A Cold Splash of Reality

Even I know when too much is too much. Fed Chairman Ben Bernanke? Not so much:

The Federal Reserve’s emergency programs in response to the financial crisis were successful in helping the economy and now the central bank is at risk of overdoing it, said Dallas Fed President Richard W. Fisher.

The central bank “opened the floodgates” and “it worked,” the regional bank chief, who votes on monetary policy this year, said during a speech today in Dallas. “We re- liquefied the economy. In my opinion, we might have done too much.”

Fisher, 62, reiterated a point he’s made in the past week that the Fed may be going too far, even as he defended the central bank’s initial decisions.

But there’s talk at the Fed at doing even more more — in the form of yet another round of quantitative easing. Or as we used to call it: running the printing presses nonstop. Here’s the word from IBT:

Douglas Borthwick of Connecticut-based Faros Trading believes the housing double dip will “translate into a double dip on the overall US economy, further rolling forward any stimulus-exit plans set by the Fed, and setting the stage for an announcement of QE3 in July.”

“Jobs and Housing remain the focus for the Fed, and both areas continue to face severe difficulties,” said Borthwick.

Try as Bernanke might, the housing market just won’t reinflate. What is inflating are the prices on things consumers actually buy:

U.S. consumers face “serious” inflation in the months ahead for clothing, food and other products, the head of Wal-Mart’s U.S. operations warned Wednesday.

The world’s largest retailer is working with suppliers to minimize the effect of cost increases and believes its low-cost business model will position it better than its competitors.

Still, inflation is “going to be serious,” Wal-Mart U.S. CEO Bill Simon said during a meeting with USA TODAY’s editorial board. “We’re seeing cost increases starting to come through at a pretty rapid rate.”

Usually, the first stages of inflation feel pretty good — wages increase along with prices and everybody feels richer from those fat profits and bigger paychecks. But at 8.8% unemployment (better, but not good enough), workers aren’t demanding or getting higher wages.

Over the 12 months that ended in February, consumer prices increased just 2.1 percent. Yet wages for many people have risen even less – if they’re not actually frozen.

Social Security recipients have gone two straight years with no increase in benefits. Money market rates? You need a magnifying glass to find them.

That’s why even moderate inflation hurts more now. And it’s why if food and gas prices lift inflation even slightly above current rates, consumer spending could weaken and slow the economy.

As people spend bigger and bigger portions of their stagnant wages on gas, food and clothing, the chances for a double-dip recession increase. This is why Bernanke keeps pushing on that string — hoping the “wealth effect” he’s creating in the equities markets will outstrip the “poverty effect” he’s creating by inflating consumer prices. And anyway, the wealth effect may prove to be very short-lived:

“The end of ‘QE2’ could induce a 10 to 15 percent correction,” said Peter Boockvar, equity strategist at Miller Tabak. Since the second leg of this bull market began so closely to Bernanke’s Jackson Hole speech, “to think that the program will end and the market won’t anticipate and respond lower, I believe, is wishful thinking.”

Meanwhile, that inflation that Bernanke doesn’t believe really exists is about to force an increase in interest rates:

The president of the Minneapolis Federal Reserve Bank said Thursday the Fed may need to increase short-term interest rates by year’s end if underlying inflation rises as he anticipates.

As a result, he said, it’s “certainly possible” the Fed’s target for short-term interest rates, now near zero, would be lifted by more than half a percentage point late this year.

People aren’t buying homes now, with mortgage rates near historic lows. And while mortgage rates don’t directly track the prime, they do follow. The cost of borrowing money for a home is about to go up. And that’s not the only kind of borrowing about to become more expensive:

The Federal government’s fiscal emergency is likely to begin in earnest this summer.

The trigger will not be entitlement spending. Rather, the driver of the fiscal crisis will be an uncontrolled $800 billion explosion in annual interest payments on the federal debt to potentially $1 trillion per year over the next five years. Such a super-charged ramp up in spending will more than offset even the most ambitious ideas now being discussed to reduce the Federal budget deficit over the next 10 years.

Just that increase in what we pay on debt we already owe would be bigger than what we spend each year on defense. Or Social Security. Or Medicare/Medicaid. We could eliminate one of the three of those, entirely, just zero it out of the budget, and it still wouldn’t pay for the increased debt payments.

So while I’m pleased that our wheezing economy created more than 200,000 jobs last month, I’m not exactly excited about our prospects.