That's ridiculous, no one looks at the CPI to forecast inflation. They look at the spread between a TIPS and a normal Treasury to see the inflation expectation.
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That's ridiculous, no one looks at the CPI to forecast inflation. They look at the spread between a TIPS and a normal Treasury to see the inflation expectation.
Quote:
Germany attacks US economic policy
Financial Times
November 7, 2010
Germany has put itself on a collision course with the US over the global economy, after its finance minister launched an extraordinary attack on policies being pursued in Washington.
Wolfgang Schäuble accused the US of undermining its policymaking credibility, increasing global economic uncertainty and of hypocrisy over exchange rates. The US economic growth model was in a “deep crisis,” he also warned over the weekend.
His comments set the stage for acrimonious talks at the G20 summit in Seoul starting on Thursday. Germany has been irritated at US proposals that it should make more effort to reduce its current account surplus. But Berlin policymakers were also alarmed by last week’s US Federal Reserve decision to pump an extra $600bn into financial markets in an attempt to revive US economic prospects through “quantitative easing”.
On Friday, Mr Schäuble described US policy as “clueless”. In a Der Spiegel magazine interview, to be published on Monday, he expanded his criticism further, saying decisions taken by the Fed “increase the insecurity in the world economy”.
“ They make a reasonable balance between industrial and developing countries more difficult and they undermine the credibility of the US in finance policymaking.”
Mr Schäuble added: “It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of their [central bank’s] printing press.”
Germany’s export success, he argued, was not based on “exchange rate tricks” but on increased competitiveness. “In contrast, the American growth model is in a deep crisis. The Americans have lived for too long on credit, overblown their financial sector and neglected their industrial base. There are lots of reasons for the US problems – German export surpluses are not part of them.”
There was also “considerable doubt” as to whether pumping endless money into markets made sense, Mr Schäuble argued. “The US economy is not lacking liquidity.”
On the future of the eurozone, Mr Schäuble confirmed in the same interview that Berlin will push for a greater private investor involvement in future bail-outs. To ensure German taxpayers faced the smallest possible burden it was important to have the possibility of an orderly debt restructuring with the participation of private creditors, he said.
Germany’s proposals for a planned new rescue mechanism have run into resistance from the European Central Bank, which fears they will add to investor uncertainty at a crucial time for Europe’s 12-year old monetary union. Mr Schäuble said the new mechanism would apply only to new eurozone debt but argued the European Union “was not founded to enrich financial investors”.
Mr Schäuble envisaged a two-stage process in a future crisis. The EU would put in place the same sort of saving and rescue programme as imposed this year on Greece. In a first stage, the term structure of government debt could be extended. If that did not work, then in a second stage, private creditors would have to take a discount on their holdings. In return, the value of the remainder would be guaranteed, Mr Schäuble said.
True, we have a credibility problem, an overblown financial sector, and a demand problem.Quote:
Mr Schäuble added: “It is not consistent when the Americans accuse the Chinese of exchange rate manipulation and then steer the dollar exchange rate artificially lower with the help of their [central bank’s] printing press.”
Germany’s export success, he argued, was not based on “exchange rate tricks” but on increased competitiveness. “In contrast, the American growth model is in a deep crisis. The Americans have lived for too long on credit, overblown their financial sector and neglected their industrial base. There are lots of reasons for the US problems – German export surpluses are not part of them.”
There was also “considerable doubt” as to whether pumping endless money into markets made sense, Mr Schäuble argued. “The US economy is not lacking liquidity.”
Kiss your children and go shopping! The Monopoly board game is 75 years old now, pick one up for funny munny family fun!
OK..Quote:
Originally Posted by wiggin
Quote:
They look at the spread between a TIPS and a normal Treasury to see the inflation expectation.
Hmm...
So the spread between a TIPS bond market price and a normal Treasury bond market price would cancel out.. what?Quote:
Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index.
I don't get what you're saying, agamemnus. The current principal of a TIPS fluctuates with the current CPI. But the spread between the bid price on a X-year Treasury and an X-year TIPS indicates the inflation expectation. Thus, since TIPS are inflation protected and Treasuries are not, you can get an idea of what kind of inflation the market expects for the next X years. If the spread really increases a lot, that means that inflation expectations are increasing (because the premium for inflation protection goes up). This is a very straightforward quantitative assessment, I don't get why this is confusing.
Okay..
1) When you say spread, do you mean difference in price?
2) Why is just using the market price of a TIPS bond not sufficient to get your inflation expectation? Why do you need to factor in a regular Treasury bond?
3) Assuming that (2) somehow is resolved, are you saying that this value you are describing is actually saying that the US CPI inflation expectation remains low?
4) How accurate has this measure been in the past...?
Yes, the spread is the difference in price (normally seen as the difference in yield). It works this way: assume that the price for a 10 year TIPS security calculates out to a 2% yield, not including the inflation adjustment (since we don't know what that is). A Treasury bond (actually, a note) sold for the same maturity might have a 4% yield. That means (simplistically) that those buying the TIPS bond assume that inflation will be 2% over the next ten years to make up for the difference in yield between the TIPS and Treasury. If inflation is lower, they lose money compared to the Treasury (meaning they shouldn't buy it), and if inflation is higher they'd lose money compared to the Treasury (meaning someone else should bid more for it). Thus, the market price for a TIPS note as compared to a Treasury gives you an idea of what the market is expecting for inflation in the next X years (X being the maturity of the bond).
The TIPS-Treasury spread has been below 2% for some time; 2% is the rough unofficial inflation target of the Fed. This implies that despite all of the monetary and fiscal easing that Congress and the Fed have done in the last two years, inflation is still expected by the markets to be lower, not higher than trend (likely due to all of the deleveraging happening in the economy). This can be dangerous, leading to a deflationary spiral. QE raises the inflation expectation, bringing it more into line with the target.
