Going forward, markets expect oil prices to back off slightly from their current level, and I hope they are right.
I presume he is talking about <a href="http://futures.tradingcharts.com/marketquotes/index.php3?market=CL>oil futures. Stupid CNBC always obsesses on the near-term contract.
Looking out a little futher, that there's what we call "backwardation".
Lacker obviously ahsn't gotten the memo: "inflation" (CPI) can never exceed 2%. The BLS & Fed will continue to "adjust" any price increases away with hedonics and subsititution. If this means replacing fuel, food, healthcare, education and housing with cheap imported Chinese lawn furniture and iPods, so be it.
The classic way that governments deal with huge debt problems is to inflate away debt. Encouraging inflation is, almost certainly, the only real solution to dealing with 50%+ price declines in the major bubble areas (the coasts).
Kett82, yep, a graph is always coming. I just want to see the lengthy divergence for myself - and I figured others would too. And as long as I'm looking at the data, I might as well double check Lacker's arithmetic.
Looking out a little futher, that there's what we call "backwardation".
Nemo - I'm not futures expert but if I recall my days in the commodities biz (where I was on the producer side but drank with the trader side)... there are two factors involved in a 'backwardation' condition... (1) prices over time and (2) interest rates. This is because the future price is a translation of present price PLUS holding or future production cost vs the cost of money over that period (interest rates)...
So the backwardation could be because the market anticipates lower prices going forward OR much higher interest rates s.t. future t.v.o.m. discounting increases... or some combo of both.
Those are the major elements of the calc as I recall it, though recollection is also that as relative drivers the price effect is much larger than the interest rate effect.
I find it interesting that he seems to be on the same page as Plosser, too. It will be very interesting when they cycle back onto the FOMC-
they seem to believe that monetary policy is still too loose.
Probably true, but we can't cut back just before an election- that definitely wouldn't be prudent.
in other words, the J6P isn't buying hedonics anymore, so we might as well sop this up during the next recession.
Well, maybe they can start hedonically adjusting food prices in order to account for all the recent genetic improvements. Not just an ear of corn but a ingestible mosquito repellent to boot.
Because the job of a central banker is to protect the purchasing power of currency, it is overall inflation that we need to keep down, not just core inflation.
Lacker isn't currently a voting member of the FOMC, and...
And never will be with an attitude like that. I mean, what a radical concept; "Protect the purchasing power of the currency." It's almost like he's read and believes in our Constitutional republic as enumerated.
One idea that people have about current inflation is that it is commodity driven and that commodity prices rising are mainly a function of economic expansion in emerging markets. I'd like to raise the question for others about what the U.S. Fed should do assuming that picture is true. Does it make sense to keep U.S. growth slow or negative as a response to inflation if the U.S. economy is not what is driving the inflation? My perspective is that there are different constituencies in the U.S. (e.g. what's the best policy for a young worker and what's best for a retired senior living off interest income may well be in conflict), so the Fed has a tough job. But I do feel that it should take into account what is driving inflation and not just whether there is inflation when forming policy.
Those are the major elements of the calc as I recall it, though recollection is also that as relative drivers the price effect is much larger than the interest rate effect.
Not in 1980 it wasn't - that was when I hung out with those traders. It was a toss up then (increasing prices discounted at high interest rates).
So the backwardation could be because the market anticipates lower prices going forward OR much higher interest rates s.t. future t.v.o.m. discounting increases... or some combo of both.
I think you may have this backwards.
For the buyer of the future to be acting rationally, it must be a wash whether he buys the asset now and keeps it, or holds cash and signs the futures contract. (Otherwise he could arbitrage between the two.)
So if interest rates are about to go up -- making the return on cash more attractive -- the prices of the futures would have to go up to compensate.
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that bites you" says a sign held by a UNITE HERE union member at
Wednesday's action in San Francisco. Expanding their "Don't Deposit at
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consumers outside Countrywide Bank centers across the country. The union is
asking consumers not to deposit their savings at Countrywide.
So we need a multiple of current interest rates to make them about breakeven in effect per your recollection...sounds about right, can you recall the interest rate used by the trader/drinkers?
But I do feel that it should take into account what is driving inflation and not just whether there is inflation when forming policy.
Agree 100%. If prices are rising as a result of supply and demand, then trying to control them with monetary policy would be foolish.
High commodity prices can be trying to say either of two things: (a) "Hey central bank, you printed too much money"; or (b) "Hey America, you need to consume less". It is very important for the Fed to identify which message is being sent.
In the medium to long term, that is. Right now there is a non-trivial risk that the entire financial system is about to collapse, and I suspect the central bankers are more focussed on that.
I think there is a minus sign in there, treated like the cost of financing or some such...? Been along time and never lived in that end of the energy bidness.
Published: December 19 2007 14:23 | Last updated: December 19 2007 20:02
Morgan Stanley became the third top investment bank in a month to raise capital from a sovereign wealth fund after announcing higher than expected writedowns of $9.4bn, due largely to subprime related losses.
John Mack, chairman and chief executive, said the $5bn capital injection from China Investment Corporation would bolster its already strong balance sheet and strengthen its deep ties in China. It becomes the second Wall Street bank after Bear Stearns to turn to China for help.
..."
To me it seems obvious though. Cheap money has created this inflation. Low inflation by offshoring production to China created millions of Chinese and Indian consumers and we are now getting the backlash.
You don't get something for nothing if history has taught us anything.
Low inflation was created by the monetary policy because we kept rates low since we could purchase chinese goods cheaply. We created the Chinese demand by not recognizing the true cost of production.
the major factor behind backwardation isn't interest rates. It's: 1) difficulty in storing commodities; and 2) expectations of excess supply vs. scarcity in the future relative to the present.
This explains why crude oil, heating oil and gasoline traditionally are backwardated while natural gas is not (in the same interest rate environments). Backwardation roll yield is the largest component of return in these energy futures over time and the biggest reason contracts like USO are attractive. According to Hilary Til, ARR in rolling near-term crude futures from 1983-2004 was 15.8% compared to 1.1% for crude spot price. Similar advantages for heating oil and gasoline but not natural gas.
In a world where oil always feels scarce, crude should always be backwardated and crude futures will almost always be a good long-term bet.
My belief is that the Fed has been using the term "inflation" as a euphemism for "asset bubble" so not to panic anyone. The irony is that earlier this year when they claimed to be primarily concerned about "inflation", the CPI numbers didn't look so bad.
Now when their primary concern is the economy, they have to deal with soaring CPI numbers due to the speculative blowup in oil that started when the Fed began cutting rates.
Bernanke argues that to stave off deflation you have to cut early and aggressively. Alas, by not dealing with the speculation problem properly he's had that option taken away from him.
Wall Street can read Bernanke's speeches and papers too, and use them to refine their own strategies. They can specifically plan for those "early and aggressive" rate cuts -- and turn the remedy into even more toxic asset bubbles.
