Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Global Warming ClImate Change Mega Death Trend - 8th Apr 24
Gold Is Rallying Again, But Silver Could Get REALLY Interesting - 8th Apr 24
Media Elite Belittle Inflation Struggles of Ordinary Americans - 8th Apr 24
Profit from the Roaring AI 2020's Tech Stocks Economic Boom - 8th Apr 24
Stock Market Election Year Five Nights at Freddy's - 7th Apr 24
It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- 7th Apr 24
AI Revolution and NVDA: Why Tough Going May Be Ahead - 7th Apr 24
Hidden cost of US homeownership just saw its biggest spike in 5 years - 7th Apr 24
What Happens To Gold Price If The Fed Doesn’t Cut Rates? - 7th Apr 24
The Fed is becoming increasingly divided on interest rates - 7th Apr 24
The Evils of Paper Money Have no End - 7th Apr 24
Stock Market Presidential Election Cycle Seasonal Trend Analysis - 3rd Apr 24
Stock Market Presidential Election Cycle Seasonal Trend - 2nd Apr 24
Dow Stock Market Annual Percent Change Analysis 2024 - 2nd Apr 24
Bitcoin S&P Pattern - 31st Mar 24
S&P Stock Market Correlating Seasonal Swings - 31st Mar 24
S&P SEASONAL ANALYSIS - 31st Mar 24
Here's a Dirty Little Secret: Federal Reserve Monetary Policy Is Still Loose - 31st Mar 24
Tandem Chairman Paul Pester on Fintech, AI, and the Future of Banking in the UK - 31st Mar 24
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How to Forecast Stock and Commodity Asset Prices

Stock-Markets / Market Manipulation Jun 12, 2009 - 12:48 PM GMT

By: Adrian_Ash

Stock-Markets

Best Financial Markets Analysis ArticlePick a Number...Any Number - "We are entering upon waters for which I have no chart and in which I therefore feel myself an utterly incompetent pilot." – James Warburg of the banking dynasty, resigning as President Roosevelt's monetary advisor, 1933


WANT TO KNOW WHERE the price of gold, oil, the S&P, Euro or overseas stock markets are heading?

Pick a number, any number. Go on, choose whatever number you like! Because that's how policy-makers and their advisors would like to set the common denominator of asset prices – the value of money.

"When I calibrate my favorite version of the Taylor rule using the most recent data," says Greg Mankiw, professor of economics at Harvard and chairman of Dubya Bush's  "I get a target for the nominal federal funds rate of about negative 1%."

Actually, "as long as expected inflation is still positive...that means an even more negative target for the real interest rate. And given the forecasts of inflation and unemployment, we are likely to get further into the negative region in the months to come."

Yes, you read right. As Dr.Marc Faber of the Gloom, Boom & Doom Report has been howling since Mankiw published his "Economic View: Time to Go Negative" in the NY Times back in April, the professor "seems to have great sympathy for the outright expropriation of savers."  Negative real rates of interest – returns paid to cash depositors that lag the rate of consumer-price inflation, thereby devaluing bank savings in terms of purchasing power – are currently best maintained in Zimbabwe, notes Faber. And Mankiw is such a man of the future, sent back in time to guide us with the wisdom of ages yet to pass, that pension savers in the United States might hope their retirement runs out before the Fed acts on his hindsight and drags us all into Robert Mugabe's brave new world.

Ignoring the fact that the real Fed Funds rate was negative for 34 of the 38 months between Aug. 2002 and Oct. '05 – a feat topped only by the 40 months of negative real rates between Sept. 1974 and Jan. '78 –  "The idea of negative interest rates may strike some people as absurd," writes Mankiw.

"But remember this: Early mathematicians thought that the idea of negative numbers was absurd.Today, these numbers are commonplace..."

Early mathematicians also gave the world geometry, algebra, Pi, elevation surveying and pneumatics. But those old, dead people with their fear of surds...They know nothing! NOTHING! as class monitor Jim Cramer would no doubt scream if invited to comment. And closer still, even within living memory, "When you look at the [Fed's] mistakes of the 1920s and 1930s, they were clearly amateurish," as Mankiw told the WSJ in Feb. 2000.

"It's hard to imagine that happening again – we understand the business cycle better."

"[In May 2001] I wrote a paper on monetary policy in the 1990s," the über-enlightened Mankiw blogs on. "I estimated the following simple formula for setting the federal funds rate:

Federal funds rate = 8.5 + (1.4 x (Core inflation - Unemployment))

"The parameters in this formula were chosen to offer the best fit for data from the 1990s," explained Mankiw after solving his equation 8 years ago. Yes again, you read that right. His "favorite" monetary-policy rate for any given pair of inflation and jobless data is spat out by taking the one from the other, multiplying the result by 1.4 and then adding that result to eight-point-five.

Not because those figures of 1.4 and 8.5 represent some immutable law of the universe. They're now stuck in the mold of, say, the ratio of a circle's circumference to its diameter always equaling 22/7...or the weight of fine gold (its specific gravity) being 19.3 that of an equal volume of water. No, Mankiw instead built his theorem upon the achievements of "miracle worker" Alan Greenspan (to quote the professor), head of the Fed when inflation – as well as unemployment – trended down towards 40-year lows.

Inflation is always and everywhere a monetary phenomenon; so any change in the rate of inflation much come due to changes in monetary policy. Unemployment is also influenced "over a period of at least two or three years by central-bank actions," Mankiw asserts. Hence the numbers – not quite any numbers – squeezed out of Mankiw's solution to the Maestro's 40-year records in US macros-stability and growth.

One-point-four, eight-point-five. Keep them in mind. They might mean something important. Not least a whole new surge in commodity and especially Gold Prices as savers flee the warm, welcoming  arms of US commercial banks – now being recapitalized by lending cash at pre-crisis prices but giving depositors next-to-nothing in return.

"I'm advocating 6% inflation for at least a couple of years," says Mankiw's Harvard colleague – and former IMF chief economist – Kenneth Rogoff. At current interest rates, "It would ameliorate the debt bomb" by taking real rates to their very lowest in history and leaving them there. Or rather, it would make the debt bomb sound like a fire-cracker against the exploding oil refinery of re-shrunken savings rates, impossible investment decisions, and collapsing Treasury bonds.

"There's trillions of dollars of debt, in mortgage debt, consumer debt, government debt," Rogoff notes sagely. Yet somehow, he thinks, soaking the lenders will mean avoiding "a long period of slow growth."

Remember: This tomfoolery might sound absurd right now, but in Harvard's bright smiley future, it could indeed become commonplace – and US cash savers lived with precisely this outcome between 2002 and 2005.

Now this "thinking" represents the blue-sky academic and professional chin-stroking amidst which the Federal Reserve claims it will start raising rates and withdrawing "excess liquidity" just as soon as Consumer Price inflation ticks higher.

Like Jim Cramer says, they really do know nothing.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in