I don't know how accurate the spread has been in predicting inflation expectations in the past; TIPS have only been around since 1997. But that's largely irrelevant. It's a very quantitative measure of what the market thinks will happen with inflation in the US for the next 5-30 years (though obviously at 30 years the expectation is likely a WAG). If the spread increases a lot above the inflation target, it means that the market is getting jittery about US QE measures and think it will lead to rampant inflation - this has knock-on effects on business investment and the like. Following the smart money, this doesn't seem to be the case.
http://online.wsj.com/article/SB1000...pinion_LEADTopQuote:
Palin's Dollar, Zoellick's Gold
An unlikely pair elevate the monetary policy debate.
It would be hard to find two more unlikely intellectual comrades than Robert Zoellick, the World Bank technocrat, and Sarah Palin, the populist conservative politician. But in separate interventions yesterday, the pair roiled the global monetary debate in complementary and timely fashion.
The former Alaskan Governor showed sound political and economic instincts by inveighing forcefully against the Federal Reserve's latest round of quantitative easing. According to the prepared text of remarks that she released to National Review online, Mrs. Palin also exhibited a more sophisticated knowledge of monetary policy than any major Republican this side of Wisconsin Representative Paul Ryan.
Sarah Palin says she's deeply concerned about the Federal Reserve's plan to buy $600 billion of U.S. bonds to boost the economy. Alan Murray, Jerry Seib and Jon Hilsenrath discuss why the Federal Reserve has been drawn into the political fray.
Stressing the risks of Fed "pump priming," Mrs. Palin zeroed in on the connection between a "weak dollar—a direct result of the Fed's decision to dump more dollars onto the market"—and rising oil and food prices. She also noted the rising world alarm about the Fed's actions, which by now includes blunt comments by Germany, Brazil, China and most of Asia, among many others.
"We don't want temporary, artificial economic growth brought at the expense of permanently higher inflation which will erode the value of our incomes and our savings," the former GOP Vice Presidential nominee said. "We want a stable dollar combined with real economic reform. It's the only way we can get our economy back on the right track."
Mrs. Palin's remarks may have the beneficial effect of bringing the dollar back to the center of the American political debate, not to mention of the GOP economic platform. Republican economic reformers of the 1970s and 1980s—especially Ronald Reagan and Jack Kemp—understood the importance of stable money to U.S. prosperity.
On the other hand, the Bush Administration was clueless. Its succession of Treasury Secretaries promoted dollar devaluation little different from that of the current Administration, while the White House ignored or applauded an over-easy Fed policy that created the credit boom and housing bubble that led to financial panic.
Misguided monetary policy can ruin an Administration as thoroughly as higher taxes and destructive regulation, and the new GOP majority in the House and especially the next GOP President need to be alert to the dangers. Mrs. Palin is way ahead of her potential Presidential competitors on this policy point, and she shows a talent for putting a technical subject in language that average Americans can understand.
Which brings us to Mr. Zoellick, who exceeded even Mrs. Palin's daring yesterday by mentioning the word "gold" in the orthodox Keynesian company of the Financial Times. This is like mentioning the name "Palin" in the Princeton faculty lounge.
Mr. Zoellick, who worked at the Treasury under James Baker in the 1980s, laid out an agenda for a new global monetary regime to reduce currency turmoil and spur growth: "This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves toward internalization and then an open capital account," he wrote, in an echo of what we've been saying for some time.
And here's Mr. Zoellick's sound-money kicker: "The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today." Mr. Zoellick's last observation will not be news to investors, who have traded gold up to $1,400 an ounce, its highest level in real terms since the 1970s, as a hedge against the risk of future inflation.
However, his point will shock many of the world's financial policy makers, who still think of gold as a barbarous relic rather than as an important price signal. Lest they faint in the halls of the International Monetary Fund, we don't think Mr. Zoellick is calling for a return to a full-fledged gold standard. His nonetheless useful point is that a system of global monetary cooperation needs a North Star to judge when it is running off course. The Bretton Woods accord used gold as such a reference until the U.S. failed to heed its discipline in the late 1960s and in 1971 revoked the pledge to sell other central banks gold at $35 an ounce.
One big problem in the world economy today is the frequent and sharp movement in exchange rates, especially between the euro and dollar. This distorts trade and investment flows and leads to a misallocation of capital and trade tensions. A second and related problem is the desire of the Obama Administration and Federal Reserve Chairman Ben Bernanke to devalue the dollar to boost exports as a way to compensate for the failed spending stimulus.
As recently as this week in India, Mr. Obama said that "We can't continue situations where some countries maintain massive [trade] surpluses, other countries have massive deficits and never is there an adjustment with respect to currency that would lead to a more balanced growth pattern."
If this isn't a plea for a weaker dollar in the name of balancing trade flows, what is it? The world knows the Fed can always win such a currency race to the bottom in the short run because it can print an unlimited supply of dollars. But the risks of currency war and economic instability are enormous.
***
In their different ways, Mrs. Palin and Mr. Zoellick are offering a better policy path: More careful monetary policy in the U.S., and more U.S. leadership abroad with a goal of greater monetary cooperation and less volatile exchange rates. If Mr. Obama is looking for advice on this beyond Mr. Zoellick, he might consult Paul Volcker or Nobel laureate Robert Mundell. A chance for monetary reform is a terrible thing to waste.
So: Sarah Palin can read the party line that someone else wrote for her, and Zoellick said nothing of the sort:
Quote:
Originally Posted by Free Exchange
And regardless of what we think of Palin, she has millions of 'fans'. They even follow her every word on Twitter. :bulb:Quote:
Lest they faint in the halls of the International Monetary Fund, we don't think Mr. Zoellick is calling for a return to a full-fledged gold standard.
Mention the gold standard and millions will chime in. Ron Paul has an important committee determined to audit the Federal Reserve. Rand Paul vows to vote No on raising the debt ceiling....
It's gonna get interesting. :D
What you are describing is not two market values, but two yields given by the US Treasury. The yield difference depends entirely on what the US treasury expects inflation to be. So, it's not a good indicator of what the market expects inflation to be. And, since TIPS depends on a backward-looking CPI change, it's not a good mechanistic inflation expectation, either.Quote:
Yes, the spread is the difference in price (normally seen as the difference in yield). It works this way: assume that the price for a 10 year TIPS security calculates out to a 2% yield, not including the inflation adjustment (since we don't know what that is). A Treasury bond (actually, a note) sold for the same maturity might have a 4% yield.
