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Archive for June, 2008

2008-06-30 US Economic Releases

Posted by Sada Mosler on 30th June 2008

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Chicago Purchasing Manager (Jun)

Survey 48.0
Actual 49.6
Prior 49.1
Revised n/a

Better than expected.

Still on the soft side.


NAPM-Milwaukee (Jun)

Survey 46.1
Actual 39.0
Prior 45.0
Revised n/a

Worse than expected.

GDP muddling through with the fiscal package supporting domestic demand as price pressures continue to escalate.


Posted in Daily | No Comments »

2008-06-27 Daily US Economic Releases

Posted by WARREN MOSLER on 27th June 2008

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Personal Income (May)

Survey 0.4%
Actual 1.9%
Prior 0.2%
Revised 0.3%

Higher than expected as fiscal rebates kick in, and last month revised up some as well.


Personal Spending (May)

Survey 0.7%
Actual 0.8%
Prior 0.2%
Revised 0.4%

Also higher than expected with consumers spending a higher % of fiscal rebates than expected.


PCE Deflator YoY (May)

Survey 3.2%
Actual 3.1%
Prior 3.2%
Revised n/a

A bit lower than expected.


PCE Core MoM (May)

Survey 0.2%
Actual 0.1%
Prior 0.1%
Revised n/a

Also lower than expected.


PCE Core YoY (May)

Survey 2.2%
Actual 2.1%
Prior 2.1%
Revised n/a

This is lower than expected as well.


Karim writes:

  • Core PCE deflator up 0.1% in May, unch at 2.1% y/y.
  • Headline deflator up 0.4% and rises from 3.1% to 3.2%.
  • Personal income up 1.8% due to 25.6% rise in ‘other’ government transfer payments (tax rebates); wage and salary income up 0.3% after -0.1% read prior month
  • Personal spending up 0.4%

Yesterday Kohn mentioned there were only a few signs of higher headline inflation ‘embedding’ themselves into core; this report another sign of that.

U of Michigan Confidence (Jun F)

Survey 56.7
Actual 56.4
Prior 56.7
Revised n/a

Karim Writes:

  • Drop from May to June (59.8 to 56.4); 3rd lowest reading in 46yr history of survey.
  • Record low (21%) reported income gains, reflecting job losses and housing and equity wealth declines.
  • Rising food and energy prices also contributed to worst buying climate survey for durables since 1980.
  • Current conditions fell 5.7pts.
  • Expectations component fell 2pts; this now 38% off of Jan 2007 high; survey report stated that 25-35% drop in expectations was typical in advance of Post-WW 2 recessions.
  • 1yr fwd inflation expectations drop from 5.2% to 5.1% in June; 5yr fwd unch at 3.4%.

  • [top]

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Re: Mainstream sounding off on inflation

Posted by WARREN MOSLER on 26th June 2008

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(an email exchange)

On Thu, Jun 26, 2008 at 2:25 PM, Tom wrote:

Where’s Bernanke’s Inner Volcker?

by Larry Kudlow

(NRO) On the day after an unusually important Fed policy meeting both gold and stocks severely rebuked the central bank’s decision to take no action in support of the weak dollar or to curb rapidly growing inflation. Gold spiked $30, a clear message that Bernanke & Co. won’t stop inflation. Stocks plunged over 200 points, an equally clear message that the Fed’s cheap-dollar inflation is damaging economic growth.

These market warnings are two sides of the same coin. Inflation, which is caused by excess dollar creation, is the cruelest tax of all. It is a tax on consumer and family purchasing power. It is a tax on corporate profits. It is a tax on the value of stocks, homes, and other assets. Crucially, the capital-gains tax — the most important levy on all wealth-creating assets — is un-indexed for inflation. Hence, long before Barack Obama or Congress can legislatively raise the capital-gains tax rate, rising inflation is increasing the effective tax rate on real capital gains. That’s an economy-wide problem.

By doing nothing at the June 25 meeting the Fed turned its back on the very inflation-tax problem it helped create. The spanking it received from the markets was well deserved.

Former Fed chairman Paul Volcker, who is advising Sen. Obama’s presidential campaign, issued a stern warning at the New York Economics Club a few months back. He said inflation is real and the dollar is in crisis. Soon after, Fed head Ben Bernanke changed his tune in public speeches, pledging greater vigilance on inflation and hinting at a defense of the dollar. Treasury man Henry Paulson and President Bush also stepped up their rhetoric regarding a stronger greenback.

But words were no substitute for actions this week.

It is an interesting historical footnote that Paul Volcker is still highly regarded as the greatest inflation fighter of our time. Working with Ronald Reagan, it was Volcker who slew the inflation dragon in the 1980s. Indeed, the combination of tighter monetary control from the Fed and abundant new tax incentives from Reagan launched an unprecedented twenty-five-year prosperity boom characterized by strong growth and rock-bottom inflation. At the center of the boom was a remarkable 12-fold rise in stock market values, a symbol of the renaissance of American capitalism. But that was then and this is now.

Talk of major new tax hikes is in the air today, while the inflationary decline of the American dollar is plain fact. It’s as though our economic memory is being erased, both in tax and monetary terms. Staunchly optimistic supply-siders Arthur Laffer and Steve Moore are even finishing a book on the subject. Called The Gathering Economic Storm, its concluding chapter is titled: “The Death of Economic Sanity.”

