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Inflation Targeting Proposal an Exercise in Blazing Stupidity; Fed Fools Itself

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October 15, 2010 – Comments (6)

I like Mish, quite a lot. There are seveal of his ideas that I very much agree with, including those in this post.

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Inflation Targeting Proposal an Exercise in Blazing Stupidity; Fed Fools Itself
Friday, October 15, 2010

http://globaleconomicanalysis.blogspot.com/2010/10/inflation-targeting-proposal-exercise.html

[excerpt]

Lower interest rates are not typically synonymous with rising inflation, but Bernanke foolishly thinks he can get that magic pair with the power of persuasion in conjunction with Quantitative Easing.

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Elegant Nonsense

The idea that inflation expectations matter one iota except as pertains to hyperinflation is silly.

Seriously, will you go out and buy appliances, food, autos, gasoline, or anything else just because you expect prices to go up? Even if you would, how much? You cannot store gasoline nor will you buy more food than a freezer or your pantry will hold. Then if you do, then what?

Then if everyone else does too, demand down the road will crash, and prices will fall back as well.

Perhaps you will buy an appliance, but only if you needed one anyway. Then after you buy it, you sure will not buy another.

Thus, it does not take a lot of brainpower to see that at best (a very iffy at best), all targeting inflation expectations can possibly do is shift some marginal demand forward.

However, if stores attempt to take advantage of the Fed's announcement and hike prices, the opposite could happen. With unemployment at 10% higher, higher prices might just as easily scare consumers away as opposed to goading them into spending.

Inflation Targeting is an Exercise in Blazing Stupidity

Stepping back for a second, it is imperative to understand that although the Fed can attempt to increase liquidity, it cannot determine where the liquidity goes, or if it goes anywhere at all.

From that perspective, attempts by the Fed to increase prices, if they worked at all, would more likely than not affect goods with inelastic demand such as food and energy, and commodities via speculation. That is not at all what the Fed wants.

Thus, the entire proposal is an excise in blazing stupidity.

6 Comments – Post Your Own

#1) On October 15, 2010 at 3:13 PM, miteycasey (30.49) wrote:

And this surprises you how???

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#2) On October 15, 2010 at 3:23 PM, dbjella (< 20) wrote:

If the Fed wants inflation it needs to bypass the banks and go direct.  

If someone were to give me $50k interest free, then I would probably turn around and buy treasuries....hmm I wonder where that idea came from???????

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#3) On October 15, 2010 at 5:31 PM, outoffocus (23.50) wrote:

But bringing demand forward has been the government's strategy all along.  They just want the numbers to look good. They don't care how it happens, whether its sustainable, or even if the numbers are true.  They just have to look good long enough for the same idiots to get reelected.  Then the cycle continues...

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#4) On October 15, 2010 at 7:18 PM, OneLegged (< 20) wrote:

OOFocus, right on the head!

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#5) On October 16, 2010 at 3:26 AM, JakilaTheHun (99.94) wrote:

Mish is a moron. He seems to continually be oblivious to what's going on. 

People always try to frame everything in terms of inflation, but no one really cares about inflation, except as it relates to interest rates.  Interest rates are the problem.  However, it's inevitable that if you take actions that will push the demand curve for loans back up (and hence, interest rates back up), that some inflation will result.  Inflation targeting is, more or less, interest rate targeting. 

And the problem isn't whether people are buying appliances.  The problem is that banks aren't willing to lend out money when interest rates are in the gutter.  They can't profit under that system.   And when they can't profit by lending out to people and businesses; they buy risk-free assets like government treasuries. 

In other words, unless the demand curve for interest rates is pushed upwards, banks will continue to "lend" out all the money in the world to governments and way too little money to the private sector.  Low interest rates and deflation empowers governments and destroys private enterprise.  It's that simple. 

The nations that have used inflation targeting over the past decade (e.g. South Korea, Australia) have fared much better than the more ill-defined monetary authorities, such as the Bank of Japan and the Federal Reserve. 

Too many dodos don't seem to get this and Mish is more oblivious than most.  He doesn't seem to have any f@$#ing clue as to why interest rates might be important to the economy. 

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#6) On October 16, 2010 at 2:26 PM, binve (< 20) wrote:

miteycasey,

:)

dbjella,

>>If someone were to give me $50k interest free, then I would probably turn around and buy treasuries....hmm I wonder where that idea came from???????

That is a very good question :)

outoffocus,

That is a very good point. But how much more demand can they pull forward? My guess is a lot less than most of the stock geniuses are assuming.

..

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