As equity prices fall, media pundits are lining up to offer irresponsible and dangerous advice to central bankers. I've written enough about Anatole Kaletsky in the UK (and he's not getting any better), but right now the focus of idiocy seems to have shifted to the US. I just watched a studio full of people on CNBC's pre-market show competing to see who could advocate the biggest and quickest Fed easing. The fact that December CPI data had just been released, showing prices up 4.1% year-on-year, didn't seem to deter anyone.
One gent talked about "losing the war for want of a horse", whatever that means; another said that the economy was being put at risk by Fed dithering; and a third, possibly the most dangerous of all, said that we could worry about inflation later, once the economy had been restored. There was only one voice of sanity: the loud guy who reports from the NYSE trading floor opined that the Fed could cut rates "by 425 basis points tomorrow" (i.e. to zero) without it making any difference: the correction in the economy, after years of excesses, is going to happen anyway.
These are all equity guys rather than economists, and it's clear that they identify a healthy economy with rising stock prices. It ain't necessarily so: stock prices touched record highs in 2007, after a decade in which the US economy has gone through what the Japanese refer to as "hollowing out", consuming far beyond its means and going wildly into debt to just about everyone in the world. Irresponsible monetary policy fostered these developments, with a surge in inflation only prevented by the fortuitous boom in industrial production in China and India, which provided a seemingly endless supply of cheap imports.
Now the party's over. As was always inevitable, the rise in living standards in China and India, coupled with overconsumption in the US and elsewhere, is putting pressure on the prices of key commodities, not least oil. The resultant rise in short-term inflation is curbing US consumer spending power. The (correct) cyclical response of the Fed in raising interest rates has exposed the irresponsible financial practices that began during the excessively lax Greenspan years, resulting in the so-called "credit crunch".
This is a classic business cycle adjustment: cutting rates can only delay it -- and may not even do that -- but will allow inflation to get further entrenched. Anyone who was involved in the financial world through the 1970s and 1980s will know how painful it is to tackle inflation once it has taken hold, which is why the advice to "save the economy now, fix inflation later" is so irresponsible. Even if the Fed and the BoE and others resist these siren calls, it's definitely time to inflation-proof the old portfolio.
One of the most amazing aspects of the current crisis is the fire-sale of major US financial firms to foreign interests. For years, the US Treasury market has relied on offshore buyers; now, it's desperate banks, looking to restore capital after massive write-offs, who are selling themselves to the highest bidders. Up until now, most of the buyers have been found among the "sovereign funds" of the Middle East and Asia, a trend that has already attracted disapproving glances from Congress (well, it is an election year). Now it appears that the large Japanese banks, which went through similar traumas of their own a decade and more ago, are looking to join the feeding frenzy. At some point, Uncle Sam won't have anything else left to sell. This is how empires end.
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