"America's economic policy mix is a threat to the world"

[Hazir]

Eh, you are aware that there were elections in the US 2 days ago which pretty much made it impossible for the President to do what you accuse him of?

[wiggin]

Funny that you claim to know better than the FED what their QE under present circumstances will do.

Uh? The debate at the Fed isn't what QE will do, it's whether it is necessary to avert a deflationary spiral.

http://www.washingtonpost.com/wp-dyn...110307372.html

Today, most measures of underlying inflation are running somewhat below 2 percent, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run. Although low inflation is generally good, inflation that is too low can pose risks to the economy - especially when the economy is struggling. In the most extreme case, very low inflation can morph into deflation (falling prices and wages), which can contribute to long periods of economic stagnation.

Even absent such risks, low and falling inflation indicate that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating. The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed. With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

While they have been used successfully in the United States and elsewhere, purchases of longer-term securities are a less familiar monetary policy tool than cutting short-term interest rates. That is one reason the FOMC has been cautious, balancing the costs and benefits before acting. We will review the purchase program regularly to ensure it is working as intended and to assess whether adjustments are needed as economic conditions change.

Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated. Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation.

Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable.

(emphasis added)

Look, I'm not saying Bernanke or the Fed have a crystal ball and know precisely what is going to happen in the economy. But they know more or less what effect QE will have on the economy, inflation, asset prices, etc. They are obviously aware of the future inflation concern but frankly it isn't currently an issue and they have lots of well-honed tools to clamp down on inflation in the future if it does become an issue. That's the whole point of the FOMC.

Regardless, this has little bearing on your statement I took issue with, which was this:

Yeah the rest of the world isn't going to like this much; the US is inflating itself out of its debts. They may have a closer look at Weimar to get an idea of how dangerous that is.

Inflation is too low. The Fed is aware of concerns about too high inflation and is making sure QE and other measures (e.g. incredibly low interest rates) don't result in said high inflation. So, conclusion? The Fed is doing their job, trying to keep inflation at a low - but not too low - level. Hardly 'inflating itself out of its debts'.

[agamemnus]

Well, inflation is only "low" because the calculation is done with a bucket of artificially deflated Chinese goods. The dollar hasn't been doing so hot recently.

[wiggin]

Exchange rates have little to do with inflation.

[Hazir]

Uh? The debate at the Fed isn't what QE will do, it's whether it is necessary to avert a deflationary spiral.

http://www.washingtonpost.com/wp-dyn...110307372.html


(emphasis added)

Look, I'm not saying Bernanke or the Fed have a crystal ball and know precisely what is going to happen in the economy. But they know more or less what effect QE will have on the economy, inflation, asset prices, etc. They are obviously aware of the future inflation concern but frankly it isn't currently an issue and they have lots of well-honed tools to clamp down on inflation in the future if it does become an issue. That's the whole point of the FOMC.

Regardless, this has little bearing on your statement I took issue with, which was this:

Inflation is too low. The Fed is aware of concerns about too high inflation and is making sure QE and other measures (e.g. incredibly low interest rates) don't result in said high inflation. So, conclusion? The Fed is doing their job, trying to keep inflation at a low - but not too low - level. Hardly 'inflating itself out of its debts'.

The problem is that they can't control the inflation that's going to come about because of QE. They are taking the risk of having to fight back an inflation that is much too high at a moment that employment still hasn't picked up.

Exchange rates have little to do with inflation.

Ah yeah, the good old 'our currency, your problem' stance. Well you can try it again, like in the seventies, this time other countries may not feel exactly like there is no alternative to sticking with 'your currency'. With current yields the risk of too high an inflation for US government bonds to be attractive to foreign investors may be in sight real fast.

What America needs is a government that stops attempting to export its problems rather than to deal with them at home.

[wiggin]

The problem is that they can't control the inflation that's going to come about because of QE. They are taking the risk of having to fight back an inflation that is much too high at a moment that employment still hasn't picked up.

Why would inflation increase when employment (and growth) are still very low? That's Japanese thinking, and BOJ timidity is a large part of why their economy has been in the shitter for two decades.

Furthermore, the Fed has lots of tools to bring inflation down, but they're out of conventional tools to increase it. I fail to see why you're afraid that the Fed would be incapable of fighting inflation if that became an issue. If I understand it correctly, you seem to imply (by saying we're 'inflating away our debts') that they are capable but unwilling, but every statement from the Fed (and all of the available data on inflation) seems to indicate that you're wrong.

Ah yeah, the good old 'our currency, your problem' stance. Well you can try it again, like in the seventies, this time other countries may not feel exactly like there is no alternative to sticking with 'your currency'. With current yields the risk of too high an inflation for US government bonds to be attractive to foreign investors may be in sight real fast.

