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We are in trouble. Have been for a while. Maybe more people are finally noticing.
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:
"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 su ion.
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 e 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 quan y 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.
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 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
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.
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...
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