The picture that comes to mind reading the Fed statement this morning is of Superman holding up the meteor that would have squashed America and, with perspiration pouring down his super-forehead, pushing it back out to space while issuing a press release saying “the meteor is returning to space”.
The Fed is picking up the US economy while reporting that the economy’s picking up, as if it’s just happening on its own, which it’s not.
Or, as Royal Bank of Scotland’s plain talking chief strategist Bob Janjuah said yesterday, as reported by FT Alphaville, on his return from summer holidays: “All I see is growth and asset price gains driven by the willing and reckless destruction of government and central bank balance sheets.”
Well, I guess that’s one way to look at it.
At some point Superman has to give the meteor a shove and hope that it keeps going on its own, but there’s a small, persistent crowd of deflation zombies moaning in sackcloth from the sidelines that it’s not going anywhere, and that deflation is the problem.
Such as Bob Janjuah, who is apparently calling 550 on the S&P 500 (it’s now 1061). As FT Alphaville‘s Neil Hume commented: “Wow.”
Says Janjuah: “I continue to see a private sector that wants to pay down debt, increase savings, cut costs, take less risk. And I see the period of government and central bank driven boom times as rolling over very fast from here on in. Why? Because I think balance sheets and sustainability – government, central bank and private sector, matter. If they no longer matter, I will be wrong, and I will have to accept that the policy of ‘Print/Borrow/Spend on Rubbish we don’t Need’ is a limitless phenomenon, without consequences, which means there should never be a bear market ever again.”
Actually, when you read this morning’s statement with the comments of deflationists like Janjuah and our own Steve Keen ringing in your ears, you can see that the Fed is having a bet each way, announcing that economic recovery is underway (the meteor is returning to space), but it’s not letting the thing go just yet.
“…the Federal Reserve will continue to employ a wide range of tools to promote economic recovery…”
“The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.”
And the Fed funds rate is staying at 0-0.25% “for an extended period”.
The stockmarket has roared 60% higher in a classic recovery out of a bear market final spasm, and the economic recovery it has been anticipating has clearly now arrived.
The discussion now revolves around whether inflation will return, or whether we are in for an extended period of deflation.
There are arguments for both: for the return of inflation (money printing, ballooning deficits, rising commodity prices) and for long deflation (look what happened in Japan).
I’m going with the strength of the stockmarket and the growing signs of recovery and hoping, with Ben Bernanke, that we’re looking at economic recovery with price stability. But Japan is the ghost of Banquo haunting Macbeth at the banquet.
Meanwhile, as the US economy moves clearly into recovery mode, inflation expectations are starting to rise and the majority of commentators believe the main risk for the US, and world, economy is not deflation, but that the Fed prematurely takes sides in the inflation/deflation debate and acts too soon to choke off inflation expectations.
But happily there’s no sign of that yet: “With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.”
This article first appeared on Business Spectator.
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