The Fed's inflation 'solution'

If you think you haven't been paying high enough prices, you're in luck. Some Federal Reserve officials agree with you.

By Bill_Fleckenstein Aug 10, 2012 2:05PM

Image: Inflation © Nick Koudis, Getty ImagesProminent articles in The Wall Street Journal and The New York Times on Tuesday discussed interviews given Monday by the head of the Federal Reserve Bank of Boston, Eric Rosengren, and they naturally goosed the market while also getting under my skin.


For one, the articles made it painfully obvious that Rosengren is a central planner at heart. If he had his way, he would unleash as much money as it took to force the economy to deliver the lower job and higher inflation rates he wants:


"You continue to do it (print money, monetize debt)  until you have documented evidence that you are getting growth in income and the employment rate consistent with your economic goals . . . . For the first seven months we've been treading water. That's different from what we expected at the beginning of the year," Rosengren said.


I think I speak for everyone here?

Now we get to the really insidious portion of his comments: "The one thing I think all economists agree on is that the Fed should be able to have an impact on inflation . . . . We're missing on the inflation target. I think all economists would agree that we should take action to get back to the inflation target."


His proposal to do that would basically be to have inflation/employment rate targeting, where the Fed would have open-ended asset buying programs (aka, quantitative easing), which has the bank buying assets to pump money into the economy) until the desired rates were achieved.


What is really disturbing about his views -- albeit not surprising, I'm sorry to say -- is that, once again, we see that no lessons have been learned. The Fed is the epicenter of the financial disaster and ruined lives that have become the America of the past decade or so, and yet no one there can see it.


During the first equity bubble, I used to comment a lot on the fact that while we were in the midst of a stock mania, and even while there were regular articles about how Japan was struggling as it wrestled with the aftermath of the very same thing, there was almost no recognition of the bubble in America, let alone the consequences that would follow.


Similarly, during the real-estate bubble I was mystified to see people behave even more recklessly than they had in the late 1990s, even though they still had the scars from that experience.


He's not speaking for me

Now we have the Fed advocating that we pursue the same insane policies that have been the source of our economic ills -- as I noted earlier and have protested repeatedly for 17 years,. Does anyone in America really think that the inflation rate isn't high enough? Don't we all want lower prices?


It is just insane that the Fed (or its supporters) has a shred of credibility left. Historians are going to look back on this period and say people were literally out of their minds to fall all over themselves buying government paper -- bonds -- when nominal (and actual) rates were negative and while the Fed (and every other central bank) was intent on creating even more inflation.


As great of an opportunity as the early 1980s were for stocks and bonds, due to the valuations and the policies in place, this is an even more absurd "opportunity."  However, it's not anywhere near as easy to capture; shorting bonds or making investments predicated on inflation is not as easy as just locking up long-term Treasurys at 12%-plus and letting Paul Volcker  and compounding work their magic.


Just put us into our misery

Nevertheless, Rosengren's interview spree is a good look into the "mind" of the easy-money "doves" at the Fed. Though it pains me, and I know it is perverse, I continue to advocate that the Fed just hurry up and do what it's going to do so the bond and currency markets can revolt and the country will hopefully be forced to pursue sane policies. The reason I am willing to do that is because I know they are going to be irresponsible, and I know that will lead to more trouble, but it will be the kind of trouble we actually need. Only by pursuing these policies to their absurd conclusions can we put an end to them.


I made the mistake from 1995 to 2000 of continually expecting the Fed (in the form of Alan Greenspan) to do the right thing. I was not only disappointed, but it cost me a good deal of money for a time. However, I learned that just because these fellows are in positions of power doesn't mean that they are either smart or inclined to do what is right.


A better future through fewer options

As I have chronicled more times than I care to count, the people who run the Fed and other central banks are more apt to pursue the wrong policies than anything else. One has to know what one is up against. In this case, the people who have the incredible power that printing money bestows have no understanding of history and have shown irresponsibility that would be criminal in other contexts. While we all might wish that weren't the case, unfortunately it is. Thus, we must understand what they are going to do and prepare ourselves for those policies and their consequences.


