Dunkelberg: Should Bernanke Be Worried?

Gentle Ben and Dudley Do-Right continue to support QE2 on the grounds that the Fed has a dual mission: keep inflation AND unemployment low. Wrap this with the thin tissue of a fear of deflation, and we have the position of most of the Fed Governors.

On “Main Street Fed” (e.g. the 12 Regional Fed Bank presidents), the views are more diverse, with many concerned about the huge amounts of liquidity being force-fed to the economy via QE2. The Fed denies that their actions are “monetizing the debt.”

Let’s see, the Fed buys Treasury Bonds and gives the seller a check drawing on funds created from thin air, hmmm. Having given up my Treasury Bond (for a tidy profit since bond prices have been rising), I now must find a place to put the money.

A savings account? Are you kidding! Money market funds and savings accounts pay nothing. Stock market? Risk of a “correction” pretty high. Gold? Soon the “greater fools” will be unmasked. But how about emerging markets? Growth is strong there and expected to stay strong for the longer term. Always good to be in assets buoyed by growth. So, the proceeds from the purchase of the Treasury financed by a check drawn on the Fed created from thin air now flows overseas to raise more havoc there.

And what about the inflation threat?

“Tut tut” says Gentle Ben, inflation is low and expectations are well anchored (in financial markets anyway, if ordinary folk expected prices to soar, they are not in much of a position to hedge, unable to buy and store gasoline or input materials etc.). “I can raise interest rates in 15 minutes.” Yeah, but will that do anything to keep inflation under control other than through a Volcker-like crunch? And exactly how is it that continually buying Treasury bonds will improve unemployment? That mechanism is murky and, for many, non-existent when a “liquidity trap” has been sprung.

So here’s the story on Main Street.

In September, 2010, the percent of firms cutting average selling prices exceeded the percent raising prices by 11 points. In March, reversed, with a net 9 percent reporting higher selling prices, a 20 percentage point increase in the net percent raising prices. A net 7 percent planned (hoped) to raise average selling prices in September, now 24 percent. The “fire sale” on Main Street is over, inventories are balanced and now inflation is back. It is not at all clear that those betting billions on bonds in New York, determining “expected inflation” measures for the inflation watchers, are tuned in to the change.

They should go shopping.

William Dunkelberg is an Economic Strategist, Boenning & Scattergood and Chief Economist, National Federation of Independent Business.