The Fed is a Rogue Elephant (wonkish rant) – Telegraph Blogs

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Ambrose Evans-Pritchard


The Fed is a Rogue Elephant (wonkish rant)

Ben Bernanke thinks the money data is a `Black Box’

Ben Bernanke thinks the money data is a `Black Box’

Ben Bernanke has moved the goal posts yet again.

Headline CPI inflation in the US is 3.4pc. There is no deflationary threat at this stage that can justify holding rates near zero until the moon turns into blue cheese, let alone embarking on emergency money printing.

The Bernanke Fed has more or less ignored headline inflation until now, arguing that what matters is "core" inflation. This strips out energy, fuel and food, which none of us consume of course.

Unfortunately, core inflation has been catching up lately. The Dallas Fed’s "trimmed mean" measure known as core PCE has risen (on a six-month annualized basis) from 0.9pc in January to 2.1pc in June.

So what the does the Fed do? It switches tack and says that headline inflation is not such a bad gauge after all. They do this knowing that the oil and food shock has subsided and that the headline rate will fall back for a while. This will create the impression that inflation is abating. "Cheeky," said ING’s global economist Rob Carnell.


As you can see from the two charts below, the broad M2 money supply is growing robustly at 8pc and narrow M1 is growing at over 15pc.



Yes, I know, Ben Bernanke thinks the money data is a "Black Box" that cannot be understood, and ultimately a form of medieval witchcraft. Well, perhaps he should rethink. This is not picture of an economy facing imminent deflation.

Note how weak M2 was fifteen months ago (and broader M3 – which Bernanke has abolished, but others track – was actually contracting at 1930s rates). That was a very good lead indicator of the economic relapse we saw in the first half of 2011.

I am wary of Bernanke’s sudden change of heart on headline inflation. It confirms my suspicion (shared by many readers) that the Fed is deliberately bringing about inflation and currency debasement to cushion the effects of debt-deleveraging. This amounts to a soft default on America’s debts.

QE1 was an entirely appropriate response to the threat of spiralling collapse and an implosion of the money supply. I backed it whole-heartedly, and make no apologies for doing so.

QE2 was a different animal. The threat of imminent deflation was bogus. The effect was to juice stock prices and increase the asset wealth of the rich, hoping for a trickle down. In reality it punished poor people through rising food and fuel costs long before any trickle came through.

Needless to say, it also punishes prudent savers in order to rescue improvident and promiscuous borrowers. This has immense social and moral consequences over time, and risks undermining the virtues that made America the world’s paramount power.

Dallas Fed chief Richard Fisher said in a speech last March, further QE would "only prolong the injustice that we have inflicted on savers."

He warned of the risk that the Fed will be viewed as "a pliant accomplice to Congress’ and the executive branch’s fiscal misfeasance," if it carries on down this road. "Barring some frightful development, I will vote against any program that might seek to extend or enlarge the substantial monetary accommodation we already have provided. The liquidity tanks are full, if not brimming over. The Fed has done its job. What is needed now is for business to be incentivized to commit that liquidity to creating American jobs. This is the task of the fiscal authorities, not the Federal Reserve."

Mr Fisher stuck to his word. He voted against the Fed’s promise yesterday to keep rates near zero until mid-2013.

The Fed is engaged in dangerous forms of social engineering. Central banks should never enter this territory.

Yes, I have been critical of the ECB for other reasons. It allowed the Club Med bubble to build up from 2004-2007, misread both the oil spikes of 2008 and 2011, has allowed M3 to gyrate wildly, but the ECB is not — or not yet — a rogue elephant trampling social norms under foot.

An intellectual case can be made that inflation should be raised to 4pc to 6pc in the western world to lift us out of our debt trap. EX-IMF chief economist Ken Rogoff and others have made exactly that argument. Fine. Let debate be joined.

But if so, the Fed needs to state this openly and not carry out a social revolution by subterfuge. Any such decision should be subject to democratic endorsement by elected parliaments.

How can we bring these the central bankers to heel?

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