StockJockey discusses Ben Bernanke and his beliefs and plans regarding inflation, deflation, reflation, etc.
Bernanke: Think Inflation Now
Courtesy of StockJockey at 1440 Wall Street
The plot twists for Macro Traders have come fast and furious this year; If you are like me you have probably learned something from it all. As Paul Tudor Jones is fond of saying, Global Macro is a 3-dimensional chess board, and it sure beats the hell out of mundane long/short strategies, at least if you are looking for sex appeal.
Market historians are coming out of the woodwork; you don’t have to be a Talmudic scholar to peruse Bernanke’s written archives, although I prefer to piggyback Major Leaguers as opposed to the minor league journeymen, and the re-treads that CNBC bookers prefer.
Populist bloggers might get the page views, but I prefer pragmatic strategists who call it as they see it, and are on to Big Ben’s game of managing expectations:
"Bernanke believes in expectations management. Today was a step in that direction. Today the core CPI went to 0% month to month. Given soaring unutilized resources, we are moving to deflation faster than anyone thought. Bernanke as the scholar of the Great Depression and the author of papers on the financial accelerator abhors price deflation. Soon will come assurances that the Fed will do all in its power to achieve a significant positive inflation rate." Frank Veneroso
Bernanke is doing all that he can, but planting the seeds of inflationary expectations might be his most important job at the moment. I would submit that he is happy to see Gold (GLD-AMEX) ramping, and the middle of November seems to have been the inflection point for a basket of securities:
"There seems to be rapid inflation in deflation stories in the media…we are in the sweet spot in these trades, but the pile on could soon turn dangerous. Will the reflation attempts take hold?" 1440 Wall Street
The explosive moves have gotten everybody’s attention; prop desks and headline chasers who were bidding up the dollar and shorting gold a month ago have been murdered.
Technical level’s were tested last week in the dollar, and it has since caved in. Wall Street is suddenly hip to “quantitative easing”, but sage market historians have been poring over Bernanke’s archives, and not just the stuff he wrote in 2002.
November 17th
In 2000 Ben Bernanke presented a paper on Japan’s economic plight. It contained his policy prescriptions for a Japan teetering on the edge of debt deflation. His policy prescriptions were clear:
1.Move to quantitative easing, but in size. If it is a big enough, it will work.
2.Do it in part by buying forex, thereby devaluing your currency.
3.Don’t hesitate to buy a broad array of non conventional assets if that is what it takes.
4.Work with other government agencies to achieve your end.
5.Employ expectations management. Set out a high inflation target. Get people to think inflation, not deflation.
When one reads this paper it becomes clear that the recent ballooning of the Fed’s balance sheet is not due to a series of unintended consequences as the Fed has responded to the unfolding crisis. It is also clear that quantitative easing will progress until the threat of debt deflation has passed.
The objective of Bernanke’s program is clear: to stabilize and increase asset prices, to do the same with goods prices, and thereby to increase real spending, real economic activity and real incomes available to service debt, thereby reversing the financial accelerator. I am not going to speculate here as to how well it might work and when. That is for another time. I simply set forth the doctrine according to helicopter Ben and say, the objectives are clear, and if market participants go from ignoring the Fed’s ballooning balance sheet to noticing it, they might begin to adopt the behaviors that helicopter Ben is trying to engineer. And if they do that, even if it doesn’t work or doesn’t work soon, there could be one hell of a short covering rally in all the decimated risk assets and one hell of a reversal in the soaring dollar. Frank Veneroso
Connecting the dots is easy when you have smart people spoon feeding you, and yesterday’s events were telegraphed to some extent. Bernanke is pulling out all the stops – it might not work, but it is the only avenue he can see.
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…..zero inflation or mild deflation is potentially more dangerous in the modern environment than it was, say, in the classical gold standard era. The modern economy makes much heavier use of credit, especially longer-term credit, than the economies of the nineteenth century. Further, unlike the earlier period, rising prices are the norm and are reflected in nominal-interest-rate setting to a much greater degree. Although deflation was often associated with weak business conditions in the nineteenth century, the evidence favors the view that deflation or even zero inflation is far more dangerous today than it was a hundred years ago.
Japanese Monetary Policy: A Case Of Self-Induced Paralysis?,
Ben S. Bernanke, Princeton University, December 1999
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Bernanke laid out a forex solution to the “quantitative easing” policy he is now embracing. It appears few people got it right, based on the past week of trading.
But yesterday’s statement cleared up the confusion. Will it work? Hell if I know – but I sure hope so. But Ben is trying to plant the seeds of inflationary expectations, and seems to be succeeding to some extent.
The easy money has been made in the currency markets, but if the trend is your friend, hammer home this theme into your brain. And then go read Bernanke’s 1999 tome.
Today Peter Cardillo of Avalon Partners summed up the recent policy actions succinctly:
“This is a desparate move that the Fed made,” he said.
Reflate or die, indeed.
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The Inflation Factor
dshort.com
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Japanese Monetary Policy: A Case of Self-Induced Paralysis?* 
Ben S. Bernanke
Princeton University
December 1999
Princeton.edu PDF
Previously
Rapid Inflation in Deflation Nation (Stories)
1440 Wall Street
The Twin Curves
Gregor.us
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November 18th
…the U.S. is on a path of quantitative easing that the world has never seen. All economies will super ease. But the U.S. will be the worst. It is amazing to me that this is not issue No. 1 in financial markets. The hedge funds and investment banks have all gone super bullish on the dollar. This is just another hedge fund investment bank craze with a lot of herding and manipulation. They keep talking about a shortage of dollars when the U.S. is the world’s mega debtor and the world’s mega current account deficit economy. They keep talking about the dollar as a safe haven when the locus of economic weakness and financial crisis is here and the Federal Reserve is clearly on a path to debase the dollar because of the debt deflation here.
And finally: “It’s as crazy as the case they made for commodities in the first half, when the world economy was weakening, supply and demand responses were well under way and prices had gone higher in real terms than in any prior cycle in history. This is the last desperate bubble for this failing crowd. And when they are exhausted the dollar will fall very hard and gold will be released to the upside. That is all I know,” Mr. Veneroso says.
A Brief Interview with Frank Veneroso – November 18, 2008
Stockhouse
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‘‘All Available Tools’: What the Fed’s Moves Really Mean
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