CPI, Empire, and Bernanke’s managing of expectations
Posted by WARREN MOSLER on July 15th, 2011
Right, core is giving Bernanke ‘cover’ to not do any more QE.
I think he now realizes QE doesn’t actually do anything positive for the economy, as all his staff studies show. Yes, it can lower term rates a tad, but it also removes interest income as he himself seemed to have recognized in his own 2004 research paper.
But he also recognizes that it does scare the living daylight out of the likes of China and other portfolio managers who don’t understand monetary operations.
So he’s in a bit of a bind, as his tone of voice showed while responding to live questions.
If he says QE doesn’t do anything, he destroys what he now considers the useful fiction that the Fed has more tools in its toolbox, as markets would realize they are now flying without a net vs the belief in a ‘Bernanke put.’
And so he assures China there will be no more QE, while explaining to Congress that higher core inflation makes QE inappropriate at this time. And while this could be called intellectually dishonest, it’s also required under ‘expectations theory’ that says managing expectations is critical to price stability and optimal output.
As previously discussed, they all believe in the Confidence Fairy, and that economic performance is in no small way a function of expectations.
Also, while outlooks were positive, below, they were less positive than before.
And Michigan just came in lower than expected as well. The jury is still out on when the economic soft spot might end.
And Aug 3 looks to remove US and therefore world aggregate demand, one way or another.
Karim writes:
CPI
- Headline declines as expected on energy (-0.2%); core much stronger than expected (0.3%)
- Supports key message BB has been delivering that bar is high for QE3 due to core inflation high and rising now, vs low and falling a year ago
- A year ago, Core CPI was 0.9%, with the 3mth and 6mth rate annualized rates of change near Zero
- Now, Core CPI is 1.6% (highest since late 2009) and the 3mth and 6mth annualized rates of change are 2.9% and 2.5%.
- What is interesting in looking at the attached chart is that the change from the lows is the highest in about 5yrs, and much higher than when oil went to $150 back in the summer of 2008
- The key is OER (1/3 of core) is now trending at 0.1-0.2% m/m; combined with the other ‘sticky’ components of core (i.e., medical, education), its hard to see core falling back below 1.5%
Empire Survey: Modest gains in current conditions and strong gains in 6mth Outlook
| Current | July | June |
| Business Conditions | -3.76 | -7.79 |
| Prices Paid | 43.33 | 56.12 |
| New Orders | -5.45 | -3.61 |
| Shipments | 2.22 | -8.02 |
| Delivery Times | 1.11 | -3.06 |
| Inventories | -5.56 | 1.02 |
| Employees | 1.11 | 10.20 |
| Workweek | -15.56 | -2.04 |
| 6MTH Outlook | July | June |
| Business Conditions | 32.22 | 22.45 |
| Prices Paid | 51.11 | 55.10 |
| Prices Received | 30.00 | 19.39 |
| New Orders | 25.56 | 15.31 |
| Shipments | 30.00 | 17.35 |
| Delivery Times | 6.67 | 2.04 |
| Inventories | 1.11 | -9.18 |
| Unfilled Orders | 5.56 | -9.18 |
| Employees | 17.78 | 6.12 |
| Workweek | 2.22 | -2.04 |
| Capital Expenditures | 22.22 | 26.53 |
| Technology Spending | 12.22 | 14.29 |
July 15th, 2011 at 12:53 pm
Well said Warren!
the theory that expects intellectual dishonesty to scale was doomed to founder on an infinite rock supply
any operations person in any field would agree with this;
it’s only population scale that causes people in different fields to lose track of common logic
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roger erickson Reply:
July 15th, 2011 at 1:00 pm
@roger erickson,
ps: expecting to scale intellectual dishonesty = an innocent fraud at best
add that to the 7DIFs of fiscal policy?
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Roger Erickson Reply:
July 18th, 2011 at 9:27 pm
@roger erickson,
the 8th Blunder of the Modern World
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July 15th, 2011 at 6:28 pm
Central banks should be eliminated, if this is not yet an other demonstration I don’t know what is. Central banks are now reduced to institutions playing psychological games with the markets (if ever were other thing).
Beyond ridiculous: everybody playing the ‘what the other will be thinking I’m thinking he thinks’.
And the worst of it all is anyway people will end up thinking he will be printing money anyway. Since 2008 they are wasting all their political capital (‘abusing of printing money and saving banks’) on little games while actually not printing much real money, if they at least had printed money in a more effective manner (deficit spending on programs) and letting banks fail (credit destruction: deflationary). That would have been good, non-crony, policy.
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July 15th, 2011 at 9:44 pm
Love the economic analysis as always, but isn’t the political picture suddenly looking fairly rosy for August 3rd? I’m hearing that the Grand Bargain is dead and there will be a more or less “clean” debt ceiling increase with a sort of Kabuki theater cuts package to be presented by Obama (and most probably rejected by Congress.)
There’s some potential this would have trouble getting to the House floor, but it seems Boehner doesn’t want a debt ceiling SNAFU so I’d guess if this is what McConnell and Reid have settled on, it’s likely to happen.
I’m trying to marshal some links to show all the pieces; I’ll return when I have a moment.
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ApeMan1976 Reply:
July 15th, 2011 at 9:57 pm
OK, I see the problem. The cuts that are theoretically going to be added to the package that were points of agreement in the House/Administration talks. I had momentarily been under the impression that those cuts were not going to be part of the deal passed this week, but I’m seeing sources to the contrary now.
So I guess we are still looking at some Hoover economics if things continue on this course. Oh well. Sorry for the false celebration.
APS
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