If you factor in market value, any two bonds on the same time horizon should have the same exact market price.
If you look at gold prices, and most any other commodities, it is obvious that people expect commodity prices to rise, indicating that inflation will also rise.
Okay, you clearly don't understand how this works. The Department of Treasury doesn't set yields. T-notes are sold in a bidding process. If the price is higher, the actual yield is lower, and vice versa.
I don't have a clue what you mean by 'mechanistic inflation expectation' either.
Lastly, on gold, it has nothing to do with commodity prices. Some people driving up the price of gold (and commodities) right now clearly do believe that the dollar will fall in the future, but it's hard to translate that into a quantitative measure of inflation expectation. Furthermore, there are a lot of speculators in that market which distorts things. That's not to say that there aren't speculators (or a 'rush to quality') in the Treasuries market, but here you have an apples-to-apples comparison where the only difference is an inflation correction. It's by far the best method of analyzing the US inflation expectations.
Just to add to that, the rising price of gold has more to do with the expected future value of the dollar (and other major currencies) than it does with inflation. While the former might contribute toward the latter, so do many other factors.
Then you are back so saying that you take the market price difference of the bonds, and investors just go along with the assumption that the inflation rate is taken account for by the CPI change. Well, because of China, the CPI still doesn't account for the accumulated debt that buying goods from other countries has on the buying power of the dollar in terms of things that are not consumer goods, such as raw materials and gooold. So, you are not really getting a value of inflation, you are getting a value of CPI inflation.Quote:
Originally Posted by wiggin
Something that just plugs in some common already-existing values as opposed to gathering your own data and forming your own analysis, I guess.Quote:
I don't have a clue what you mean by 'mechanistic inflation expectation' either.
But commodity prices are going up too, I think. Anyway, in theory it is apples to apples, but the theory doesn't account for an enormous trade deficit... so it's not apples-to-apples, it's more like Chinese apples to apples.Quote:
Lastly, on gold, it has nothing to do with commodity prices. Some people driving up the price of gold (and commodities) right now clearly do believe that the dollar will fall in the future, but it's hard to translate that into a quantitative measure of inflation expectation. Furthermore, there are a lot of speculators in that market which distorts things. That's not to say that there aren't speculators (or a 'rush to quality') in the Treasuries market, but here you have an apples-to-apples comparison where the only difference is an inflation correction. It's by far the best method of analyzing the US inflation expectations.
The whole inflation analysis in any case glosses over the buying power of your average American. If the question is "how will my money in the bank fare?", then just inflation is fine. But, I think we are talking about just how much stuff the average American can buy, as well:
* High inflation is bad.
* Modest-to-low price inflation, without a corresponding rise in wage (because input resources cost too much, and because [cheap, foreign] output resources/goods cannot fetch a price enough to make any profit), is bad, too.
Also, there's always a lot of "end of times" speculation about gold that isn't extended to other commodities. So gold prices are more of a fluke than anything.
Some went down or stayed steady, but that's the exception...
http://www.indexmundi.com/commoditie...rabicas-coffee
http://www.indexmundi.com/commodities/?commodity=corn
http://www.indexmundi.com/commodities/?commodity=sugar
http://www.indexmundi.com/commoditie...odity=soybeans
http://www.indexmundi.com/commoditie...od-price-index
http://www.indexmundi.com/commoditie...ls-price-index
http://www.indexmundi.com/commoditie...el-price-index
Uhm, yes, inflation is measured by the CPI. If you want to talk about other measures of inflation, that's fine, but CPI is pretty much the accepted standard.Quote:
Originally Posted by agamemnus
Uh, what?Quote:
Something that just plugs in some common already-existing values as opposed to gathering your own data and forming your own analysis, I guess.
It's true that commodities have gained (though not as much as gold) in recent days. It's hard to back out an inflation expectation number from that, though. Not a very useful metric, then.Quote:
But commodity prices are going up too, I think. Anyway, in theory it is apples to apples, but the theory doesn't account for an enormous trade deficit... so it's not apples-to-apples, it's more like Chinese apples to apples.
I'm not sure I understand why you think running a trade deficit is somehow hiding part of inflation either.
Err... but the CPI specifically measures what the average American can buy (and doesn't do a perfect job of figuring out how much the money in your bank is worth). Isn't that the point?Quote:
The whole inflation analysis in any case glosses over the buying power of your average American. If the question is "how will my money in the bank fare?", then just inflation is fine. But, I think we are talking about just how much stuff the average American can buy, as well:
* High inflation is bad.
* Modest-to-low price inflation, without a corresponding rise in wage (because input resources cost too much, and because [cheap, foreign] output resources/goods cannot fetch a price enough to make any profit), is bad, too.
As for wages, that's a whole 'nother story. I briefly mentioned it in an earlier thread. Either wages have been flat compared to inflation (in which case things haven't really gotten worse, they just haven't gotten better) or they're rising - depends on your analysis. What does this have to do with inflation expectations, though?
What I'm saying is that the CPI can only measure past product price inflation, not past commodity inflation. Without international trade, the two would trend the same way.Quote:
Originally Posted by wiggin
Rawr.Quote:
Uh, what?
Just look at all the commodity general price index graphs in the last post I made. They are all trending up.Quote:
It's true that commodities have gained (though not as much as gold) in recent days. It's hard to back out an inflation expectation number from that, though. Not a very useful metric, then.
Not just "a" trade deficit, but a huge one! It's not hiding it; you are just not seeing the commodity inflation reflected in the CPI. If China suddenly starts easing its exchange rate fix, the deficit will decrease. The effect is that we get fewer cheap goods from China, and even though we still would get cheap goods from other places, our goods will become more expensive both because we'll have to start buying more expensive stuff from other countries, and make our own more expensive stuff (which will use commodities that have been rising in nominal dollar price!). More expensive goods = CPI is higher = consumer inflation is higher.Quote:
I'm not sure I understand why you think running a trade deficit is somehow hiding part of inflation either.
The CPI does not measure what the average American can buy, because you must not account for wage inflation in the CPI.Quote:
Err... but the CPI specifically measures what the average American can buy (and doesn't do a perfect job of figuring out how much the money in your bank is worth). Isn't that the point?
