The man gets some recognition....
Showing posts with label Inflation. Show all posts
Showing posts with label Inflation. Show all posts
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More bad news, if more were needed.....
As if investors didn't have enough to worry about, Friday's batch of economic numbers shows more signs of recession as well as its evil twin--inflation. First, the government reported that U.S. consumer spending rose more than expected in January, but the gain was eaten up by swiftly rising prices.
Then, a Chicago-based business group said U.S. Midwest business activity contracted sharply in February, showing that even areas of the country least affected by the boom-bust housing cycle are feeling ripples from the crisis. On top of that, U.S. consumer sentiment dropped to a 16-year low in February, hitting levels that usually sound the alarm bells of recession, on worries about declining incomes and rising unemployment, a survey showed.
No surprise, then, that stocks opened sharply lower on Friday--and then proceeded to fall even more. Friday's reports were just the latest in a string of worrisome news about the growing threat of recession and inflation.
"Over the last three to four weeks, there have been a string of economic releases that were dramatically weaker than expected," said John Canavan, a market analyst at Stone and McCarthy Associates. "The implications are quite negative for the economy."
The only bright spot: futures traders are now speculating that the Federal Reserve will cut interest rates by three-quarters of a point at its March 18 meeting instead of the half point that was expected previously.
Unfortunately, oil prices are not playing nice. The Fed would like to cut rates but inflation just will not go away.
The price of oil has hit a record high for the second day running, touching $102.08 a barrel for US sweet crude. However, the figure is still surpassed in inflation-adjusted terms by the peak of $102.53 reached in 1980, the International Energy Agency says. The oil price surge is supported by traders switching their cash out of shares and currencies and into commodities, traders say
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Why are the easiest lessons the hardest to accept. Take the relationship between money and inflation. Since the Romans, people have understood that if a government produces more money, prices rise. It is as simple as that.
Does the Fed accept this most basic of economic relationships? The chart above tracks the 12 month rate rate of the most important measure of the money stock - M2. In 1995, the Fed did understand the importance of controlling the money supply. They had managed to get monetary growth down to around 1 percent a year.
Then something happened. Collectively, the FOMC must have taken a stupid pill. The committee ordered the guys in the basement to crank up the printing presses. In 1996, the money supply started to rise very rapidly indeed.
What were the consequences of all that extra money? The US got two speculative bubbles in a row. First,there was the stock market bubble, which reached a frenzy with the dot.com fiasco. The Fed calmed things down a little in 2000, raised rates and the dot.coms bombed. Undeterred, the Fed went at it a second time. In 2001, just after 9-11, the money supply began to increase, interest rates came down, and off went the housing bubble. Today, that mess is still being cleared up.
So, two speculative bubbles in ten years; with the dollar sinking to record lows. Few central banks have such a dismal record of incompetance. The federal government did their part. Encouraged by lower interest rates, it ran up a large fiscal deficit to complement the monetary chaos over at the Fed.
So, in macroeconomic terms, where is the US right now? It has a massive current account deficit; a large fiscal deficit; rising government indebtedness; personal debt is at an all time high; the economy is slowing, while the housing market has fallen down a dark hole; and to top it all, the Fed still has the money supply growing at around 6-7 percent annually.
What is the way out of this mess? Again, it is nothing complicated. The Fed must reduce the growth of the money supply, which means higher interest rates. This will encourage private sector savings, and reduce personal sector indebtedness. Higher interest rates will also discourage the federal government from running up large deficits. This recipe may involve some upfront costs - a recession is very likely. However, continuing this macroeconomic mess will only delay a much deeper and more painful economic downturn later.
Sadly, the Fed has still not quite understood the relationship. As the chart above indicates, monetary growth is still way too fast. Although, the housing market is unwinding; the Fed have ensured that there is still plenty of inflationary pressure building up. Sooner or later, rates will have to go up again.
Consumer prices climbed 0.7 percent, the biggest increase since September 2005, led by a jump in gasoline costs. They were up 2.7 percent from the same time last year. These are bad numbers.