And cost of storage may be zero if you are a trader who will never take delivery. Aren't futures contracts mostly speculative, never-delivered paper now?
Looking at the table that CR presented, I find it quite disturbing that tobacco expenditure exceeds medical care expenditure.
Weird...
Panicker | 12.19.07 - 2:56 pm | #
Not to worry, though - the Fed Gov Tobacco Settlement is being well spent on cessation programs and healthcare services for those affected by the promotion and use of this highly addictive and deadly chemical cocktail.
oh yes, I remember now: China Investment Corporation...saw a great picture of the CEO and they all look very ready to take over the world; the sovereign funds ready to scoop up America for pennies on The Bush Dollar; very proud moment here for all the retarads, crack whores and tatoo casino cults that run this country! Thanks guys, heck of a job!!
John Mack, chairman and chief executive, said the $5bn capital injection from China Investment Corporatio
Is there a word for a period where some items inflate massively while others deflate massively at the same time? Seriously. This inflation vs deflation argument may be too simplistic.
I'm no economist (if that's not obvious), but I don't think "stagflation" covers what I'm getting at... I'm not even quite sure what I'm getting at.
Maybe it helps to imagine a giant seesaw with a barrel of oil on one end and a new Toll Brothers house on the other.
Erik: ... millions of Chinese and Indian consumers and we are now getting the backlash.
Oops, I guess we shouldn't have started all this globalization until we had all our externalities under control. The pea-minded free-tradists can't be bothered with reality though, they've got a dogma to believe in.
High commodity prices can be trying to say either of two things: (a) "Hey central bank, you printed too much money"; or (b) "Hey America, you need to consume less". It is very important for the Fed to identify which message is being sent.
Cheap money has created this inflation. Low inflation by offshoring production to China created millions of Chinese and Indian consumers and we are now getting the backlash.
These views are way too U.S. centric. It's simply a fact that the potential supply of both labor and consumers from China, India, Brazil, the Middle East, etc. is several multiples of the U.S. plus Europe, plus Canada put together. That capacity/demand is going to continue to come on-line and hook up to the world economy no matter what the Fed does. Demand for oil, food, and other resources is real. The Fed and the rest of the U.S. govt. has to form the best policies for dealing with that reality.
I've wondered the same thing. I don't think we're in charted waters, here.
A crash is a crash is a crash. Each one is different, and everything is out of control until it's over (go ahead and try to brake and steer, if it makes you feel better).
Let's coin the new term. Mine is: "Torqueification."
I think the Fed Bankers are smart people who genuinely care about the good of the country (I know many of you disagree).
RealEstateRisk | Homepage | 12.19.07 - 3:40 pm | #
The road to hell is paved with good intentions... in some cases that road is a four lane expressway at rush hour packed like a parking lot with the well intentioned.
tranches of love - I don't know what you call it but it's a clever trick, huh? Massive inflation on items we need (food, energy, health) and massive deflation on items we want (tv's, etc.).
There is a school of analysis that looks to commodity prices to judge inflationary pressure, but most Fed officials are not in that school. The point they make over and over is that to the extent commodity price changes can be contained, they represent relative price shifts rather than inflation. It is wage gains - particularly wage gains relative to productivity - that the Fed tends to watch to assess whether commodity price gains can translate into inflation. Labor accounts for about 70% of GDP, if memory serves, so if wage gains are no greater than productivity gains, that limits inflation from the supply side.
In arguing that the Fed should consider whether the source of inflation is domestic, you have hit upon another issue that is occasionally mentioned with regard to Fed policy. Fed officials don't have much impact on weather, Chinese development, or government policy toward ethanol production, so why should the Fed respond to price impulses from those sources? The answer often heard form Fed officials is that inflation expectations have a strong impact on actual future inflation. If current inflation results form things the Fed cannot control, the Fed still has to make sure that inflation expectations don't rise in response to current inflation. If that means hiking rates when rate hikes won't have any impact on the sources of current inflation, so be it. Low, stable inflation tends to mean steady inflation expectations in the face of short-term fluctuations, but the worry now is that petroleum price gains are not proving to be short-term.
Is there a word for a period where some items inflate massively while others deflate massively at the same time? Seriously. This inflation vs deflation argument may be too simplistic.
I think this is fairly characteristic of speculative episodes, especially in later phases where some asset bubbles begin to burst before others. The simultaneous buying panics and selling panics throughout the economy creates this weird divergence in prices.
That's why I try to avoid the term inflation these days in favor of something like credit expansion, even though you could rightly argue that the money supply increase from credit expansion is inflation.
I think the Fed Bankers are smart people who genuinely care about the good of the country (I know many of you disagree).
RealEstateRisk | Homepage | 12.19.07 - 3:40 pm | #
It's difficult to give the bankers much credit for patriotism or selflessness when our elected leaders continue to set such a poor example.
Your comment reminds me of the mother who learns that Junior is in the pokey: "Not my Billy! He's a good boy and would never do anything like rob a liquor store!"
Demand for oil, food, and other resources is real. The Fed and the rest of the U.S. govt. has to form the best policies for dealing with that reality.
Well, that was kind of my point. For the U.S. Fed to respond to a global commodities demand shock by raising interest rates would be a disaster. Hence their emphasis on "core" inflation.
The only useful responses to a global demand shock are to increase supply or to curb domestic consumption (e.g., find alternatives). Free market forces will see to both, if they are allowed to function in the context of a stable currency. The job of a central bank is to provide that stable currency.
tranches of love --
Maybe it helps to imagine a giant seesaw with a barrel of oil on one end and a new Toll Brothers house on the other.
And the fulcrum that connects the plummeting house to the skyrocketing barrel is ... ?
If the FedBankers are the good guys, why did they ignore the public policy component of predatory lending? Why did they abdicate their role in regulating the non-banks? If they did not want to get their hands dirty, why didn't they hand that responsibility off to another regulator?
I will tell you why, because they are top-down academics that have no desire to live in the real world. Ever live in Washington DC? Not the real world.
If you think they are good guys with good intentions, then my response is that they were grossly negligient in fulfulling their duties. As a quasi-regulator, their JOB is to lean against the markets, not to spread their anal sphincter for the monied interests. John Edwards may be our next president as a result because people know at their core that the Fed does care enough.
Tranches, I can't speak for others, but since I'm one bandying the words I can clarify what I'm saying.
I use - and differentiate between - "asset inflation/deflation" and "inflation/deflation" because I don't have better knowledge of the correct terminology. I took too many econ classes, I guess, and so for me inflation/deflation without the identifier is a monetary issue. That is, it's an increase/decrease in the amount of available money. If I stick "asset" in front, I'm referencing the common perception - the goods and services measured in cost of living indexes. Now that said, one of the common misperceptions of BOTH types is that ALL goods go up or down. There will be exceptions.
