The Real Deflategate

The Fed has intensely debated
When interest-rate hikes should be slated.
Like a team I won't name,
They're playing the game
With balls that are underinflated.

With a mandate to find the right measure
Of balancing jobs versus treasure,
They're Patriots all,
But the Hawks want the ball
To be at the usual pressure.

The rate of the jobholding share
Is less than appears to be there,
As if it were tested
And then one suggested
To secretly let out some air.

In spite of the fear of inflation,
Wages display moderation,
Since it's hard to inflate
With a tumbling rate
Of labor force participation.

Says Yellen: "It starts to annoy,
In discussing the rate of employ,
The analogy calls
For playing with balls;
Is it something the fellows enjoy?"

"It seems to me, based on my role,
The economy's just like the Bowl:
The material might
Be flaccid or tight,
But the point is to get to the goal."

En (La)Garde Against Deflation

Said Lagarde, of a threat that dismayed 'er:
"There's a danger that prices may crater. 
We're conditioned to fear
That things become dear
But deflation's the risk that is greater."

"With deflation, the instinct is human
To save and cut back on consumin',
But though disciplined ways
Are worthy of praise,
They prevent the economy's boomin'."

"To all of those countries who plan
To avoid the malaise of Japan:
Forget all the rules
Of conventional tools,
And stimulate now, while you can!"

Doves & Hawks Together

Thoughts diverge in the FOMC
On how long to hold on to QE,
But in case of deflation,
Without hesitation,
They'll ease up unanimously.

Prof. Bernanke vs. Gold Standard

Said Bernanke: "A standard of gold
Is empirically hard to uphold;
When bound to the ingot,
The high and low swing got
Too hard to be quickly controlled."

Fed Chairman Ben Bernanke has embarked on a series of four lectures at the George Washington University business school, on the role of the Federal Reserve system and the recent financial crisis. In his first lecture on Tuesday, on the origin and mission of the Fed, Prof. Bernanke came out swinging against the gold standard as a solution to our monetary and economic problems. The Chairman claimed that the gold standard:

• Creates deflation (famously decried by William Jennings Bryan in his "Cross of Gold" speech);
• Causes interest rates to rise during downturns and fall during good times - the exact opposite of what should happen, and a factor in the greater volatility that prevailed during the gold standard years;
• Links everyone's currencies, so that monetary policy in one country gets transmitted to others;
• Can quickly fall apart if speculators believe that the central bank has any other priorities than maintaining the gold standard (such as fighting unemployment).

Supporters of the gold standard (okay, gold bugs) were indignant at this use of the central bank / academic bully pulpit.  James Rickards, author of Currency Wars, tweeted: "I'm not troubled when #Bernanke misleads Congress since they can fend for themselves. But today he misled college students. Disgraceful." Mr. Rickards disputes Mr. Bernanke's assertion (shared by many others) that the constraints imposed by the gold standard were a factor in the Fed's inadequate response to the Great Depression.

Belt-Tightening Blues

In the stock market sell-off's severity,
There's a White House political rarity:
While private demand
Is too soft to expand,
There's a Democrat talking austerity.

As millions of Americans fretted about S&P's Friday night downgrade of US sovereign debt, Monday's stock markets saw a tsunami of selling that began in Asia and rolled across the world, ending with the S&P 500 stock index down 6.7% for the day. However, the downgrade itself was not the catalyst, as evidenced by the fact that Treasury prices actually rose. The market was much more spooked by waning growth prospects, caused in part by government belt-tightening at a time of slack private demand. How ironic that, following a Republican President who stimulated the economy with spending and tax cuts, and his Democratic successor announces years of growth-dampening spending cuts ahead.

Stop Blowing Bubbles

Thomas Hoenig, the hawkish Fed governor,
Says: "The Dollar has way too much dove in 'er;
With a null target rate,
I doubt we'll deflate,
But inflation is bound to be stubborner."  

Retiring Kansas City Federal Reserve Bank President Thomas Hoenig summed up his argument for tighter money in a speech at the London School of Economics yesterday.  In what may be his valedictory address, Hoenig stressed the urgent need for a transition from short-term liquidity crisis management to longer-term inflation-fighting.  As he pointed out, the Fed's overly accomodative policy in 2003 set the stage for the asset bubble that crashed five years later.  Hoenig also added his voice to those blaming "QE2" for the recent round of commodity inflation, though without really making the case for it.

Open Letter to Bernanke

A financially right-leaning lot
Told the Fed: "We would rather you not
Take this easing approach,
As inflation is gauche,
While deflation is much more de droite."   

A group of prominent economists, pundits and investment managers, most of them - like Jim Grant, William Kristol and James Chanos - allied with the Republican Party, penned an open letter  to Fed Chairman Ben Bernanke, urging him to put aside "QE2," the second round of quantitative easing. This group feels that the Fed cannot solve all of the economy's problems and risks a new round of inflation by trying to stimulate more credit. The group made no comment on the risk of deflation, about which they are evidently less concerned.

Analogies Économiques II: Economy = Balloon

It's distended when something constricts it,
Once inflated, will burst if one pricks it;
Whether flaccid or rounded,
When broke, it's confounded
The efforts of experts to fix it.  

TIPS Under Zero

The Treas'ry's inflation-linked note
Is yielding a negative quote;
If deflation holds sway,
It's investors who pay,
Though the likelihood may be remote.   

For the first time ever, the Treasury Inflation-Protected Securities (TIPS) were issued at a negative yield: -0.55%. Since the actual interest payments will include an inflation premium (currently expected to be 1.7% per annum over the five-year life of the notes), investors will likely receive a net interest rate of something like the current 5-year T-note yield of 1.18%. However, if inflation slows, investors earn less, and may even end up paying interest to the Treasury.

Golden Error?

If the dollar's debased and inflated,
Then the gold bugs appear to have made it;
But if, like Japan,
Our "lost decade's" at hand,
Then the gilded is quite overrated.

The Fed's Shrinking Universe

Like the merciless Emperor Ming,
Bernanke's a powerful king,
But a bout with Deflation
Would lower his station
To a Keynsian pushing a string.

Overheard at the Offices of PIMCO

"Deflation is viewed with frivolity
By many in Washington's polity,
But if prices are sinking,
We'll stock up, I'm thinking,
On Treasury bonds of high quality."

Keynesian Smackdown

Said Paul Krugman: "Bernanke, you wannabe -  

There's a hundred of you, and just one o' me;  

Now you've set rates so low  

That we've nowhere to go  

But to try to reflate the economy."

Up or Down?

Two economists of well-known ability
Broke out into open hostility;
Whether high or low prices
Were less welcome vices,
And which carried more probability.  

In- / De- cisive Analysis

Said Bernanke, stroking his beard,
"This '-flation' is worse than I feared;
All the research I see 
Is pointing to 'de-';
It's the 'in-' crowd that strikes me as weird."

The New Economics

"Inflation's" the cry, much like "fire"
As the national debt caroms higher.
But though it seems stranger,
Deflation's the danger,
Of a lackluster cash multiplier.