|Sven Jari Stehn|
A Goldman Sachs economist, Sven Jari Stehn, has definitely jumped the shark, or expects the US to. The audacity of this plan is exceeded only by the insanity of it. And guess who picks up the tab, via increased cost of living and devaluation of savings? You guessed it: the same wage-earners who picked up the tab for the financial industry's previous boondoggles and extortion of the middle class. Increased inflation wacks the working hardest because they expend more of their income on commodities like food and fuel, and because they lack sophisticated investments to hedge against inflation. Cheers, Sven. I hope this brilliant plan works out for you. And I hope you never have to work for a living.
But with an overload of pessimism already in the market, the Fed's "Twist" announced last week-in which it plans to swap out $400 billion of short-term government debt on its $2.8 trillion balance sheet and buy-longer-duration Treasurys-also has dampened enthusiasm for fundamental economic growth.
The Treasury market is sending the message that inflation, in particular the healthy kind that comes from growth, is dead for now as the central bank commits to a zero-interest rate policy for at least the next two years.
"One source of inflation is a healthy economy running at full tilt and companies exercising pricing power over the consumers of their goods and services," Nicholas Colas, chief market strategist at ConvergEx in New York, wrote in his daily market analysis.
"A 10-year note yielding less than 2 percent signals that Treasury buyers do not think such a scenario will play out until 2021 at the earliest," he continued. "That means little domestic earnings growth through the cycle and even less in the way of a recovery in domestic labor markets. Hard assumptions to justify owning equities, to be sure."
That idea of generating positive inflation has gained prominence recently as forecasts for gross domestic product growth come down and the Fed advances its idea to drive down borrowing costs from already near-record lows.
Over the weekend, Goldman Sachs economist Sven Jari Stehn released a bold proposal that would entail a joint effort between the Fed and Congress.
Washington, under Stehn's plan, would embark on an aggressive stimulus program using government debt. The Fed then would crank up the printing presses and simply monetize the debt away once growth has reached a desired level.
It's a dangerous plan that risks inflation, particularly when the headline rate is at 3.6 percent and the core rate-stripping out food and energy-is at 1.8 percent, near the Fed's desired range of 2 percent. The controlling of inflation is half of the central bank's dual mandate, so the idea is representative of how desperate the market is of creating growth.
"Combining fiscal stimulus with a change in the Fed's targeting regime and further purchases of Treasury securities would be a powerful device to enhance the credibility of the Fed's commitment to push up prices," Stehn wrote in a research note. "Such cooperation would be a radical but highly effective tool: fiscal policy would accumulate additional public debt and the Fed would inflate it away."
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