The silver lining is that I think (and hope) that we are in the late stages of centrally planned money printing, and when that ends, sane policies will be forced upon us by the world's currency and bond markets. Then we can get back to rooting for the right thing, instead of the wrong thing as a means to a right end.


Aug 27, 2012 2:10PM
The underlying problem with the Fed psychology is that they have now equated prosperity with inflation--perhaps because inflation often accompanies prosperity. But this isn't always true, we've had one without the other from both sides. Even if it were true, this reasoning is equivalent to "The wind is caused by the violent shaking of the trees". Do you have to have a two-digit IQ to get appointed to the Fed nowadays?
Aug 13, 2012 7:02PM
I fervently hope you're right Bill.  I am terrified when I look at my portfolio which it just so happens to agree with where I thought it would be back when I was working and saving.  But now I see the word trillion being bandied about as if those people actually understand the magnitude and I sink into a despair that I can only exit by ignoring whatever I've just read or watched.

Oh, before the thought gets away from me, I'd also like to make a comment about the money supply.  It seems that the dollar has become the world's currency.  Seen that way, trillions of dollars seems workable being spread around between 7 billion people and 200 countries.  The problem is that I it appears to me (I'm listening to my gut here) that the US budget is too large - way too large in proportion to the money supply seen this way.  The rest of the world and their managed currencies also appear not to have signed up for this idea.  So I am forced to agree with you Bill that the experts are not and they are just winging it.  Or they have (who are they?) an agenda (evil?) that doesn't include those of us too busy living from day to day.
Aug 13, 2012 6:51PM


Get America working.  There's an interesting article on the MSN page right now about the oil boom in Oklahoma.  They got jobs, jobs, and more jobs.



Aug 13, 2012 4:36PM
"There is no condition right now like that to get America working again so we are doomed folks"

You are actually wrong on two points, but for the same reasoning... First, not all businesses borrow to cover administrative costs. In fact, re-investing profits on additional inventory creates the pancake effect preferred over the ivory tower approach. In an economy that achieved Maturity, I'd rather have sustainable assets than uber wealth. The Fed was incorrect. Approaching this stagnant period with a 12% bank rate and refusal to buy any shoddy assets would have forced banks into insolvency. It would have been much easier to reconcile, arrest, incarcerate and hire people with more integrity. as for that "project" I disagree with you entirely. After banks purposely starved and neglected urban properties and funded over-extended sprawl, the time was ripe to invest in mass transit and more efficiencies in infrastructure supported by alternatives to fossil and finite fuel supplies as well as toxicity generators. If you wonder why it didn't happen, it was because every upper middle class and wealth class kid went to college to be a paper pusher. It should occur to us all that EVERY move made since 1999 has had only one goal- float the barge carrying the inheritors, sink all others. They don't row so basically we've been at the mercy of the current headed for the waterfall, whether sitting pretty on that barge or treading water around it.

We need to dump oil, close banks, end the Fed, reconcile, issue new currently and make inroad progress on a self-sufficient naturally harmonious future. Less wealth, more stability. 
Aug 13, 2012 3:29PM
I am not smart enough to  comment on fed policy. The fed told me so.


It is just insane that the Fed (or its supporters) has a shred of credibility left. Historians are going to look back on this period and say people were literally out of their minds to fall all over themselves buying government paper -- bonds -- when nominal (and actual) rates were negative and while the Fed (and every other central bank) was intent on creating even more inflation.



Pretty much the Federal Reserve is in a catch 22 situation here. There is no one buying U.S. T-bills right now so they have to loan money at zero percent interest for the banks to get the money to buy the US T-bills. They are keeping the rates low because they do not want to have to print even more money just to pay the interest on the US T-bills.


Keeping interest rates low keeps inflation in check expect for the component we buy from overseas. If you do not understand this then you need to study business more. Basically almost all businesses have to borrow money to pay for salaries and raw material and stores and transporting goods etc. If they are charged 8 percent on their loans then they have to increase their costs by about 12 percent to cover the new loans and increased costs passed on to them by their suppliers. This just triggers more and more inflation as businesses try to pass on borrowing costs.


