3/9/2011 3:31 PM ET
Reassurances from the Fed on down about low inflation and falling unemployment are ringing hollow as stagflation looms. They aren't fooling us, but they might be kidding themselves.
Related topics: Federal Reserve, economy, Ben Bernanke, investing strategy, Anthony Mirhaydari
Economists aren't exactly held in high regard these days.
The run-up to the 2008 financial crisis and the deep recession that followed were accompanied by reassurances from economists all the way up to Federal Reserve chief Ben Bernanke that the subprime mortgage problem was "well contained."
British economists even issued a formal apology to the Queen after she berated them for not predicting the credit crunch. Their rationale? That many were guilty of "wishful thinking combined with hubris."
Now, the same brain trust of mainstream academics and economists is offering reassurances that ring just as hollow to the person on the street. Their main arguments: Rising food and fuel prices aren't a concern and rising "core" inflation isn't a threat.
Economists tell Queen they're sorry
While they are at it, they also claim that ultraloose monetary policy hasn't fueled commodity and food inflation -- even though we've seen a 38% increase in the DB Commodity Tracking Index and a 22% increase in the U.N. Food Price Index over the last seven months. After all, they say, measured inflation is still very low, manufactured goods are still cheap, and wage pressures are contained because of high unemployment.
All of these theories have been espoused by Bernanke and other members of the Fed's policy committee, and by prominent Wall Street economists and investment strategists. But growing evidence suggests they just aren't true. In fact, they're flat wrong. So believe these five fallacies at your peril:
Over the last few months, I've repeatedly discussed the rising threat of inflation and the specter of higher interest rates in a series of columns and blog posts. And for good reason: I think these upward trends will be the economic linchpins for 2011. Higher prices sit at the center of all the current major issues: energy, monetary policy and government credit risk.
Anthony Mirhaydari
These issues will be critical in determining whether a double-dip recession or period of economic stagnation awaits us.
Interest rate hikes to combat inflation are already well under way in the developing world. On March 8, Vietnam raised rates by 1% to 12%. Market chatter has China raising its reserve requirement ratio for the ninth time since 2010 to tighten lending. Thailand and South Korea are expected to raise policy rates this week, following rate hikes by Indonesia in February.
With the economic recovery now in its third calendar year and with crude oil price up more than 55% from last summer's lows, central banks in the developed world are being forced to take action. Last week, the European Central Bank signaled that it will more than likely raise rates at its April policy meeting -- despite the fragile state of peripheral eurozone countries like Greece and Portugal./*
But if you listened to Bernanke's recent testimony to Congress, and to the comments of some of the more dovish members of the Federal Reserve, you'd think this era of ultracheap money and low inflation will just keep going. For them, there's no problem at all. Bernanke told Congress he believes big increases in the prices of food and fuel will have only a "temporary and modest" impact on consumers.
Make no mistake, inflation is here and central banks will have to react.
2: 'Core' inflation is all that mattersOf course, there is also the question of whether economists are even properly accounting for inflation. Right now, the Fed's preferred measure -- the core personal consumption expenditure price index -- is rising at just a 0.8% annual rate.
You probably feel like inflation is much higher than that piddling number. That's because the core rate excludes rises in food and energy prices. Don't you wish you could just exclude those price hikes from your household budget?
The reasoning behind the exclusion is that these volatile necessities won't keep going up over the long term. Economists assume food and fuel inflation will be "contained" -- just as rising mortgage defaults and foreclosures were "contained" to subprime borrowers back in 2007.
The latest Beige Book report of economic conditions, produced by Fed researchers, suggests otherwise. The report noted that nonwage input costs are increasing and that "(m)anufacturers in a number of districts reported having greater ability to pass though higher input costs to customers. Retailers in some districts mentioned that they had implemented price increases or were anticipating such action in the next few months."
