Newsgroup: it.economia.borsa
Titolo: Get Ready for Inflation and Higher Interest Rates

Quello che appare all'orizzonte sono nuvole nere, ma abbiamo chi con il 
cuore in mano ci dice che siamo fuori dalla bufera. A chi credere? A 
quello che avvisa del peridolo o a quello che alla vista di una goccia 
nel bicchiere lo vede pieno?
""Rahm Emanuel was only giving voice to widespread political wisdom 
when he said that a crisis should never be "wasted." Crises enable 
vastly accelerated political agendas and initiatives scarcely 
conceivable under calmer circumstances. So it goes now.
Here we stand more than a year into a grave economic crisis with a 
projected budget deficit of 13% of GDP. That's more than twice the size 
of the next largest deficit since World War II. And this projected 
deficit is the culmination of a year when the federal government, at 
taxpayers' expense, acquired enormous stakes in the banking, auto, 
mortgage, health-care and insurance industries.
With the crisis, the ill-conceived government reactions, and the 
ensuing economic downturn, the unfunded liabilities of federal programs 
-- such as Social Security, civil-service and military pensions, the 
Pension Benefit Guarantee Corporation, Medicare and Medicaid -- are 
over the $100 trillion mark. With U.S. GDP and federal tax receipts at 
about $14 trillion and $2.4 trillion respectively, such a debt all but 
guarantees higher interest rates, massive tax increases, and partial 
default on government promises.
But as bad as the fiscal picture is, panic-driven monetary policies 
portend to have even more dire consequences. We can expect rapidly 
rising prices and much, much higher interest rates over the next four 
or five years, and a concomitant deleterious impact on output and 
employment not unlike the late 1970s.
About eight months ago, starting in early September 2008, the Bernanke 
Fed did an abrupt about-face and radically increased the monetary base 
-- which is comprised of currency in circulation, member bank reserves 
held at the Fed, and vault cash -- by a little less than $1 trillion. 
The Fed controls the monetary base 100% and does so by purchasing and 
selling assets in the open market. By such a radical move, the Fed 
signaled a 180-degree shift in its focus from an anti-inflation 
position to an anti-deflation position.
[Our Exploding Money Supply]
The percentage increase in the monetary base is the largest increase in 
the past 50 years by a factor of 10 (see chart nearby). It is so far 
outside the realm of our prior experiential base that historical 
comparisons are rendered difficult if not meaningless. The currency-in-
circulation component of the monetary base -- which prior to the 
expansion had comprised 95% of the monetary base -- has risen by a 
little less than 10%, while bank reserves have increased almost 20-
fold. Now the currency-in-circulation component of the monetary base is 
a smidgen less than 50% of the monetary base. Yikes!
Bank reserves are crucially important because they are the foundation 
upon which banks are able to expand their liabilities and thereby 
increase the quantity of money.
Banks are required to hold a certain fraction of their liabilities -- 
demand deposits and other checkable deposits -- in reserves held at the 
Fed or in vault cash. Prior to the huge increase in bank reserves, 
banks had been constrained from expanding loans by their reserve 
positions. They weren't able to inject liquidity into the economy, 
which had been so desperately needed in response to the liquidity 
crisis that began in 2007 and continued into 2008. But since last 
September, all of that has changed. Banks now have huge amounts of 
excess reserves, enabling them to make lots of net new loans.
The way a bank or the banking system makes new loans is conceptually 
pretty simple. Banks find an entity that they believe to be credit-
worthy that also wants a loan, and in exchange for the new company's 
IOU (i.e., loan) the bank opens up a checking account for the customer. 
For the bank's sake, the hope is that the interest paid by the borrower 
more than makes up for the cost and risk of the loan. The recently 
ballyhooed "stress tests" on banks are nothing more than checking how 
well a bank can weather differing levels of default risk.
What's important for the overall economy, however, is how fast these 
loans are made and how rapidly the quantity of money increases. For our 
purposes, money is the sum total of all currency in circulation, bank 
demand deposits, other checkable deposits, and travelers checks 
(economists call this M1). When reserve constraints on banks are 
removed, it does take the banks time to make new loans. But given 
sufficient time, they will make enough new loans until they are once 
again reserve constrained. The expansion of money, given an increase in 
the monetary base, is inevitable, and will ultimately result in higher 
inflation and interest rates. In shorter time frames, the expansion of 
money can also result in higher stock prices, a weaker currency, and 
increases in commodity prices such as oil and gold.
At present, banks are doing just what we would expect them to do. They 
are making new loans and increasing overall bank liabilities (i.e., 
money). The 12-month growth rate of M1 is now in the 15% range, and 
close to its highest level in the past half century.
