Inflation Is Going to Get Ugly
Federal Reserve officials are acknowledging increasing weakness in the economy, signaling a willingness to cut rates again at their next meeting. But inflation concerns are rising among some officials, indicating the magnitude of their next move may be a matter of contention......
Some officials, however, expect growth to rebound in the second half, and they are wary of cutting rates so low now that they would spur higher inflation as the economy recovers. Monetary policy works with a lag, so interest-rate cuts tend to boost the economy six months to a year after they are implemented.
"The Fed has to be very careful now to add just the right amount of stimulus to the punch bowl without mixing in the potential to juice up inflation once the effect of the new punch kicks in," Richard Fisher, president of the Federal Reserve Bank of Dallas, said in a speech in Mexico City yesterday. Mr. Fisher dissented in the Fed's latest vote, which lowered the interest-rate target half a point.
Charles Plosser, president of the Federal Reserve Bank of Philadelphia who also is on the voting rotation this year, suggested this week that he would need to see a deeper deterioration in the economy -- beyond the weak numbers already expected -- to support further easing.
But Mr. Plosser, who backed the last two rate cuts, said he expects "little progress" in lowering a key inflation measure this year or next, "and I am skeptical that slower economic growth will help," he said. "All you have to do is recall the 1970s when we experienced both high unemployment and high inflation to appreciate that slow economic growth and lower inflation do not necessarily go hand in hand."
This has been one of the main reasons I have argued against the rate cuts over the last few months. The bottom line is inflation is nowhere near a good level.
Here is a chart of the year-over-year change in inflation:
And here is a chart of the year-over-year change in money growth
Let's look at the prices some important commodities that form the bedrock of our economy.
Wheat:
Gold:
Copper:
Oil
Corn
Inflation looks really tame, doesn't it (end really sarcastic, smart-ass tone)
I first started to become concerned about inflation after my twice weekly shopping trips. I noticed that things I buy regularly -- milk and chicken -- were increasing in price to uncomfortable levels. In Houston Texas, a gallon of milk was roughly $2.99/gallon for the longest time. Over the last 6 months it has increased in price to $3.39/gallon. Bonless skinless chicken has increased from approximately $5.50/package (roughly 4 chicken breasts) to over $7.00 package. Then I started to listen to check-out conversation and it was all centered on prices. I realize the Bonddad's shopping list is hardly exciting reading, but this is where my concern started.
Now we have stories like these about agricultural prices hitting record highs and inflation hedging commodites like gold and sliver doing likewise. Anyone who follows these markets -- wheat, corn and the like -- has seen huge price increases over the last 5-7 years. While the Fed was concerned about "core" inflation -- great if you don't eat or drive anywhere but completely useless for anything else -- non-core inflation was running through the roof.
And it's not as though interest rates were sky high in the first place. Take a look at the following charts from the St. Louis Federal Reserve:
Effective Federal Funds:
10-Year CMT
30-Year CMT
AAA Corporate paper
BBB Corporate paper
Interest rates are cheap beyond belief. It's not as though money is expensive right now. The central problem isn't the cost of money -- it's a poorly managed financial sector. But thanks to 17 years of Alan "cheap money" Greenspan, we're all use to the Fed cutting rates whenever we feel economic pain. Thanks for nothing.
Banks are tightening lending standards for businesses and consumers -- even beyond real-estate loans -- and companies' demand for credit has weakened, a new Federal Reserve survey of senior bank-loan officers shows.
The January survey offers the hardest evidence yet that the credit crunch is spreading. Although banks also reported some tightening of lending requirements on credit cards and other consumer loans, commercial and industrial loans have been the most severely affected.One-third of the U.S. banks and about two-thirds of the foreign banks responding told the Fed they had tightened lending standards on commercial and industrial loans during the three months ended Jan. 31. About half the banks said they have widened the spread between their cost of funds and what they are charging borrowers.
"Bankers are becoming more cautious," said Keith Leggett, economist at the American Bankers Association in Washington, "but also borrowers are getting more cautious."
About a third of the banks participating in the survey reported weaker demand for commercial and industrial loans, while about one in 10 reported strong demand. Among those that saw a reduced appetite for loans, "a decrease in customers' needs to finance inventories and investment in plant and equipment" was cited frequently. 70% of the respondents cited a drop in businesses' needs for merger-and-acquisition financing as a reason for lower demand.
Here is a link to the Fed's report
So now we hear the Federal Reserve actually talking about inflation. That's nice. It's what they should have been talking about all along.
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I understand the point and am also concerned about inflation. But inflation is a less immediate concern than a tanking economy.
The economy turned over last August and probably dived into actual recession in December. Until January the Fed had been dragging its feet but finally played catch-up with their "surprise" overdue rate cut in January. They now seem to be on target.
What the Fed needs to do is continue the steep cuts for the next couple of months followed in short order by steep increases. Granted, that will lead to stagflation but that may well be the best of the bad options this country faces as a result of years of improper economic policy.
Another eye opening post Bonddad. Thanks as always.
Bonddad, your "sarcastic, smart-ass tone" really becomes you. Welcome aboard...L
I hate to say I told you so, but the radicalization of Bondad is upon us!
