Low-flation

2 Apr

Leave it to a French attorney to supply us with the latest addition to the list of non-words we currently must endure. In her words before the upcoming IMF meeting, Christine Lagarde commented on the job killing low-flation that exists in the Eurozone. Fed Governor Bullard must have been envious that he did not think of it first when he remarked today that inflation rate in the U.S. will be managed from below (???) and that Fed policy will be highly responsive to any signs of falling inflation. We comment on these remarks because the level of certainty and respect that is currently being afforded these monetary mandarins is bordering on crazy. As we await the ECB’s decision to extend their own non-traditional monetary policies, in addition to rumblings out of Japan that they will extend their monetary carpet bombing even further, we have run across a study by the BOE that throws water on the entire concept of the money multiplier. The authors of said report maintain that traditional concepts of money creation are essentially relics of the past and that the monetary base can only be altered by Central Bank policy, particularly the non-traditional variety. If you like curve fitting studies, then you will really love this one as it looks at the most recent actions by Central Banks and their effects on lending and money creation. The conclusion is that there is no such thing as “money printing” and that Central Banks, through their various non-traditonal zero rate bound policies have the ultimate ability to affect the amount of “money” in the system. The study pays lip service to increased bank regulation and attitudes toward risk, but my point in discussing this study is that we are currently on the brink of giving Central Bankers complete carte blanche, even when it comes to dismissing tried and true concepts of money and banking. The risk, as we have discussed, is that with power comes hubris and a Central Bank mindset that  believes markets, economies and attitudes toward risk can be effectively managed using some intricate (unknown to us) algorithm. It is our belief that this complacent and unjustifiable faith in Central Bankers represents an inflection point, just as the complete lack of belief in monetary efficacy represented a tipping point during the Volcker era.These inflection points are critical as they, in our opinion, represent secular divergences between paper and non-paper assets. Buy Stuff Sell Paper

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