Commentaries
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Reasons to be cheerful
By John M. Berry
John M. Berry, who has covered the economy for four decades for the Washington Post and other publications, is a guest columnist.
Doing more with less is a corporate mantra that some say bodes ill for job growth. Data last week showed that productivity at non-farm business jumped at an extraordinary 9.5 percent annual rate in the third quarter.
Yet the sharp gains in efficiency are helping drive corporate profits and that could be just what’s needed to convince employers that it’s safe to begin hiring again. (more…)
Now you can get inflation protection for the (super) long haul
Treasury announced that it’s tweaking its TIPs program so investors can get inflation protection for 30 years rather than 20 years. It will certainly make break-even calculations much easier since the government doesn’t sell regular run-of-the-mill Treasurys with 20-year maturities.
The first batch of 30-year TIPS will be sold in February, while the 20-year variety will be discontinued immediately.
Playing politics with Social Security
By John M. Berry
The White House’s knee-jerk reaction to the news that inflation was so low that Social Security beneficiaries won’t get a cost-of-living increase next year was a seriously bad omen for long-term control of federal spending.
The problem wasn’t the $13 billion cost of another one-time $250 payment to each retiree proposed by President Barack Obama. No, it was the utter disregard of the discipline inherent in indexing payments to changes in consumer prices.
Benefits were indexed in the 1970s precisely to stop politicians eager to curry political favor by providing large benefit increases on an ad hoc basis.
Shoveling out more checks to an important group of voters when the economy is as depressed as it is now would be a popular thing to do. Plenty of Democrats — as well as many of the Republicans who have been clamoring about soaring budget deficits — quickly endorsed the $250 payment even though prices weren’t just flat, they fell by 2 percent. (more…)
the other missing ingredient in the formula for figuring out inflation for these people, is that they more then any other group is impacted by the increasing costs of medical care and prescription drugs. that was the argument in favor of this, to offset that portion of inflationary increase.
Kohn on V-shapes, housing, inflation and a whole lot more
Donald Kohn, the Fed’s number 2, has a lot to say about the economic outlook but not a whole lot new in terms of when the central bank will reverse course on its extraordinary easy monetary policy. Full speech at the National Association for Business Economics in St. Louis can be found here.
Some choice bits:
I don’t think a V-shaped recovery is the most likely outcome this time around.
I’m not sure the stock market and credit markets agree, but they might come around to his way of thinking eventually.
The demand for U.S. exports has been increasing lately after falling sharply in the first half of the year. However, with the firming of domestic demand, imports have also begun to increase, and, on net, the external sector appears to be a roughly neutral influence on overall economic activity at present.
There’s been lots of talk about a weak dollar feeding an export-led recovery, but it doesn’t look like it’s weak enough just yet.
And here’s my favorite on the recovery in the housing market. Emphasis mine.
Can Kohn say “credit deflation”. Fed members are almost always optimistic, but Donald Kohn sounds like a big cuddly grizzly bear to me. They have all the facts, this green shoots talk is starting to smell.
We’re all doomed, part 94
If you really want to spook yourself, try this. The sweep of history, courtesy of Dylan Grice of SocGen (he starts with 3rd Century Rome) shows that all fiat money eventually collapses under the weight of its internal contradictions, as politicians struggle to meet promises made under more benign circumstances.
There are some really spooky charts here, showing the real level of government liabilities (rather than merely the actual borrowing) and none of the Western countries looks remotely solvent. Oddly enough Spain comes out best – or least worst – with liabilities totalling a mere 250 percent of GDP. The US is joint worst with 550 percent.
Grice comes up with even scarier figures when he calculates the income/liability ratios, which effectively show that Europe and the US have no hope of returning to long-term fiscal stability.
Alas, he gives us no idea of how to protect ourselves from the consequence of fiscal incontinence. Perhaps that’s in his next piece of research. I’ll let you know.
None of this had to happen and it was not the inevitable conclusion of social security and medicare. Had the gov properly invested (or even just saved) the social security taxes each year, the system would be functioning fine. Congress just couldn’t resist spending the money. Imagine if you put away money for retirement by writing a postdated check and then spending the money! That is exactly what congress did.