It happens to people with common sense who get fed up with bull.
Hale, I just want to thank you for rearin back and bitch-slapping all those Heritage/Cato Institute trolls that used to permeate this site whenever an economic thread came up. Since you've been putting up these magnificently researched and fact based data exposing "doo-doo" economics for what it is, they won't dare post here. You couldn't piss in a thimble and wet one of em.
PS I grew up on a farm before I moved to the Big Cty Atlanta, and I can promise you the farmers don't get anywhere near those prices.
Based on evidence, I think it's fair to characterize pronouncements by the Fed and the Department of Commerce as purely political and their so-called benchmarks as purely political as well.
The degree to which "official" measures of economic activity actually reflect reality on the ground has increasingly approached zero during this Administration. That's not to say past Administrations have been any better.
It's long past time the public sees these exercises for what they are: pure wishful thinking based on analysis of the latest slain chicken's guts.
Hey BONDDAD,
May I suggest you do a column on the weak dollar and its effects on inflation and America's competitiveness? I don't think people realize what a big deal this is.
For example, since Bush took office, crude oil is up about 110% in Euros, but up about 240% in dollars, the difference being the depreciation of the dollar. I'm sure you could do the same with other commodities.
Bingo.
Try out my "Euros-in-
My solution to help the middle class would have been, instead of the silly stimulus package, to
reign in the hedge funds and the oil future's market and then get gas down to $ 1.50 a gallon.
Now this would shed a glimmer of hope. However, this stimulus package now has raised the price of oil, which came to $ 29 billion,
and by summer we will have more like $ 5.00
per gallon. It was the gas prices that sucked the life out of the economy!
Why is nobody listening? I have been saying and writing this for some time. I do not know how the government comes up with the numbers of inflation, but you cannot exempt energy from that calculation. It is like excluding the cost for the Iraq and Afghanistan wars from the budget. Or the IOUs in the social security fund, that makes the Republicans squirm. Or like the debt services is only calculated as ratio of the Nation's GDP. All these indicators rely on calculations that are based on calculations and on assumptions. Who came up with the formula to keep the deficit under 3% of GDP. Like you are way cool if you score 1% of GDP new debt in the budget. Are they calculating the drug trafficking as part of the GDP? Lets assume the credit markets crunch crunches on and the government cannot find enough money to borrow: there is not enough to go around. Then it does not matter whether it's 1, 2 or 3% of GDP. If a gallon of milk costs $5 and you have only $4.90 and can't borrow: no milk for you buddy. If you are trying to sell your house and there is no money: what is the value of your house? Nothing. If you Borrow money for your house from the Chinese (communist) government, is your house still in America?
And still, there's a great deal of resistance to a message that we need to use less energy.
I really don't think that people understand the magnitude of the energy lottery that we won 150 years ago or so. One barrel of oil has the amount of joules, or energy, of up to 25,000 hours of human labor. And at 40 hours a week, that's 12.5 years of labor for one barrel of oil. And the average American uses 25 barrels. That's 300 years of labor from an energy slave, just from the oil. At $20 per hour, that's $500,000 per barrel, but it's selling for under $100.
That total amount of energy in BTUs is very hard to replace. There are alternative sources—solar, wind, geothermal—but none of them are liquid fuels and none of them have the transportability and energy density that oil does. So it's not just a plug-and-play, BTU-engineering problem.
They're working on high capacity capacitors to replace chemical based batteries. We'll get there. In the meantime, let's use renewables as much as we can.
Its amazing that those socialist Europeans with their free healthcare, no time limit unemployment
benefits have a much better economy than the US.
But then most of them are not funding two unnecessary foreign occupations.
Who says they do have a better economy? Last time I looked growth was low to stagnent. Government debt high. And the new French president is suggesting that the welfare state be scaled back a bit.
As opposed to the US, where the growth is low to stagnant, government debt is high, and the current US president is saying that we need to scale back the welfare state a little bit?
If europe is really doing so poorly, how come the Euro is becoming the currency of choice for trade?
Correct me if I am wrong, but hasn't Germany taken off? I thought after years of slow to no growth they are flying.
Wulfstan,
Bud, please get a life and stop posted irrelevant nonsense.
Be careful what you wish for..For you may have to sample what the rest of us have to live with.
Just wait until you get a little older and the HIGH price of health insurance and medications reaches YOU.
YOU my friend will cry harder than I will.!!
What the hell are you talking about? He's saying how he supports single payer, or even socialised medicine, and you're talking about how the high price of insurance is going to get him later???
Uh, I'm no economist, but doesn't a huge tax cut for the richest Americans also cause inflation?
That depends. It would not be if the government could curb its spending.
I like how word that..."ri
I would like to see the size and scope of government rolled back...eve
If you granted tax cuts proportional to what government spends that would be anti-inflationary.
Tax cuts for the rich have a lot less effect because they will not spend the money. They will hide it somewhere in the Caribbean. A lot of the money will also go to venture capitalists which results in almost zero production of real goods.
"The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered.
