I’ve been wrong on the Fed

Posted on by

> Hi
>
> You’ve been looking for this kind of financial trouble for a bit over in Europe. Good call Warren.
>
> Bobby.
>

Thanks, yes, I called it from mid 2006 – weakness due to deficit too small to support the credit structure, but inflation racing up as food/fuel rise due to Saudis acting the swing producer and biofuels burning up our food supply.

My error was in thinking the inflation would keep the fed from cutting. Been totally wrong on that!

Never would have thought a CB would act this way in the face of a triple negative supply shock – food/fuel/importand export prices all ratcheting up.

And looks like another 50 cut or maybe even 75 or 100 on Jan 30 even as core inflation goes through their ‘comfort zone,’ and Bernanke’s pushing Congress to hike the deficit! Never imagined the Fed would be keen to send a strong ‘we don’t care about inflation’ message, regardless of GDP in the short run. Goes against every aspect of mainstream monetary theory. But they sure are doing it!

And still no major weakness in the real economy, apart from some possible weakness late December if exports fell off. That won’t be out for a while.

All I can come with are three things:

  1. They’ve been misusing futures prices for oil and food to predict inflation will fall.
  2. They are afraid of fixed exchange rate/gold standard types of monetary collapses, even though we have a floating exchange rate policy, where that doesn’t happen and for all practical purposes can’t happen with floating fx.
  3. They are relying on their forecasts for weakness to bring down inflation when it’s coming from a combination of producer price
    setting, biofuels, and Paulson’s weak $ policy chasing foreign central banks away from $US financial assets.

And yes, watch out for a system wide failure of the payments system in the Eurozone if deposit insurance gets tested by a major bank failure.

Also, the $US remains fundamentally strong, but Paulson and to some degree the Fed are scaring investors away from $US financial assets, including US and other pension funds, which keeps the $ cheap enough to drive increasing US exports.

warren

♥

Share