Archive for the ‘Inflation’ Category

Theater of the Absurd

Monday, June 20th, 2016

Vladimir: “Well? What do we do?”

Estragon: “Don’t let’s do anything. It’s safer.”

From “Waiting for Godot” 

In Waiting for Godot, two men spend more than an hour talking nonsense and it’s called Theater of the Absurd.

After last week’s Federal Open Market Committee (FOMC) meeting, Fed Chair Janet Yellen spent an hour talking nonsense and it was called a press conference. But, really, it could be argued that the Fed is at least as absurd as anything in Waiting for Godot. Much of the dialogue in Godot could, in fact, have come from the FOMC.  For example …

Vladimir: “I don’t understand.”

Estragon: “Use your intelligence, can’t you?”

Vladimir uses his intelligence.

Vladimir: (finally) “I remain in the dark.”

Janet Yellen: “Although the unemployment rate has declined, job gains have diminished.”talawa waiting godot

Estragon: “I can’t go on like this.”

Vladimir: “That’s what you think.”

The FOMC has continued ZIRP (zero interest rate policy) for 90 months. Estragon and Valdimir waited for Godot for only a couple of days.  (more…)

Inflation: The Fed’s Red Herring

Monday, May 23rd, 2016

If you wanted to boost economic growth, which of the following would you focus on?

  • U.S. corporate taxes, which are the world’s highest and are driving businesses to relocate abroad
  • A regulatory environment in which new regulations are being issued at a record pace; for 2015, the Federal Register contained a record 81,611 pages of new regulations
  • Record government debt, which now exceeds $19 trillion
  • Falling household income, with wages down an average of 5.9% since 2007
  • Corporate profits, which fell 5.1% in 2015
  • Low productivity growth, with the average growth rate less than a third of what it was during the previous period of 1995 to 2010
  • The fact that, for the first time ever, more companies are failing in the U.S. than are launching
  • The fact that, with a dearth of initial public offerings, there are half as many public companies as there were in the 1990s
  • Low inflation

    Regulations have been the one growth industry during the Obama Administration. Above is a copy of new federal regulations for 2015. 

    Regulations have been the one growth industry during the Obama Administration. Above is a copy of new federal regulations for 2015. 

If you picked low inflation, congratulations. There is a place for you on the Federal Reserve Board.

The Fed’s focus on inflation is a result of its mandate to reduce or stabilize the unemployment rate and the rate of inflation. But its seeming obsession with a 2% rate of inflation is nonsensical. As we’ve pointed out, 2% appears to be an arbitrary number. Will the economy function better if the inflation rate is 2% instead of 2.5%? Why not 1.5%? (more…)

Set. Down. No Hike.

Monday, March 21st, 2016

The economic outlook can be summed up in five words: Everything’s great, except what isn’t.

We’ll lead with the “everything’s great” part, as seen through the filter of the Federal Reserve Board.  As Fed Chair Janet Yellen reminds us after every meeting, the Fed has two goals—lowering the unemployment rate and stabilizing prices.

The Fed’s target unemployment rate is 4.7% to 5.8% and, if you believe the U.S. Bureau of Labor Statistics (see below re: why you shouldn’t), the Fed has accomplished that goal, as the current rate is at an eight-year low of 4.9%.  The Fed’s target inflation rate is 2% and, depending on how you measure inflation, it’s close to that number.Stock Prices

“The Fed’s preferred measure, the personal consumption expenditures price index, rose 1.3% in January from the previous year, and so-called core inflation—which excludes volatile food and energy prices—was 1.7%,” The Wall Street Journal reported. “The consumer-price index rose 1% in February from a year earlier, but core CPI was up 2.3% for the year, the largest 12-month increase since May 2012.”

So the Fed could have logically declared its mission accomplished and begun to gradually increase interest rates, as was expected after December’s initial miniscule rate increase.  So why was the vote at last wek’s meeting 10-1 against a rate hike? (more…)

Hard Landing

Monday, February 1st, 2016

The Federal Reserve Board’s Open Market Committee met last week for the first time since raising interest rates in December and then published its usual policy statement full of mush.

It could have been written by Russia’s politburo.  It’s loaded with statements like this one: “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

In other words, if we’re not already in a recession, we’re pretty close to one, so the Fed is not going to raise rates to normal levels anytime soon. 20160128_policyerror_0

We’ll spare you the rest of the policy statement, which can be summed up as follows: “Blah, blah, blah.”  If the Fed were being honest, here’s what the latest policy statement would have said:

Well, that was a disaster.

We’ve been hearing for years that it was time to raise interest rates.  Virtually every economist on the planet, not to mention all of the journalists who think they understand the economy, had been predicting that the Fed would raise interest rates in December.  (more…)

The Big Disconnect

Monday, December 7th, 2015

Imagine being stuck in a blizzard.  You look out your window and can see the snow piling up outside, yet the meteorologist on your TV is forecasting continuing sunshine and near tropical weather.

That level of disconnect is similar to that shown by some members of the Federal Reserve Board, who are preparing for liftoff, even as the economy implodes like a SpaceX rocket. The difference, though, is that the SpaceX failure was an unmanned flight; when the Fed acts, we’re all on board, like it or not.Fed Meteorologist

We recently reported that a couple of members of the Federal Open Market Committee had spoken publicly in favor of a rate hike. But this past week, they were no longer the outliers, as even Fed Chair Janet Yellen joined in during a speech before the Economic Club of Washington.