The Feds have lied to everyone about higher interest rates cause lower inflation as they wish to put out an over heated economy and blame inflation when they are really just increasing borrowing rates to stop economic growth.


They tried this right before the 2008 crash which caused the crash and had to lower rates to zero to try to get the economy going.


Only this time round they lost their job creators as small business owners could not get credit to start businesses. No bank was willing to loan money on new businesses and no one in their right mind would start a busniess at this time. Hence the Death Spiral of LOST JOBS and an ever weaker and weaker economy we are in.


We are pretty much at a Great Depression style fix now. The US came out of it's Great Depression only because the bankers realized that they were going to be murdered by Hitler's Germany and hired 10's of millions of Americans at good wages to build war machines to defeart Hitler. And we had brave Harry Truman who as a junior Senator visited these new factories and reported back to Congress the money was being stolen and wasted. The bankers knowing that their lives were on the line made damn sure that the war machines were built and the money not stolen.


There is no condition right now like that to get America working again so we are doomed folks.


The super rich will still the money and we will go into bankruptcy from which we will not recover.


And the super rich will move to China.


Hopefully the Chinese will know what to do with them.


Aug 13, 2012 12:36PM
"I realize this is contrary to what you have learned in college economic courses. However, our educational system is government sponsored socialism. Economic is not a science it is a joke"

You left out Enterprise. Enterprise isn't a joke, it's a cyclical necessity. In no way should anyone in a role they did not Found, be paid much at all. A Master Degree should be handed out at graduation with a Pink Slip and a copy of a law that says- no Master works for anyone. Prove yourself now. The idea that there is massive unemployment and hopeless no longer even looking, while paper button and administration pushers are earning high salaries is what will destroy us. WHEN we crash, we will not only have to fend for ourselves, but deal with these whiny losers too. Education is where you learn something. Prove it. Economics is where you get paid for doing something someone else finds necessary or useful. Prove it.
Aug 13, 2012 12:32PM
I keep hearing that the Bush economics are what got us into this problem. Can someone please explain what they are talking about.  Obama used that Bush tax cuts as our biggest issue in his last election which was a reasonable argument. The problem is if that is the defining issue why is he pursuing the same policy less just 1% of it. I guess 99 % of the tax cuts were a good idea and now he admitting that he was wrong. Another one was that we under regulated the financial and real estate industry and that got banks into a financial mess. If Bush did that then why is the same problem happening all around the world?
Aug 13, 2012 11:44AM

Response to The Fosz, "What is the most unproductive expenditures in the America's Budget? War. War is not productive..."


The best way to level the playing field and share the sacrifice is a Conscription Military. Without it congress and our president act with impunity.

Aug 13, 2012 10:54AM
IDK and ME

Finally someone who understands!! Inflation is a hidden tax caused by a devalued dollar. In the 1950s gasoline cost something like .25 cents a gallon. It still is, except you need a silver quarter(remember those) to adjust for the devaluation of the dollar which has lost 97% of its power since the Fed came into existence in 1913. The diluting of the money supply (stimulus) are the root of inflation. Central banking is a Marxist ideology, folks!! It is the 5th plank in Karl Marx's Communist Manifesto, look it up. It is NOT a free market enterprise or Capitalist theme. The Fed is a banking cartel, there is nothing Federal about it and it has no reserves. It appoints members not elect them. It is immune from audits and constitutional enforcement. It practices fractional reserve banking a Ponzi scheme onto itself. Wow! I can't believe how many people on this discussion are so naive and dumb about the Fed's true identity.

Aug 13, 2012 10:16AM

We need deflation not inflation!! Between a deflationary 1/2% and 0% inflation.  With fixed low wages inflation reduces the buying power of the consumer. (70% of our economy) Inflation increases unemployment because few real dollars are available purchases, reducing demand for produces and services.


I realize this is contrary to what you have learned in college economic courses. However, our educational system is government sponsored socialism. Economic is not a science it is a joke. PHd's and noble prize winners in economic should take their certificates and flush them down the toilet. That what there worth. It will take a complete new economic thinking to turn around our present economic condition. And a lot of people are not going to like what we have to do.

