The Writers versus the Signatories

At Bloomberg:

Signatories of a letter sent to then-Federal Reserve Chairman Ben S. Bernanke in 2010 warning of the risks associated with the bank’s policy of quantitative easing are standing by their claims -- even as the biggest U.S. companies are flourishing, inflation is muted and holding Treasuries has been one of the best trades out there.

In the word "even", you can read the position taken by the writers of that story:

Signatories stand by their prediction of inflation even as the economy improves.

The position taken by the writers is that the economy is doing better, and the improvement is evidence that inflation will not come, so the signatories were obviously wrong.

You see a lot of that lately: the idea that we have not had inflation yet, so we're not gonna get it. And yes, at some point you do have to say "The waiting period is over. A final outcome can now be determined." I'm just not sure we're there yet.

The writers continue:

The Nov. 15, 2010, letter signed by academics, economists and money managers warned that the Federal Reserve’s strategy of buying bonds and other securities to reduce interest rates risked “currency debasement and inflation” and could “distort financial markets.” They also said it wouldn’t achieve the Fed’s objective of promoting employment.

Four years later, members of the group, which includes Seth Klarman of Baupost Group LLC and billionaire Paul Singer of Elliott Management Corp., are facing a different economy. U.S. companies now boast low debt, big cash piles and record profits. They’re creating jobs at the fastest average pace since 2005 and unemployment has dropped to 6.1 percent from 9.8 percent when they wrote the letter. The recovery has underpinned an almost 200 percent gain in the Standard & Poor’s 500 Index since March 9, 2009.

Four years have passed, the writers point out. And, judging by that last paragraph, the economy is doing very well.

So, what do you think?

The economy is not doing well at all. Not the economy I know. But it is doing better than it was. And that is when the threat of inflation can become real -- when things pick up. The writers, laughing at the signatories and thinking we have not had inflation so we will not, those writers are on thin ice. That's what I think.

Inflation is held down by a depressed economy. If inflation picks up, it will happen when the economy picks up. Now, I'm not predicting inflation. But the view that says "the economy is doing better, so inflation is not a threat" is just exactly wrong. I can't see how people who write about the economy can pretend to believe it.


The question of timing remains. The writers point out that four years have passed since that letter was written, and the economy is doing fine. The implication is that if we were going to get inflation, we'd have got it by now.

What do you think? Is four years enough time? How about six years? It's four years since the letter, but it's a full six years since the start of Quantitative Easing. The quantitative easing that troubles the Signatories started in September 2008:

Graph #1: Percent Change, Base Money, Monthly Data: 2004-08-01 to 2014-08-01

August 2008 marks the end of relatively tame money growth. September 2008 marks the start of aggressive money growth. September 2014 marks a full six years of aggressive money growth. And yet two different price indexes both show that inflation since September 2008 has been milder than it was in the period before that date:

Graph #2: CPI (blue) and PCE (red) Inflation Measures, Monthly, 2004-08-01 to 2014-08-01

We've had less inflation since QE began than we had in the years before QE. And we want the threat of inflation to be gone. Doesn't that count for something?

Not much. No.