Gold’s run impressively up
All the goldbug fever, not withstanding today’s pullback in the yellow metal’s price, got me thinking about just how well has gold stacked up against say stocks and oil over the longer term. I picked 2004 as a starting point for no other reason than it gives enough distance from the mania of the credit bubble and the distortion of its popping.
Gold’s trajectory is pretty impressive. Now whether you think that means it’s bubble that never fully burst or whether it’s indicating a longer term trend in which enough investors want a hedge against inflation further down the line is another matter. But, since 2004, it’s been mostly up.
Check it out.
Gold
Oil
Good points. I suppose these 3 graphics pulls together 3 important/basic economic drivers:
1. A metal that somehow provides emotional and industrial security;
2. Oil drives so many things;
3. The Dow Industrial discounts producer market forces.
I had a thought last night and tested it on some friends: if we take each graph and fit a logarithm on it, we will get 3 different curves. If these are then combined into one log graph, it could become interesting. My gut feel is that the composite graph will flat line or even slope downwards. The latter won’t be good.
Who’s afraid of deflation?
For most policymakers, deflation is the stuff of nightmares — scarier even than bank failures and stock market collapses. As the economy stumbled, deflation became Lords Voldemort and Sauron rolled into one.
In recent months, however, this economic supervillain seems to have lost its power to intimidate.
With growth reviving, many economists now believe that deflation is highly unlikely to materialize.
Another group suggests that deflation is not nearly as nefarious as often portrayed. Since falling prices are not generally associated with depression, we were wrong to be frightened in the first place.
Sadly, both of these reassuring premises are wrong. We should still be afraid of deflation.
First, the notion that deflation is a misunderstood and potentially benevolent economic force is only partially true. Supporters of this theory often cite research from the Federal Reserve Bank of Minneapolis, which showed that falling prices seldom coincide with depression.
Looking at data for 17 countries over more than a century, the Minneapolis Fed concluded that “nearly 90 percent of the episodes with deflation did not have depression.”
You say deflation – but have you paid your real estate taxes lately, or may be you happen to pay admission to mary-go-round in a local park?
In my experience, everything that is not goods – taxes, admissions, surcharges, co-payments go up.
Here, in tri-state, rents are not falling either.
How does this not constitute inflation – if about 80% of my expenses are not goods, I can not understand.
May be Mr Swann will explain?
from Rolfe Winkler:
Fed walks the tightrope
(Cartoon from The Economist, click to enlarge)
NEW YORK, July 29 (Reuters) – The sound money set remains concerned that the Federal Reserve’s emergency actions to corral collapse could ignite hyperinflation. In particular, they point to the explosion of excess reserves inside the banking system, which they call dry tinder just waiting for the spark of recovery. Bill Dudley, president of the Federal Reserve Bank of New York, says this isn’t an issue because the Fed now pays interest on excess reserves. It's a good argument, but only in the short run.
To liquefy the banking system, the Fed drastically expanded its balance sheet, which, as you can see in the chart to the right, has led to an explosion of excess reserves at banks.
(Click chart to enlarge in new window)
For decades they never rose above $10 billion. Now they’re above $700 billion. To understand why this level of excess reserves has some worried about hyperinflation, it helps to understand what they are.
Andrew – I am far from the ledge. Comfortably in a deck chair a long way from 20% uneployment. I agree creative destruction and the incredible ability of the US to reinvent itself will eventually ensure a return to a new normal. However you still have commercial realestate, option arms and unfunded pensions without even going into the $50 odd trillion of future promises and plummeting tax receipts. If this is not the recipe for vast amounts of money printing and more than a little concern from your Chinese bankers I cannot think what would worry you.
I disagree that it requires physical destruction of infrastructure and/or apocalyptic decimation of the workforce to ensure hyperinflation. This has never been the requirement historically. Simply watch the lack of faith in the US$ over the next two years. I do not see wheelbarrows of cash for a loaf of bread but the US$ index below 52 and a mad scramble to buy hard assets to exit the US$.
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The Wall
