Sunday, September 6, 2009

Fed's Hoenig is worried about inflation...

"As we become more confident that we are at the bottom of the recession and are moving into recovery, we must become more resolute in systematically reducing our balance sheet and raising interest rates."
"If the government, the banks and consumers address the difficult issues of debt and the Federal Reserve begins to remove the significant stimulus in an orderly fashion, then we will come out of this recession without an inflationary hangover. Noninflationary growth will follow, new wealth will be generated, and we will continue to be the strongest, most successful economy in the world. But in the short run, these actions will involve painful choices, and it is the responsibility of citizens like you, and policymakers like me, to consider the impact of today’s choices on tomorrow. We must choose well."  
"If the monetary stimulus does not come out, the price level trend shown earlier in Chart 9 will only worsen. As a reminder of what that might imply, you need only study the early ’80s when high inflation undermined our economic system. "
"In considering these charts and the matters of policy, we should be aware of two pieces of legislation that I suggest influenced their contours: the 1946 Employment Act and the 1977 Amendment to the Federal Reserve Act. The 1946 Employment Act established as a national priority a goal of low unemployment.  Low unemployment is a worthy goal and one that I share, but it cannot be achieved by systematically keeping interest rates low.  In 1977, Congress passed the Amendment to the Federal Reserve Act—also called the Humphrey-Hawkins Act—which called upon the Federal Reserve, as the central bank of the United States, to pursue a dual mandate of promoting long-run stable economic growth and stable prices.
"Assume for a moment that the 20 largest institutions were required either to raise new equity, or to reduce their total assets to meet the 6 percent equity capital ratio.  This would require that they raise more than $300 billion in new capital or, as Chart 2 shows, they would need to shrink in size by $5 trillion, or some combination of the two options. The numbers in Chart 2 make clear how much of an advantage the larger institutions have over smaller banks, and show the excess leverage the largest banks have accumulated."
full text available here: Thomas M Hoenig Text

The above are quotes from Thomas M Hoenig, President Federal Reserve Bank of Kansas City. Clearly, Hoenig makes some very good points regarding our financial institutions over leveraged condition and debt situation overall. I would say its too little too late however. Isn't this something they were supposed to be watching for the last 25 years?

But worst of all, as professed students of the Great Depression and keepers of the money...he apparently thinks that the Fed has been successful in its mandate of promoting stable growth and stable prices. If you look at the dollar chart...a 96% decline IS NOT STABLE PRICES. It may be stable growth, but it is definitely NOT STABLE PRICES.

Additionally, Hoenig is worried about inflation. Can you see inflation in that DBA chart? I can't. And what does this depression have in common with the 1974 recession? Not much - I will tell you. All the Fed does is worry about inflation, because they need inflation in order to continue their policies regarding fiat currency and fractional reserve lending.

Clearly, he may be a smart man and certainly seems much more sensible than Bernake...but he should not have his job if I can understand the financial system better than he does. This is astonishing.

End the FED.
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