As for wages, that's a whole 'nother story. I briefly mentioned it in an earlier thread. Either wages have been flat compared to inflation (in which case things haven't really gotten worse, they just haven't gotten better) or they're rising - depends on your analysis. What does this have to do with inflation expectations, though?
My initial outrage is that you said that inflation is too low. It's only too low when you don't consider Chinese goods coming in at an artificially low price! If you get rid of those artificially low goods, the consumer inflation number, as measured by the CPI change, will be higher.
If you don't (get rid of the Chinese goods), you are simply reducing your industrial base by discouraging industry via cheap Chinese goods, which in the long run reduces real wage levels. That, in turn, means less money going to the US government coffers, tax rates are eventually increased, reducing the wage levels even more.
Edit:
It's a lose/lose more situation. . .
Yes, but separating out actual changes in commodity prices vs. speculation is very difficult. The value of commodities go all over the place (easily 200% change in a few months) - the trade-weighted value of the dollar only changed about 7%, and even that isn't really tied to product prices.Quote:
Originally Posted by agamemnus
I think that it's very difficult to know what would happen to CPI if the US trade deficit narrowed. For example, the trade deficit sharply narrowed during the recession, but CPI inflation was very low (some might say too low). On a long term perspective, it's tough to know. China might provide us with cheap goods (driving down CPI), but their rapidly rising demand for raw materials and oil is distorting commodity markets, driving up CPI.Quote:
Not just "a" trade deficit, but a huge one! It's not hiding it; you are just not seeing the commodity inflation reflected in the CPI. If China suddenly starts easing its exchange rate fix, the deficit will decrease. The effect is that we get fewer cheap goods from China, and even though we still would get cheap goods from other places, our goods will become more expensive both because we'll have to start buying more expensive stuff from other countries, and make our own more expensive stuff (which will use commodities that have been rising in nominal dollar price!). More expensive goods = CPI is higher = consumer inflation is higher.
I've said it before and I'll say it again: in the long run, rebalancing of the global economy is necessary and a good thing. I'm not convinced it will lead to rampant inflation in the US, though. Certainly the dollar has been overvalued for a very long time due to a number of circumstances, but it's possible that a healthier US economy would result in a lower, and not higher, level of inflation.
Still not getting this. CPI measures the price of a basket of goods with some fancy econometrics thrown in to give it some pizazz. If the price of a basket of goods has only gone up 2%, then the dollar has gotten 2% cheaper. The effect on the individual may be positive (if their wages increase faster than inflation), negative, or neutral, but that's irrelevant to the question of Fed policy on inflation targeting and expectations.Quote:
The CPI does not measure what the average American can buy, because you must not account for wage inflation in the CPI.
Even if this is true, so what? That's not how much the goods cost in the US, they're made in China and cost less. Inflation targeting isn't to some magical US with no trade deficit, but to the situation we exist in today. In that situation, inflation much below trend (or even deflation) will have serious macroeconomic consequences, with Japan being a perfect example. If things ever change to start pushing prices upwards, the Fed can always turn around and tighten monetary policy, but I don't see it happening any time soon.Quote:
My initial outrage is that you said that inflation is too low. It's only too low when you don't consider Chinese goods coming in at an artificially low price! If you get rid of those artificially low goods, the consumer inflation number, as measured by the CPI change, will be higher.
Bullshit, this is scare mongering. Trade is not a zero-sum game. Americans are benefiting by having cheap Chinese goods so they can buy more of stuff (higher quality of life) and spend their extra money on other things. This extra cash can easily be spent on US goods and services, and US economic growth is not necessarily harmed by Chinese growth.Quote:
If you don't (get rid of the Chinese goods), you are simply reducing your industrial base by discouraging industry via cheap Chinese goods, which in the long run reduces real wage levels. That, in turn, means less money going to the US government coffers, tax rates are eventually increased, reducing the wage levels even more.
Where'd you get the 7% figure?..Quote:
Originally Posted by wiggin
True, but still the overall effect is to lower the CPI.Quote:
I think that it's very difficult to know what would happen to CPI if the US trade deficit narrowed. For example, the trade deficit sharply narrowed during the recession, but CPI inflation was very low (some might say too low). On a long term perspective, it's tough to know. China might provide us with cheap goods (driving down CPI), but their rapidly rising demand for raw materials and oil is distorting commodity markets, driving up CPI.
I never claimed "rampant inflation", but inflation nonetheless.Quote:
I've said it before and I'll say it again: in the long run, rebalancing of the global economy is necessary and a good thing. I'm not convinced it will lead to rampant inflation in the US, though. Certainly the dollar has been overvalued for a very long time due to a number of circumstances, but it's possible that a healthier US economy would result in a lower, and not higher, level of inflation.
The CPI does not measure what the average American can buy. Given two periods with two different CPI levels, the difference in the CPI does not equate to a difference in spending power because of employment and wages also change.Quote:
Still not getting this. CPI measures the price of a basket of goods with some fancy econometrics thrown in to give it some pizazz. If the price of a basket of goods has only gone up 2%, then the dollar has gotten 2% cheaper. The effect on the individual may be positive (if their wages increase faster than inflation), negative, or neutral, but that's irrelevant to the question of Fed policy on inflation targeting and expectations.
Japan didn't run deficits during its 1990s stagflationary period, as far as I remember. Anyhoo, inflation is not too low!Quote:
Even if this is true, so what? That's not how much the goods cost in the US, they're made in China and cost less. Inflation targeting isn't to some magical US with no trade deficit, but to the situation we exist in today. In that situation, inflation much below trend (or even deflation) will have serious macroeconomic consequences, with Japan being a perfect example. If things ever change to start pushing prices upwards, the Fed can always turn around and tighten monetary policy, but I don't see it happening any time soon.
Trade in general? I agree. It's good. But this is a special situation, because we as a country have been too short-sighted and even delusional in dealing with the deficit.Quote:
Bullshit, this is scare mongering. Trade is not a zero-sum game. Americans are benefiting by having cheap Chinese goods so they can buy more of stuff (higher quality of life) and spend their extra money on other things. This extra cash can easily be spent on US goods and services, and US economic growth is not necessarily harmed by Chinese growth.