The Volcker anti-inflation model presumably handed down to Alan Greenspan and Ben Bernanke always argued that price stability is the cornerstone of economic growth. Yet it appears that today’s Fed has reverted to a 1970s-style Phillips-curve mentality that argues for a trade-off between unemployment and inflation, rather than the primacy of price stability.

History teaches us otherwise. It states that since rising inflation corrodes economic growth, inflation and unemployment move together — not inversely. Even in the last 18 months this is proving true. Inflation bottomed around 1 percent in late 2006. Unemployment bottomed at 4.4 percent about 6 months later. Today, the CPI inflation rate has climbed to over 4 percent, wholesale prices have jumped to 7 percent, and import prices have spiked to 18 percent. Unemployment, meanwhile, has moved up to 5.5 percent.

Over the past five years the greenback has lost 40 percent of its value. Oil is close to $140 a barrel. And gold, now trading above $900 an ounce, is warning that if the Fed fails to stop creating excess dollars, inflation could rise to 6 or 7 percent.

I had hoped Ben Bernanke would reveal his inner Volcker at Wednesday’s meeting. He didn’t. While the Fed acknowledged that “the upside risks to inflation and inflation expectations have increased,” it took no action taken to raise the fed funds target rate, which now stands at 2 percent and is actually minus-2 percent adjusted for inflation. Even a quarter-point rate hike — merely taking back the last easing move in April — would have been a shot heard ’round the world in defense of the beleaguered dollar. It didn’t happen.

Only Richard Fisher, president of the regional Dallas Fed, dissented in favor of a higher target rate. That leaves the hard-money Fisher as the lone remaining protégé of Paul Volcker.

Of course, if Fed policymakers reconvene immediately to right their wrongheaded mistake, the value of our money could be quickly restored. The next scheduled Open Market meeting is August 5, but they needn’t wait that long.

Let’s hope they come to their senses.


Good, thanks, as expected, this is where the mainstream (no pun intended) is going, though Kudlow is of course not ‘center’ mainstream.

Good luck to us!


Posted in Articles, Email, Fed | No Comments »

Re: Kohn to ROW- You hike, not us (today’s speech)

Posted by WARREN MOSLER on 26th June 2008

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(an interoffice email)

On Thu, Jun 26, 2008 at 7:48 AM, Karim wrote:

Global Economic Integration and Decoupling

Vice Chairman Donald L. Kohn
At the International Research Forum on Monetary Policy, Frankfurt, Germany
June 26, 2008

For the moment, higher headline rates of inflation have shown only a few tentative signs of embedding themselves in core inflation or in longer-term inflation expectations.

>   -talking about u.s. here

However, policymakers around the world must monitor the situation carefully for signs that the increases in relative prices globally do not generate persistently higher inflation. Additionally, in those countries where strong commodity demands are associated with rapid growth in aggregate demand that outstrips potential supply, actions to contain inflation by restraining aggregate demand would contribute to global price stability.

>   -not describing/talking about u.s. here;
>   focusing on EM primarily.

right, gets back to bernankes testimony a while back that the falling dollar has been a good thing as it works to lower the trade gap via increasing US exports that sustain US demand. the old ‘beggar they neighbor’ policy from the 30′s.

unfortunately for us it’s actually a ‘beggar thyself’ policy on closer examination as most mainstream economists will attest. they all say you don’t ‘inflate your way to prosperity’ by weakening your currency. otherwise latin america and africa for example would be the most prosperous places in the world

seems they are still in the mercantalist mode where exports are good and imports bad, and this policy is making us look like a bananna republic at an increasing rate.

recall from previous emails the dollar decline has been triggered by paulson succeeding in keeping cb’s from buying $US, Bush keeping oil producing monetary authorities from accumulating $US, and Bernanke discouraging foreign portfolio managers from accumulating same.

(more later on how it’s actually not happening due to fed rate policy, but they think it is)

as suspected, the $US is most likely to take another major leg down as it adjusts to a level where the trade gap is in line with foreign desire to accumulate $US financial assets which is probably a lot lower than the current 55-60 billion per month.

the ‘cost push inflation’ is pouring in through the trade channel, and the fed is increasingly taking the heat from the mainstream (not me- i’m the only one who thinks inflation isn’t a function of rates the way they do) for its apparent weak $US/inflate your way out of debt approach.

furthermore, the mainstream (and the stock market) sees the low interest rate/weak dollar policy as taking away US domestic demand as higher price for food/fuel leave less domestic income for everything else, including debt service.

that is, they see the falling dollar hurting us domestic demand more than the low interest rates are helping it.

the reality is there’s foreign monopolist- the saudis (and maybe russians)- that’s milking us for all they can with price hikes, and keeping us alive buying our goods and service and thereby keeping US gdp muddling through.

the real standard of living for most working americans has dropped by perhaps 10% as they work, get paid enough to eat and drive to work, and the rest of their real output is exported.

and our policy makers, including bernanke and paulson who’ve ‘engineered it’ think this is all a good thing- they think imports are bad and exports good and we are paying the price in declining real terms of trade.

while in my book interest rates are not a factor, the mainstream thinks they are, and the response when the inflation gets bad enough will be higher interest rates. The ‘correct’ anti-inflation rate last August was 5.25 when the fed didn’t cut.

by Jan 08 it was probably at least 7% with headline moving through 3% to get a sufficient ‘real rate.’

today it’s probably moved up to 8%+ as cpi is forecast to go through 5% over the next few months and gdp muddles through around 1%.

the mainstream (not me) will say that by having a real rate that’s too low now the fed will need a rate that much higher down the road as inflation accelerates due to over accommodative fed policy.

