Wednesday, March 09, 2011

Doom Loop

The Fed's Dennis Lockhart made some news this week:

Fed's Lockhart: Oil shock could lead to QE3

If oil prices continue to climb, it could force the Federal Reserve to make a new round of asset purchases, according to Atlanta Fed President Dennis Lockhart.

Appearing at the National Association of Business Economics in Arlington, Va., Lockhart said that while he doesn't think additional purchases are currently warranted, more stimulus could be needed if oil prices continue to climb.

"If [the rising price of oil] plays through to the broad economy in a way that portends a recession, I would take a position we would respond with more accommodation," Lockhart said at the conference.

From my article in the September 1, 2009 issue of The American Conservative:

The problem is that employment and other output-gap components can remain intractably weak in the face of rising prices. For Bernanke, however, rising prices are subordinate to the output gap. This can create a cycle in which commodity inflation saps money from the broader economy and causes deflation, which the Fed in turn fights with ever easier money.

One sign a nation is gripped by economic madness (see Fergusson's When Money Dies) is when perverse logic like Lockhart's comes to be seen as not only acceptable but sensible -- and most people forget they ever thought otherwise.


Anonymous rapier said...

I had a pretty good chuckle over that one. Even the rabid printing fans understand that rising commodity prices are throwing a roadblock in front of more QE. The depth of the cluelessness is frighting. Don't these guys talk to each other?

I can accept the fact they are as prone to error as anyone, well moreso, but to be wrong for the wrong reason which is well advertised puts one in a class all their own.

3/09/2011 1:05 PM  
Anonymous Anonymous said...

Where was Lockhart during the 1970's? It is incredible that this sort of thinking is still possible. Maybe they skip over that period in central banker school.

3/11/2011 1:41 AM  
Anonymous Anonymous said...

Jesus H Christ


3/20/2011 12:47 AM  
Anonymous fledermaus said...

So what's the idea here? Buy what assets? Defaulted muni bonds? More mortage shitpaper?

Then what? Wall street buys heavily into oil furtures inflating the price even more (but hey at least the Street gets paid) and oil company stocks and bonds.

Meanwhile everyone who doesn't have access to free fed money gets jacked by sky rocketing energy prices. Good luck with that one.

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