Continued: The Fed isn't making it worseSingle page12Next >RELATED ARTICLESExchange-traded funds: List of ETFs & research - MSN MoneyAn ETF for China's consumer-driven future- MSN Money3 giants dominate the ETF industry - exchange-traded funds - MSN MoneyApple iPad 2 inflates tablet bubble- MSN MoneyIs this the end of cheap food? - 2 - commodity shortages - MSN Money5 lies the economists are feeding us - 1 - investing & the economy ...VIDEO ON MSN MONEY/* /**/ var scp_UserRating=-1; down_arrow_hover= new Image(); down_arrow_hover.src = 'http://blu.stc.s-msn.com/br/scp/css/15/decoration/toolbar/rating/down_hover.gif'; down_arrow_normal= new Image(); down_arrow_normal.src = 'http://blu.stc.s-msn.com/br/scp/css/15/decoration/toolbar/rating/down_normal.gif'; up_arrow_hover= new Image(); up_arrow_hover.src = 'http://blu.stc.s-msn.com/br/scp/css/15/decoration/toolbar/rating/up_hover.gif'; up_arrow_normal= new Image(); up_arrow_normal.src = 'http://blu.stc.s-msn.com/br/scp/css/15/decoration/toolbar/rating/up_normal.gif'; var scp_thankyoutext = 'Thank you!'; var scp_thankyoualttext = 'You have voted on this'; var scp_votestext = '{0} votes'; var scp_votescount = 19; var scp_errmsg = 'Errors occured while saving your rating. 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Well, you will see that by the middle of 2012 the S&P500 will be 10 or 20% below today's levels. The reson is simple. The US has lost its industrial edge and its global leadership. It has become North Brazil.
Those who work for the government including Bernanke don't give a damn as their pension and benefits are indexed for inflation. Those who own a business or have a job are too busy to notice. And those who don't have a job are too depressed to care.
And if things weren't bad enough, just wait till a new batch of demagogues capitalize on the resentment of the millions of people whose quality of life has been cut in half, or have lost their savings, or their house.
1 0ReportSpamj. hol3 hours agoAnything that I would say demonizing the corporate elite and bad mouthing the rich and their political puppets would surely draw boo's from the crowd that seem to think pure capitalism is the best way to go. Most of those people belong in the Republican party, and there are even a lot of them in the Democrat party. The truth of the matter is that this country is ruled by an elite class that owns both parties, this ultra rich elite class will do whatever they can to make themselves wealthier. I believe that the FED run by Ben Bernanke is just another prop to make the theft from the rich look legitimate. This article is 100% right when it states that the energy and food prices rising is causing a real inflationary problem, the core inflation is important but it doesn't immediately affect my pocket like food and energy prices. I think the time has come in this nation for "we the people" to retake our country and stop all this money grabbing at the top. If we don't do it peacefully now it could lead to a violent conflict in the future that our children might have to endure. 5 0ReportSpamwatchdog now3 hours agoThe unemployed for over six months arent counted. An economist said that more high paying jobs will come back than those that are outsourced. Foreclosures and bankruptcies everywhere. Jobs outsourced to China, India, and anywhere dirt cheap. Bush screws up everything. No healthcare for the people. Education cutbacks. Arguing in D.C. Huge deficit. And a whole lot more. Nothing but lies and a whole lot of hot air. Yet nothing is done to stop the corporations and the goverment from taking over the planet. Where's the responsibility to the people? Where's the responsibility to country? Nothing but greed and stupidity. It's the long run, stupid. We have the buying power. Not them. Keep it up and it will be game over. Wait till China gains enough strength to take over and then uncle sam will be asking for your help to fight. Not me. 4 0ReportSpamChip In4 hours agoIn the past decade we have had low tax rates for the wealthy and large corporations. We also have had two expensive and unfunded wars. We can solve most of the U.S.'s financial problems by increasing taxes on the wealthy and large corporations, and cutting the defense budget significantly. It is as simple as that. 9 0ReportSpamcolorado cowboy6 hours agoGood article----I could put about 50 more things they do not tell us the truth on but we can all see what is going on...Corporate domination--they have more cash on hand than ever before and took it from the middle class---ridiculous to say the least....Any politician that votes with the corporations should be bussed out of Washington ASAP...or railing against worker rights like the republican governor's are doing---killing the middle class right before our eyes !!!!! 14 3ReportSpamAdd a commentReportPlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. 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$.dap("&PG=INVET1&AP=1089",300,250,"dapAd2");FeedbackMARKET UPDATEUSINTERNATIONALNAMELASTCHANGE% CHANGEThere's a problem getting this information right now. Please try again later.NAMELASTCHANGE% CHANGEThere's a problem getting this information right now. Please try again later.[BRIEFING.COM] A lack of catalysts left the Dow and S&P 500 to chop their way to a flat finish, but the tech-rich Nasdaq logged a sizable loss as it lagged its counterparts once again. ... More