by the time the cost push inflation works its way to core- probably over the two quarters- the fed will ‘suddenly’ feel itself way behind the inflation curve and recognize they made a horrible mistake and now the cost of bringing down inflation is far higher than it would have been early on- just like they’ve always said.

the mainstream knows this, and now sees a fed with its head in the sand regarding inflation. they also see this weak dollar policy as subversive as it undermines the currency and inflation accelerates.

i expect there will be a groundswell of mainstream economists calling for the replacement of bernanke, kohn and the entire fomc very soon.

ironically, in my book low rates have helped moderate inflation via cost channels and have helped moderate domestic demand via interest income channels.

rate hike will add to domestic demand as net interest income of the private sectors from higher government interest payments add to personal income and demand.

and rate hikes will add to the cost push inflation via higher interest costs for firms.

it’ all going down hill fast, with policy makers both going the wrong way on key issues as they have the fundamentals backwards.

the only near term ‘solutions’ are near term crude oil supply responses like 30 mph speed limits which isn’t even under consideration in any form, nor are any other crude supply responses. most other alternative energy sources don’t replace crude.

medium term supply responses include pluggable hybrids that only start being produced in late 2010.

longer term supply responses include nuclear which might come on line 15 years down the road.

a collapse in world demand is possible if china/india let up on their deficit spending and growth, but so far that doesn’t seem in the cards. all their ‘tightebning’ seems to be on the ‘monetary’ side which does nothing of consequence apart from further increase inflation.

so with no supply responses on the horizon expect the saudis to keep hiking prices, and keep spending the new revenues to keep world gdp muddling through, cb’s hiking interest rates that will bring results that will cause them to hike further, and continuously declining real terms of trade for oil importers.

what to do?

cds on germany- it’s one go all go over there, and germany is the least expensive insurance.

forward muni bmas over 80 with no interest rate hedge as markets should discount the obama lead and long move up with inflation.


Posted in Fed, Speech | 9 Comments »

2008-06-26 Daily US Economic Releases

Posted by WARREN MOSLER on 26th June 2008

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GDP QoQ Annualized (1Q F)

Survey 1.0%
Actual 1.0%
Prior 0.9%
Revised n/a

As expected.  Weak but no recession.


Personal Consumption (1Q F)

Survey 1.0%
Actual 1.1%
Prior 1.0%
Revised n/a

A touch better than expected with further improvement in Q2 still expected.


GDP Price Index (1Q F)

Survey 2.6%
Actual 2.7%
Prior 2.6%
Revised n/a

A bit worse than expected.


Core PCE QoQ (1Q F)

Survey 2.1%
Actual 2.3%
Prior 2.1%
Revised n/a

More than a bit worse than expected.
GDP better than expected, and inflation worse than expected was reflected in the Fed statement, but not in Fed action.


Initial Jobless Claims (Jun 21)

Survey 375K
Actual 384K
Prior 381K
Revised 384K

Unchanged from the previous week’s report that was revised up some.  Still in the new range.


Continiuing Jobless Claims (Jun 14)

Survey 3105K
Actual 3139K
Prior 3060K
Revised 3057K

A little worse than expected, prior week revised down marginally.

Weak, but no recession yet.


Help Wanted Index (May)

Survey 19
Actual 17
Prior 19
Revised 18

All evidence shows labor markets still soft.


Existing Home Sales (May)

Survey 4.95M
Actual 4.99M
Prior 4.89M
Revised n/a

Continuing signs of a bottom.
Levels are too low given demographics and should recover substantially even with a weak market.


Existing Home Sales MoM (May)

Survey 1.2%
Actual 2.0%
Prior -1.0%
Revised n/a

Better than expected.


Existing Home Sales Median Price (May)

Survey n/a
Actual 208.6
Prior 201.2
Revised n/a

The upturn in prices wasn’t even reported by the mainstream press while the downturns were sensationalized.


Existing Home Sales Median Price YoY (May)

Survey n/a
Actual -6.3%
Prior -8.5%
Revised n/a

Year over year price declines are far less than the case-shiller index which reports only on the largest metro areas.  OFHEO prices declined even less year over year.  Again, the mainstream media doesn’t report this and continues to repeat case-shiller numbers.


Existing Home Sales Inventories (May)

Survey n/a
Actual 4.485
Prior 4.549
Revised n/a

I thought the last spike up was suspect- might have had something to do with foreclosures hitting the list- and may now be turning down as well, following the actual numbers of new homes for sale which has been falling rapidly.


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2008-06-25 EU News Highlights

Posted by WARREN MOSLER on 25th June 2008

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Weakness and inflation= rate hikes in the eurozone.

Fed response to same conditions later today.

Trichet Says Price-Stability Risks Have Intensified


Spanish Producer-Price Inflation Accelerates to 23-Year High


European Bonds Drop Before German Price Reports, as Stocks Gain


ECB’s Noyer Backs Inflation Vigilance, Flexible Exchange Rates


ECB’s Tumpel-Gugerell Says ECB Ready to Raise Rates If Needed


Wellink Says Inflation Accelerating, ECB on `Heightened Alert’


ECB Confirms August Press Conference, Scraps Summer Holiday


Inflation Tops Unemployment as Main Concern in EU, Survey Shows


German Consumer Optimism Nears 3-Year Low, Stern Poll Shows


Spain Recession Risk Climbs as Rates Move Higher, Survey Shows


Europe Heavy-Truck Sales Fall on Eastern Region Drop


Posted in EU, Inflation, Interest Rates | No Comments »

2008-06-25 US Economic Releases

Posted by WARREN MOSLER on 25th June 2008

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MBA Mortgage Applications (Jun 20)

Survey n/a
Actual -9.3
Prior -8.8%
Revised -8.7


MBA Mortgage Purchases (Jun 20)

Survey n/a
Actual 333.4
Prior 360.2
Revised n/a

MBA Mortgage Refinances (Jun 20)

Survey n/a
Actual 1212.20
Prior 1378.60
Revised n/a

MBA Mortgage Application TABLE (Jun 20)

Purchase mortgage applications back at the low end of the new range, partially because mortgage bankers have lost market share, but housing remains very slow as well.

