Double dip? More deflation first?

Mar 30, 2010

Disinflation Continues...

Despite all the worries about inflation, the latest release of the Dallas Fed's Trimmed mean PCE inflation calculations (a measure of the core rate of inflation) indicates that inflation is still headed downward:

http://economistsview.typepad.com/.a...ec42970b-500wi
[click to enlarge]

"The trimmed mean PCE inflation rate is an alternative measure of core inflation in the price index for Personal Consumption Expenditures"

Here are the recent data for the 12-month inflation rate (3/29 release):

12-month Mar-09 2.26 Apr-09 2.24 May-09 2.08 Jun-09 1.94 Jul-09 1.66 Aug-09 1.60 Sep-09 1.45 Oct-09 1.51 Nov-09 1.40 Dec-09 1.37 Jan-10 1.18 Feb-10 1.04


Posted by Mark Thoma on Tuesday, March 30, 2010 at 12:51 AM

We are in trouble. Have been for a while. Maybe more people are finally noticing.

the inflation is in the stock market.

Prices don't go up until the last people in the country touch the dollar.

Deflation on the prowl as Bernanke shuts down his printing press

The most audacious monetary experiment in modern history ended on April Fools' Day. America must walk without crutches, on gangrenous legs.



By Ambrose Evans-Pritchard
Published: 6:35PM BST 04 Apr 2010
The US Federal Reserve has completed its purchase of $1.7 trillion (£1.1bn) of mortgage securities, agency debt and US Treasuries, the conjuring trick of "credit easing" that allowed Ben Bernanke to create stimulus equal to 12pc of GDP.

The Fed's money creation has been more or less the size of Washington's borrowing needs for the last year, as Beijing notes with suspicion.
We will never know whether it was wise to go nuclear. My view – anathema to readers, I fear – is that Ben Bernanke and Britain's Mervyn King saved us from potential calamity. We were all too close to the tipping point illustrated in Irving Fisher's Debt Deflation Causes of Great Depressions, the moment when the sailing ship catches water and capsizes instead of righting itself by natural rhythm.

Work by Berkeley Professor Barry Eichengreen shows that global trade, industrial output, and stock markets all crashed at a faster rate over the six terrifying months after the Lehman crisis than during the early 1930s. How quickly we forget, and how easily we are seduced by a 76pc stock rally into thinking it was a storm in a teacup. Just wait until the day fiscal retribution comes.

The $1.7 trillion created out of nothing will vanish as the bonds are sold on the open market. Not too quickly, let us hope. Easy money must cushion the blow of spending cuts. Even talk of ending QE amounts to tightening. While the US economy has begun to create jobs again – plus 114,000 in March, stripping out short-term census workers – there were false dawns in 2002 and 1982. The broader U6 jobless rate nudged up to 16.9pc.

Bond vigilantes ask who will step into the Fed's shoes to soak up the flood of debt from Washington, whether from the Obama Treasury or from Fannie Mae and Freddie Mac – the mortgage giants on death row.

Yields on 10-year Treasuries have jumped 30 basis points in two weeks to 3.94pc. Alan Greenspan called it "the canary in the mine" for US sovereign debt.

The yield spike is happening even though core inflation (trimmed mean PCE) has been dropping like a stone, touching a record low of 1.04pc in February. The Fed's Monetary Multiplier is languishing at 0.815, a flat tire.

The basic 30-year fixed mortgage has risen to 5.08pc from 4.71pc in December. The US housing market looks too sickly to withstand this. New home sales have fallen for four months in a row, dropping to a half-century low in February. The inventory of unsold homes has jumped to 8.6 months supply. Some 24pc of mortgages are in negative equity.

Mr Bernanke is taking the fateful decision to knock away the props of the mortgage market even though the M3 broad money supply has been contracting at an epic pace of 6pc since September. If M3 gives early warning of six to 12 months, beware.

Mr Bernanke does not look at M3, disdaining such monetarist eccentricities as medieval sorcery. The M3 signal has certainly been erratic over the years. It can be distorted by portfolio shifts. But the refusal to even look at it has been the root of much trouble over the past four years.

Had Mr Bernanke paid attention, he would have seen the need to pop the credit bubble earlier. He would also have avoided his catastrophic error in the early summer of 2008. Robert Hetzel, chief economist at the Richmond Fed, writes in Monetary Policy In The 2008-2009 Recession that central banks themselves triggered the crisis by failing to cut rates fast enough as the economy tanked from March to July 2008.

Cast your mind back to that moment. Rates had already been slashed from 5.25pc to 2pc. Oil and copper prices were rocketing. Inflacionistas were screaming, accusing the Fed of 1970s debauchery and some Fed hawks seemed to agree.

