Ben Speaks, Markets Crumble, Again

John Ransom
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Posted: Jun 23, 2011 12:01 AM
Ben Speaks, Markets Crumble, Again

The Fed told us nothing new in their litany of reasons why the economy seems to be stuck in the mud. But, according to Forbes, Fed Chairman Ben Bernanke “Admits He’s Clueless On Economy’s Soft Patch.”

The cause of both the overheated prices- inflation- and the downturn in economic growth are temporary, they say.

The FOMC also reiterated its belief many factors hindering growth are transitory in nature, such as the "damping effect of higher food and energy prices on consumer purchasing power and spending, as well as supply chain disruptions associated with the tragic events in Japan."

It takes a rare confluence of circumstances to produce low growth and high inflation,  but the Fed did it!

That confluence is not an every day occurrence.  Or even every business cycle occurrence. The Fed has to work really hard to get that kind of mojo going.   

Since the beginning of the expansionist monetary policy of the government, some, including me, have said that at the end of the day you'll be left with anemic growth and high inflation.

That's about where we are right now. 

Says the FOMC:

However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed.  Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions.  However, longer-term inflation expectations have remained stable.

On the one side the Fed expects us to believe that we have low growth and high inflation not related to any of the policies that they have pursued; that low growth and high inflation is purely coincidental; on the other hand we have critics who predicted that's exactly what would happen given the policies the government has pursued.
 
I don't believe in coincidence in economics. Economics and monetary policy aren't magic tricks. They're predictive. 

Where you have lots of liquidity, you have rising prices, including the prices in the stock market.  It’s a phenomenon made worse by the unpredictability of the Obama administration’s policies regarding business. While there is plenty of money, there is no confidence, so you see pockets of inflation as that money reaches for safety and security in an uncertain environment.

I don’t blame the Fed for everything that’s wrong with the economy. The Obama administration is mostly responsible.  

But I do side with those who saw this coming.

Of course Ben Bernanke made it clear in his press conference today that the Fed saved the day by preventing deflation.

From Forbes account of the Bernanke’s press conference:

“People don’t appreciate how pernicious deflation could be” for the economy, said the chairman, who then said QE2 saved the economy from deflation and was completely justified at the time.  “[Back then] we were missing on both sides of our dual mandate, today we are much closer [to fulfilling it].”

Forbes pilloried Bernanke as being “clueless” on the economy.

“Bernanke, as usual, avoided asking the uncomfortable questions and was even humble enough to admit he didn’t have all the answers.  The question is, are we better off knowing Bernanke himself doesn’t know?”

On cue, the markets dropped more than half a percent in the wake of Bernanke comments.

Maybe the Fed should rethink trotting out Bernanke for a press conference after every FOMC meeting?

Bernanke sure has a winning way of saying nothing in the worst possible manner. At least judging by market reaction.   

“It doesn’t matter how Bernanke spells it,” I wrote after the last Bernanke public relations drive-by, “the markets will always interpret whatever he says as bad news.”

That’s because Forbes is right. Bernanke's clueless. And more importantly, the rest of us know it.  

“Yesterday, Ben tried to reassure the markets that oil prices would not adversely affect the recovery,” I wrote on March 3rd. “It was lost in translation though. Bernanke started speaking and the market started sinking.”

The FOMC however now admits that high prices are hurting the economy. However they say that the hurt is only temporary.

“The slower pace of the recovery reflects in part factors that are likely to be temporary,” says the FOMC, “including the damping effect of higher food and energy prices on consumer purchasing power.”

In other words, all is well.

The market doesn’t buy it, even with leveraged money.

But Ben sure buys it with yours.

A poll from our contributor Mike Shedlock:




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