Durable Goods Orders (May)

Survey 0.0%
Actual 0.0%
Prior -0.5%
Revised -1.0%

About as expected. Remains on the weak side, but not at recession levels as economy continues to muddle through.


Durables Ex Transportation (May)

Survey -1.0%
Actual -0.9%
Prior 2.5%
Revised 1.9%


New Home Sales (May)

Survey 512K
Actual 512K
Prior 526K
Revised 525K



New Home Sales MoM (May)

Survey -2.7%
Actual -2.5%
Prior 3.3%
Revised 4.8%

A touch better than expected from a very low base.


New Home Sales TABLE NSA (May)



Actual Number of Homes for Sale (May)

Survey n/a
Actual 453.00
Prior 461.00
Revised n/a

Lower than expected and working its way down nicely.


FOMC Rate Decision (Jun 25)

Survey 2.00%
Actual 2.00%
Prior 2.00%
Revised n/a

They don’t consider inflation a problem yet.


Posted in Daily | No Comments »

Warren B is on the radio!

Posted by Sada Mosler on 24th June 2008

Mike Norman’s show

Tuesday, June 24, 2008 @ 10:20 EST

Houston Area: Houston 1110 AM KTEK
Dallas / Fort Worth Area: DFW 1110 AM KJSA

Posted in Radio | 6 Comments »

2008-06-24 Daily US Economic Releases

Posted by WARREN MOSLER on 24th June 2008

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S&P/Case Shiller Home Price Index (Apr)

Actual 169.9
Prior 172.2
Revised 172.2


S&P/Case Shiller Composite 20 YoY (Apr)

Survey -16.0%
Actual -15.3%
Prior -14.4%
Revised -14.3%

Karim writes:

  • Conf board survey drops to 16yr low, from 58.1 to 50.4
  • Current conditions drop 9.7pts and future expectations fall 6.3pts
  • 1yr fwd inflation expex unch at 7.7
  • All following drop to new cycle lows
  • Jobs plentiful less jobs hard to get (-12.2 to -16.4; pretty good leading indicator of unemployment rate)
  • Plans to buy auto in next 6mths from 5.1 to 4.8
  • Plans to buy a home from 2.4 to 2.2
  • Plans for a domestic vacation from 33.4 to 29.6
  • Plans for foreign vacation from 8.2 to 7.5

Inflation is biting harder than the lower Fed funds rate is helping.

The Fed has to decide whether a slightly higher Fed funds rate will bring more relief/benefit to consumers on the inflation side than possible additional drag from the interest rate side.

Consumer Confidence (Jun)

Survey 56.0
Actual 50.4
Prior 57.2
Revised 58.1


Richmond Fed Manufacturing Index (Jun)

Survey -5
Actual -12
Prior -5
Revised n/a

Not looking good.

Weakness and ‘inflation’ continue.

House Price Index MoM (Apr)

Survey -0.4%
Actual -0.8%
Prior -0.4%
Revised -0.6%

Back down, but at least not through the lows.


ABC Consumer Confidence (Jun 22)

Survey -
Actual -
Prior -44
Revised -


Posted in Daily, Housing | No Comments »

2008-06-23 Weekly Credit Graph Packet

Posted by WARREN MOSLER on 23rd June 2008

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IG On-the-run Spreads

IG6 Spreads

IG7 Spreads

IG8 Spreads

IG9 Spreads

Looks to be slowly zigging and zagging its way higher.


Posted in Credit | 2 Comments »

WSJ: An economist who matters

Posted by WARREN MOSLER on 23rd June 2008

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An economist who matters

by Kyle Wingfield

(Wall Street Journal) Robert Mundell isn’t in the habit of making fruitless policy recommendations, though some take a long time ripening. Nearly four decades passed between his early work on optimal currency areas and the birth of the euro in 1999 – the same year he received the Nobel Prize for economics.

The Euro had nothing to do with the optimal currency area considerations.

Back in America, there’s an election going on. There’s also been a spate of financial problems, not the least of which is a weak dollar. But Mr. Mundell says “the big issue economically . . . is what’s going to happen to taxes.”

Democratic nominee Barack Obama regularly professes disdain for the Bush tax cuts, suggesting that those growth-spurring measures may be scrapped. “If that happens,” Mr. Mundell predicts, “the U.S. will go into a big recession, a nosedive.”

Even if the lost aggregate demand is more than replaced at the same time?

One of the original “supply-side” economists, he has long preached the link between tax rates and economic growth. “It’s a lethal thing to suddenly raise taxes,” he explains. “This would be devastating to the world economy, to the United States,

Even Laffer, the originator of his curve, does not agree with that.

and it would be, I think, political suicide” in a general election.

That may be true, but so far polls don’t show it.