Let's walk a simple - probably applicable - example. Let's assume deflation (notice, a reduction in total available money). If we flip our perception of supply and demand, we can see that if we have a (nominally) fixed quantity of goods and they're pursuing fewer dollars, then the intersection point will be lower. In other words, the price of goods and services will decline. (Short term good for consumers - until their wages become part of those services that are declining.)
BUT, there's a critical assumption in there - that "fixed quantity". If something has a high enough demand relative to the available quantity then its SPECIFIC demand curve will go opposite that predicted by the environment. So, say for example the "Peak Oil" people are right and production goes and stays below demand, then due to the increased demand the price will go up. It may not go up as steeply as it might have had the deflation not existed - but in "real" terms it's still going upward.
To reiterate -- inclining/declining prices of goods happen contrary to the general tendency of the economy due to specific factors relating to those goods. Don't get blind-sided by generalities.
Look ya'll, if you got kin folk in retirement cribs and ifn they be still holding gold or diamonds, ya'll be going and get those, cause the cribs gonna be illiquid, yah here. This is Katrina and help is not on the way, ya'll need to be catchn rides and headn out to Houston and not go to The Dome Bro!
wants vs. needs are indeed an important demarcation in economic analysis, for by definition they have different elasticities and price-sensitivies.
We "need" housing, transportation, education, healthcare -- and inflation is alive and well there, since this is where the rentiers lay out their bets, collecting their tolls on the economy.
dryfly, as usual, makes a good point as he notes that good intentions aside things may not go according to plan.
Let's face it. Our countryman and most of us have been living very high on the hog as compared with the rest of the world, for a long time. We have been consuming products and natural resources, especially energy at a multiple many times of an average person in the rest of the world.
Americans would not tolerate the level of gasoline taxation here that the Japanese or Europeans accept. And we had been, in the past, refusing to drive the scooters and ultra compact cars that the average person drives over there...or walk, bicycle,take public transportation.
So how do the policymakers at the top get us to change. They certainly don't want to suffer backlash at the polls. So we have embarked (or been shoved off) on this very risky, and I believe intentional economic course.
Thus we are destined to pay a very, very high tax for EVERYTHING, in the future (inflation). And Yes I agree that, maybe, in the short term, as we experience recession or worse prices will take a fall especially RE.
But I have placed my bet that in the long haul, for the dollar, and the American consumer the curve from here... as in the cost of everything, goes up and up.
About the futures price and backwardation, Nemo has it exactly correct. There is an arbitrage between the current cash price of the commodity and the future price. The two factors are the cost of money and the cost of storage. The full carry is the sum of these two factors. Suppose the contract was for a pound of cornflakes, interest rates were 10% per month, cash corn flakes were $10 per pound, and it costs 10 cents to store a pound of corn flakes for a month. The one month future price of corn flakes would be 10$(spot price) +
.1 * 10 (interest) + .1 (storage) = $11.10. if someone were to offer to buy the future pound of corn flakes for more than 11.10 then there would be a pure arbitrage, where someone else would buy the spot, finance it, store it, and then deliver it one month later at an all in cost of $11.10, making a risk free profit of the difference.
So if interest rates are to be higher in the future, all other things being equal would imply higher futures prices.
in the last post, it should read that the 'maximum' price for one month future would be $11.10. There is no minimum if you allow for negative interest rates otherwise the min is zero.
The rate of credit creation slows precipitously as the list of assets that can be pledged dwindles down.
The interest and principal payments due on existing debt get close to and ultimately exceed the amount of money in the system, as the rate of credit (money) creation slows.
Those who detect this while they still have money pay off their debts, (correctly) deducing that a "reset" is about to take place - and that cash (assets) will have value, while debt will be a millstone that will drag you underwater.
Those who are unable to pay off their debts will find that a contracting credit (money) supply leaves them with insufficient funds to pay their debts. Debt defaults at a rapidly increasing rate.
The creditors (who granted the credit) will repossess the assets pledged for the debt in lieu of payment, while the debtors are financially destroyed.
The destruction of outstanding credit via default shrinks the money supply further, and we go back to #1.
actually many more dollars are chasing some-what more goods. just now it's hidden.
Interested outsiders like me strongly suspected the edge was dangerously near last march when the fed ceased publish the M3 money supply numbers. Making it much more difficult to know about repurchase agreements and institutional money market accounts and what the fed and foreign CB ers were doing back and forth.
I don't know what happens in the short run...as it all shakes out.
But in the longer term I suspect stagflationary mark has it right.
And I disagree with those who say that Lacker is a loan voice of reason, or he just ain't got with the program.. and inflation is just an awful unintended outcome from bad fed policy,
Inflation IS the program... and the policy.
Our government, and corporations intend to pay social security and retirement benefits with (guessing) 25 cent dollars... and the national debt too.
Whats "our" problem?...debt.
Debt to the Chinese and Japanese who hold half of all our outstanding US bills bonds and notes...
Debt to banks, debt to CC companies and on and on.
I believe, (and i have bet) that Inflation, with decreased US consumerism IS the policy in the long run.
There is a school of analysis that looks to commodity prices to judge inflationary pressure, but most Fed officials are not in that school. The point they make over and over is that to the extent commodity price changes can be contained, they represent relative price shifts rather than inflation. It is wage gains - particularly wage gains relative to productivity - that the Fed tends to watch to assess whether commodity price gains can translate into inflation. Labor accounts for about 70% of GDP, if memory serves, so if wage gains are no greater than productivity gains, that limits inflation from the supply side.
If your description of Fed thinking is correct, then my prediction is that U.S. labor will decline as a percentage of U.S. GDP, and the Fed will acknowledge that change only in retrospect. The idea that commodity price increases represent unpredictable one-time events rather than a rate of inflation makes sense historically, but isn't a good fit to an environment where worldwide demand and worldwide labor supply will continue to grow faster than worldwide resources.
In arguing that the Fed should consider whether the source of inflation is domestic, you have hit upon another issue that is occasionally mentioned with regard to Fed policy. Fed officials don't have much impact on weather, Chinese development, or government policy toward ethanol production, so why should the Fed respond to price impulses from those sources? The answer often heard form Fed officials is that inflation expectations have a strong impact on actual future inflation. If current inflation results form things the Fed cannot control, the Fed still has to make sure that inflation expectations don't rise in response to current inflation. If that means hiking rates when rate hikes won't have any impact on the sources of current inflation, so be it.
The Fed are smart guys and they should be able to distinguish between inflation expectations for wages and inflation expectations for commodities. Since the latter will only have a lasting impact on prices for those few commodities where hoarding behavior can carry on indefinitely (e.g. gold and precious stones), it should be less important according to the style of thinking that focuses on forward trends.
Nope its only deflationary pressure. Whether it turns into deflation or inflation is predicated on if the gov't can flood the place with enough money to overcome the deflationary pressure.
