Scary Stuff Steve

Steve Liesman scared the heck out of me yesterday on CNBC; even more than he usually does. It is a fact that he is indeed well connected with those who serve at the Federal Reserve and some believe he articulates many of their thoughts and ideas while on air. He was part of a panel on Monday that was discussing whether or not a little bit of inflation is good for the economy and markets.

I should sell tickets for this but in case you didn't see it, I've linked it here. Liesman espoused to "...print our way out" as one of the methods to pay off our debt. He then went on to explain to Jon Hilsenrath of The Wall St. Journal that "The tax base goes up with inflation."

But he didn't stop there. He continued in the same segment to say that we might now be in a deflationary environment. And if we are not experiencing outright deflation, that it is "certainly a disinflationary environment." The coup de grace came when Melissa Francis tried to explain to Mr. Liesman that the Fed has already printed a tremendous amount of money and created an environment where inflation could be a serious problem down the road. To that, Mr. Liesman responded, "we haven't done very much of it actually." He mercifully ended the segment by expressing his desire that the Fed should RAISE their inflation target to 3%.

Now if you will allow me to participate in the discussion. Here are some things I would have said if I were invited on that particular panel. First off, it is virtually impossible for a country to print its way out of debt. That's because interest rates spike higher, making debt service much more expensive. And concurrently, GDP falls as the middle class loses most of its purchasing power. The result is the numerator (debt) in real terms may decline nominally, but the denominator (GDP) plummets in real terms. Therefore, debt as a percentage of GDP becomes even more intractable.

Even more mendacious for Mr. Liesman was his statement that we are, without a doubt, in a disinflationary environment. How can this be if import prices are up 11.5%, wholesale inflation is up 4.6% and consumer inflation is up 2.6%; all on a year over year basis? There isn't even the slightest hint of deflation outside a small decrease in home prices YOY, which have reversed course and inched higher over the last seven months.

But the most egregious statement came when he said that the Fed hasn't printed much money. The Fed's balance sheet has grown to over $2.2 trillion as they have printed money from nothing and purchased $1.4 trillion worth of mortgage debt and $300 billion in longer dated Treasuries. The only factor that is preventing runaway inflation is banks are not lending out that money. If they were, Mr. Liesman's new target rate of 3% for inflation would have a couple of zeros after it. And if he is in fact a mirror of the Fed's mind set, we may see those rates of inflation before too long.