-Thomas Jefferson (3rd President of the United States. 1743-1826)
Ok, that said, we know that if Dems win in the fall the market will blow--just as it was set-up to go down when Bush took office in 2000. The only thing is, this time Bush has so wrecked our economy and we have lost so many jobs, I really fear how this will play out.
What should have Bush done different about the economy? Not the war...the economy?
ummmmm....
How about having a real energy task force, not a closed-door oil company advisory panel?
Raised taxes to pay for his wars.
I want my constitution back!
You mean the one that made no mention of SS or Medicare?
The one that authorized Congress to mint money, the one whose purpose was to promote the general welfare.
How about the one with the first, second, third, fourth, etc... Amendments
Oil is up, way up, the dollar is down, way down, both as a result of the excesses of the Bush administration. Domestically, food crops are through the roof due to the price of oil for Christ sake, biofuel. And the government can't stop borrowing because, politically, we can't raise taxes to meet spending.
This may be the economic perfect storm. If China decides to float its currency, we will be toast.
My only hope is that when we start over with an economy the size of Brazil's, that we will have learned a lesson about unfettered capitalism. But, we seem to have forgotten about Hoover already.
unfettered capitalism enhances the rich and makes a middle class poor.
the problem becomes in america the middle has bought into unfettered capitalism reinforced by a corp media that owns the air waves.
many older americans are still looking or commies under their beds and treat capitalism as benefiting them. suckers.
there is a sucker born every minute and two capitalists to take him or her.
from capitalism to unfettered capitalism to imperialism to facism to war mongering.
welcome to america.
"unfettered capitalism enhances the rich and makes a middle class poor."
Can you explain this further?
I think if anything the level of taxes is the hardest thing for the middle class to overcome. you now have to work until about May 15th every year just to pay all the taxes...fe
We have created a class of government workers who have inserted plum pension plans that pay almost 100% of what they earned while working while the poor private sector worker gets maybe 40-50% if he is lucky. How is going to be sustained when it is the private sector guy paying the government guy's pension?
That is just one of many pressures.
If china floats its currency it will put US based mfg back to work creating products, jobs and wealth, negating the deleterious effects of china
Great idea! And you know how to make them do this, right? Oh that's right, China has decided that they are going to simply define the money's value, and has refused to float it for the last few decades!
Don't be silly. There is NO inflation now, nor will there be... until wages rise. THEN all hell will break loose. You see, price inflation is GOOD. It means the deserving folks at the top are getting more and the plebes at the bottom are coughing up their rightful due. When wages rise, it means the plebes are getting more and the toffs are paying out. AND THAT IS A CATASTROPHE. As long as nothing affects the rich, it's not a bad economy.
Now that we all understand conservative economics, we can all sleep easy knowing it's smooth sailing until a Democrat gets in office. Then we can all blame her (or him) for everything that goes wrong.
Inflation of the currency is caused by more money chasing available goods for sale and the sole controller of inflation is the Federal Reserve.
Greedy workers and pay rises ( non existent today) are NOT the cause of price inflation.
I believe he was being sarcastic.
yea, well while all you plebes are sitting around blaming everyone else for your problems I am out there working hard and making money.... not rich...but my income is increasing every year.
That's all you have to do. Doesn't matter what Bush does, the legislature does, nobody....
Yeah, cause that's always the way that it goes! Oh wait, for most people, working hard and making money is fine, until some disaster strikes, such as a car accident, or a job outsourced, or a loss of healthcare, or anything else that will make it so that they aren't able to continue, due to the economic policies of bushco(tm)
It matters a LOT what Bush does and the legislature does.
I love all you guys who think that just because you're out there working hard, the solution for everyone is just that simple, that their situation is the same as yours and your solution applies to them. Pure Republican talking point.
1- There were people in Asia, Russia, Mexico, Brazil, Argentina, all working hard. One day their money was worth 10,000 for an ounce of gold, the next day it was worth 200,000 for an ounce of gold. You think that can't happen to you? Look at the price of gold the last 7 years.
2- Doesn't matter what Bush does? Our third largest item on our National Budget is the INTEREST on our National Debt. Some $429 Bil. in 2007. Out of a $3 Tril budget, that is a chunk. Pays only interest, no principle. More than 33% of that interest is due ONLY to Bush and his GOP pals. About another 33% is due to REAGAN and BUSH. Gee, that would pay for EVERYONE's free healthcare. And a bunch of roads, bridges. And some R&D. But, no, it goes to service debt and buys us....NOTH
My guess is that due to a reluctance to face class and wealth distribution issues, the US relies too heavily on the Federal Reserve. The problem is that there are limits to what cheap money can do to keep the economy running well in the long term. After all, right now the problem is not that people have not borrowed and spent money, but that they have resisted the impact of wealth redistribution upward by borrowing and spending money, and are now tapped out.
So basically, we are going to see debt repudiation. It may take the form of write-downs of mortgage debt, repayment in inflated dollars, or whatever, but that is what is going to happen. The Fed opting to risk inflation is really just a judgment that inflation is a less destabilizing means of debt repudiation than the alternatives.
Perfect. The time honored solution for excess federal debt. Inflate your way out of it. But it only works as long as creditor nations are hostage to our markets. Has anyone done the math?
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