A futures market in contango (longer date futures prices higher than nearer ones) should reflect, as others have said, the cost of financing, storage and insurance. The front contract can become discounted greater than expected, if for instance, storage is unavailable. This happened earlier this year in oil.
Classic Keyensian backwardation in theory occurs as producers hedge out their future production. Speculators will pay lower prices in the future to reflect the risk that cash prices may decline into the future. In general producers are more at risk to price swings than consumers, and are willing to sell in the future at lower prices to mitigate business risk.
The difference between the theoretical price of a contagoed market and the actual price curve of a given market is called the convenience yield - the price premium consumers are willing to pay to avoid the costs of a shortage.
The markets reflect the prices of the marginal buyers and sellers.
jkinthewoods notes that producers are more sensitive to changes in price than consumers and i think I understood that they are prone to backwardation..
I wish I understood how that principle might be affected by the kind of PCE numbers CR reported at the top.
When the mess gets big enough, Bernanke will get the boot and be replaced by Lacker, or somebody like him.
That's my hope anyway.
There's a bit of an anti- (food/oil) inflation push on the past few days at CNBC. Subtitles like "Inflation Kills", under stories and pix of people getting trampled in rushes for food,etc.
I'm taking that as a possible sign of where the new propaganda, and hence, policy, is heading.
dryfly said, "Nope its only deflationary pressure. Whether it turns into deflation or inflation is predicated on if the gov't can flood the place with enough money to overcome the deflationary pressure."
Who's gonna take that flood of money? For example, today we hear that the ABX index finds insufficient new MBS to justify a market come January 19. Will the RMBS market come back into existence to sop up the money?
What types of borrowers currently have the confidence of lenders (investors who are now obviously more concerned about repayment than yield)?
Commercial RE? Already overbaked. LBOs? There's fear there too. Equities? Recognition is setting in that earnings are declining.
I think it's gonna be a hard sell to find buyers for that flood of money.
tranches of love asked: "Is there a word for a period where some items inflate massively while others deflate massively at the same time? Seriously. This inflation vs deflation argument may be too simplistic."
There certainly is: "Normal."
Look at home prices (falling) and energy prices (rising). The blend of these two items (and all the rest) is moderate inflation that's being temporarily pushed higher by volatile energy prices.
Look at CR's chart, it's happened before.
Another point while I'm here. Lacker's "lengthy divergence" comment is meaningless. Again, look at CR's chart. After the first Gulf War oil prices fell from high levels. The PCE (which includes energy components) fell faster than core PCE (which doesn't).
After oil hit its trough and began to rise, PCE rose faster than core PCE.
If one includes a more-volatile item in a spending/inflation index the index is more volatile, and if you leave it out it's less volatile.
So what? There's zero new information there.
As to the level of inflation, using either PCE or core PCE, inflation has been higher at times in the past few years than it is now. Again, so what? Higher energy prices are only significant if they rise high enough and for long enough to drive prices of everything else higher. Core PCE proves that they aren't.
Sebastian - Its not normal to have almost every IB and CB insolvent. This country is insolvent right now and the margin call is on the phone... ring, ring.
"As to the level of inflation, using either PCE or core PCE, inflation has been higher at times in the past few years than it is now. Again, so what? Higher energy prices are only significant if they rise high enough and for long enough to drive prices of everything else higher."
Dec. 19 (Bloomberg) -- China avoided designation as a currency manipulator again as Treasury Secretary Henry Paulson urged the nation's officials to allow a faster pace of exchange- rate gains.
The Treasury didn't designate any of the 23 countries or regions as a manipulator, according to its semiannual review of exchange-rate policies released today in Washington.
Paulson must have noted what the Chinese did when Bush invited the Lama to the White House. He decided that now that we need them to bail us out it might not be wise to infuriate them more.Wise and funny man.
Because the job of a central banker is to protect the purchasing power of currency, -- Lacker
The Fed was chartered to provide liquidity to capital markets and prevent the repeat of the deflationary crashes of the late 19th and first decade of the 20th century.
It seems the toughest job of a central banker is to disguise the real rate of inflation and prevent the fear of inflation from increasing the velocity of transactions. More to the point, theyre failing on all fronts: real estate and its credit universe is deflating, financialized assets (shares, other bonds, derivatives, etc.) are topping and bag holders are anxious (VIX up), and a world awash in fiat currencies is bidding up the prices of real necessities (for Josh Stern).
The classic way that governments deal with huge debt problems is to inflate away debt.
True, Iceman. Hand in glove with this, they understate inflation to reduce COLA for reducing the drain from SS and all transfer payment programs. See: mock turtle | 12.19.07 - 4:53 pm |-- Purr-fect.
If prices are rising as a result of supply and demand, then trying to control them with monetary policy would be foolish.
Au contrare, Nemo. All changes in prices, everywhere, and at all times, are the result of monetary policy, or so said Milton Freidman. Inflation is the result of creating credit/money that increases at a faster rate than the supply (demand, for Josh Stern, et. al.) of stuff to buy. The financial con-artistry supports the ruse that increasing asset prices is good wealth, but increasing consumable prices is bad inflation. Its only a mis-direction, ala the 3 card Monty. Youre not looking where you should be, or have been fooled by slight of hand.
ac | 12.19.07 - 3:58 pm |- Great Post!
mock turtle | 12.19.07 - 4:17 pm |- That the pendulum is swinging back is certain. How the decreasing ability to consume cheap resources plays out could be more catastrophic and less contained in the system as-built. Given the ratcheting-up of global fundamental headwinds (financial, energy, water, resources, environmental, civil, political, conflict, etc.) the longer term prospects are so-so to ghastly. Inflation? Perhaps. 30 to 100 years of depression? Possible (though I hate to contemplate it.)
Dustdevil | 12.19.07 - 4:38 pm Bingo! Yahzee! We. Have. A. WINNER! Re: dryfly: 12.19.07 - 5:07 pm, It doesnt matter if central bankers are flooding credit to the big banks, its not a liquidity problem now. Its a solvency problem, and lenders are pulling back leaving the borrowers and their over-priced collateral in peril. Dustdevil has it spot-on. Lather-rinse-repeat, all the way down to collateral = to cash money. Remember the cliché: take the money and let the credit go. It was true in the 30s and will be again.
1) Re: inflation graph showing divergence of "core" from "total" CPI: The graph shows rates of increase, ie first derivative, and disguises the actual compounded difference in CPI
...you may recall that core inflation was devised in the 1970s to filter out some of the more volatile consumer prices to get a better read on inflation trends. For several decades, core inflation seemed to work well...
Since when does 30 years make several decades? The credibility crunch continues.
Unless people's wages go up tremendously, they cannot inflate away the problems without a huge drop in the standard of living and all the crime and violence that comes along with that. Doing something like that tends to be very unwise in the long run.
Use overall PCE when thinking annually and long term. Use Core rates when looking at monthly stats. Ignore overall inflation at your peril. Except for now where a few years of 5% inflation is what we need to mitigate the effects of this housing debt crisis.
