Courtesy of Mish
Here is an email from Robert who is wondering about the Fed’s ability to inflate, and the consequences if they try. Robert writes …
Something is bothering me.
I thought there would be inflation after the US government and FED’s actions, but there has been no inflation. I was wrong and you were right. I understand why and I also agree with the concepts of "peak credit" and "peak consumption," as far as the West goes at least.
But this seems to mean that the government can sell vast quantities (1 -2 trillion per year) of debt directly to the FED and to other parties with few observable short or intermediate term consequences.
If everyone agrees that the economies of the West will be weak for many years (for a host of reasons) and everyone also agrees that the dollar will be the reserve currency for years to come then:
1) What is the problem with running 1.5 trillion dollar deficits per year as far out as the eye can see? ( I am not being facetious.)
2) What is the problem with using federal-government borrowed money to bail out state and local governments to keep them from near implosion and the likely associated social problems?
If I am missing something, what is it?
Fed’s Primary Mission Failed
First off, congratulations for understanding the Fed’s attempt at producing inflation has failed. Many do not see it that way, but it depends on the definition of inflation, and an understanding of what the Fed is really attempting to do.
The Fed’s primary goal is not to get prices to rise (regardless of what they say), but rather to get banks lending, consumers spending, and businesses hiring. The Fed and Congress have failed on all three scores.
One Sided Policies
The Fed did not produce inflation, but there is a huge price to pay to pay for the Fed’s One sided policies.
- The rich get richer and the poor get poorer.
- When the rich make a mistake they get bailed out.
- When the poor make a mistake they get tossed to the dogs.
One needs to look at things not just from the recent "stabilization" of banks, but as an ongoing affair that has killed the middle class. Inflation was running rampant (in terms of credit in general and mortgage lending in particular). Wages did not keep up with prices and people plowed into assets as a means of savings.
The bailouts did not produce inflation, but the middle class bailed out the banks and got nothing in return but higher taxes, fewer services, and looking ahead, years of stagnation.
Moreover, the bondholders (such as China, Japan, and PIMCO) were made whole, while the homeowners are still mired in debt. Adding to the misery, banks lord it over on homeowners with total nonsense about the morality of walking away.
We will all suffer the consequences of these one sided moral-hazard policies for a decade to come. Quantitative easing, bailouts, extend-and-pretend schemes, and the alphabet soup of lending facilities all have very real consequences.
Near-term or intermediate-term (a few years out) inflation are not likely in the mix, but the distortions caused by the Fed and Congress will still affect us for a decade to come. Those distortions (caused by one-sided policies that favor banks and the wealthy) have killed and will continue to kill the middle class.
Robert, that is what you sensed, even if you could not put your finger on it.
Those who missed it should read Myths About "What’s Economically Important" for a discussion about how and why credit, not prices, is the key to the mess we are in.