Should taxes instead be cut again, I ask him, to stimulate the sluggish economy? Mr. Mundell replies that he favors a ceiling of 30% on marginal rates (the current top rate is 35%). He recounts how the past century experienced a titanic struggle over whether tax rates are too high or too low: from a 3% income tax in 1913; up to 60% during World War I; down to 25% before Congress and President Herbert Hoover raised taxes back to 60% in 1932 and “sealed the fate of our economy for a long, long time”; all the way up to 92.5% during World War II

When real output more than doubled, even as 7 million of our best workers went into the military.

before falling in three steps, reaching 28% under President Ronald Reagan; and back to nearly 40% under Bill Clinton before George W. Bush lowered them to their current level.

Deficit spending is much more of a driver of aggregate demand than marginal income tax rates.

In light of this fiscal roller coaster, Mr. Mundell says, “the most important thing that could be done with respect to tax rates now is to make the Bush tax cuts permanent. Eliminating that uncertainty would be more important than pushing for a further cut – in the income tax rates, anyway.”

One tax that he would cut, to 25%, is the corporate tax rate. “It could be even lower,” he says, “but I think it would be a big step to lower it to 25% . . . I made that proposal back in the 1970s.”

Very small potatoes from a macro point of view.

A long-haired Mr. Mundell spent that decade not only arguing for the euro, but laying the intellectual groundwork for the Reagan tax-cut revolution. Mr. Mundell says those tax cuts remain “as important to the United States as the creation of the euro was to Europe – a fundamental change.”

The deficit spending of the Regan years was the driver of the expansion- tax cuts and spending increases.

Combined with Paul Volcker’s tight-money policy at the Fed, which Mr. Mundell also championed, supply-side economics killed off stagflation.

And not the drop in crude prices due to a 15 million barrel per day supply response when natural gas prices were uncapped and utilities switched from oil to gas (and coal, etc.)???

Seems Mundell is pure propaganda.

Or at least it killed it off at the time. With prices again rising as growth slows, some economists are worried that stagflation could be making a comeback. Not Mr. Mundell – not yet.

He draws a comparison with the situation in 1979-1980. Start with the dollar price of oil, which he calls “one of the two most important prices in the world” (the other being the dollar-euro exchange rate, which we’ll get to in a moment).

“If you look at the price level since 1980,” he begins, “oil prices would naturally double by the year 2000. So from $34 a barrel in 1980 to $68 a barrel. And then . . . because the inflation rate’s about 3.5%, it would double again by 2020. So the natural price . . . would be something like $136 in 2020.

So ‘naturally’ doesn’t include inflation???

More to the point, the inflation rate was about 3.5% for 20 years or so with oil prices under $20, so now with oil spiking to $140, inflation should fall to the Fed’s target of maybe 2% due to a modest output gap?

“Now, we [already] got to $130-something, but . . . I really think the price is going to settle down, probably below $100, if not below $90. What I’m saying is we’re not so far off track.”

Guess he forgot the first week of micro that shows how monopolists set price?

As an economist, he should know Saudis are necessarily setting price.

American motorists still shocked by $4-a-gallon gasoline might think we’re rather more off track than Mr. Mundell suggests. Bolstering his case, he immediately moves on to another commodity often invoked to demonstrate inflation: gold.

“The price of gold in 1980 was $850 an ounce. And the price of gold today is about the same. It’s astonishing,” he says. “It’s true, gold did go up” to more than $1,000 an ounce earlier this year, “but the public doesn’t believe that there is inflation. If there was big inflation coming, then you’d see the price of gold going up to $1,500 an ounce very quickly, and that hasn’t happened.”

If they could take Nobel Prizes away, that statement would put him at risk.

In any case, don’t expect to hear Barack Obama or John McCain talk about the weak dollar’s contributions to any problem. “As [journalist] Robert Novak once put it, it’s like cleaning ladies who come in and say ‘I don’t do ironing.’

Good thing he isn’t running with a statement like that.

[Politicians] say, ‘I don’t do exchange rates,’” Mr. Mundell chuckles. “They think they can only lose by talking about exchange rates, because they don’t know enough about it, and it’s hard to predict anyway, for anyone.”

If Mr. Mundell had his way, there wouldn’t be anything for politicians to say about exchange rates. They would be fixed – as they were under the Bretton Woods arrangement after World War II until 1971, when President Nixon took the U.S. off the postwar gold standard and effectively launched the era of floating exchange rates.

“It’s a very poor and a dangerous system,” Mr. Mundell says of the floating regime, “because it creates exaggerated swings in the exchange rate.”

Vs. exaggerated swings in unemployment. Fixed foreign exchange regimes regularly ‘blow up’ with double digit or higher unemployment, negative growth, and actual blood in the streets. They have been abandoned for very good and practical reasons.

Case in point is the dollar-euro rate. From a low of about 82 cents in 2000, Europe’s common currency has risen fairly steadily and has been valued at more than $1.50 since late February, even breaking the $1.60 barrier once.

Without any negative growth, moderate inflation, and, in the Eurozone, declining unemployment.

“What people have to realize is there’s been a fundamental change in the way markets work in the past 20 years,” Mr. Mundell says. “Now, exchange rates are driven not so much by trade but by capital accounts and capital movements, and the huge amount of liquidity that’s sloshing around the world.”

Guaranteed he can’t discuss ‘liquidity sloshing around the world’ beyond that rhetoric.

Central banks world-wide, he notes, are trying to reach an equilibrium between dollars and euros in their $6.5 trillion worth of foreign reserves. Roughly two-thirds of these reserves are kept in dollars now, so they have about $1 trillion left to move into euros.