"Pondering" has it right, while core inflation may be of interest to economists and inside the Beltway denizens and Wall Street, the "man on the street", whose net income is not increasing is the one who most acutely meets the problems of overall inflation, especially the "volatile" fuel and food sector. The pct of income spent on same is much more volatile for the lower 60% of households. I have a hard time not seeing "stagflation" in 2008.
Since I am a long-time CR reader...I know that "for fun..." means cool graphs ahead!
Regards,
Going forward, markets expect oil prices to back off slightly from their current level, and I hope they are right.
I presume he is talking about <a href="http://futures.tradingcharts.com/marketquotes/index.php3?market=CL>oil futures. Stupid CNBC always obsesses on the near-term contract.
Looking out a little futher, that there's what we call "backwardation".
The squeeze is just beginning.
Lacker obviously ahsn't gotten the memo: "inflation" (CPI) can never exceed 2%. The BLS & Fed will continue to "adjust" any price increases away with hedonics and subsititution. If this means replacing fuel, food, healthcare, education and housing with cheap imported Chinese lawn furniture and iPods, so be it.
The classic way that governments deal with huge debt problems is to inflate away debt. Encouraging inflation is, almost certainly, the only real solution to dealing with 50%+ price declines in the major bubble areas (the coasts).
[OT] Al Lord finds you can't go home again
Floyd Norris has the best job in the world
Looking at the table that CR presented, I find it quite disturbing that tobacco expenditure exceeds medical care expenditure.
Weird...
Kett82, yep, a graph is always coming. I just want to see the lengthy divergence for myself - and I figured others would too. And as long as I'm looking at the data, I might as well double check Lacker's arithmetic.
Best to all.
Looking out a little futher, that there's what we call "backwardation".
Nemo - I'm not futures expert but if I recall my days in the commodities biz (where I was on the producer side but drank with the trader side)... there are two factors involved in a 'backwardation' condition... (1) prices over time and (2) interest rates. This is because the future price is a translation of present price PLUS holding or future production cost vs the cost of money over that period (interest rates)...
So the backwardation could be because the market anticipates lower prices going forward OR much higher interest rates s.t. future t.v.o.m. discounting increases... or some combo of both.
yes/no?
Panicker, those are Price Indixes, not quantity. So this just shows the changes in prices for different consumption items.
Best Wishes.
OT: this sudden change in stock prices which seems to happen so often around 2 p.m.: could you make money off it with a collar trade?
dry,
Those are the major elements of the calc as I recall it, though recollection is also that as relative drivers the price effect is much larger than the interest rate effect.
I find it interesting that he seems to be on the same page as Plosser, too. It will be very interesting when they cycle back onto the FOMC-
they seem to believe that monetary policy is still too loose.
Probably true, but we can't cut back just before an election- that definitely wouldn't be prudent.
in other words, the J6P isn't buying hedonics anymore, so we might as well sop this up during the next recession.
Someday this war's gonna end...
Well, maybe they can start hedonically adjusting food prices in order to account for all the recent genetic improvements. Not just an ear of corn but a ingestible mosquito repellent to boot.
Because the job of a central banker is to protect the purchasing power of currency, it is overall inflation that we need to keep down, not just core inflation.
Lacker isn't currently a voting member of the FOMC, and...
And never will be with an attitude like that. I mean, what a radical concept; "Protect the purchasing power of the currency." It's almost like he's read and believes in our Constitutional republic as enumerated.
One idea that people have about current inflation is that it is commodity driven and that commodity prices rising are mainly a function of economic expansion in emerging markets. I'd like to raise the question for others about what the U.S. Fed should do assuming that picture is true. Does it make sense to keep U.S. growth slow or negative as a response to inflation if the U.S. economy is not what is driving the inflation? My perspective is that there are different constituencies in the U.S. (e.g. what's the best policy for a young worker and what's best for a retired senior living off interest income may well be in conflict), so the Fed has a tough job. But I do feel that it should take into account what is driving inflation and not just whether there is inflation when forming policy.
Those are the major elements of the calc as I recall it, though recollection is also that as relative drivers the price effect is much larger than the interest rate effect.
Not in 1980 it wasn't - that was when I hung out with those traders. It was a toss up then (increasing prices discounted at high interest rates).
dryfly --
So the backwardation could be because the market anticipates lower prices going forward OR much higher interest rates s.t. future t.v.o.m. discounting increases... or some combo of both.
I think you may have this backwards.
For the buyer of the future to be acting rationally, it must be a wash whether he buys the asset now and keeps it, or holds cash and signs the futures contract. (Otherwise he could arbitrage between the two.)
So if interest rates are about to go up -- making the return on cash more attractive -- the prices of the futures would have to go up to compensate.
I think. I admit I am not an expert...
Things look great from where I sit:
Dec. 19 /PRNewswire-USNewswire/ -- "Don't feed the bank
that bites you" says a sign held by a UNITE HERE union member at
Wednesday's action in San Francisco. Expanding their "Don't Deposit at
Countrywide" campaign this week, the labor union UNITE HERE approached
consumers outside Countrywide Bank centers across the country. The union is
asking consumers not to deposit their savings at Countrywide.
dry,
So we need a multiple of current interest rates to make them about breakeven in effect per your recollection...sounds about right, can you recall the interest rate used by the trader/drinkers?
Is it wrong to support a mutiny? Put BB and Kohn in a lifeboat, and send 'em away.
Long live Captain Lacker. He's no savior, but when starving and forced to choose between a 10-year old Twinkie and a pile of rat droppings...
Josh Stern --
But I do feel that it should take into account what is driving inflation and not just whether there is inflation when forming policy.
Agree 100%. If prices are rising as a result of supply and demand, then trying to control them with monetary policy would be foolish.
High commodity prices can be trying to say either of two things: (a) "Hey central bank, you printed too much money"; or (b) "Hey America, you need to consume less". It is very important for the Fed to identify which message is being sent.
In the medium to long term, that is. Right now there is a non-trivial risk that the entire financial system is about to collapse, and I suspect the central bankers are more focussed on that.
Nemo,
I think there is a minus sign in there, treated like the cost of financing or some such...? Been along time and never lived in that end of the energy bidness.
OT: From Financial Times
FT.com / Financials - Morgan Stanley taps China for $5bn
"Morgan Stanley taps China fund
By David Wighton in New York
Published: December 19 2007 14:23 | Last updated: December 19 2007 20:02
Morgan Stanley became the third top investment bank in a month to raise capital from a sovereign wealth fund after announcing higher than expected writedowns of $9.4bn, due largely to subprime related losses.
John Mack, chairman and chief executive, said the $5bn capital injection from China Investment Corporation would bolster its already strong balance sheet and strengthen its deep ties in China. It becomes the second Wall Street bank after Bear Stearns to turn to China for help.
..."