In the long run, with trade like this, we are harmed. It immediately exports jobs overseas. That's fine, as long as the benefits of trade diffuses into the economy and creates even more jobs, but does it?
Let's just forget the debt problems created by maintaining a constant country deficit... Given the shrinking middle class (ie: more and more people falling below the mean income) as a percentage of the population, and continually falling income mobility since the late 1980s or so... what conclusion can we draw from these figures...?
My conclusion here is that the current 9.6% unemployment level reflects a higher structural unemployment level rather than just temporary unemployment, because the low unemployment level enjoyed till around 2006 was just an illusion created by the promise of infinitely increasing US deficit spending.
Here, for example:Quote:
Originally Posted by agamemnus
http://finance.fortune.cnn.com/2010/...ar-debasement/
Source?Quote:
True, but still the overall effect is to lower the CPI.
*yawns* We want inflation, it's the hyperinflation that's the problem.Quote:
I never claimed "rampant inflation", but inflation nonetheless.
So? Doesn't have anything to do with Fed policy.Quote:
The CPI does not measure what the average American can buy. Given two periods with two different CPI levels, the difference in the CPI does not equate to a difference in spending power because of employment and wages also change.
Uh, not true. Deficits increased steadily from 1991 or so to 7.4% of GDP in 2000. Regardless, I recognize that Japan and the US are hardly similar, but they're a lot more similar than the US and, say, Greece.Quote:
Japan didn't run deficits during its 1990s stagflationary period, as far as I remember. Anyhoo, inflation is not too low!
This is the same argument made about immigrants taking our jobs. It's simply wrong. This is not a zero sum game.Quote:
In the long run, with trade like this, we are harmed. It immediately exports jobs overseas. That's fine, as long as the benefits of trade diffuses into the economy and creates even more jobs, but does it?
Those numbers are disputed. See my earlier thread about this.Quote:
Let's just forget the debt problems created by maintaining a constant country deficit... Given the shrinking middle class (ie: more and more people falling below the mean income) as a percentage of the population, and continually falling income mobility since the late 1980s or so... what conclusion can we draw from these figures...?
What does structural unemployment have to do with China?Quote:
My conclusion here is that the current 9.6% unemployment level reflects a higher structural unemployment level rather than just temporary unemployment, because the low unemployment level enjoyed till around 2006 was just an illusion created by the promise of infinitely increasing US deficit spending.
For wiggin and aggie. Commodity inflation:
http://www.econbrowser.com/archives/...y_infla_2.html
*Strokes moustache*Quote:
Originally Posted by GGT
Ha, nice try. You almost had me, there. It's a trade-weighed index... Well, we're buying more cheap goods from China than before, and fewer goods from Europe (edit: RELATIVELY), so obviously it wouldn't fall as much.Quote:
Originally Posted by wiggin
I'm saying that the overall effect of a flood of cheap goods from another country is to lower the CPI (versus those cheap goods NOT coming in), even if commodity prices increase (otherwise, why buy those goods?). I don't see why you are asking me for a source for this...Quote:
Source?
Or deflation, as you were saying. But I don't think we have deflation.Quote:
*yawns* We want inflation, it's the hyperinflation that's the problem.
I'm saying that the Fed has to look at both the CPI and the entirety of the economic situation.Quote:
So? Doesn't have anything to do with Fed policy.
Hmm, not sure. What's this, then? http://www.tradingeconomics.com/Econ...spx?Symbol=JPYQuote:
Uh, not true. Deficits increased steadily from 1991 or so to 7.4% of GDP in 2000. Regardless, I recognize that Japan and the US are hardly similar, but they're a lot more similar than the US and, say, Greece.
That's not my point... My point is that trade does not benefit everyone in the economy equally if the wealth does not diffuse through.Quote:
This is the same argument made about immigrants taking our jobs. It's simply wrong. This is not a zero sum game.Quote:
Originally Posted by Agamemnus
O? Which one?Quote:
Those numbers are disputed. See my earlier thread about this.Quote:
Originally Posted by Agamemnus
The trade deficit!! AAAAAAAAAAAARHHHHHHHGGGKIGY&N(G^&*VD%^VD^&VW$%BExw v5erase7f8e4t <---- I make my passwords like this... in a fit of indescribable insanity!Quote:
What does structural unemployment have to do with China?
I specifically said it was a trade-weighted valuation, you asked for a source, I gave one.Quote:
Originally Posted by agamemnus
It's hardly that simple. This seems to be the problem with most of your reasoning.Quote:
I'm saying that the overall effect of a flood of cheap goods from another country is to lower the CPI (versus those cheap goods NOT coming in), even if commodity prices increase (otherwise, why buy those goods?). I don't see why you are asking me for a source for this...
Not yet, but inflation expectations took a serious blow this spring/summer until QE2 was hinted at in the September Fed meeting. Too low expectations (even if technically positive) can lead to a deflationary spiral.Quote:
Or deflation, as you were saying. But I don't think we have deflation.
The entirety of the economic situation is that the risks of deflation far outweigh the risks of inflation right now, and the Fed's tools to deal with inflation are a lot better than their available tools to deal with deflation. So, better to err on the side of caution. Trust me, if we get into serious deflation things will be far worse for consumers than they are today.Quote:
I'm saying that the Fed has to look at both the CPI and the entirety of the economic situation.
Sorry, I thought you meant fiscal deficits, not trade deficits. Yes, in general Japan is a trade surplus country, but that has little bearing on its deflationary impact (in fact, deflation really screwed over Japanese exporters). Regardless, I think we can agree that deflation would be a Bad Thing.Quote:
http://www.theworldforgotten.com/showthread.php?t=1190Quote:
O? Which one?
That's not a structural problem IMO; structural unemployment is normally seen as a skill mismatch.Quote:
The trade deficit!! AAAAAAAAAAAARHHHHHHHGGGKIGY&N(G^&*VD%^VD^&VW$%BExw v5erase7f8e4t <---- I make my passwords like this... in a fit of indescribable insanity!
