstein

In a speech last week, Dallas Federal Reserve Bank head Richard Fisher covered a lot of ground, innocently noting many problems (the worst of which the Fed has created). He discussed the nation's massive, long-term unfunded Social Security and Medicare liabilities, putting the amount at roughly $99 trillion.

But what I found objectionable was his temerity in commenting: "We know from centuries of evidence in countless economies, from ancient Rome to today's Zimbabwe, that running the printing press to pay off today's bills leads to much worse problems later on. The inflation that results from the flood of money into the economy turns out to be far worse than the fiscal pain those countries hoped to avoid."

Of course, this is exactly the policy the Fed has pursued, will pursue and that Fisher himself has voted for. This is a classic example of the Fed's MO: Talk tough and run the printing press at full speed.
Flirting with inflation
Fisher even had the nerve to point out the insidious, corrosive long-term problems caused by Fed-sponsored inflation: "I have said many, many times that inflation is a sinister beast that, if uncaged, devours savings, erodes consumers' purchasing power, decimates returns on capital, undermines the reliability of financial accounting, distracts the attention of corporate management, undercuts employment growth and real wages, and debases the currency."

All of that is true. But if Fisher or any other of the incompetent, irresponsible money printers at the Fed believed that, they would immediately stop targeting interest rates and start targeting some supply-based measure of monetary growth or create some variation of the gold standard.

But the Fed obviously doesn't care about the effects of inflation, which is a direct result of its money printing. And, as I pointed out in my book, "Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve," it is this action that's put middle-class Americans in the pickle they're in -- whereby their home values have caved in and their houses are worth less than the debt held against them. Meanwhile, they're being eaten alive by the vagaries of inflation.
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Robot rallies
A friend who is very knowledgeable -- specifically, about quantitative-trading types -- recently weighed in on the stock market's amazing ability to ignore all the recent bad news. In periods when there isn't much news and not much volume, quantitative-trading strategies can rule the tape, which is sort of what we have been seeing. When I pressed him as to what kinds of strategies are being used, he said it's almost all about price action.

Thus those you might think of as normal buyers and sellers are sort of on the sidelines for a variety of reasons, allowing the computers -- which gauge value based on price action -- to ride roughshod and help create the rallies that help produce the illusion of prosperity. That, in turn, begets excitement on the part of more folks who don't understand the economic backdrop.

Bottom line: During the no-news period, which is roughly the middle eight weeks of any quarter when corporations are not reporting results en masse, the lack of data allows computers free rein. That may go a long way to explaining the maniacal behavior we've seen recently on the tape.
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Jim Jubak
When will oil prices fall?
The demand for oil in Asia remains high because of government subsidies that keep fuel cheap. Jim Jubak says the biggest Asian subsidies should begin dissipating over the next year.

Of course, denial has a role in all this, too, as Wall Street would just as soon not see the big picture: the major trouble that lies ahead for the consumer and the economy, as the aftermath of the housing bubble continues its prolonged unwinding.

After all, that backdrop is not a recipe for higher stock prices. But let the price of oil drop, and market bulls will herald the start of economic recovery.

Continued: High prices take bite out of economy