To me it seems obvious though. Cheap money has created this inflation. Low inflation by offshoring production to China created millions of Chinese and Indian consumers and we are now getting the backlash.
You don't get something for nothing if history has taught us anything.
Low inflation was created by the monetary policy because we kept rates low since we could purchase chinese goods cheaply. We created the Chinese demand by not recognizing the true cost of production.
dryfly,
the major factor behind backwardation isn't interest rates. It's: 1) difficulty in storing commodities; and 2) expectations of excess supply vs. scarcity in the future relative to the present.
This explains why crude oil, heating oil and gasoline traditionally are backwardated while natural gas is not (in the same interest rate environments). Backwardation roll yield is the largest component of return in these energy futures over time and the biggest reason contracts like USO are attractive. According to Hilary Til, ARR in rolling near-term crude futures from 1983-2004 was 15.8% compared to 1.1% for crude spot price. Similar advantages for heating oil and gasoline but not natural gas.
In a world where oil always feels scarce, crude should always be backwardated and crude futures will almost always be a good long-term bet.
My belief is that the Fed has been using the term "inflation" as a euphemism for "asset bubble" so not to panic anyone. The irony is that earlier this year when they claimed to be primarily concerned about "inflation", the CPI numbers didn't look so bad.
Now when their primary concern is the economy, they have to deal with soaring CPI numbers due to the speculative blowup in oil that started when the Fed began cutting rates.
Bernanke argues that to stave off deflation you have to cut early and aggressively. Alas, by not dealing with the speculation problem properly he's had that option taken away from him.
Wall Street can read Bernanke's speeches and papers too, and use them to refine their own strategies. They can specifically plan for those "early and aggressive" rate cuts -- and turn the remedy into even more toxic asset bubbles.
Sorry, USO is an ETF, not a contract.
Seems to me a buyer needs to develop a discount that includes both the cost of financing and the cost of storage, no?
The rock & hard place will likely arrive in 2008. Slightly high inflation + low GDP growth.
Even though the Fed Futures think another 25bps cut is likely, I think this quarters high PCE will be enough to make them hold out.
I think the Fed Bankers are smart people who genuinely care about the good of the country (I know many of you disagree).
And cost of storage may be zero if you are a trader who will never take delivery. Aren't futures contracts mostly speculative, never-delivered paper now?
my poor savings account's interest rate went down last night. If only they were all Lackers.
Looking at the table that CR presented, I find it quite disturbing that tobacco expenditure exceeds medical care expenditure.
Weird...
Panicker | 12.19.07 - 2:56 pm | #
Not to worry, though - the Fed Gov Tobacco Settlement is being well spent on cessation programs and healthcare services for those affected by the promotion and use of this highly addictive and deadly chemical cocktail.
Can you say. "Crime under the color of law?"
oh yes, I remember now: China Investment Corporation...saw a great picture of the CEO and they all look very ready to take over the world; the sovereign funds ready to scoop up America for pennies on The Bush Dollar; very proud moment here for all the retarads, crack whores and tatoo casino cults that run this country! Thanks guys, heck of a job!!
John Mack, chairman and chief executive, said the $5bn capital injection from China Investment Corporatio
Is there a word for a period where some items inflate massively while others deflate massively at the same time? Seriously. This inflation vs deflation argument may be too simplistic.
I'm no economist (if that's not obvious), but I don't think "stagflation" covers what I'm getting at... I'm not even quite sure what I'm getting at.
Maybe it helps to imagine a giant seesaw with a barrel of oil on one end and a new Toll Brothers house on the other.
Erik: ... millions of Chinese and Indian consumers and we are now getting the backlash.
Oops, I guess we shouldn't have started all this globalization until we had all our externalities under control. The pea-minded free-tradists can't be bothered with reality though, they've got a dogma to believe in.
High commodity prices can be trying to say either of two things: (a) "Hey central bank, you printed too much money"; or (b) "Hey America, you need to consume less". It is very important for the Fed to identify which message is being sent.
Cheap money has created this inflation. Low inflation by offshoring production to China created millions of Chinese and Indian consumers and we are now getting the backlash.
These views are way too U.S. centric. It's simply a fact that the potential supply of both labor and consumers from China, India, Brazil, the Middle East, etc. is several multiples of the U.S. plus Europe, plus Canada put together. That capacity/demand is going to continue to come on-line and hook up to the world economy no matter what the Fed does. Demand for oil, food, and other resources is real. The Fed and the rest of the U.S. govt. has to form the best policies for dealing with that reality.
Krugman is a terrible speaker.
tranches of love | 12.19.07 - 3:43 pm | #
I've wondered the same thing. I don't think we're in charted waters, here.
A crash is a crash is a crash. Each one is different, and everything is out of control until it's over (go ahead and try to brake and steer, if it makes you feel better).
Let's coin the new term. Mine is: "Torqueification."
I think the Fed Bankers are smart people who genuinely care about the good of the country (I know many of you disagree).
RealEstateRisk | Homepage | 12.19.07 - 3:40 pm | #
The road to hell is paved with good intentions... in some cases that road is a four lane expressway at rush hour packed like a parking lot with the well intentioned.
Just sayin'.
tranches of love - I don't know what you call it but it's a clever trick, huh? Massive inflation on items we need (food, energy, health) and massive deflation on items we want (tv's, etc.).
What's wrong with that picture?
Josh,
There is a school of analysis that looks to commodity prices to judge inflationary pressure, but most Fed officials are not in that school. The point they make over and over is that to the extent commodity price changes can be contained, they represent relative price shifts rather than inflation. It is wage gains - particularly wage gains relative to productivity - that the Fed tends to watch to assess whether commodity price gains can translate into inflation. Labor accounts for about 70% of GDP, if memory serves, so if wage gains are no greater than productivity gains, that limits inflation from the supply side.
In arguing that the Fed should consider whether the source of inflation is domestic, you have hit upon another issue that is occasionally mentioned with regard to Fed policy. Fed officials don't have much impact on weather, Chinese development, or government policy toward ethanol production, so why should the Fed respond to price impulses from those sources? The answer often heard form Fed officials is that inflation expectations have a strong impact on actual future inflation. If current inflation results form things the Fed cannot control, the Fed still has to make sure that inflation expectations don't rise in response to current inflation. If that means hiking rates when rate hikes won't have any impact on the sources of current inflation, so be it. Low, stable inflation tends to mean steady inflation expectations in the face of short-term fluctuations, but the worry now is that petroleum price gains are not proving to be short-term.
Is there a word for a period where some items inflate massively while others deflate massively at the same time? Seriously. This inflation vs deflation argument may be too simplistic.
I think this is fairly characteristic of speculative episodes, especially in later phases where some asset bubbles begin to burst before others. The simultaneous buying panics and selling panics throughout the economy creates this weird divergence in prices.
That's why I try to avoid the term inflation these days in favor of something like credit expansion, even though you could rightly argue that the money supply increase from credit expansion is inflation.