USA Today reported, “Federal Reserve Chair Janet Yellen signaled Wednesday that the Fed is all but certain to raise interest rates this month for the first time in nearly a decade, saying that gains in the economy and labor market have met the central bank’s goals.”

If you read on, though, that’s not quite what she said.  Given that inflation is nowhere near the Fed’s 2% goal, she couldn’t say that the central bank’s goals have been met. (more…)

Brady Plot Puts U.S. Economy on Verge of Deflation

Monday, May 11th, 2015

The Federal Reserve Board – which may be the smartest deliberative body on the face of this earth – bought more than $3.5 trillion in bonds in an effort to raise the inflation rate to 2%.

It failed.  In fact, the inflation rate is lower now than it was before the bond buying began.RED CARPET AT THE MET COSTUME INSTITUTE GALA 2011

Why that is so now seems pretty obvious.  It’s Tom Brady’s fault.  We don’t know that for a fact, of course.  How can we prove it?  But, as attorney Tom Wells might put it, it’s “more probable than not.”

The hunky quarterback of The New England Patriots likely involved his wife, former supermodel Gisele Bündchen, since she’s retired now and has nothing better to do.

To again borrow the words of Wells, Brady was “at least generally aware” of the Federal Reserve Board’s attempts to increase the rate of inflation to 2% … and so he set out to thwart that attempt.  (We’re not sure how being “generally aware” differs from being “aware,” or why it needs to be modified by “at least,” but it sounds pretty ominous.)

(more…)

Bazooka or Blunderbuss?

Monday, March 16th, 2015

Any day now, it seems that European Central Bank President Mario Draghi’s full head of hair will migrate to his chin and turn gray, as the central banker morphs into former Fed Chair Ben Bernanke.Bazooka 2

Last week, the ECB began its purchase of €60 billion ($64.2 billion) a month in Eurozone government bonds, with total purchases expected to eventually exceed €1 trillion.

He’s called the purchase his “big bazooka,” but it could turn out to be a blunderbuss, an antiquated weapon that’s prone to misfiring.

(more…)

The Inflation Straw Man

Monday, March 2nd, 2015

 “When real interest rates start to move up, that’s when the crisis could hit.”

                                                  Alan Greenspan

So the Federal Reserve Board spent six years and boosted its bond portfolio to $4 trillion in an effort to boost the rate of inflation to 2%.

How did that go?  Not so well.

This week, the U.S. Bureau of Labor Statistics (BLS) reported that the Consumer Price Index for All Urban Consumers (CPI-U) declined 0.7% in January on a seasonally adjusted basis.  It was the third consecutive month of decline; over the past year, the “all-items index” decreased 0.1% before seasonal adjustment. CPI

In other words, the U.S. has joined Europe and is in deflation mode.  It’s the first time the CPI hit negative territory for the year since the beginning of the financial crisis in 2009.  Imagine how low prices would be if the Fed didn’t buy all those bonds!

That dropping oil prices caused U.S. deflation underscores the foolishness of the Fed fantasy about a 2% inflation rate.

As David Stockman’s Contra Corner put it, “the CPI measure of inflation is so distorted by imputations, geometric means, hedonic adjustments and numerous other artifices, that targeting to 2% versus 1% or even a zero rate of short-term measured consumer price inflation is a completely arbitrary, unreliable and unachievable undertaking. Yet, (Fed Chair Janet) Yellen’s latest exercise in monetary pettifoggery is apparently driven by just that purpose … ”

(more…)

It “Eats Societies Alive”

Monday, January 5th, 2015

“Oh, no!” you’ve probably been thinking.  “The cost of filling my gas tank dropped again!”

Falling prices are a good thing for the cash-strapped American consumer, whose income on-average has fallen to where it was in 1994, as we’ve reported.  But behind every silver lining, there’s a black cloud and leave it to us to find it. Deflation

Deflation is typically a sign that all is not well with the economy.  Prices drop when the economy is so weak that consumer demand drops.  When prices drop, profits decrease, stock prices drop, and unemployment and bankruptcies increase.  Consumers put off purchases and wait for prices to fall further, which contributes to even further deflation.  Deflation was an issue during the Great Depression and every period of deflation has been accompanied by a recession.

Raúl Ilargi Meijer of The Automatic Earth says deflation “eats societies alive,” explaining that “Deflation is not lower prices. Deflation is people not spending, then stores lowering their prices because nobody’s buying, then companies firing their employees, and then going broke. Rinse and repeat. Less spending leads to lower prices leads to more unemployment leads to less spending power.”

(more…)

Inflation Is Too Low? Tell That To American Consumers.

Monday, December 8th, 2014

We’ve explained in the past how the federal government puts a yellow smiley face on its unemployment figures by excluding Americans who have given up looking for work and including part-time workers as if they are fully employed.

Similarly, the Congressional Budget Office estimates the cost of a tax increase or tax reduction under the assumption that the increase will have no impact on taxpayer behavior – so tax cuts have no economic benefit and tax increases produce revenue without harming the economy.CPI

So we shouldn’t be surprised that the Consumer Price Index (CPI), which measures inflation, rigs the numbers by excluding increases in the cost of food and energy.

The Federal Reserve Board’s $3.5 trillion in bond buying failed to boost inflation to the target rate of 2%, but the Fed could have accomplished its goal without buying a single bond.  All it had to do was change the method used for calculating CPI.

(more…)