Not to be outdone by Maslow, inflation has its own hierarchy of
needs. Basic needs (physical survival) correlate to food and
energy, safety (comfort) correlates to core inflation, and
self-actualization correlates to asset inflation. The Federal
Reserve admits that it has little influence on food and energy,
believes that it can control core inflation, and says that it has
no control over asset inflation.
I believe the Fed's rhetoric is only partially truthful. I agree
that the Fed has little control over the demand for survival needs.
However, when it comes to core inflation (the safety teddy) General
), Intel (
) and US Steel (
) have more influence on the overall price structure than the
The Fed is being outright disingenuous when it comes to asset
inflation. This form of self-actualization is at the top of the
inflation hierarchy of needs. Asset purchases are the most
discretionary and the first place for excess liquidity to flow to.
While professing the opposite, the Fed has maintained an active
policy of promoting asset inflation.
After leaving office, former Fed Chairman
Greenspan admitted that the Fed engineered asset
bubbles to promote innovation
. Even though the housing bust has proved much more difficult than
Greenspan had imagined, Fed Chairman Bernanke has not changed
policy. Every one of Bernanke's "specialized" programs has failed
to generate targeted core inflation because the Fed cannot really
control the application of liquidity, only the intensity of the
The Fed cannot even control which asset sectors get inflated.
While the effort to inflate housing prices is failing, stock and
even junk bond prices are rising. The question is does the Fed care
about targeting asset sectors or just creating a general wealth
effect? I believe the Fed's focus is primarily on managing the
overall wealth effect, not inflation in general and least of all
the value of the dollar in foreign exchange.
Now we know that both Greenspan and Bernanke have reached
self-actualization in the world of asset bubbles. Greenspan's
recent interview with Bloomberg's Al Hunt was quite telling. He
thought the banks could not make a profit and lend efficiently if
they were required to maintain capital for long tail events. The
role of government is to bailout black swans. Again, the Fed's
policy is to remove any obstacles to asset inflation.
Imprudent lending is Fed policy and that is why Bernanke is so
opposed to the creation of an independent consumer protection
agency. Protecting consumers from aggressive banking directly
stands in the way of promoting the wealth effect. Both Greenspan
and Bernanke aspire to see masses of self-actualized consumers.
Regardless of what you think of how inflation is calculated with
"owner equivalent rent" and "hedonic" (constant value) adjustments,
leaving asset inflation out of the calculation makes the inflation
numbers meaningless. Don't let the Fed tell us that we have no
inflation when stocks are up 50% and the dollar is collapsing.
Finally, I am waiting for the Fed to explain in behavioral terms
how businesses and consumers changed with each decrease in the fed
funds rate. Was the change from 1% to 0% as effective as the change
from 5% to 4%?
Wall Street Weather's
"Asset Inflation: The Missing Indicator In Economic
And Monetary Policy"
provides an excellent discussion of asset inflation and monetary
Author is long GE and INTC.
Is U.S. Dollar Carry Trade Replacing the One in