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10/19/2009 11:29:58 AM
Michael Steinberg submits:
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 Electric ( GE ), Intel ( INTC ) and US Steel ( X ) have more influence on the overall price structure than the Fed.
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 flow.
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 policy.
Disclosure: Author is long GE and INTC.
See also Is U.S. Dollar Carry Trade Replacing the One in Japanese Yen? on seekingalpha.com