Dr Hetzel said the Fed "effectively tightened" policy in June 2008 by tough talk that led the futures market to price in a half-point rate rise by September 2008. Evidence that the growth rate of broad money had long been plummeting was ignored.

The European Central Bank went further, raising rates in July even though the eurozone was already deep in recession. We know what happened. Lehman, AIG, Fannie and Freddie fell apart in September. The wheels came off the world's financial system.

My fear is that the Fed will repeat the mistake – in this case by reversing QE too soon. The problem is Mr Bernanke's ideological doctrine of "creditism".

Is the Fed chairman worshipping a false religion? Was Milton Friedman right in arguing that the quantity of (broad) money is what is what matters most, not the credit mechanism?

Upon this abstruse doctrinal point will depend – perhaps – whether the Atlantic economies rise above stall speed or lurch into a double-dip recession.

Well, continued disinflation is not the same as a double-dip recession, necessarily. (could be but doesn't have to be). It is possible to have positive economic growth and have lowering inflation at the same time, but it needs to be put in perspective in this instance.

Since the fed is keeping interest rates sooo low for sooo long, there is little pressure on prices from that aspect (and it is an important aspect). Plus, the fact that the recovery that is occurring is doing so without much in the way of jobs being added means that there is little pressure on wages going up. In fact, the primary source of inlationary pressure in this environment would have to be from fuel prices and they ARE going up, but without housing prices increasing or borrowing costs increasing significantly, the overall price index is not under much pressure.

We are still recovering from such an economic meltdown that the economic indicators can show big growth partly because the numbers were so negative before. (In other words, it is all relative)

Since so many people are out of work, it is a good thing that inflation is not YET out of control. But I think most of us fear that it is only a matter of time. I think that the stock market is primed for a correction in the relatively near future ( next 6 months), because it has gone up so fast in anticipation of the improved earnings that companies are reporting.

The federal debt HAS to put pressure on interest charges within the next 4 years (at the outset), and that is when I think we will face another recession.

WH, your second big post was up while I was composing that little thing above. Sorry for redundancy or for speaking out of turn. I hope Bernanke know what he is doing. I'm not positive that he does.

The continuing crash in real estate and the jitters in the bond markets have me a little spooked. I'm not at all sure we've turned the corner on the liquidity trap.

Quote:

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Originally Posted by Winehole23

The continuing crash in real estate and the jitters in the bond markets have me a little spooked.

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Did you stop being spooked for awhile?

Since fall of 2008? Nope.

Pretty scary numbers coming out

the real unemployment is like a little over 10 by now

and the numbers released for available credit to consumers are suggestive of nothing close to a recovery


its going to be a rough ride

Bernanke highlights US housing and job market weakness

http://news.bbc.co.uk/2/hi/business/8608313.stm

Meanwhile, Wall St skates free to destroy again.

The spineless Dems and corrupt Repugs won't regulate.

Greenspan says nobody could have seen it coming, ain't his fault, anyway.

Like dubya said nobody could have know there were no WMD, ain't his fault, anyway.

They lie like turds in toilet bowl, because as members of the oligarchy, they know they will never be held responsible, not accountable for any of the shit they visited on the non-oligarchy.

greenspan is a vintage lying jew fed chairman

disgusting

i love it that he seems to care enough to try to defend himself at length though

Example: the expenditure method:

GDP = private consumption + gross investment + government spending + (exports − imports), or

http://upload.wikimedia.org/math/d/f...e658bc1728.png

Remember that big bad goverment spending adds to GDP. As we scale back stimulus we will see a contraction of GDP, if the scaling back of that stimulus is faster than the underlying economic growth.

Also remember that the stimulus spending isn't currently dragging the economy, because it is being funded through borrowing. Since the risk-free rate has been so low, the borrowing we have been doing has been prety bargain basement except, alarmingly, a few recent auctions where interest rates demanded by investors was above the risk free rate.

The "market" in general is beginning to worry about the amount of borrowing being done by the US Gov't. This has manifested itself around the edges here and there, and we are still well within what the market considers acceptable, but we should seriously consider the effects of borrowing much more.

Also for those who aren't familiar with the equation, the "investments" term means investments in new productive means, such as new stores, new factories, etc, and not specifically what most people would term investments. If you "invest" in an existing share of stock, that does not add to the GDP.

I remember hearing a little sniglet on NPR about Fed rates in which it was noted that the equations the Fed uses to determine roughly what the Fed rate should be indicated that the Fed rate should actually be NEGATIVE, i.e. that the person making a loan would PAY the borrower, not the other way around.

Obviously that won't happen, but don't expect the Fed rate to budge for the forseeable future.

