Thursday, October 23, 2008

Jim Bianco: Fed acts are 'hyperinflationary'

Jim Bianco joined Bloomberg TV today to discuss the Fed's latest backstop of the financial markets, a plan to provide $540 billion in loans to money market funds.

More details on the plan from Bloomberg:

"The Federal Reserve will provide up to $540 billion in loans to help relieve pressure on money-market mutual funds beset by redemptions.

``Short-term debt markets have been under considerable strain in recent weeks'' as it got tougher for funds to meet withdrawal requests, the Fed said today in a statement in Washington. A Fed official said that about $500 billion has flowed since August out of prime money-market funds, which with other money-market mutual funds control $3.45 trillion.

The initiative is the third government effort to aid the funds, which usually provide a key source of financing for banks and companies. The exodus of investors, sparked by losses following the bankruptcy of Lehman Brothers Holdings Inc., contributed to the freezing of credit that threatens to tip the economy into a prolonged recession.

``The problem was much worse than we thought,'' Jim Bianco, president of Chicago-based Bianco Research LLC, said in a Bloomberg Television interview. Policy makers are trying to prevent ``Great Depression II'' by stemming the financial industry's contraction, he said."

Lots more to hear in the interview clip above. A quick overview:

Bianco addresses the likely effects of future stimulus packages (historically used to improve economic statistics and a "short-term fix"), the current state of mortgage lending and availability of credit in a recession, and the problem of trying to force additional lending into an economy facing problems from an earlier bout of overlending.

Jim also talks about the hyperinflationary consequences of central banks inflating their balance sheets (through bailouts and lending facilities) and expanding the global money supply. He places this problem in the context of an ongoing battle between the forces of deflation and future inflation or hyperinflation.

Despite this scary concept, Bianco says he is looking for stock and commodity markets to turnaround once things get better. At that point, says Bianco, prices could "go straight up".

Nevertheless, Jim says he is currently staying defensive (in cash) and would rather be a little late than early to the party.