Barclay’s Bank assesses Fed’s credibility at less than zero

In a second warning from a major bank, Barclays “warn[ed] that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall ‘below zero’.” This warning apparently focuses entirely on inflation prospects, and ignores other risks. According to the article, Barclays believes “that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. If it hesitates, the bond markets will take matters into their own hands.”

The trouble is that raising interest rates could severely inhibit economic activity; this is why the Fed held interest rates steady this week. This apparently does not matter to Barclays. Tim Bond, the bank’s chief equity strategist, wrote, “This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that’s possible. It has lost all credibility.”

Inflation typically occurs when spending is out of control; classically, too many dollars chasing too few goods; moreover, we might attribute the lack of supply to low productivity. In a situation where supply and demand would regulate interest rates, out of control borrowing–as with the U.S. government’s spending on its military–should push interest rates sky high, to restrain spending. Yet even the pro-capitalist Economist acknowledges a need for spending on a neglected infrastructure; this article points to the levee breaches in New Orleans following Hurricane Katrina, the Minnesota bridge collapse, the recent levee breaches and flooding this year, while we face drought here in the west, and a growing population overall as examples of problems that need remedying. According to the Economist:

In 2005 the American Society of Civil Engineers estimated that $1.6 trillion was needed over five years to bring just the existing infrastructure into good repair. This does not account for future needs. By 2020 freight volumes are projected to be 70% greater than in 1998. By 2050 America’s population is expected to reach 420m, 50% more than in 2000. Much of this growth will take place in metropolitan areas, where the infrastructure is already run down.

If America does not act, says Robert Yaro of the Regional Plan Association (RPA), a body that plans for the New York-New Jersey-Connecticut region, it will have the infrastructure of a third-world country within a few decades. Economic growth will be constricted, and the quality of life will be diminished.

If consequences of the United States’ foreign policy came home to roost on September 11, 2001, the costs of empire close for a kill. By some measures, the U.S. spends more than the entire rest of the world on its military. This money does not exist, except as debt. Further, the spending and the policies, instead of securing U.S. access to oil, have further jeopardized it, adding to inflationary pressures as the cost of transportation adds to the cost of everything else, so much so that jobs may return to the U.S.

“It’s not just about labor costs anymore,” says [economist Jeff] Rubin. “Distance costs money, and when you have to shift iron ore from Brazil to China and then ship it back to Pittsburgh, Pittsburgh is looking pretty good at 40 bucks an hour.”

But when Barclays worries about inflation, the bank partly worries about “a wage-spiral.” I can’t say I know how this plays out. But contradictions are apparent.

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