“If you did a hundred billion dollars” annually, Mr. Mundell points out, “you’d need 10 years to build that up, and that amount of capital movement has a tremendous effect in keeping the euro overvalued. It’s not good for Europe

It does help their real terms of trade, but maybe he doesn’t think that’s ‘good.’

and . . . ultimately it would cause more inflation in the United States.”

It already is, but here he’s denying it.

But this continuing shift doesn’t mean that the dollar’s status as the world’s dominant currency is in danger, at least not in the short run. Countries like Iran may be pushing for the pricing of oil in another currency, “but it wouldn’t happen unless Saudi Arabia and the Gulf states moved in that direction, and I don’t see any way in which they would do this,” Mr. Mundell says.

He also doesn’t ‘see’ that it doesn’t matter what currency anything is ‘priced in’ as it’s just a numeraire. What matters is the currency they ‘save in’ as he mentions when he estimates how they want to hold their reserves and how that matters.

“It would be very damaging to the relations between the United States and the Gulf countries. There’s an implicit defense alliance between those, and that’s what overrides as a top priority.”

Nor is there a macroeconomic argument for demoting the dollar. “Remember, the growth prospects for the United States are probably stronger than that of Europe, because you’ve got continued and substantial population growth in the United States, and zero population growth in Europe,” Mr. Mundell says. “Quite apart from the fact that the U.S. economy is innovating more rapidly, and the population is younger and not getting old as rapidly, so they pick up new technology faster. So I look upon the United States still as the main sparkplug of economic growth in the world.”

He misses his own argument. It’s about what currency non-residents want to ‘save in’ that determines reserve levels and the dollar being a reserve currency.

As for the euro’s overvalued status, he forecasts deflation in Europe,

Negative CPI???

along with a slowdown and an end to its housing boom.

Already happening to some degree.

The answer, he suggests, is for the Federal Reserve and the European Central Bank to cooperate in putting a floor and a ceiling on both the euro and the dollar. “You have to grope” to the appropriate range, he maintains, but a good starting point would be to keep the euro between 90 cents and $1.30.

That would mean the ECB buying $ and giving the appearance that the $ is ‘backing’ the Euro as the ECB collects dollar reserves. This is probably unthinkable politically for the Eurozone as they want the Euro to be the world’s reserve currency, not the $.

Even better, in his mind – and now we’re really talking long term – would be to have a global currency. This could take the form of a new money or a dominant existing one to which all others are fixed – probably the dollar. “As Paul Volcker says,” Mr. Mundell relates, “the global economy needs a global currency.”

With no global fiscal authority to regulate aggregate demand? That’s a prescription for economic disaster.

To get there, he proposes holding a new, Bretton Woods-type meeting in 2010 at the Shanghai World’s Fair. Mr. Mundell, who has been spending “a lot of time” in China advising the government, says reviving an international system of fixed exchange rates would be a tremendous help to Beijing as it tries to fend off demands from U.S. and European politicians that it appreciate or float its currency.

Here, he recalls Washington’s similar “bashing” of the Japanese yen in the 1980s, and its ultimately disastrous effects: “Japan got stuck with an overvalued currency for a decade, and suffered from a perpetual deflation in its housing market from 1990 until just a couple of years ago. And China doesn’t want to have the same problem.”

Japan ran/allowed a budget surplus from 1987 to 1992 that wiped out demand and the economy didn’t begin to recover until subsequent deficits got over 7% of GDP.

China isn’t making that mistake.

Another part of his solution is for Asian countries to form their own currency bloc. If they did so, he says, “it’d be comparable in size to the European and the American bloc. And then it would not be so much the question of . . . the U.S. and Europe bashing China” or other rising economies.

He totally misses the roll of aggregate demand.

These three currency blocs, he predicts, would be large enough to weather wide swings in their exchange rates. But the swings would still do economic damage, so “the best thing you could do is to stabilize them, and that’s where the global currency comes in.”

Could it happen? Mr. Mundell allows that three decades may pass, but predicts that like the euro and the Reagan revolution before it, the global currency’s time, too, will come. Any skeptics might want to review the last few decades before betting against him.

I agree the world might do something counter productive like that. Unless there’s something worse they could do that pops up.


Posted in Articles, Currencies | 2 Comments »

2008-06-23 Valance Weekly Economic Graph Packet

Posted by WARREN MOSLER on 23rd June 2008

[Skip to the end]

Real GDP

Can you find the recession? Year over year will be reasonable until last year’s large Q3 number drops out without similar sized q3 this year.


Capacity Utilization, ISM Manufacturing

Down but not out as GDP muddles through.


Philly Fed Index, Chicago PMI, ISM Non-Manufacturing, Empire Manufacturing Index

Limping along, but off the lows
The survey numbers seem to be depressed by inflation.


Retail Sales, Retail Sales Ex Autos, Total Vehicle Sales, Redbook Retail Sales Growth


Personal Spending, Personal Income

Apart from cars and trucks, retail muddling through, and getting some support from the fiscal package.

Non-farm Payrolls, Average Hourly Earnings, Average Weekly Hours, Unemployment Rate

Certainly on the soft side, but still positive year over year, earnings still increasing, and unemployment still relatively low (the last print was distorted a couple of tenths or so by technicals).

Total Hours Worked, Labor Participation Rate, Duration of Unemployment, Household Job Growth

Help Wanted Index, Chicago Unemployment, ISM Manufacturing Employment, ISM Non-Manufacturing Employment

Philly Fed Employment, Challenger Layoffs

Most of the labor indicators are on the weak side, but not in a state of collapse. And GDP is picking up some from the fiscal package which should stabilize employment.

