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Archive for February 27th, 2008

Bernanke testimony

Posted by Sada Mosler on 27th February 2008

Mercantilism is alive and well

Most telling statement when asked about what he wanted for the economy-

moderate domestic consumption, more investment, and more exports to eliminate the trade deficit.
(I’m looking for the transcript now to get the exact quotes.)

This fits with the policy of a lower interest rates, lower $, lower domestic real consumption due to higher import prices, and higher exports to sustain demand (at the ‘expense’ of the country you are exporting to who ‘loses’ demand for its products). This can be done for as long as nominal domestic wages remain ‘well anchored’ thereby reducing real wages, particularly vs our intended markets.

This is the old ‘beggar thy neighbor’ policy last seen in the 1930′s. The purpose was to accumulate the world’s gold supply, and increase ‘national savings.’ The policy was called mercantilism. It’s the logical end that follows from being on a gold standard.
A trade surplus tended to increase gold reserves, while a trade deficit tended to drain gold reserves.

Today we have non convertible currency, so government accumulation of its own currency per se is meaningless. However, we have retained some of the gold standard accounting nomenclature, such as ‘national savings’ which still features govt. accumulation of it’s own currency (as well as foreign exchange, which at least does represent value).

Fed Chairman Bernanke, the student of the great depression of the 30′s, sees the tail risk as that of gold standard deflationary collapses, and is cutting interest rates to bring the $ down and increase exports. He deems trade deficits ‘bad’ and ‘unsustainable,’ trade surpluses ‘good’ and ‘wealth enhancing,’ and increasing ‘national savings’ the mark of success.

(Mainstream economics, with all its shortcomings, does recognize the differences between convertible and non convertible currency regimes that Bernanke seems to be missing.)

Additionally Chairman Bernanke made it clear today that he sees lower futures prices for crude oil, a non perishable commodity, as indicative of market expectations for future prices, and is making decisions on that basis.

Ironically, the backwardated crude market is the result of the Saudis/Russians acting as swing producer setting price and letting quantity adjust (imperfect competition), which is functionally an engineered spot ‘shortage’ that supports price.

This brings us back to the present condition of the US economy-

Weak domestic real demand due to ‘well anchored nominal wages’ and falling real wages,

GDP muddling through with the support of booming export demand and a falling trade deficit,

And cost push inflation accelerating.


Based on today’s testimony, the FOMC seems fine with the lower $ and the associated rising costs of imports, as the weak $ supports export growth.

It will get concerned about inflation when it sees signs unit labor costs are accelerating.

Posted in Fed | 6 Comments »

2008-02-27 US Economic Releases

Posted by Sada Mosler on 27th February 2008

2008-02-27 MBAVPRCH

MBAVPRCH Index (Feb 22)

Survey n/a
Actual 358.2
Prior 357.6
Revised n/a

While still winter numbers, this is nonetheless looking very weak.

No way to tell if it’s more than loss of market share to banks, but other winter housing numbers are also weak.

2008-02-27 MBAVREFI

MBAVREFI Index (Feb 22)

Survey n/a
Actual 2458.9
Prior 3533.8
Revised n/a


2008-02-27 Durable Goods Orders

Durable Goods Orders (Jan)

Survey -4/0%
Actual -5.3%
Prior 5.2%
Revised 4.4%


2008-02-27 Durable Goods Orders

Durable Goods YoY (Jan)

Survey n/a
Actual 3.0%
Prior 4.2%
Revised n/a


2008-02-27 Durables Ex Transporation

Durables Ex Transportation (Jan)

Survey -1.4%
Actual -1.6%
Prior 2.6%
Revised 2.0%


2008-02-27 New Home Sales

New Home Sales (Jan)

Survey 600K
Actual 588K
Prior 604K
Revised 605K


2008-02-27 New Home Sales MoM

New Home Sales MoM (Jan)

Survey -0.7%
Actual -2.8%
Prior -4.7%
Revised -4.0%


 Gives less reason to think January payrolls will be reversed very much higher.

Posted in Daily | No Comments »

Two quick comments on inflation

Posted by Sada Mosler on 27th February 2008

  1. Bernanke may be reminded of the reason the dual mandate includes inflation – voters don’t like inflation even more than they don’t like unemployment.
  1. As inflation rates rises into the March 18 meeting, with the FF rate at 3% the real rate falls, which the FOMC sees as ‘easier’ policy.

    Posted in Fed, Inflation | No Comments »

    Additions to yesterday’s review

    Posted by Sada Mosler on 27th February 2008

    Forgot to include the influence of the 8,000 lb gorilla I’ve been advancing for the last few years!

    Supporting GDP

    1. Pension funds adding to allocations for passive commodity strategies

    Sources of inflation

    1. Pension funds adding to allocations for passive commodity strategies
    2. Pension funds contributing to the $ decline by allocating funds away from domestic equities to foreign equities
    3. Sovereign wealth funds allocating to passive commodity strategies

    Errors made by the Fed

    1. Failure to recognize the influence of pension funds on inflation and aggregate demand
    2. Failed to understand reserve accounting and liquidity issues
      1. Thought open market operations altered functional quantitative measures, not just interest rates
      2. Delayed implementing the TAF for several months to accept additional bank assets as collateral
      3. Failed to recognize that the liability side of Fed member banks is not an appropriate source of market discipline

    Posted in Fed, Inflation | No Comments »

    Re: update

    Posted by Sada Mosler on 27th February 2008

    Dear Philip,

    Seems there’s a break between Mishkin and Kohn that previously wasn’t there.
    Markets are thinking Kohn supports a 50 cut and that he and Bernanke are alligned.

    Today Bernanke may show whether he leans towards Mishkin, the co academic, or Kohn, more the practitioner.

    Meanwhile, another ‘inflation day’ with oil and commodities up, $ down, and headlines like ‘Honda says no recession in US.’

    All the best,

    On 27 Feb 2008 09:09:43 +0000, Prof. P. Arestis

    > Dear Warren,
    > Many thanks.
    > > Do you think Kohn’s speech indicates he’s ready to cut another half point
    > > on Mar 18?
    > I think the simple answer to the question is probably no with a question
    > mark. I say this in the sense that before March 18 we will probably hear
    > more about Kohn’s views, which may be clearer in terms of whether he is
    > ready for another half point reduction. However, in terms of the analysis
    > he offered in the piece you kindly sent me I did not see anything that
    > suggested half point cut, although there is plenty in the piece to suggest
    > that he is in favour of more cuts. I say this in that although he sees
    > problems with the real economy he is also mindful of inflation, but he is
    > not an ‘inflation nutter’ as some others are. So at this stage I believe he
    > will go for a cut but not as much as half point.
    > What do you think?
    > Best wishes, Philip

    Posted in Email, Fed | No Comments »