Aug 13, 2012 9:35AM
Bill is doing really well here...  I think the only thing not touched on is the fact that the Central Banks can't be that idiotic and stupid in what they do.  I think we all realise that the old credit fueled system is now a thing of the past and we just have to see it all unwind.  America has had several centrl bank rises and falls.  I just think they are headed to a more global form of central banking and are just going to hoplessly collapse every nations finacial system to create a hopeless mire...  From there we can see the World central bank or just 3 or 4 major central banks.  They have to know that they are driving us off a cliff.  No one can be that stupid.  I think they are doing it on purpose to bring about largere and more powerful central banking/central planning.
Aug 13, 2012 6:30AM

"Deflation and a Second Great Depression are to be avoided at ALL COSTS. Let me repeat - at ALL COSTS. Mild to Semi-High inflation would be an amazing blessing at this point as that would signal the green shoots of renewed growth and our no longer dangling on a precipice somewhere below the first cliff we went over. If we tumble off this second precipice into the chasm of a Great Depression II, then there will be no possible crane or even Act of God that could save us."


We are already there. In case you've missed it, the highest tier shuffle the money around via paper, all tiers below have no money, it pays bills only. The only difference between this and the other periods of hyper-inflation is- abundant low level revolving credit. We need a new currency and no Fed.

Aug 13, 2012 6:26AM

"As I have chronicled more times than I care to count, the people who run the Fed and other central banks are more apt to pursue the wrong policies than anything else. One has to know what one is up against."


The reverse of this quote is what will surprise you, the Fed and our next government. Its MY country as much as it is yours or theirs. That eliminates the US vs. Them concept. Age is our ally. The oldest are killing us, the youngest are learning entirely different lessons that the 3-4-5 generations in between did not. When a body who is not US can cause US to fail, it is our enemy and we will see it gone. I don't post this because I like saying it, YOU Bill, have been saying in different words all along: CLOSE THE BANKS. RECOVER JOBS NOW.

Aug 13, 2012 12:53AM
Bill, the Fed isn't the only problem. Corruption (politically and in banking) are the other side of the coin and a much bigger problem. From the fraudulently manipulated LIBOR to the outright theft of funds (MF Global). These actions threaten the integrity of the market and are the real reason for the malaise in the economy. Left unchecked they will ultimately lead to its complete collapse. Until criminal banksters and politicians are put behind bars the only growth industry left in America will be fraud.
Aug 12, 2012 11:11PM
So Bill, what do you think about going short treasuries via ProShares inverse bond funds--TBF, TBT, and TTT.  Timing in these things is everything.  I sure your readers would love to hear your thinking on this.
Aug 12, 2012 7:40PM
I don't normally agree with Fleckstein, but this time I do.    Greenspan & co were a major cause of the 2008 Recession.   The same folks are flooding the market with new printing press cash and it will had a devastating effect on our US dollar via rising inflation, especially in commodities.    If you are in bond funds, be very alert at all times.  Keep your bond terms short--less than 6 years or so, or even shorter.  Be ready to sell them all when its finally the US's turn to be Greece.
Aug 12, 2012 6:00PM
So, we're going to attempt micro-managing the economy.  Seems like these "intellectuals" should spend some time reading about systematic variation.  In systematic variation there is a natural variation that can be completely disrupted by human intervention - to the point of "breaking" it.  Kind of like trying to reset a scale back to 0.00 every time you use it.  Eventually, you throw things completely out of wack and get unpredictable results.  But, then they can pay Social Security and the like with real cheap dollars.  And, that's what they really want.  All the rest of us are stupid - don't you know.
Aug 12, 2012 5:11PM

The Fed is brain dead. The only thing QE has done is to raise stock prices. No economic or job growth.

They think this artficial wealth effect will increase aggregate demand. However most people have very little money in the stock market. The people that are selling at these high prices are deleveraging or using the money to pay for ever increasing food and fuel prices which the Fed has created. The only ones to benefit from Fed policies are the top 0.01% (i.e. primary dealers).

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This column is a synopsis of Bill Fleckenstein's daily column on his website,, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.



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