Feb. 14, 2012, 12:01 a.m. EST
The Fed wants to be wrong
By Michael A. Gayed
"Things don't go wrong, they simply happen." Jacob Ghitis
I think its relatively safe to say that SuperBen and the League of Extraordinary Bankers want to be wrong.
There has been quite a bit of debate in recent weeks regarding the Fed's ZIRP (Zero Interest Rate Policy) extension to 2014. On the one hand, it’s clear that the ultimate fear all bankers have is for a deflation-like scenario to grip the U.S. economy as it has for Japan following the 1989 top in the Nikkei. In an effort to counter this, Bernanke not only told the market that interest rates likely will remain low for an even more extended period of time, but also that the Fed explicitly wants to achieve 2% inflation.
Inflation in a highly leveraged society is effectively the lesser of two evils. I say this because with deflation, the debt load that's already been incurred becomes heavier and heavier as fewer dollars are circulating throughout the economy to pay off those liabilities. Deflation benefits savers since dollars become worth more, while inflation benefits borrowers since debt becomes worth less.
So the Fed wants to fight off deflationary concerns resulting from a European growth austerity-driven slowdown, and remove the "tail risk" of a bank failure similar to what happened in 2008 with Lehman. However, the Fed in truth wants to be wrong about its future outlook for the economy. It doesn't want the low growth environment to persist because the world needs some combination of growth and inflation to pay off years of accumulated debt. Note that I am not making a moral argument here about this being right or wrong, but rather a comment on the real macro issue that central banks face.
More: http://www.marketwatch.com/story/the-fed-wants-to-be-wrong-2012-02-14
Gold is $1,581/oz today. When it hits $2,000, it will be up 26.5%. Let's see how long that takes. - De 3/11/2013 - ANSWER: 7 Years, 5 Months
| 