Anyways, I think we're talking past each other. All I wanted to say from the beginning is that QE2, like QE1, is a fairly reasonable monetary policy to deal with unprecedented levels of deleveraging in the economy that had a significant contractionary impact. Inflation is simply not a major concern right now, as evidenced both by market inflation expectations and current inflation measures (as well as the effects of QE1 on a number of indicators of the cash supply). When inflation and economic activity pick up again, the Fed can easily contract the money supply to keep inflation in check. *shrugs* You can argue that the Fed should be doing something else, but I think they're doing their job as mandated by Congress.
I see.
Whenever the Fed does a reverse course on anything, it makes markets jittery, however.
In terms of structural unemployment, I do agree that normally a skill mismatch is what it is. Just think about this, though. India and China each have a population of 1.2/1.4 or so billion people, and hundreds of millions in each country now have a skill set in technical/research and business fields. Up until before 2007 (when housing prices stopped rising), these are the fields that all the professors, and all the textbooks, and all the TV programs, and all the reporters, and all the King's men, have said would make the US competitive in the world: the US would buy cheap goods in return for services, research innovation, business leadership, and very complex items such as planes.
And it did happen, but of course much of the cheap goods were also financed by the Chinese drive to industrialize. (the yuan peg) Now that so many people are unemployed -- and not just those who have a high school education, but across the board -- and many European and Asian markets have almost fully recovered, how are we getting any of these jobs back? They don't need us anymore. The structural problem is that we do not have enough capital invested, not that we don't have enough infrastructure invested.
In my state, Massachusetts, we have many great, clean and efficient stores and malls. Our highway system is excellent, and the local roads are decent enough (though very bad in some places). We have good water, electricity, and cable services. We have many of the best universities in the country, and in the world. Our education system is one of the best in the country. We are one of the thinnest and healthiest people in the country.
However, our political, economic, and social system is a mess.
Even with low housing values, developers are now converting pristine woodland in the north into unattractive, expensive, and (often) vacant house lots, devoid of trees. They are building right next to major highways. (who would want to live there?) In short, our urban planning laws are weak and encourage terrible planning (see the 2010 Question 2 about housing permits, which failed miserably).
Our big high-tech industries, pharma and software, are stagnating and failing because of lack of money availability in the economy. Our urban cities are crumbling because of a political culture of corruption and irresponsibility, the poor's belief in the right to handouts, and stagnant police funding despite tax increases and stimulus funding.
We have a 6.25% sales tax rate, while New Hampshire to the north has 0% -- no one smart buys TVs, expensive furniture, fridges, or computers in this state. Our political discourse is very weak, with all our representative slots going to Democrats in the last election. We are paying more and more for social welfare to people (many here illegally and who can't speak English) who just get by in crappy apartments and have tons of babies.
Even though we are one of the thinnest and healthiest people in the country, many of us are fat or obese slobs.
So... yes, nice rant Aga, but what about the structural unemployment you were going to talk about? Well, the structural unemployment problem is still a skill mismatch. We all want to work in business/marketing pharma research, software, or engineering firms since that is what our top world-renowned universities actually teach, but no one is hiring. Instead, there are plenty of openings in the bloated (and soon to be bloated even more) all-encompassing "health care industry", but low supply -- the bubble of 2015. There's also a huge demand for life-force batteries in China, but just not enough people here willing to do it. We should just import people from Mars; I'm sure they're willing to work the long life-force battery hours for ridiculously low wages.
I don't want to drag this argument out any further, so I'll just say that I'm much more bullish on America than you are.
LOL, well.. even though I am disappoint, I am bullish on Amerika, too. I have to be in order to stay sane. The alternative is freezing in Canada, getting probed daily you-know-where by British cameras, or learning Chinese...
My memory must be failing. I could have sworn wiggin said (in some other thread) that our problems can't be addressed with Fed monetary policies.
My reading comprehension must be failing. It looks to me like wiggin is saying that what the Fed is doing is perfectly reasonable to address our problems.
:confused:
Quote:
REVIEW & OUTLOOK | NOVEMBER 13, 2010
Embarrassment in Seoul
The world won't follow slow-growth, weak-dollar America.
Has there ever been a major economic summit where a U.S. President and his Treasury Secretary were as thoroughly rebuffed as they were at this week's G-20 meeting in Seoul? We can't think of one. President Obama failed to achieve any of his main goals while getting pounded by other world leaders for failing U.S. policies and lagging growth.
The root of this embarrassment is political and intellectual: Rather than leading the world from a position of strength, Mr. Obama and Treasury Secretary Timothy Geithner came to Seoul blaming the rest of the world for U.S. economic weakness. America's problem, in their view, is the export and exchange rate policies of the Germans, Chinese or Brazilians. And the U.S. solution is to have the Fed print enough money to devalue the dollar so America can grow by stealing demand from the rest of the world.
But why should anyone heed this U.S. refrain? The Germans are growing rapidly after having rejected Mr. Geithner's advice in 2009 to join the U.S. stimulus spending blowout. China is also growing smartly having rejected counsel from three U.S. Administrations to abandon its currency discipline. The U.K. and even France are pursuing more fiscal restraint. Only the Obama Administration is determined to keep both the fiscal and monetary spigots wide open, while blaming everyone else for the poor domestic results.
The American failure was most acute on trade, as the U.S. and South Korea couldn't agree on a bilateral pact that the two countries had signed three years ago. Mr. Obama had campaigned against that pact in 2008, let it languish for two years in office, and now suddenly wants the South Koreans to agree to new terms.
But the Koreans aren't pushovers, and they want new concessions from America in return. They also see a less urgent need for a trade pact with the U.S. because, while Mr. Obama has fiddled, the Koreans have been negotiating other trade deals with all and sundry—not least a pact with the European Union that carries nearly identical terms to what the Bush Administration negotiated in 2007. Mr. Obama's negotiators left Seoul empty-handed.
Meanwhile, China and other Asian economies see first-hand that rather than spurring more U.S. growth (on which Asian exporters still depend), U.S. monetary ease has flooded the developing world economies with dollars they're not able to absorb; produced exchange-rate turmoil to the detriment of the region's traders; and sent the world's dollar-denominated commodity prices climbing.
