An Honest Write-Up on Monetary Policy, Inflation, and the Economy

[Fake Sugar Dick (WARNING, NOT THE REAL SUGAR DICK!)]

I haven't been real pleased with all the sunshine pumping about the improving economy when none of the indicators are really pointing that direction.  This article brings up some things that aren't really being talked about, but should be.

Austerity, Oil Prices Helping Put the 'Stag' in 'Stagflation'

If you listen closely enough, you can hear the stagflation storm brewing across the economy. It's the sound of rising prices and weak economic growth conspiring to create the Federal Reserve's worst enemy.

Friday's lame GDP print exemplified where we're heading, with the economy gaining just 2.8 percent in the fourth quarter of 2010 no matter how much government economists tried to talk up the robust corporate balance sheet and supposed gains in employment.

The report unveiled the next ingredient in the stagflation cocktail-namely, austerity at the state and local government level.

Combined with rising energy and food costs and unemployment that will suffer all the more as local governments will be forced to cut labor, government belt-tightening will ensure weak growth for many quarters ahead.

Real state and local government consumption expenditures and gross investment fell 2.4 percent in the quarter, reflecting the need for belt-tightening amid a huge debt and deficit mess.

At the same time, the economy will have to deal with a new normal in oil prices, with the former range of $80 to $90 now likely to be replaced by something north of $95 and perhaps well into the hundreds.

T. Boone Pickens told CNBC on Friday that he expects oil to hit $120, a daunting prospect for an economy hoping to keep inflation out of the way long enough for employment and housing to catch up to the rest of the economic data points.

Analysts say $100 a barrel oil takes 1 percentage point off GDP, while $120 would subtract 2 percentage points (this was reported on TV earlier by my colleague Bob Pisani who cited Gluskin Sheff economist David Rosenberg). With consensus running only to a bit above 3 percent growth for this year, the damage that Middle Eastern turmoil could do to the US economy is profound.

Of course, economists would be quick to point out that higher gas prices don't equate necessarily to a surge in inflation. But even those time-honored arguments will get tested.

In a separate broadcast appearance, Richmond Fed President Jeffrey Lacker addressed the importance of inflation perception and how a belief that $4 gasoline and $4 lettuce can convince consumers that inflation is here, economic models be damned.

"The real danger is inflation psychology," he said, later importantly adding, "We have got to get the timing just right on this thing."

The emergence of stagflation trends is critical for the Fed in that it means the central bank is failing on both ends of its dual mandate-ensuring stable pricing and employment.

Chairman Ben Bernanke has been a focal point of criticism during the Middle Eastern violence, with detractors saying it is the Fed's easy-money policies that have driven up the price of dollar-denominated commodities and consequently global food costs. The Wall Street Journal in an editorial Thursday cited the "Bernanke premium" on food and energy, and that was one of the kinder catcalls.

"The fact that the Fed's massive money printing effort is the progenitor of global food riots completely escapes (Bernanke)," Michael Pento, senior economist at Euro Pacific Capital, said in a blog post. "As more damage is done, the Fed will use the resulting contraction in GDP to justify a third round of quantitative easing-further harming the GDP.

"Unfortunately, the viscous cycle of stagflation will grow more acute with each iteration of the Fed's love affair with counterfeiting. Countries that make the mistake of continuing to peg their currencies to the US dollar will suffer more inflation and more destabilization. Since it will be hardest for the US to ditch the dollar, our hopes are dimmer."

With the clock ticking on the second leg of quantitative easing purchases, figuring out the right way to step away will be pivotal to avoid the full stagflation fury.

[ednksu]

the one thing that bothers me about this article is that it seems like the author ignores $4 dollar gas when Bush was nearing the end of his term. People accurately pegged rising prices to oil costs and not to an actual inflation of the price of goods that the author worries about in the second half of his piece.  Seems like more alarmist anti-Obama pumping to me rather then a real critical evaluation of policy effecting inflation.

[Stupid Fitz]

the one thing that bothers me about this article is that it seems like the author ignores $4 dollar gas when Bush was nearing the end of his term. People accurately pegged rising prices to oil costs and not to an actual inflation of the price of goods that the author worries about in the second half of his piece.  Seems like more alarmist anti-Obama pumping to me rather then a real critical evaluation of policy effecting inflation.

no

[michigancat]

T. Boone said he thinks oil will get to $120?

[ednksu]

the one thing that bothers me about this article is that it seems like the author ignores $4 dollar gas when Bush was nearing the end of his term. People accurately pegged rising prices to oil costs and not to an actual inflation of the price of goods that the author worries about in the second half of his piece.  Seems like more alarmist anti-Obama pumping to me rather then a real critical evaluation of policy effecting inflation.

no

justify your answer please.  A few years ago very few people were hyper concerned about recessions, then double dips, then inflation, then stagflation when oil was over speculated on.  The only real variables that have changed for our conservative posters are the white house and some revelations in the middle east which could improve stability over the long term.

[Fake Sugar Dick (WARNING, NOT THE REAL SUGAR DICK!)]

the one thing that bothers me about this article is that it seems like the author ignores $4 dollar gas when Bush was nearing the end of his term. People accurately pegged rising prices to oil costs and not to an actual inflation of the price of goods that the author worries about in the second half of his piece.  Seems like more alarmist anti-Obama pumping to me rather then a real critical evaluation of policy effecting inflation.

I think you should read the article again.

[wiley]

T. Boone said he thinks oil will get to $120?

why do i keep hearing this magic $120?  Wouldn't it keep going up?  Once we get all ok with the price in a year or two up it will go again.  Lets just set it at $200 for my lifetime.

[john "teach me how to" dougie]

T. Boone said he thinks oil will get to $120?

Maybe just wishful thinking on his part?

[michigancat]

T. Boone said he thinks oil will get to $120?

Maybe just wishful thinking on his part?

[wiley]

speaking of...gas is gonna jump up to 3.39 on the kansas side of KC.   

[john "teach me how to" dougie]

T. Boone said he thinks oil will get to $120?

Maybe just wishful thinking on his part?

Just wondering if his wind and solar investments are paying off.

[Fake Sugar Dick (WARNING, NOT THE REAL SUGAR DICK!)]

T. Boone said he thinks oil will get to $120?

Maybe just wishful thinking on his part?

Just wondering if his wind and solar investments are paying off.

Last I heard he's moved on to NG.  Talking about how we have billions of pounds of NG that could power the US for decades and how every semi-truck should operate on them.  I'm guessing he'll coincidentally invest heavily in Mack and Briggs and Stratton right before his lobbying efforts for the NG semis comes to fruition.

Wish I had enough cash to ensure every investment I made became a policy directive of the Fed Govt.  I think this is currently GE's business model.

[sys]

http://www.bbc.co.uk/news/magazine-25255957

gold.