NAHB Housing Index, NAHB Future Sales Index

Housing Starts, Building Permits, Housing Affordability, Pending Home Sales

Leveling off to improving a touch.
Housing is still way down and could bounce 35% at any time.
And still be at relatively low levels.

MBA Mortgage Applications

Mortgage apps are down but they are still at levels previously associated with 1.5 million starts vs today’s approx 1 million starts (annual rate).

Fiscal Balance, Govt Public Debt, Govt Spending, Govt Revenue

It’s an election year, and here comes the Govt. spending which is already elevating GDP.

CPI, Core CPI, PCE Price Index, Core PCE

PPI, Core PPI, Import Prices, Import Prices Ex Petro

Export Prices, U of Michigan Inflation Expectations, CRB Index, Saudi Oil Production

The ‘inflation’ is only going to work its way higher as it pours through the import and export channels.
And with Saudi production completely demand driven, there’s no sign of a fall off of world demand for crude at current prices.
Yes, the world’s growing numbers of newly rich are outbidding America’s lower income consumers for gasoline, as US demand falls off and rest of world demand increases.

Empire Prices Paid, Empire Prices Received, Philly Fed Prices Paid, Philly Prices Received

All the price surveys are pretty much the same as ‘inflation’ pours in.

ABC Consumer Confidence, ABC Econ Component, ABC Finance Component, ABC Buying Component

And all the surveys look pretty much the same as ‘inflation’ eats into confidence

10Y Tsy Yield

And with all the weakness rates have generally moved higher as it seems inflation is doing more harm than ultra low interest rates are helping, perhaps causing the Fed to reverse course.

10Y Tips

The TIPS market has been discounting higher ‘real’ rates from the Fed.

Dow Index

Even as stocks look to test the lows


Posted in Employment, Energy, Fed, GDP, Housing, Inflation, Oil | 2 Comments »

2008-06-23 EU Daily News Highlights

Posted by WARREN MOSLER on 23rd June 2008

[Skip to the end]

Weakness, inflation, and rising debt to GDP levels caused by both weakness and higher interest rates.

Get your sovereign eurozone credit default insurance before it’s too late!


Europe’s Manufacturing, Services Industries Shrink


German business confidence falls in June, Ifo survey says


Ifo’s Nerb Says Business Climate Burdened by High Energy Prices


ECB Has to Be `Tough’ on Rates Beyond July, Liebscher Tells MNI


ECB should look seriously at rate level: Stark


EU Summits Reveal Economic-Strategy Rifts


Threat of rate rise rattles EU businesses


France’s 2008 Budget Deficit May Near 3% of GDP, Tribune Says


European Government Bonds Advance as German Confidence Fades


Posted in EU, News Highlights | No Comments »

Saudi Iran OIL Update

Posted by WARREN MOSLER on 23rd June 2008

[Skip to the end]

Saudis say they will pump more if markets want more.

They post prices to their refiners and then fill all orders at their posted prices.

Their posted prices and spreads have also been moving in their favor lately.

Can it be more clear that the Saudis are ‘price setters?’

And with excess capacity very near zero, Russia and Iran are also price setters, and anyone else with more than a million bdp of output.

Price goes to the higher of where any of the price setters set their prices.

And the FOMC now knows this and will give the possibility of continuous price increases a lot more weight in their decisions.

Good luck to us!


Posted in Oil | No Comments »

Another look at Kohn’s June 11th speech

Posted by WARREN MOSLER on 20th June 2008

[Skip to the end]

This still reads hawkish to me:

The results of such exercises imply that, over recent history, a sharp jump in oil prices appears to have had only modest effects on the future rate of inflation. This result likely reflects two factors. First, commodities like oil represent only a small share of the overall costs of production, implying that the magnitude of the direct pass-through from changes in such prices to other prices should be modest, all else equal. Second, inflation expectations have been well anchored in recent years, contributing to a muted response of inflation to oil price shocks. But the anchoring of expectations cannot be taken as given; indeed, the type of empirical exercises I have outlined reveal a larger effect of the price of oil on inflation prior to the last two decades, a period in which inflation expectations were not as well anchored as they are today.

Nonetheless, repeated increases in energy prices and their effect on overall inflation have contributed to a rise in the year-ahead inflation expectations of households, especially this year. Of greater concern is that some measures of longer-term inflation expectations appear to have edged up since last year. Any tendency for these longer-term inflation expectations to drift higher or even to fail to reverse over time would have troublesome implications for the outlook for inflation.

The central role of inflation expectations implies that policymakers must look beyond this type of reduced-form exercise for guidance. After all, the lags of inflation in reduced-form regressions are a very imperfect proxy for inflation expectations. As emphasized in Robert Lucas’s critique of reduced-form Phillips curves more than 30 years ago, structural models are needed to have confidence in the effect of any shock on the outlook for inflation and economic activity.

This was considered the dovish part:

In particular, an appropriate monetary policy following a jump in the price of oil will allow, on a temporary basis, both some increase in unemployment and some increase in price inflation. By pursuing actions that balance the deleterious effects of oil prices on both employment and inflation over the near term, policymakers are, in essence, attempting to find their preferred point on the activity/inflation variance-tradeoff curve introduced by John Taylor 30 years ago.

So the question is whether that point was realized by a 2% Fed funds rate currently?

