Wikinvest Wire

Managing inflation by printing money

Sunday, March 22, 2009

Maybe I'm missing something here, but what appears to be the new conventional wisdom of managing inflation expectations through massive amounts of newly printed money used to purchase inflation-protected Treasuries has an "unholy" feel about it.

This view has been seen elsewhere in recent days (see this item from last week) and it showed up again in this Wall Street Journal report($) where Mihir Worah, a fund manager at Pimco, noted the following:

By buying TIPS, Mr. Worah says the Fed wants to curb the risk of persistently falling consumer prices, or deflation, by putting a floor on the break-even rate, the yield spread between nominal Treasurys and TIPS. The gap is a gauge of investors' inflation expectations and is closely watched by the Fed.

"The Fed understands that they need to keep inflation expectations on the positive side," says Mr. Worah. "The Fed will step in to buy TIPS if it [the break-even rate] falls below a certain level, which makes investing in TIPS safer than it was."
This is remarkable - the "management" of inflation "expectations" by printing money.

What will they think of next?

Well, let see.

The other major gauges of inflation "expectations" come from the Conference Board's Consumer Confidence Survey and the Reuters/University of Michigan Consumer Sentiment Survey and, given the dizzying array of prices with which consumers are confronted in attempting to gauge the current rate of inflation, their assessment almost always boils down to which way the price of gasoline is moving.

As former Fed chairman Alan Greenspan once lamented, these prices are too easily and too regularly observed by individuals for their own good (or something like that).

So, if the oil price continues its recent ascent, a possible next step for the Federal Reserve might be to somehow use some of that freshly printed money to keep the price at the pump in check. Can you short the mammoth United States Oil Fund, said to hold about a quarter of all crude oil futures contracts?

Alternatively, if the oil price plunges back toward $30, they could start buying oil futures.

OPEC would love that...


This week's cartoon from The Economist: IMAGE


dearieme said...

Bloody Hell, they are managing the boiler by tapping the gauge?

I suspect that they are going to buy up the one sort of Treasury Bond that can't be defaulted on by running an inflation.

Anonymous said...

I fear they are only making things much, much worse. I'd much rather have a couple horrible years and fix the fundamental problems rather than trying to prop up a system that can never be made to work properly.

Support said...

You have to feel sorry for the general public that is being kept in the dark as the Federal reserve manipulates the gauges behind the scenes. God bless blogs like this one who shine a light on the implications of what the Fed is doing and trying to accomplish.

Anonymous said...

"You have to feel sorry for the general public"

What is even more sad is that some of us are trying to tell them constantly...daily even. And yet they don't listen, like blind/deaf little sheep they still get in the line to be slaughtered.

From daily news, to blogs, to youtube videos, to documentaries...I don't know what else anyone can do to warn people.

I hope everyone who reads this is prepared...and if not...get ready now.

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