Can you show me tangible evidence that shows the market worrying about US borrowing.

http://www.bloomberg.com/apps/news?p...d=a0a8xAghPS8I

http://online.wsj.com/article/SB1000...atestheadlines

Who controls the majority of U.S. debt? - hint, it ain't China..

Just guessing, Japan?

Is there a point in there somewhere?

No - intergovernmental agencies - over 5.8 trillion.....

I guess my point is that the majority of U.S. debt is owned by the Social Security trust fund...not by any foreign power.....that money fluctuates greatly from year to year...

Is that supposed to put me at ease?

...so it's money we own ourselves, future obligations, and we're earning interest on it...

...just disproving the disinformation that China or other foreign powers control a majority of U.S. debt, that is simply not true...

I guess someone forgot to tell the bond vigilantes and people who trade sovereign default swaps.

Quote:

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Originally Posted by Nbadan

...so it's money we own ourselves, future obligations, and we're earning interest on it...

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If this is true, then the solution to all our problems is to lend ourselves even more money, right?

The more we "lend" ourselves, the more interest we "make" off of ourselves, right?

Sounds crazy right? But if we are earning 1 trillion dollars in interest then wouldn't that pay for yearly expected obligations for decades after the SS trust fund goes negative? ...and that won't be for decades..

Sounds pretty crazy, Dan.

Quote:

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Originally Posted by Nbadan

...so it's money we own ourselves, future obligations, and we're earning interest on it...

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That would be all nice and peachy if we didn't have to go borrow money from someone else so that we can pay ourselves interest.

Quote:

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Originally Posted by Nbadan

Sounds crazy right? But if we are earning 1 trillion dollars in interest then wouldn't that pay for yearly expected obligations for decades after the SS trust fund goes negative? ...and that won't be for decades..

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Why don't you quit your job and see how long you can sustain yourself by loaning yourself money?

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Originally Posted by Winehole23

Sounds pretty crazy, Dan.

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It's absurd. If it were possible to make money by loaning it to yourself, none of us would be working.

I hoped understating my objection would lead to a fuller explanation of how the interest we pay to service our debt gets converted into "income". Dan was either acting like he'd discovered the Philosopher's Stone, or he just thinks we're pathetic idiots. I actually hope it was the latter.

Quote:

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Originally Posted by coyotes_geek

It's absurd. If it were possible to make money by loaning it to yourself, none of us would be working.

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We don't own 6 trillion dollars but if we did we could live very comfortably just off the interest...that's 300-400 thousand dollars in interest, a majority of the interest paid on the debt, minus net interest...

Quote:

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Originally Posted by Nbadan

We don't own 6 trillion dollars but if we did we could live very comfortably just off the interest...that's 300-400 thousand dollars in interest, a majority of the interest paid on the debt, minus net interest...

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Like I said, I encourage you to quit your job and try this concept out for yourself. Quit your job, loan yourself all your money, spend it, agree to pay yourself back at whatever interest rate provides you the income to meet your desired standard of living and get back to us as to how long that concept works for you.

Quote:

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Originally Posted by coyotes_geek

Like I said, I encourage you to quit your job and try this concept out for yourself. Quit your job, loan yourself all your money, spend it, agree to pay yourself back at whatever interest rate provides you the income to meet your desired standard of living and get back to us as to how long that concept works for you.

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:lmao

Quote:

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Originally Posted by coyotes_geek

loan yourself all your money, spend it, agree to pay yourself back at whatever interest rate provides you the income to meet your desired standard of living and get back to us as to how long that concept works for you.

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To be fair, that plan worked wonderfully for bank executives :)

Ouch.

Quote:

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Originally Posted by LnGrrrR

To be fair, that plan worked wonderfully for bank executives :)

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It worked wonderfully until it didn't.

Quote:

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Originally Posted by coyotes_geek

It worked wonderfully until it didn't.

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How many bank execs have had to give up all those bonuses they granted themselves for running our economy into the ground?

I'm still torn between two outcomes:

1) People running the banks were stupid enough to think they could reduce risk with magical equations

2) People running the banks knew/gamlbed that the government wouldn't let every bank fail, and so pocketed as much cash as they could milking stupid customers

The goal is to eventually pay off most of the debt, don't get me wrong, but lets not act like a lot of that interest we are paying toward the national debt isn't just going to ourselves...

Let's not act like our other creditors don't really matter either.

....our whole banking system is founded on debt, collateral, and promises to pay, that's our monetary system, all the credibility of the U.S...

Quote:

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Originally Posted by Winehole23

Let's not act like our other creditors don't really matter either.

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Like I said, the eventual goal is to pay down the debt...

Quote:

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Originally Posted by Nbadan

....our whole banking system is founded on debt, collateral, and promises to pay, that's our monetary system, all the credibility of the U.S...