However, the Fed aren't looking at the CPI. Those bozos are looking at "core inflation", which excludes food and energy. These numbers show only a 0.1 percent rise in prices.
Lets get our concepts clear here; what is core inflation? It is a useless irrelevant measure that excludes all the prices that matter to ordinary Americans. It is con, a scam, a nonsense and a joke. Pay no attention to it. It tells us nothing about inflation. Do you know anyone who doesn't eat or doesn't need fuel?
Core inflation is a distraction. Rather than focus on the real issue, i.e. rising prices, the Fed tracks this meaningless index. The Fed would like us to believe that gasoline and food price increases are something that simply happen by accident and that it has nothing to do with them. Let us remind ourselves how the Fed's monetary policy directly causes the prices of these key items to increase.
So, the lesson is simple; the Fed must raise rates and keep on raising them until they regain control of inflation.
However, that is unlikely to happen because Bernanke is soft on inflation. He is weak.
Does anyone out there still think that interest rates are coming down anytime soon. Forget it, inflation is still running around out there. The latest bad news came from wholesale prices, which screamed ahead in May. The monthly increase was 0.9 percent. That is almost a full percentage point increase in just one month. A few more months like May, and the US will have something like double digit inflation.
Bernanke and the gang must have needed a toilet break when they heard about these numbers. To put it mildly, the Fed must have a few concerns about continuing inflation risks. The question is whether they have the backbone to put in anothe rate rate. The economy certainly needs one.
The bond market knows what to do, even if the Fed has lost the plot. The data sent US government bond yields back up to near five-year highs. The benchmark US Treasury 10-year bond yield rose to 5.23% after the US report was released, continuing their recent upward trend.
Today, the Wall Street Journal speculated that US interest rates might need to rise further. It seems that the current interest rates are not in "the restrictive zone". The WSJ speculate that 8 percent interest rates might be needed to push inflation below 2 percent.
In terms of the housing market, there is perhaps little that the Fed can do right now. Long term interest rates are creeping up, and killing off what little hope there was for the market stabilizing.
WALL STREET JOURNAL EUROPE
Investors are starting to worry that the U.S. Federal Reserve will have to push overnight interest rates up in order to get inflation under firm control. But how much higher than the current 5.25% will the central bank have to go? If New Zealand is any guide, something like 8% might be called for.
Many economists think that overnight interest rates are "neutral," neither inflationary nor disinflationary, when they are two to three percentage points above the inflation rate. U.S. inflation is at 2.6%, measured by the consumer-price index, so the current overnight rate would still be within the neutral range.
If the Fed starts thinking like its counterpart in New Zealand, it will want to move well into the restrictive zone. Until a few weeks ago, such extreme thinking seemed positively un-American. Investors were confident that Alan Greenspan and Ben Bernanke, his successor as Fed chairman, would manage to get inflation down without causing much financial pain.
But with inflation trends creeping upward, in Europe as well as in the U.S., it may be time to think again. The Fed's policy of keeping rates low wasn't the only reason that prices crept up. The big U.S. trade deficit and less regulated financial markets also contributed. But the central bank's complacency in the early years of the decade increasingly looks like a mistake. It may take 8% rates to reverse it.
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Living in the city can be expensive. Over the last four years, the inflation rate in America's largest cities has been significantly faster than for the US as a whole. Cumulatively, LA has experienced 3 percentage points of additional inflation relative to the rest of the country. In Chicago, the situation is even worse; the city has accumulated at least 4.5 percentage points of inflation.
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Bernanke might be talking tough on interest rates, but many investment analysists are far fron convinced. Many believe that the collapsing housing market will bring the economy down with it, pushing the US into recession by the end of the year and reducing inflationary pressure. Rather than raising interest rates, the Fed will be beginning a new cyle of monetary policy easing.
