Should Bernanke 'pull a Volcker'?

Jan 10, 2011

Paris, France

It was snowing when we left Baltimore. Bad weather...

The weather has been odd this year. Florida had its coldest spell ever this year.

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Freeways in Southern California were closed because of the snow.

Forecasters are predicting the coldest January in many years.

And Cancun, Mexico, hit record lows just when the experts were there debating how to cure global warming.

Here in Paris it is raining...temperature about 45 degrees. Very typical for this time of year.

The first business week of the year was calm. Traders and investors were getting back to their desks, reading the papers, and trying to get a grip on what was going on. No one wanted to panic until he had chance to figure out what to panic about. Except for a big drop in gold early in the week, nothing much happened...

Investors seemed mostly optimistic. Most believed that a slow recovery really was on the way. But the actual reports were mixed and perplexing.

For example, last Thursday, the employment figures were reported as both a triumph and a setback.

This from AP:

WASHINGTON (AP) - The nation's economy added 103,000 jobs in December and the unemployment rate dropped to 9.4 percent last month, its lowest level in 19 months.
That sure sounds like good news. But Bloomberg gave the story a different spin:
U.S. Economy Adds 103,000 Jobs, Fewer Than Forecast

Jan. 7 (Bloomberg) -- Employers in the U.S. added fewer jobs than forecast in December and the unemployment rate dropped, partly reflecting a shrinking workforce, a sign the labor-market recovery will take time to develop.
Hmmm... not so good after all. It turned out that private employers added 103,000 jobs last month, while the government cut 10,000. But that wasn't why the unemployment rate fell. The fine print in the AP story gives the real reason.
...the job growth fell short of expectations based on a strengthening economy. And the drop in unemployment was partly because people stopped looking for work.
What's the real story? What's really going on? The employment numbers are fishy. Last year, for example, a total of about 1.1 million new jobs were created. That sounds nice, until you realize that the economy needs to add about 120,000 jobs per month - or 1.4 million - just to stay even with population growth.

Right now, there are 130 million people with jobs. According to the feds, there are 15 million more who would like to have jobs but can't find work. That puts the total workforce at 145 million.

But wait; ten years ago the portion of the population that wanted to be employed was just over 50%. That would be about 160 million today. What happened? Do fewer people want to work today? Or are there actually fewer jobs, and more people unemployed, than the official figures tell us?

Based on these numbers, the real tally of the jobless is probably about 30 million, or about 18.7%.

The Great Correction continues...

**Now, here's some bad news. As far as we could tell the Obama team only had one good man on it...former Fed chief and DR hero Paul Volcker. But word came last week that Volcker is out as head of the president's economic advisory committee.

Dear Readers are reminded that Volcker saved the day back in 1979. He pledged to cut inflation. He kept his word. It wasn't easy. He put interest rates up over a time when the CPI was running at 13%. And Ronald Reagan backed him up.

If you're going to get control of inflation you can't trail the CPI. You have to get ahead of it. Which is why Bernanke's pledge is such nonsense. He says that inflation rates go up, he'll put up the key Fed lending rate to 2%. He's already increased the monetary base to 3 times what it was under Volcker. He's committed to raising it another 33% by the end of June, bringing it to 4 times its 1980s level. When all that latent inflation becomes real inflation we'll see prices rise more than just 2% per year. We'll see them fly.

What we won't see is Ben Bernanke getting ahead of them by putting rates up even more than inflation. It won't happen. Because it goes completely against the grain of Ben Bernanke's theories.

The US is in a Great Correction. He thinks it needs stimulus, not austerity. When inflation rates finally begin to go up, he'll dither. He won't want to put up interest rates at all. At first, he'll hope that it is just a fluke. He'll delay. He'll hesitate. He'll stall. At first, the rise of inflation will be confused with a growing economy. Prices will move up. Consumers will spend money just to get rid of it. Businessmen will think they have more demand on their hands. They may even hire more workers. Stocks may go up.

Bernanke won't want to nip this 'recovery' in the bud. 'Growth' - even with inflation - is better than no growth, he will reason.

Then, when CPI is really getting up some real speed...and the inflation rate is headed towards 10%... he'll realize that it is too late. The only way to get ahead of it would be to 'pull a Volcker'...and bring the whole economy down around him - like Volcker did.

But Volcker was still dealing with an essentially healthy economy. It could survive the fall. Today, the economy is much heavier...and more fragile. Debt levels are three times what they were back then. Stocks are high, with a long way to fall too. And unemployment - as we saw above - is already about 12%, with mortgage rates still near 50-year lows. Imagine what would happen with the prime rate above 10%. Who would hire anyone? How could the US finance its deficits? What would it do to the US economy?

We don't know...but we'll guess that Sherman did less damage to Atlanta.

Inflation will run wild...

*** State of Zombies

How bad is unemployment? Maybe these figures from Insider Monkey will help. Dear Readers will note that they give away the most bread in the same city where they have the most circuses:

"In 2006, there were 26.5 million people who received food stamps. In 2007, there were 26.2 million people in the program. So, the "normal" level of food stamp participation was around 26 million people. Things changed in 2008. The number of participants increased by 1.9 million. We were still in a recession during the first half of 2009. Food stamp participants increased by another 5.2 million people that year. There were then a total 33.4 million people receiving food stamps. The recession officially ended by July 2009, and one would expect the worsening to stop. But millions more who weren't officially "poor" in 2009 became poor in 2010. When Republicans were trying to extend Bush tax cuts for the rich by keeping social programs hostage, 6.8 million more joined the ranks of food stamp participants. Now, there are more than 40 million people receiving food stamps, though to remove the stigma they don't call it the "food stamp program" anymore. Now, they use debit cards to distribute the handouts and they call it the Supplemental Nutrition Assistance Program (SNAP). Oh Snap!

"Today, there are 14 million more people who try to get by using food stamps than there were in 2007. These are in addition to the usual suspects who have been using food stamps for years. These people aren't your "average" food stamp participants- these are hardworking Americans who fell on hard times. Insider Monkey, your source for free insider trading data, compiled the list of states that are falling harder than the rest. Here is the list of top ten states with the highest food stamp participation rates:

10. Maine:        17.28 out of 100 receive food stamps

9. New Mexico:       17.33 out of 100 receive food stamps

8. Kentucky:       17.9 out of 100 receive food stamps

7. Michigan:       18 out 100 receive food stamps

6. Louisiana:        18.2 out of 100 receive food stamps

5. Oregon:       18.4 out of 100 receive food stamps

4. West Virginia:       18.41 out of 100 receive food stamps

3. Tennessee:       19.3 out of 100 receive food stamps

2. Mississippi:       19.4 out of 100 receive food stamps

1. District of Columbia:      19.7 out of 100 receive food stamps

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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1 Responses to "Should Bernanke 'pull a Volcker'?"


Jan 11, 2011

"Hard working American" is an extinct species. After getting used to less working hours and high wages, the Americans expect the Govt to continue funding their lazy life-style. Even if the Govt coffer is empty and the dollar is tottering, they refuse to tighten their belts and start emulating their great-great-forefathers whose hard work they are enjoying now.

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