FIRE Economy | timiacono.com - Part 4

A Good Time for a Little Escapism

Given what’s going on in the world, particularly after recent events in Paris and San Bernardino, a little escapism via one of the world’s most successful movie franchises seems perfectly reasonable at this juncture, however, a lot of people really seem to be getting carried away with the release of the latest Star Wars movie, all of which recalls this Saturday Night Live skit with William Shatner many years ago.

One Zachary Feinstein, professor of electrical and systems engineering and/or financial engineering (depending upon which news story you read) at the School of Engineering & Applied Science at Washington University in St. Louis, has hopped on board the Star Wars mania detailing Why the Star Wars rebel alliiance needs a central bank and there’s more on this subject from Bloomberg here and from Washington University here.

Mission Accomplished

Fed whisperer Jon Hilsenrath of the Wall Street Journal gives central bank chief Janet Yellen a big pat on the back for yesterday’s first interest rate hike in nearly a decade, a move that, by nearly all accounts, was just what the world needed.

Of course, history shows that asset bubble don’t really get their groove on until the Fed starts raising rates, so, we’ve got that to look forward to now…

The Hydra Headed Inflation Monster

More on the subject of inflation, or the lack thereof, ahead of tomorrow’s big Fed decision to hike interest rates for the first time in nearly a decade comes via this item at the Wall Street Journal where the graphic below is supplied along with commentary detailing how hard it is for the world’s smartest economists to figure out exactly what is going on with consumer prices in a world where money is freely printed and central banks perpetually fall short (on the low side) of achieving their 2 percent inflation goal.

Important topics omitted from the discussion include central bankers irrational fear of deflation (as detailed in a recent report from the BIS), any mention of the overall inflation rate of basically zero when the nation’s money was linked to something other than “confidence in the government to do the right thing” (i.e., up until shortly after the Federal Reserve was founded in 1913), and the nature of money (sound or otherwise).

Maybe 2% Inflation Isn’t Ideal

Among the many rate-hike-related themes appearing in the financial media this week is what some are calling the Federal Reserve’s “Inflation Conundrum”, an homage to a similar stumping of the central bank more than a decade ago when short-term rates were raised but long-term rates didn’t budge, that is, until the yield curve inverted and, voila!, financial crisis and recession ensued when another asset bubble burst.

The WSJ weighs in with The Mystery of Missing Inflation Weighs on Fed Rate Move ($) today.

Fed officials face a troubling question: Jobs are on track, but inflation isn’t behaving as predicted and they don’t know why. Unemployment has fallen to 5%, close to estimates of full employment, but inflation is stuck at less than 1%, well below the Fed’s 2% target.

Central bank officials predict inflation will approach their target in 2016. The trouble is they have made the same prediction for the past four years. If the Fed is again fooled, it may find it raised rates too soon, risking recession.

Fed officials also don’t know why they target a 2 percent inflation rate rather than say, 1 percent or 3 percent or some other number, a question that is perhaps worth answering first, before they attempt any further investigation into why they’re not meeting this target.

Echoes of the 2008 Financial Crisis

Michael Lewis talks to Stephen Colbert about the new movie based on his book The Big Short and details the big problem with having bailed out the big banks.

Also see Third Avenue Fund’s Eerie Financial-Crisis Echo for an explanation of why the word echoes is plural in the title above.

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