Code Red: How to Protect Your Savings From the Coming Crisis by Mauldin John & Tepper Jonathan

Author:Mauldin, John & Tepper, Jonathan [Mauldin, John]
Language: eng
Format: epub
Publisher: Wiley
Published: 2013-10-22T22:00:00+00:00

The Return of the 1970s

We have every reason to believe that central bankers everywhere will be looking in the rearview mirror this time, too, as they struggle to steer their Code Red policies. In Chapter 2, we looked at how economists in the 1970s believed in the idea that higher inflation would lead to a lower unemployment rate. So far, we have no proof that QE helps employment, but Bernanke and other governors of the Fed have stated that the reason they will keep on printing money to buy government bonds is that the labor market is weak. Notice that they’re not doing it to fight deflation. They’re targeting employment, and they think that slightly higher inflation is the best way to get higher employment. We’ve gone back to the 1970s and the Phillips curve. The Fed has promised it will keep easing until unemployment hits 6.5 percent, even though there is no direct connection between QE and the unemployment rate. That’s a recipe for letting inflation creep up over time.

(And don’t even get us started on how unemployment is calculated and reported. It makes the calculation of inflation seem straightforward!)

Central bankers have also warned repeatedly that they will act later rather than sooner to rein in their unconventional policies. In testimony before the Joint Economic Committee of Congress, Bernanke let investors know that the Fed would err on the side of staying looser longer. He said, “A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further.”

For the moment, moderate inflation is giving central banks and deflation-obsessed economists like Paul Krugman a false sense of security. Inflation is low at present because it is a very lagging indicator. As we have seen, businesses do not raise prices immediately when the economy starts to grow. They wait until they are certain demand is strong. Likewise, businesses do not immediately start cutting costs just because their sales have slowed down a little. If they did, they might find it hard to raise prices in the future. This is why, over the past century, inflation has almost always been at its highest in the middle of recessions and at its lowest point as expansions were starting again. Inflation tells you very little about the future and a lot about the past. A weak global economy over the past year and a half has kept inflation subdued. When inflation starts ticking upward, central bankers will be looking in the rearview mirror and sitting on trillions of dollars of monetary base.

If central banks could not manage conventional monetary policy well in the “good old days,” why do we think they can manage unconventional monetary policy today?

A comedian once said that a second marriage is the triumph of hope over experience. You could say that trusting central banks to get things right is exactly the same thing.

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