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Sure. But that doesn't mean we have to overdo, or that overdoing is risk-free. Hyper-indebtedness compromises the value of the promise to pay at some point.

IDK....there seems to be few bounds to the amount of debt creditors are willing to take on.....the U.S. was in a time of real crisis and creditors were still willing to lend the U.S. money for nothing.......that's akin to filing for bankruptcy and still getting a credit card at 2% interest, below inflation..

This idea that fiscal prudence doesn't apply to the USA is dangerous. In fact, I can hardly conceive an idea more dangerous to our future prosperity. Can't you see the intrinsic link to fiscal deficits and borrow and spend conservatism?

I hardly expected such "deficits don't matter" rhetoric from you....

It' not 'deficit don't matter' rhetoric, as I've said, the idea is to pay down the debt considerably, but for now that debt, whether its used by the govt or private business generates wealth and spending.....the markets are concerned about the debt, but they would be much less concerned if the U.S. had a unemployment rate at about 5%, and a growing economy generating more than $3+ trillion/year in taxes...

Quote:

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Originally Posted by Nbadan

The goal is to eventually pay off most of the debt, don't get me wrong, but lets not act like a lot of that interest we are paying toward the national debt isn't just going to ourselves...

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It's completely irrelevant. Whatever interest income social security gets from their loans to the treasury is money that the treasury either has to tax away from the people or borrow from someone else. We're not coming out ahead on the transaction.

Quote:

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Originally Posted by coyotes_geek

It's completely irrelevant. Whatever interest income social security gets from their loans to the treasury is money that the treasury either has to tax away from the people or borrow from someone else. We're not coming out ahead on the transaction.

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Exactly, this "gold mine" of interest is being paid for. Who's paying it?

Duh.

Quote:

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Originally Posted by coyotes_geek

It's completely irrelevant. Whatever interest income social security gets from their loans to the treasury is money that the treasury either has to tax away from the people or borrow from someone else. We're not coming out ahead on the transaction.

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It's not like tax money just sits in Washington, even the money that is wasted is still spent, that is generating income and wealth...it's much more likely that big business ships its foreign income to banks in the Caribbean to avoid U.S. taxes, and guess what these foreign banks do with their money? Lend it to the U.S. treasury...

Quote:

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Originally Posted by Nbadan

the markets are concerned about the debt, but they would be much less concerned if the U.S. had a unemployment rate at about 5%, and a growing economy generating more than $3+ trillion/year in taxes...

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Just curious, how long do you think it will take us to get back to 5% unemployment?

Quote:

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Originally Posted by Nbadan

It's not like tax money just sits in Washington, even the money that is wasted is still spent, that is generating income and wealth...it's much more likely that big business ships its foreign income to banks in the Caribbean to avoid U.S. taxes, and guess what these foreign banks do with their money? Lend it to the U.S. treasury...

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If you really believed this, then you'd be praising Bush for Iraq and his deficits. Who cares if it was a waste? It was still money being spent generating income and wealth. Right?

At least a Decade, but it depends on what you believe the true number of jobs lost during the Bush recession really are...the recession was severe but also very regional, for instance in Texas the worst effect was slow to no home appreciation, and lose of available credit...most people who wanted a job could find one..

Quote:

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Originally Posted by coyotes_geek

If you really believed this, then you'd be praising Bush for Iraq and his deficits. Who cares if it was a waste? It was still money being spent generating income and wealth. Right?

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I just question whether all the blood shed and death was worth it, remember we'll be paying for those 20K disabled soldiers for the rest of our lives, and that's on top of the trillions we've spent on weapons, and military hardware...

Quote:

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Originally Posted by Nbadan

I just question whether all the blood shed and death was worth it, remember we'll be paying for those 20K disabled soldiers for the rest of our lives, and that's on top of the trillions we've spent on weapons, and military hardware...

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Just think of all the tax revenue generated from the trillions spent on weapons and military hardware. Certainly we're coming out ahead.

Quote:

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Originally Posted by coyotes_geek

Just think of all the tax revenue generated from the trillions spent on weapons and military hardware. Certainly we're coming out ahead.

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Good point, but seriously, those weapons destroy wealth and create new obligations....

Quote:

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Originally Posted by Nbadan

Good point, but seriously, those weapons destroy wealth and create new obligations....

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Nothing that another loan to ourselves can't fix.............

Quote:

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Originally Posted by coyotes_geek

Nothing that another loan to ourselves can't fix.............

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Now you got it!

Quote:

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Originally Posted by Nbadan

...so it's money we own ourselves, future obligations, and we're earning interest on it...

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Are you sure about that, or is it interest free?

Funny how all the profits the Postal Service taken by congress isn't being paid back when they need it. Instead, they complain about the Postal Service losing money!