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Foods to boost or bust men's baby-making odds6 ways you may be neglecting your house4 jobs everyone should experiencePrivacyLegalAdvertiseMSN WorldwideHelpAbout our adsFeedbackSite MapRSS© 2011 Microsoft/* ({0})",msgr:"a.msgr",maxcount:9999,axob:"MSNMessenger.Hotmail2Control"});a(b).channelheaderflyout({delay:{open:500,close:50}});a("a.inbox").hotmaillivemenu({hotmailcalendertext:"Calendar"});a("div.websearch2").togglesearchtext({searchInputBoxId:"q4"});a("div.websearch2 form").bindSearch2();a(".myhp").setHomepage({url:"http://www.msn.com",txt:"Make MSN your homepage"})},a.jsUrl)})})(jQuery);jQuery("a.openpopup").async("openPopup");(function(a){a(function(){a.async("asyncCanary",function(){a(".ptnrcnt1").partnerhostedcontentfeature()},a.jsUrl)})})(jQuery);(function(a){a(function(){a.async("asyncCanary",function(){a.lazyLoad.timeout=6e4;a.cookie+=";MUID=";a(".cogr.coss").slideshow({delay:7e3});a(".cogr.cotb").tabGroup({hover:{delay:300}});a("div.ivideo").async("inlinevideo",[{param:{windowless:"true"},asyncp:1}])},a.jsUrl)})})(jQuery);jQuery("a.opennew").async("openNew");jQuery(".pageoptions1").async("pageOptions");jQuery(".pageoptions1 #ausug").async("autoSuggest",[{helpLinkText:"What is this popup",helpLink:"http://help.live.com/help.aspx?project=wl_searchv1&querytype=keyword&query=sihggus&mkt=en-US",formCode:"MSMONY",openNew:"0",market:"en-us",cookieDomain:null,cookiePath:null,inputId:"q4"}]);jQuery(".quotesearchbar0").async("quoteSearchBar");jQuery(".quotesearchbar1").async("quoteSearchBar");jQuery(".quotewatchlist0").async("quoteWatchList0");jQuery(".recentquotes0").async("recentQuotes0")//]]>/*But if you listened to Bernanke's recent testimony to Congress, and to the comments of some of the more dovish members of the Federal Reserve, you'd think this era of ultracheap money and low inflation will just keep going. For them, there's no problem at all. Bernanke told Congress he believes big increases in the prices of food and fuel will have only a "temporary and modest" impact on consumers.
Make no mistake, inflation is here and central banks will have to react.
Of course, there is also the question of whether economists are even properly accounting for inflation. Right now, the Fed's preferred measure -- the core personal consumption expenditure price index -- is rising at just a 0.8% annual rate.
You probably feel like inflation is much higher than that piddling number. That's because the core rate excludes rises in food and energy prices. Don't you wish you could just exclude those price hikes from your household budget?
The reasoning behind the exclusion is that these volatile necessities won't keep going up over the long term. Economists assume food and fuel inflation will be "contained" -- just as rising mortgage defaults and foreclosures were "contained" to subprime borrowers back in 2007.
The latest Beige Book report of economic conditions, produced by Fed researchers, suggests otherwise. The report noted that nonwage input costs are increasing and that "(m)anufacturers in a number of districts reported having greater ability to pass though higher input costs to customers. Retailers in some districts mentioned that they had implemented price increases or were anticipating such action in the next few months."
The Economists don't get it but neither do most analysts. Not too long ago, some were talking about an epic bull market continuing for another three to four years.
Well, you will see that by the middle of 2012 the S&P500 will be 10 or 20% below today's levels. The reson is simple. The US has lost its industrial edge and its global leadership. It has become North Brazil.
Those who work for the government including Bernanke don't give a damn as their pension and benefits are indexed for inflation. Those who own a business or have a job are too busy to notice. And those who don't have a job are too depressed to care.
And if things weren't bad enough, just wait till a new batch of demagogues capitalize on the resentment of the millions of people whose quality of life has been cut in half, or have lost their savings, or their house.
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Fundamental company data and historical chart data provided by Thomson Reuters (click for restrictions). Real-time quotes provided by BATS Exchange. Real-time index quotes and delayed quotes supplied by Interactive Data Real-Time Services. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Gradient Analytics. IPO data provided by Hoover's Inc. Index membership data provided by SIX Telekurs.
Japanese stock price data provided by Nomura Research Institute Ltd.; quotes delayed 20 minutes. Canadian fund data provided by CANNEX Financial Exchanges Ltd.
[BRIEFING.COM] A lack of catalysts left the Dow and S&P 500 to chop their way to a flat finish, but the tech-rich Nasdaq logged a sizable loss as it lagged its counterparts once again. ... More
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