I agree that US monetary policy is having a significant effect on currency markets, but pretty much every economy is monkeying with their currency right now. Certainly a rebalancing needs to happen - deficit countries (including the US) need to depreciate while surplus countries needs to appreciate. That rebalancing is starting to happen, and QE will largely only help that. Europe is actually in a shitty position here because of the Euro - while countries on the periphery desperately need a weaker euro (and some of the bigger deficit countries probably wouldn't mind), Germany's surplus makes that difficult to achieve in a balanced manner.

Anyways, I agree that the US has fiscal problems in the long run, but the hype over inflation risk is just that - hype. Certainly it would be good if eventually the US dollar became just one of several reserve currencies, but there aren't any contenders that are even remotely suitable right now. IMO it would actually help the US not to be the only reserve currency - currently whenever there are concerns about world markets, there's a flight to quality (e.g. the dollar), which drives up the dollar's value and screws over US exporters during crises. Even in a multipolar currency world, though, I think that US Treasuries are still going to be considered extremely low risk investments. Despite all of its problems, most people are long-term bullish on the US economy, and for good reason. US Treasuries are pretty damn safe unless you envision default by the US government. If traders start to see inflation risk (which they haven't, at least looking at the TIPS-Treasuries spread) that is not commensurate with other risks, yields will rise. This is a good thing - it will mean the economy is improving enough that people are willing to invest in something other than government debt, and it probably means that the Fed can unwind their QE positions.

What America needs is a government that stops attempting to export its problems rather than to deal with them at home.

It takes two to tango. Yes, US consumption has been fueled by the fact that everyone else in the world is willing to give us cheap credit. But even if we are willing to take it, others are encouraging us to do so (rather than pushing to improve domestic consumption). Rebalancing is necessary and will slowly happen, but blaming only the US for being the engine of world growth is hardly fair.

[agamemnus]

Exchange rates have little to do with inflation.

Patently false. If the economy depends on trade (and it does), and the main source of imports is a country that is artificially deflating its exports (and it is), then the consumer price index will be artificially low. Commodity prices are increasing, relative to the dollar, while for other currencies they are not (as much). This means that things cost more to produce, even as the CPI holds steady.

[']['ear]

Yes, but at that level everything economic is pretty much interconnected, obviously. I think Wiggin was talking about direct connections.

[GGT]

The problem is that they can't control the inflation that's going to come about because of QE. They are taking the risk of having to fight back an inflation that is much too high at a moment that employment still hasn't picked up.

Ah yeah, the good old 'our currency, your problem' stance. Well you can try it again, like in the seventies, this time other countries may not feel exactly like there is no alternative to sticking with 'your currency'. With current yields the risk of too high an inflation for US government bonds to be attractive to foreign investors may be in sight real fast.

What America needs is a government that stops attempting to export its problems rather than to deal with them at home.

Yet everyone denies there's a subtle currency war going on. Our Fed and Treasury are more concerned with deflation than inflation. Talk of Japan's lost decade seems to already apply to us (US) but it's not acknowledged much. Wages and income have been flat as costs of living have escalated, particularly for the middle classes.

Our inflation (or stagflation) of the 70's was very destructive, mostly to Americans. But that was long before the degree of globalization and sovereign debt posed the problems of today. Back then our policies weren't about coupling/decoupling from other nations, or whose currency reigned supreme. We still had the image and clout of a Superpower, and the world revolved around us (US).

I saw an article today, titled something like, "Bernanke says global recovery depends on a US recovery" but I didn't even read it. That's how jaded and skeptical I've become. Then I see the rising prices of commodities, inflated prices of staples like cotton and corn, oil and fuel. Wall St. is on some manic trend that doesn't make sense in the big picture. Good for investors, traders, speculators, pension funds....not so good for the average consumer or saver.

As winter and holidays approach, along with a lame duck congress and post-election gridlock, I get the feeling that things will get much worse before they get better.

[agamemnus]

Yes, but at that level everything economic is pretty much interconnected, obviously. I think Wiggin was talking about direct connections.

One problem of just looking at the CPI is that it says how much the basket is worth today. Policies that increase or decrease inflation have an effect for the months and years to come. Given that we know from my previous short analysis (with respect to commodities and Chinese goods) that prices will be higher in the future (because of increased taxes needed to subsidize deficit spending, as goods from non-Chinese sources will cost more), the CPI change is ridiculously insufficient as a measure of where inflation is headed.

SO, I would go so far as to say that using CPI change is not only inefficient, but irresponsible; however, looking at the wrong indicators has been the poison of choice for the Fed forever. The Fed looking at the wrong economic indicators is what gave us the 2000 bubble and subsequent over-tightening, for instance.

IF there was a crystal ball that gave us the CPI change for the future, though... then we could use it.

[wiggin]

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.

[earthJoker]

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.

[GGT]

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.”

True, we have a credibility problem, an overblown financial sector, and a demand problem.

Kiss your children and go shopping! The Monopoly board game is 75 years old now, pick one up for funny munny family fun!