Far from distancing himself from this Federal Reserve policy, Mr. Obama defended it more than once. "From everything I can see, this decision was not one designed to have an impact on the currency, on the dollar," Mr. Obama said in Seoul. "It was designed to grow the economy."
But this defense will only confirm to most of the world that the goal of U.S. monetary easing is solely domestic and political. Isn't the U.S. central bank supposed to be independent? Mr. Obama may come to regret his political embrace of Fed Chairman Ben Bernanke if commodity price increases flow through to consumer prices and leave Americans feeling poorer than they already feel.
The Administration's dubious monetary theories also led it to waste valuable political energy pushing an unlikely deal with China to revalue the yuan (and devalue the dollar). Instead Mr. Obama could have argued for reforms to China's capital account that would do some genuine good. China's exchange rate by itself has not contributed to global imbalances, but China's capital-account regulations have.
In particular, the fact that Beijing sterilizes capital inflows and recycles them into U.S. government debt instead of allowing capital to enter and exit more freely contributes to a global misallocation of resources. Mr. Geithner is too busy focusing on the exchange rate to notice, let alone to respond to Beijing's complaints about U.S. monetary instability by challenging China to liberalize its own capital account.
The world also rejected Mr. Geithner's high-profile call for a 4% limit on a nation's trade surplus or deficit, which would amount to new political controls on trade and capital flows. This contradicts at least three decades of U.S. policy advice against national barriers to the flow of money and goods. We don't like to see U.S. Treasury Secretaries so completely shot down by the rest of the world, except when they are so clearly misguided.
***
None of this should be cause for celebration, because a world without American leadership is a more dangerous place. The U.S. is still the world's largest economy, the issuer of its reserve currency, and its lone military superpower. No other nation has the will or capacity to lead the way the U.S. has for 70 years, so faltering American influence will produce a vacuum in which every nation can seek narrow advantage.
If Mr. Obama wants to restore his economic leadership, both at home and abroad, he needs an urgent shift in priorities. Strike a deal with Republicans to extend the current tax rates across the board, pursue the spending cuts proposed by his own deficit commission, end the regulatory binge that has constrained America's animal spirits, stop trying to direct capital toward political mirages like "green jobs," and press Congress to pass the Korean and other trade pacts.
The world will follow American leadership again only when it sees policies that restore robust U.S. economic growth.
http://online.wsj.com/article/SB1000...024501384.html
I guess we can assume that article reflects your exact opinion on the subject since you didn't offer one. I'd like to know how people with this opinion believe any economy can grow without jobs.
Rebuttal: Throwing Free Trade Overboard
The following excerpts pretty much outline my opinion on the subject (and I generally despise Tea Partiers),
Quote:
...frustrated with Washington, and that includes its failure to make free trade work for America. Our trade deficit in manufactured goods was about $4.3 trillion during the last decade, and the country lost some 5.6 million manufacturing jobs.
...the rest of the world is stacking the free-trade deck against us.
...most policymakers agree that the Chinese currency is grossly and deliberately undervalued, that China fails to respect intellectual property rights and that it uses government subsidies to protect its own manufacturing base. Meanwhile, the movement says, the United States does virtually nothing in response.
...what good does it do to reduce the role of our government if foreign governments are free to rig the
rules, attack American industries and take American jobs?
...the value of foreign investments in the United States now exceeds the value of American investments abroad by $2.74 trillion,
...if our trade policy is so successful, (why do) so many experts believe that the 21st century will belong to China, not the United States.
...heroes like Alexander Hamilton, Theodore Roosevelt and Ronald Reagan had no problem restricting imports to promote our national interest.
...push Washington to stand up to China and re-establish American pre-eminence, even at the cost of the country’s free-trade record.
...a fundamental reorientation of our country’s attitude toward trade and globalization.
I can't tell if you dislike trade, or just how we haven't done a good job promoting it. But I think part of our poor job promoting free trade and being able to take on anti-competitive policies abroad is that we have built-up so many barriers to entry over here.
He's a unionist. What do you think?
I have nothing against fair trade.Quote:
Originally Posted by Dreadnaught
Really? Who is paying union dues? Not me, that's for sure.Quote:
Originally Posted by Loki
What's your definition of "fair trade"?
If one partner gives up barriers the other gives up subsidies.Quote:
Originally Posted by Dreadnaught
I agree with Being on this, in a way. (Didn't I have this discussion in a dream I had a few years ago? It didn't end well for anyone, though...)
Tariffs are only a temporary solution.
As I was saying in my earlier rant, the late 90s and early 2000s outlook that we can trade non-tangible goods for cheap manufactured products is starting to fade. We need to put more thingy industry in America. What kind of thingy industry? The really good, high tech kind...
I often enjoy reading/watching about various advances in prosthetics, robotics, nanotech, miniaturization, biofuels and all kind of recycling schemes (has anyone seen the new show Dean of Invention? It's wonderful), and I often wonder why this tech is so slow to permeate through the country. Imo, it is all the government's fault. Perhaps this osmosis is so slow because of not too much or too little regulation, but bads regulation... decaying urban cities (see my street sweeper post) are a light example of this.
=======================
One of the oddest things in this bads regulation that has recently really evoked wonderment is our prescription system. In Spain, France, Germany, etc. (Europe), and even Thailand (was just watching Bangkok Dangerous, which showed this), drugs (like antibiotics) are freely sold at an affordable price by trained licensed pharmacists that would in most cases require a prescription in the US, or even isn't available in the US yet.
So let's take antibitotics as an example. In the US, you'd need a prescription... go to the doctor, and wait 1-3 hours (ok, usually 30 minutes to an hour) in either/or the waiting/exam room. There is a high risk of infection while waiting for the doctor in the waiting room. The exam room that has an unfiltered air conditioning system. Then the nurse comes in and does the routine and unnecessary quick checkup (you only want an antibiotic prescription, damnit!)... after a while the tired doctor comes in. After listening to your problems and request for an antibiotic, he writes a prescription and sends the order to a pharmacy you ask for. You pay $20 as a copay, and your plan or the state pays as well. You go to the pharmacy. Oh, they don't have it. Come back tomorrow at 10AM. Ok, it's 10AM and they still don't have it. You wait another hour and finally get your antibiotics.
