Both the ECB leaders and US economists have the same kind of fixation on inflation. We may need a new generation of economists to take over; ones who didn't live through the 1970s and now suffer from inflation OCD.
In the United States, as part of our obsession with inflation, we spent the last 20 years massaging CPI statistics or removing things like actual home prices from inflation statistics to make the numbers look better and easier to target. The irony is that nothing could help perception of monetary policy now more than to include actual home prices in inflation statistics, which were removed from inflation statistics years ago, and are still declining.
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Monetary policy was very restrictive for a whole year before Lehman failed, well after the crisis had begun, because of the obsession with commodity prices. It can also be argued that it may be too tight now. While our monetary rating puts conditions about as good as it gets for encouraging a bull market, personally, we would be fine with the announcement of a QEIII tomorrow. It may sound contradictory to how you have been raised in markets, but in this case, the Fed should add liquidity until interest rates actually start to rise. Only at that point will they have pushed enough money into the economy to satisfy the demand that we have for liquidity.
Our confidence is so poor at the moment, that if we polled you today about how much cash you'd like to have in the bank, you probably wouldn't be satisfied unless it were enough to pay off all you debts and then some. As long as this is a reflection of our collective sentiment, it doesn't matter how much money the Fed has unleashed on the system; there is room for more. Right now, additional liquidity would do more help than harm.
Mark Dodson, CFA
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