[agamemnus]

That's ridiculous, no one looks at the CPI to forecast inflation.

OK..

They look at the spread between a TIPS and a normal Treasury to see the inflation expectation.

Hmm...

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.

So the spread between a TIPS bond market price and a normal Treasury bond market price would cancel out.. what?

[wiggin]

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.

[agamemnus]

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...?

[wiggin]

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.

[GGT]

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.

http://online.wsj.com/article/SB1000...pinion_LEADTop

[wiggin]

So: Sarah Palin can read the party line that someone else wrote for her, and Zoellick said nothing of the sort:

I HAVE to say, I feel a little bad for Robert Zoellick. He has written a piece for the Financial Times that mostly consists of laying out the weaknesses of the global monetary system and proposing sensible reforms for it: things like an agenda of structural reforms to reduce imbalances, a general swearing off of currency market interventions, and an effort to move emerging markets toward floating exchange rates (with limited capital controls to avert destabilising surges of hot money). But no one is paying any attention to that. Instead, the FT has put Mr Zoellick's story on the front page with the banner headline, "Zoellick seeks gold standard debate". All because of this little bit, fifth in his plank of proposals:

"Fifth, the G20 should complement this growth recovery programme with a plan to build a co-operative monetary system that reflects emerging economic conditions. This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.

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."

That's the extent of the gold talk. And honestly, I'm not even sure what's he calling for here. Not only is this point vague, it's also the least necessary of all the things he recommends; obviously markets are very good at revealing expectations of inflation and future currency values already.

It seems like he's trying to work toward a solution to the problem of the dollar's international reserve status. As nearly everyone agrees, other currencies need to play a larger role in international reserves, but it's not necessarily easy to understand how this might take place. There are advantages to being the issuer of a reserve currency—interest rates are kept lower than normal, for instance. But such status also tends to mean a relatively dear currency, not to mention international anger at attempts to allow the currency to weaken (which, in addition to generating a trade advantage reduces the value of foreign reserve holdings). And so countries' are a bit wary about achieving reserve status.

This has led to calls for expansion of the SDR ("special drawing right"), a quasi-currency doled out by the IMF. But an effective global currency requires an effective global central bank, and there isn't one backing the SDR.

So maybe that's the gap in the international monetary system that Mr Zoellick is seeking to fill with gold. But gold just isn't a magic bullet. A real gold standard would likely be deflationary and would bring with it all the problems of any system of fixed exchange rates—stresses on reserves and loss of monetary independence among them. Broad fixed exchange rate regimes don't look that hot right now, given the significant struggles within the euro zone and the imbalances that have been generated within the dollar zone thanks to China's peg. Gold makes for a lousy medium of exchange, and as I mentioned above, its expectation signalling properties aren't perfect or unique.

The world will simply have to fumble its way forward on the reserve currency issue, perhaps focusing first on the development of regional reserve currencies. The healthiest resolution to the monetary trilemma looks, for the moment, to be a regime of floating exchange rates coupled with limited "circuit-breaker" capital controls. And Mr Zoellick must know now if he didn't already; mentioning gold is a good way to get attention, albeit at the cost of having most of your substantive points ignored.

[GGT]

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.

And regardless of what we think of Palin, she has millions of 'fans'. They even follow her every word on Twitter.
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.

[agamemnus]

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.

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.

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.

[wiggin]

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.

[Loki]

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.

[agamemnus]

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.

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.

I don't have a clue what you mean by 'mechanistic inflation expectation' either.

Something that just plugs in some common already-existing values as opposed to gathering your own data and forming your own analysis, I guess.

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.

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.

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.

[']['ear]

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.

[agamemnus]

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

[wiggin]

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.

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.

Something that just plugs in some common already-existing values as opposed to gathering your own data and forming your own analysis, I guess.

Uh, what?

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.

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.

I'm not sure I understand why you think running a trade deficit is somehow hiding part of inflation either.

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.

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?

[agamemnus]

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.

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.

Uh, what?

Rawr.

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.

Just look at all the commodity general price index graphs in the last post I made. They are all trending up.

I'm not sure I understand why you think running a trade deficit is somehow hiding part of inflation either.

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.

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?

The CPI does not measure what the average American can buy, because you must not account for wage inflation in the CPI.

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. . .

[wiggin]

Just look at all the commodity general price index graphs in the last post I made. They are all trending up.

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.

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 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'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, because you must not account for wage inflation in the CPI.

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.

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.

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.

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.

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.

[agamemnus]

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.

Where'd you get the 7% figure?..

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.

True, but still the overall effect is to lower the CPI.

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.

I never claimed "rampant inflation", but inflation nonetheless.

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.

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.

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.

Japan didn't run deficits during its 1990s stagflationary period, as far as I remember. Anyhoo, inflation is not too low!

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.

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.

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.