I think the Fed Bankers are smart people who genuinely care about the good of the country (I know many of you disagree).
RealEstateRisk | Homepage | 12.19.07 - 3:40 pm | #
It's difficult to give the bankers much credit for patriotism or selflessness when our elected leaders continue to set such a poor example.
Your comment reminds me of the mother who learns that Junior is in the pokey: "Not my Billy! He's a good boy and would never do anything like rob a liquor store!"
Greed thinks of nothing but more greed.
Josh Stern --
Demand for oil, food, and other resources is real. The Fed and the rest of the U.S. govt. has to form the best policies for dealing with that reality.
Well, that was kind of my point. For the U.S. Fed to respond to a global commodities demand shock by raising interest rates would be a disaster. Hence their emphasis on "core" inflation.
The only useful responses to a global demand shock are to increase supply or to curb domestic consumption (e.g., find alternatives). Free market forces will see to both, if they are allowed to function in the context of a stable currency. The job of a central bank is to provide that stable currency.
tranches of love --
Maybe it helps to imagine a giant seesaw with a barrel of oil on one end and a new Toll Brothers house on the other.
And the fulcrum that connects the plummeting house to the skyrocketing barrel is ... ?
The Federal Reserve, I suppose.
RealEstateRisk,
If the FedBankers are the good guys, why did they ignore the public policy component of predatory lending? Why did they abdicate their role in regulating the non-banks? If they did not want to get their hands dirty, why didn't they hand that responsibility off to another regulator?
I will tell you why, because they are top-down academics that have no desire to live in the real world. Ever live in Washington DC? Not the real world.
If you think they are good guys with good intentions, then my response is that they were grossly negligient in fulfulling their duties. As a quasi-regulator, their JOB is to lean against the markets, not to spread their anal sphincter for the monied interests. John Edwards may be our next president as a result because people know at their core that the Fed does care enough.
Tranches, I can't speak for others, but since I'm one bandying the words I can clarify what I'm saying.
I use - and differentiate between - "asset inflation/deflation" and "inflation/deflation" because I don't have better knowledge of the correct terminology. I took too many econ classes, I guess, and so for me inflation/deflation without the identifier is a monetary issue. That is, it's an increase/decrease in the amount of available money. If I stick "asset" in front, I'm referencing the common perception - the goods and services measured in cost of living indexes. Now that said, one of the common misperceptions of BOTH types is that ALL goods go up or down. There will be exceptions.
Let's walk a simple - probably applicable - example. Let's assume deflation (notice, a reduction in total available money). If we flip our perception of supply and demand, we can see that if we have a (nominally) fixed quantity of goods and they're pursuing fewer dollars, then the intersection point will be lower. In other words, the price of goods and services will decline. (Short term good for consumers - until their wages become part of those services that are declining.)
BUT, there's a critical assumption in there - that "fixed quantity". If something has a high enough demand relative to the available quantity then its SPECIFIC demand curve will go opposite that predicted by the environment. So, say for example the "Peak Oil" people are right and production goes and stays below demand, then due to the increased demand the price will go up. It may not go up as steeply as it might have had the deflation not existed - but in "real" terms it's still going upward.
To reiterate -- inclining/declining prices of goods happen contrary to the general tendency of the economy due to specific factors relating to those goods. Don't get blind-sided by generalities.
Look ya'll, if you got kin folk in retirement cribs and ifn they be still holding gold or diamonds, ya'll be going and get those, cause the cribs gonna be illiquid, yah here. This is Katrina and help is not on the way, ya'll need to be catchn rides and headn out to Houston and not go to The Dome Bro!
ac | 12.19.07 - 3:58 pm | #
and
Kirk Spencer | 12.19.07 - 4:04 pm | #
This phenomenon is now known as torqueification, (My term won by default, due to lack of interest)
wants vs. needs are indeed an important demarcation in economic analysis, for by definition they have different elasticities and price-sensitivies.
We "need" housing, transportation, education, healthcare -- and inflation is alive and well there, since this is where the rentiers lay out their bets, collecting their tolls on the economy.
dryfly, as usual, makes a good point as he notes that good intentions aside things may not go according to plan.
Let's face it. Our countryman and most of us have been living very high on the hog as compared with the rest of the world, for a long time. We have been consuming products and natural resources, especially energy at a multiple many times of an average person in the rest of the world.
Americans would not tolerate the level of gasoline taxation here that the Japanese or Europeans accept. And we had been, in the past, refusing to drive the scooters and ultra compact cars that the average person drives over there...or walk, bicycle,take public transportation.
So how do the policymakers at the top get us to change. They certainly don't want to suffer backlash at the polls. So we have embarked (or been shoved off) on this very risky, and I believe intentional economic course.
Thus we are destined to pay a very, very high tax for EVERYTHING, in the future (inflation). And Yes I agree that, maybe, in the short term, as we experience recession or worse prices will take a fall especially RE.
But I have placed my bet that in the long haul, for the dollar, and the American consumer the curve from here... as in the cost of everything, goes up and up.
Isn't that called contango?
Huh.
Funny how that lengthy divergence seems to coincide with a certain presidency.
"Deficits don't matter"....
Until they do....
We are all contango now...
Nothing erroneous at all about a money supply deflation while at the same time prices inflate.
In fact, that's the definition of deflation.
Prices are inflating because the same dollars are chasing fewer goods. Hooray for the commodities bubble...
About the futures price and backwardation, Nemo has it exactly correct. There is an arbitrage between the current cash price of the commodity and the future price. The two factors are the cost of money and the cost of storage. The full carry is the sum of these two factors. Suppose the contract was for a pound of cornflakes, interest rates were 10% per month, cash corn flakes were $10 per pound, and it costs 10 cents to store a pound of corn flakes for a month. The one month future price of corn flakes would be 10$(spot price) +
.1 * 10 (interest) + .1 (storage) = $11.10. if someone were to offer to buy the future pound of corn flakes for more than 11.10 then there would be a pure arbitrage, where someone else would buy the spot, finance it, store it, and then deliver it one month later at an all in cost of $11.10, making a risk free profit of the difference.
So if interest rates are to be higher in the future, all other things being equal would imply higher futures prices.
in the last post, it should read that the 'maximum' price for one month future would be $11.10. There is no minimum if you allow for negative interest rates otherwise the min is zero.
This isn't deflation?
Unsympathetic...
actually many more dollars are chasing some-what more goods. just now it's hidden.
Interested outsiders like me strongly suspected the edge was dangerously near last march when the fed ceased publish the M3 money supply numbers. Making it much more difficult to know about repurchase agreements and institutional money market accounts and what the fed and foreign CB ers were doing back and forth.
We "need" housing, transportation, education, healthcare -- Troy
But many Americans are consuming more house, car, degree and health services than they need.
w,
then we face some adjustments based on the forex value of our dollar, that might be a bit tough for the average american to face;-}
Someday this war's gonna end...