With an increased trust in the overall banking system, the panic demand 
for money has begun to and should continue to recede. The dramatic drop 
in output and employment in the U.S. economy will also reduce the 
demand for money. Reduced demand for money combined with rapid growth 
in money is a surefire recipe for inflation and higher interest rates. 
The higher interest rates themselves will also further reduce the 
demand for money, thereby exacerbating inflationary pressures. It's a 
catch-22.
It's difficult to estimate the magnitude of the inflationary and 
interest-rate consequences of the Fed's actions because, frankly, we 
haven't ever seen anything like this in the U.S. To date what's 
happened is potentially far more inflationary than were the monetary 
policies of the 1970s, when the prime interest rate peaked at 21.5% and 
inflation peaked in the low double digits. Gold prices went from $35 
per ounce to $850 per ounce, and the dollar collapsed on the foreign 
exchanges. It wasn't a pretty picture.
Now the Fed can, and I believe should, do what it must to mitigate the 
inevitable consequences of its unwarranted increase in the monetary 
base. It should contract the monetary base back to where it otherwise 
would have been, plus a slight increase geared toward economic 
expansion. Absent this major contraction in the monetary base, the Fed 
should increase reserve requirements on member banks to absorb the 
excess reserves. Given that banks are now paid interest on their 
reserves and short-term rates are very low, raising reserve 
requirements should not exact too much of a penalty on the banking 
system, and the long-term gains of the lessened inflation would many 
times over warrant whatever short-term costs there might be.
Alas, I doubt very much that the Fed will do what is necessary to guard 
against future inflation and higher interest rates. If the Fed were to 
reduce the monetary base by $1 trillion, it would need to sell a net $1 
trillion in bonds. This would put the Fed in direct competition with 
Treasury's planned issuance of about $2 trillion worth of bonds over 
the coming 12 months. Failed auctions would become the norm and bond 
prices would tumble, reflecting a massive oversupply of government 
bonds.
In addition, a rapid contraction of the monetary base as I propose 
would cause a contraction in bank lending, or at best limited 
expansion. This is exactly what happened in 2000 and 2001 when the Fed 
contracted the monetary base the last time. The economy quickly dipped 
into recession. While the short-term pain of a deepened recession is 
quite sharp, the long-term consequences of double-digit inflation are 
devastating. For Fed Chairman Ben Bernanke it's a Hobson's choice. For 
me the issue is how to protect assets for my grandchildren.""
Ref: 
http://online.wsj.com/article/SB124458888993599879.html
-- 
http://cuccona.myminicity.com/
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Linux Debian - kernel 2.6.18-4-amd64
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 nel bicchiere lo vede pieno?
[...]
Io preferisco il secondo....l'ottimismo � il sale della vita....diceva un 
poeta naif...  ;-)))
Personalmente dubito che nel medio/breve periodo possa ripartire 
l'inflazione e l'aumento dei tassi...nonostante la settimana scorsa i fed 
funds incorporassero un aumento di 125 bp....l'area euro 75 bp e il Regno 
Unito 100 bp sul corso dei prossimi 12 mesi.
Tali previsioni sembrano decisamente fuori luogo, cos� come i timori d'inflazione 
a cui sono legate. I segnali di un inizio della ripresa dell'attivit� sono 
evidenti, ma � alquanto improbabile che l'assorbimento della capacit� 
disponibile sia tanto rapido da generare effetti inflazionistici. Al 
contrario, preoccupa molto di pi� il fatto che le banche centrali non stiano 
espandendo con sufficiente rapidit� i propri bilanci. Ad esempio, il 
bilancio della Fed si � ristretto dell'11% rispetto a met� dicembre (sebbene 
sia aumentata la duration dato che la banca centrale ha convertito la 
liquidit� in attivit� a pi� lunga scadenza). La crescita annualizzata della 
massa monetaria britannica � al momento quasi pari all'8,5% mentre l'accelerazione 
di Eurolandia, pur attestandosi ad un robusto 16,5%, � pi� che dimezzata 
rispetto al precedente 40% circa. Tuttavia, il successo delle misure di 
allentamento quantitativo dipender� dalla capacit� della crescita della base 
monetaria di sostenere l'espansione della pi� ampia massa monetaria. A tale 
riguardo, gli ultimi segnali emersi appaiono preoccupanti. Infatti, su base 
annualizzata la crescita della massa monetaria in senso ampio appare in via 
di decelerazione tanto negli Stati Uniti che nell'area Euro e nel Regno 
Unito, in netto contrasto con le attese di crescita dell'inflazione e di 
incremento dei tassi d'interesse scontate dai mercati obbligazionari, le 
quali del resto non trovano riscontro nel perdurante rialzo dei mercati 
azionari.