QE 2 Sets Off Inflation Alarms

[Crewleader]

February 10. 2011

More Welfare for Wall Street

QE 2 Sets Off Inflation Alarms

By MIKE WHITNEY

Ever since he launched the second round of his bond-buying program (QE2), Ben Bernanke has been on a roll. The S&P has gained 10 percent and the economic data has improved dramatically. Manufacturing and retail have rebounded, consumer confidence has started to brighten, and personal consumption (PCE) is on the rise. Car sales, hotel occupancy and exports are all up, too. Even the banks seem to be more eager to lend than they were just a few months ago. Only housing is still in the doldrums and the Fed chairman probably has something up his sleeve for that, too.

Perma-bear Marc Faber thinks he's figured out the secret of Bernanke's recent successes. He says, "Never underestimate the power of printing money." Indeed. Only, in this case, an asset swap of US Treasurys for bank reserves works just as well as a printing press. Bernanke simply buys up boatloads of Treasurys from the banks and, "Voila", investors flock to riskier assets like lemmings to a cliff. And, just look at the results. Stocks keep climbing higher and higher, and everyone is happy. Well, almost everyone.

Richmond Fed President Jeffrey Lacker is not happy and he's taken his grousing to the press. Lacker thinks that Bernanke should heed the market's warnings and back off while he still can.

http://www.counterpunch.org/whitney02102011.html

[BeFree]

1. Inflation is the only way out

1+1=2

Problem is the main vehicle for this economy is housing and housing is deflating.

Anyway, it is a house of cards. Built ever higher.

[customerserviceguy]

2. It will solve the housing crisis

If everything except real estate inflates, then we will eventually see housing 'catch up' with the prices of non-real estate assets. But anyone younger than about forty years old has little or no living memory of the ruinous effects of inflation. It poisons the whole economy.

[BeFree]

3. I doubt that

A great hedge against inflation was the investment in housing.

As other prices inflated, so did housing. Now housing is deflating and other prices are rising. The whole economy as we knew it is greatly altered. We are on new ground and it's soft and eroding.

[customerserviceguy]

5. What I'm saying is

When you have a real estate economy that's in free-fall, relative to very low inflation in the prices of other things, it's psychologically damaging to the rest of the economy. When the price of gas, say, goes from $3 to $6, and everything else doubles, all real estate has to do is merely stay stable, price-wise, and sooner rather than later, it will be 'properly' priced.

The era where RE goes up faster than the general rate of inflation is long gone. I personally think it was a function of the baby boom, which is now shedding the multi-bedroom houses it needed in its youth, and as it was raising its own families, and is going for simple, one-floor dwellings to spend its retirement years.

[jtuck004]

4. Is this the same inflation that we were going to get with

1. The stimulus program
2. The Bank Bailouts
3. The QE

One of these times "they" are going to be right, of course, and we will get to hear "I told you so".

It is interesting that younger people don't really know what life is like with inflation.

But I think it is even more curious that the older ones have forgotton that it is growth that got us out
of it. That growth, of course, was built on debt and housing, of course, and going forward should be
built on rebuilding industry, educating adults, government investment in the country and our people,
working toward the next century.

But the reason they don't remember the times of inflation is because we grew ourselves out of it, not
because we cut our spending.

[angryfirelord]

6. Somewhat true

However, the way we tackled inflation in the 1970s in the short-term was by literally slamming on the brakes. The Federal Reserve engaged in a contractionary monetary policy by setting the federal funds rate to an extremely high level at 20%. That was what ultimately killed it.

[jtuck004]

7. Yes, the very thing that brought us Greenspan - because Reagan

wanted someone that would agree with his anti-regulation stance, Volcker's reward for killing inflation. And then we embarked on this long credit-driven expansion when they took down interest rates. Else we might have been right back in the same boat, methinks.

[roamer65]

8. Bernanke is playing around with a reserve currency.

Even Bill Gross is saying its time to dump dollars right now.