Notwithstanding what the investment bankers might be saying, inflationary pressures remain strong. In February, the Fed's preferred measure of inflation - the price index for consumer spending on items excluding food and energy - rose 0.3 percent. The price gauge rose 2.3 percent from a year earlier; significantly above the Fed's comfort level of 1 percent to 2 percent.
April 30 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke's assertion that interest rates may need to increase to curb inflation is wrong. That's what Goldman Sachs Group Inc., Merrill Lynch & Co. and UBS AG are saying.
While Bernanke warned last month that the odds of worsening inflation have increased, chief economists at the three firms say the worst housing slump in a decade may drive the U.S. economy into a recession and stifle consumer prices. Their chief economists say the Fed will cut its target for overnight loans between banks at least three times this year.
The conflict boils down to opposing views about real estate. Central bank governors found no evidence that the housing market had affected the broader economy, according to notes of their March policy meeting, released April 11. The National Association of Realtors said last week existing home sales fell 8.4 percent in March, the steepest drop since 1989.
Bernanke is missing "the linkage between residential housing investment and the broader economy," Jan Hatzius, chief U.S. economist at New York-based Goldman, the world's most profitable securities firm, said in an interview. "The housing downturn is of the first order of importance." Hatzius says the Fed will cut rates three times this year, to 4.5 percent from 5.25 percent.
The US economy is inching towards outright recession. In the first three months of 2007, growth slowed to 1.3 percent; the worst performance in four years. There are no prizes for guessing why the economy is sliding into the mud; the housing market. Just as rising house prices propelled the economy in 2005 and 2006, the lower prices are taking the economy down. Homeowners are cutting back on those discretionary expenditures that they previously financed with home equity loans.
Slower growth normally calls for an interest rate cut. However, the Fed is stuck in a hole. Inflation remains stubbornly high. In the first three months of 2007, core inflation jumped 2.2 percent, up from 1.8 percent in the fourth quarter of last year. A premature interest rate cut might make Ben Bernanke look soft on inflation. For central bankers, credibility is everything. So what is it going to be Ben? Higher inflation or recession?
"The US central bank has yet to develop an exit strategy from the multi-bubble syndrome that the Fed, in its zeal for inflation targeting, has spawned.
Moreover, as one bubble begets another, excess asset appreciation has become a substitute for income-based saving — forcing the US to import surplus saving from abroad in order to sustain economic growth.
And, of course, the only way America can attract that capital is by running a massive current-account deficit. In other words, not only has the Fed’s approach given rise to a seemingly endless string of asset bubbles, but it has also played a major role in fostering global imbalances."
From Stephen Roach, Economist at Morgan Stanley, May 23, 2006
Former Federal Reserve Chairman Alan Greenspan is again trying to spook financial markets. On Thursday, he turned his attention to the sub prime market. He declared that there was a risk that rising defaults in sub prime mortgage could spill over into other sectors. Greenspan conceded that it was "hard to find any such evidence" about spillovers from housing yet, but he added, "You can't take 10 percent out of mortgage originations without some impact." Greenspan felt that the downturn in U.S. housing markets stemmed more from high housing prices than from a decline in mortgage quality.
For a few weeks now, Greenspan has been pouring out doom and gloom about the US economy. Previously, he announced that a recession by the end of this year was possible, undermining the soothing words of his successor – Ben Bernanke – who is busy talking the US economy up. Sadly, Greenspan does appear to be right. Increasingly, US macroeconomic data is pointing towards a major slowdown in activity.
However, Greenspan is not prepared to take any responsibility for his role in the deteriorating economic prospects for the US economy. He was the Fed Chairman when interest rates were slashed to just one percent. He was in charge when housing prices soared, and sub prime lenders were prepared to borrow money to anyone who could show a beating pulse. He was the man that unleashed the inflationary beast and left it to Bernanke to tie it down with a sustained hike in interest rates.
Ultimately, Greenspan is proof that one’s reputation is really just a matter of timing; get out when things are good, and everyone thinks you are a star, but if you hang on when the ship is sinking, then everyone associates you with failure.
Hey! You've won a ride back to the top
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