VERSUS:
You go to a corner pharmacy in Europe, buy the antibiotics after a quick discussion with the doctor, and off you go.
It just makes me really sad.
The QEII explained.
The Ben Bernank. The Goldman Sachs. :D
One of the Fed's mandates is "maximum employment through monetary policy". But it's viewed it from a monetizing angle, flow of money and credit / price of money and credit. That leaves huge gaping holes in our reality, when more money or more profit doesn't "trickle down" to mean more jobs. Where's the policy for that? :confused:
Regarding "structural unemployment" and "mismatched skill sets", efficiency is hollowing out the American middle. Not a damn thing the Fed can do about that. I've asked this question a million times, but never get a straight answer: How is a service-based economy supposed to grow, when even skilled services are being outsourced overseas or replaced with efficient robotics or computers? Where's the policy for that? :confused:
Quote:
In Rome, a few hours' drive to the east across New York's midsection, the loss of middle-skill jobs is felt in an unusual indirect way. Accountants used to come in from nearby Syracuse to pore over the books of a copper mill owned by Revere Copper Products Inc., a company founded by the famed crier who warned of the coming British.
"They used to have 150 people in their accounting office in Syracuse. Today they come into Revere and they scan the materials, and our accounts and ledgers and computer files, and they'll just transmit that to India. And they'll have a lot of the analysis of our books done in India," said Brian O'Shaughnessy, Revere's chairman.
He declined to name the firm, but noted that the independent accounting firm has substantially thinned its ranks, as have its competitors who bid to win his business.
"Instead of 150 people in Syracuse, they now have about 25 or 30, so all of a sudden you've seen a lot of accounting jobs go offshore," he said.
That might seem surprising, since the conventional wisdom is that the U.S. has become a service-driven economy.
In a 2007 study, Princeton University economist Alan Blinder estimated that 1 in 4 U.S. jobs potentially could be sent offshore because of technology, low-cost labor and the fact that service sector jobs are so much more abundant in the U.S. economy.
"I'm not totally convinced that the deep recession has accelerated the trend toward offshoring. There are certainly examples of that. But the main effect seems to be that firms learned to get by with less labor, whether domestic or foreign," said Blinder, a former vice chairman of the Federal Reserve. "That said, as employment expands and labor markets normalize, we should see the offshoring trend reassert itself."
Blinder identifies accountants and providers of similar financial services as prime targets. Accounting blogs set up to lure these jobs to India boast of a $47,000 saving per U.S. accountant whose job is sent offshore.
Historical trends also reveal the mounting loss of middle-skill jobs.
According to data in the MIT study by Autor, skilled professional employment rose by 28 percent from 1979 to 1989, while employment in office and administrative jobs jumped 11 percent.
Then, from 1999 and 2007, those employment gains slowed to 11 percent and 1 percent respectively. And from 2007 to 2009, spanning most of the Great Recession, there was no job growth for professionals, while office and administrative employment fell by 8 percent.
This loss of middle-skill jobs — what Autor calls polarization of the job market — intersects with another discouraging trend, the concentration of wealth at the highest rungs of the wealth ladder.
Read more: http://www.mcclatchydc.com/2010/11/1...#ixzz15H4PgX4x
Heh, nice video especially at about 1 minute.
http://blogs.wsj.com/economics/2010/...-ben-bernanke/
Quote:
NOVEMBER 15, 2010, 12:01 AM ET
Open Letter to Ben Bernanke
By WSJ Staff
The following is the text of an open letter to Federal Reserve Chairman Ben Bernanke signed by several economists, along with investors and political strategists, most of them close to Republicans:
We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.
We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.
We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.
The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.
Cliff Asness
AQR Capital
Michael J. Boskin
Stanford University
Former Chairman, President’s Council of Economic Advisors (George H.W. Bush Administration)
Richard X. Bove
Rochdale Securities
Charles W. Calomiris
Columbia University Graduate School of Business
Jim Chanos
Kynikos Associates
John F. Cogan
Stanford University
Former Associate Director, U.S. Office of Management and Budget (Reagan Administration)
Niall Ferguson
Harvard University
Author, The Ascent of Money: A Financial History of the World
Nicole Gelinas
Manhattan Institute & e21
Author, After the Fall: Saving Capitalism from Wall Street—and Washington
James Grant
Grant’s Interest Rate Observer
Kevin A. Hassett
American Enterprise Institute
Former Senior Economist, Board of Governors of the Federal Reserve
Roger Hertog
The Hertog Foundation
Gregory Hess
Claremont McKenna College
Douglas Holtz-Eakin
Former Director, Congressional Budget Office
Seth Klarman
Baupost Group
William Kristol
Editor, The Weekly Standard
David Malpass
GroPac
Former Deputy Assistant Treasury Secretary (Reagan Administration)
Ronald I. McKinnon
Stanford University
Dan Senor
Council on Foreign Relations
Co-Author, Start-Up Nation: The Story of Israel’s Economic Miracle
Amity Shales
Council on Foreign Relations
Author, The Forgotten Man: A New History of the Great Depression
Paul E. Singer
Elliott Associates
John B. Taylor
Stanford University
Former Undersecretary of Treasury for International Affairs (George W. Bush Administration)
Peter J. Wallison
American Enterprise Institute
Former Treasury and White House Counsel (Reagan Administration)
Geoffrey Wood
Cass Business School at City University London
A spokeswoman for the Fed responded:
“As the Chairman has said, the Federal Reserve has Congressionally-mandated objectives to help promote both increased employment and price stability. In light of persistently weak job creation and declining inflation, the Federal Open Market Committee’s recent actions reflect those mandates. The Federal Reserve will regularly review its program in light of incoming information and is prepared to make adjustments as necessary. The Federal Reserve is committed to both parts of its dual mandate and will take all measures to keep inflation low and stable as well as promote growth in employment. In particular, the Fed has made all necessary preparations and is confident that it has the tools to unwind these policies at the appropriate time. The Chairman has also noted that the Federal Reserve does not believe it can solve the economy’s problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators, and the private sector.”