Such policy actions promote the efficient adjustment of relative prices: Since real wages need to fall and both prices and wages adjust slowly, the efficient adjustment of relative prices will tend to include a bit of additional price inflation and a bit of additional unemployment for a time, leading to increases in real wages that are temporarily below the trend established by productivity gains.

But it was then qualified by this return to hawkishness regarding the inflation expectations that he previously said showed signs of elevating:

I should emphasize that the course of policy I have just described has taken inflation expectations as given. In practice, it is very important to ensure that policy actions anchor inflation expectations. This anchoring is critical: As demonstrated by historical experiences around the world and in the United States during the 1970s and 1980s, efforts to bring inflation and inflation expectations back to desirable levels after they have risen appreciably involve costly and undesirable changes in resource utilization.11 As a result, the degree to which any deviations of inflation from long-run objectives are tolerated to allow the efficient relative price adjustments that I have described needs to be tempered so as to ensure that longer-term inflation expectations are not affected to a significant extent.

And the FOMC all agree that long term inflation expectations have been affected to some extent already.

To reiterate, the Phillips curve framework is one important input to my outlook for inflation and provides a framework in which I can analyze the nature of efficient policy choices. In the case of a shock to the relative price of oil or other commodities, this framework suggests that policymakers should ensure that their actions balance the deleterious economic effects of such a shock in the short run on both unemployment and inflation.

Of course, the framework helps to define the short-run goals for policy, but it doesn’t tell you what path for interest rates will accomplish these objectives. That’s what we wrestle with at the FOMC and is perhaps a subject for a future Federal Reserve Bank of Boston conference.

This all could mean a Fed funds rate that causes unemployment to grow and dampen inflation expectations down, but not grow so much as to bring inflation down quickly is in order.

The question then is whether the appropriate Fed funds rate for this ‘balance’ between growth, employment, and inflation expectations is 2% or something higher than that.


Posted in Employment, Fed, Inflation, Speech | No Comments »

Re: Demand destruction

Posted by WARREN MOSLER on 20th June 2008

[Skip to the end]

(an email exchange)

On Thu, Jun 19, 2008 at 10:38 PM, Russell wrote:
>   SUV sales may be falling off the cliff in the US, but in China, they are red hot.
>   Sales of the large vehicles in China rose by 40% in the first four months of this
>   year. That is twice the growth rate for the Chinese passenger car market.
>   Its no surprise why: The costs of petrol and diesel in China is as much as 40%
>   cheaper than US levels (which are nearly half of European prices).
>   China, the second-biggest fuel consumer after the U.S, has been encouraging
>   SUV purchases via subsidized fuel.
>   That now appears to be changing: The Chinese government will “increase
>   gasoline and diesel prices by 1,000 yuan ($145.50) a ton, the National
>   Development and Reform Commission said,” according to a Bloomberg report.
>   This represents a 17% price increase for gasoline and 18% for diesel. China is
>   also scheduled to raise jet-fuel prices by 1,500 yuan a ton (~25%).
>   The response in Crude futures was immediate: Crude Oil fell almost $5, spurring
>   gains in the broad averages.
>   Demand Destruction is now clearly upon us. Its a cliche, but its true: The best
>   cure for high prices are high prices.

Yes, but…
This also means rationing by price which means only the world’s richest get to drive SUV’s and the lower income groups have to take the bus.
Distribution of consumption gets skewed towards the top.
Interesting that much of the political left wants higher prices to discourage consumption, as its counteragenda regarding their distributional desires.


Posted in China, Email, Oil | No Comments »

CEO economic outlook

Posted by WARREN MOSLER on 19th June 2008

[Skip to the end]

The CEO Economic Outlook Survey doesn’t look too bad.


Posted in USA | No Comments »

2008-06-19 Canada News Highlights

Posted by WARREN MOSLER on 19th June 2008

[Skip to the end]


Canada Inflation Rate Rises More Than Forecast in May on Gasoline Costs


Canada Wholesale Sales Rise Twice as Much as Expected


Canadian Dollar Strengthens as Report Shows Inflation Accelerated in May

Gotta love these kinds of headlines. Latin America had the strongest currencies in the world with their past inflations???

Statistics Canada Says Second Straight GDP Decline Won’t Prove Recession


Canada Stock Index Extends Record as Energy Shares Surge; TD Bank Declines


U.S. economy keeps Canada on edge


Posted in News Highlights | No Comments »

2008-06-19 EU News Highlights

Posted by WARREN MOSLER on 19th June 2008

[Skip to the end]


Italian Unemployment Rate Rises for First Time Since 2003

Euro Central bankers think that’s a good thing for their fight against inflation. Unemployment was getting far too low for comfort.

France’s Woerth Maintains Economic Growth Forecast at 1.7%-2%

More than enough to warrant rate hikes.

French government wants more work hours

Trying to add supply to labor markets to keep wages ‘well contained.’

Zapatero Says Spain Suffering an ‘Abrupt Slowdown’

Spain had been growing too fast for comfort for the inflation hawks


Posted in EU | No Comments »

Reuters: Look who’s buying commodities now…

Posted by WARREN MOSLER on 19th June 2008

[Skip to the end]

Dubai commits $250 million to shariah commodity fund

by Pratima Desai

(Reuters) A Dubai government agency said on Thursday it committed $250 million (127 million pounds) to a shariah compliant fund investing in a range of commodity hedge funds, a move that will open the way for other Islamic investors.

More efficient to leave it in the ground than pump it out and buy it back?


Posted in Articles, Oil | No Comments »