That' going to change.
I don't know what happens in the short run...as it all shakes out.
But in the longer term I suspect stagflationary mark has it right.
And I disagree with those who say that Lacker is a loan voice of reason, or he just ain't got with the program.. and inflation is just an awful unintended outcome from bad fed policy,
Inflation IS the program... and the policy.
Our government, and corporations intend to pay social security and retirement benefits with (guessing) 25 cent dollars... and the national debt too.
Whats "our" problem?...debt.
Debt to the Chinese and Japanese who hold half of all our outstanding US bills bonds and notes...
Debt to banks, debt to CC companies and on and on.
I believe, (and i have bet) that Inflation, with decreased US consumerism IS the policy in the long run.
There is a school of analysis that looks to commodity prices to judge inflationary pressure, but most Fed officials are not in that school. The point they make over and over is that to the extent commodity price changes can be contained, they represent relative price shifts rather than inflation. It is wage gains - particularly wage gains relative to productivity - that the Fed tends to watch to assess whether commodity price gains can translate into inflation. Labor accounts for about 70% of GDP, if memory serves, so if wage gains are no greater than productivity gains, that limits inflation from the supply side.
If your description of Fed thinking is correct, then my prediction is that U.S. labor will decline as a percentage of U.S. GDP, and the Fed will acknowledge that change only in retrospect. The idea that commodity price increases represent unpredictable one-time events rather than a rate of inflation makes sense historically, but isn't a good fit to an environment where worldwide demand and worldwide labor supply will continue to grow faster than worldwide resources.
In arguing that the Fed should consider whether the source of inflation is domestic, you have hit upon another issue that is occasionally mentioned with regard to Fed policy. Fed officials don't have much impact on weather, Chinese development, or government policy toward ethanol production, so why should the Fed respond to price impulses from those sources? The answer often heard form Fed officials is that inflation expectations have a strong impact on actual future inflation. If current inflation results form things the Fed cannot control, the Fed still has to make sure that inflation expectations don't rise in response to current inflation. If that means hiking rates when rate hikes won't have any impact on the sources of current inflation, so be it.
The Fed are smart guys and they should be able to distinguish between inflation expectations for wages and inflation expectations for commodities. Since the latter will only have a lasting impact on prices for those few commodities where hoarding behavior can carry on indefinitely (e.g. gold and precious stones), it should be less important according to the style of thinking that focuses on forward trends.
This isn't deflation?
Nope its only deflationary pressure. Whether it turns into deflation or inflation is predicated on if the gov't can flood the place with enough money to overcome the deflationary pressure.
My suggestion is go long sand bags and boats.
A futures market in contango (longer date futures prices higher than nearer ones) should reflect, as others have said, the cost of financing, storage and insurance. The front contract can become discounted greater than expected, if for instance, storage is unavailable. This happened earlier this year in oil.
Classic Keyensian backwardation in theory occurs as producers hedge out their future production. Speculators will pay lower prices in the future to reflect the risk that cash prices may decline into the future. In general producers are more at risk to price swings than consumers, and are willing to sell in the future at lower prices to mitigate business risk.
The difference between the theoretical price of a contagoed market and the actual price curve of a given market is called the convenience yield - the price premium consumers are willing to pay to avoid the costs of a shortage.
The markets reflect the prices of the marginal buyers and sellers.
Dryfly - Sold to you! LOL.
jkinthewoods notes that producers are more sensitive to changes in price than consumers and i think I understood that they are prone to backwardation..
I wish I understood how that principle might be affected by the kind of PCE numbers CR reported at the top.
When the mess gets big enough, Bernanke will get the boot and be replaced by Lacker, or somebody like him.
That's my hope anyway.
There's a bit of an anti- (food/oil) inflation push on the past few days at CNBC. Subtitles like "Inflation Kills", under stories and pix of people getting trampled in rushes for food,etc.
I'm taking that as a possible sign of where the new propaganda, and hence, policy, is heading.
Dryfly - Sold to you! LOL.
Dustdevil | 12.19.07 - 5:22 pm | #
I'll take it now, thank you... before the price goes up more.
I'm sure Mr. Lacker is a great guy, but I just don't see much future for him - or his kind - at the Fed.
Sorry, Jeff.
dryfly said, "Nope its only deflationary pressure. Whether it turns into deflation or inflation is predicated on if the gov't can flood the place with enough money to overcome the deflationary pressure."
Who's gonna take that flood of money? For example, today we hear that the ABX index finds insufficient new MBS to justify a market come January 19. Will the RMBS market come back into existence to sop up the money?
What types of borrowers currently have the confidence of lenders (investors who are now obviously more concerned about repayment than yield)?
Commercial RE? Already overbaked. LBOs? There's fear there too. Equities? Recognition is setting in that earnings are declining.
I think it's gonna be a hard sell to find buyers for that flood of money.
tranches of love asked: "Is there a word for a period where some items inflate massively while others deflate massively at the same time? Seriously. This inflation vs deflation argument may be too simplistic."
There certainly is: "Normal."
Look at home prices (falling) and energy prices (rising). The blend of these two items (and all the rest) is moderate inflation that's being temporarily pushed higher by volatile energy prices.
Look at CR's chart, it's happened before.
Another point while I'm here. Lacker's "lengthy divergence" comment is meaningless. Again, look at CR's chart. After the first Gulf War oil prices fell from high levels. The PCE (which includes energy components) fell faster than core PCE (which doesn't).
After oil hit its trough and began to rise, PCE rose faster than core PCE.
If one includes a more-volatile item in a spending/inflation index the index is more volatile, and if you leave it out it's less volatile.
So what? There's zero new information there.
As to the level of inflation, using either PCE or core PCE, inflation has been higher at times in the past few years than it is now. Again, so what? Higher energy prices are only significant if they rise high enough and for long enough to drive prices of everything else higher. Core PCE proves that they aren't.
Sebastia
Sebastian - Its not normal to have almost every IB and CB insolvent. This country is insolvent right now and the margin call is on the phone... ring, ring.
In September and October, the overall PCE price index rose at a 3.3 percent annual rate
And in November the overall rate rose at 4.4% annual. Bet he was afraid to say that, or didn't he know?
"As to the level of inflation, using either PCE or core PCE, inflation has been higher at times in the past few years than it is now. Again, so what? Higher energy prices are only significant if they rise high enough and for long enough to drive prices of everything else higher."
like food? So what, right?
con tango?
Sorry, it should have been 4.31%. See I made the inflation go down. The Fed should hire me.
Dec. 19 (Bloomberg) -- China avoided designation as a currency manipulator again as Treasury Secretary Henry Paulson urged the nation's officials to allow a faster pace of exchange- rate gains.
The Treasury didn't designate any of the 23 countries or regions as a manipulator, according to its semiannual review of exchange-rate policies released today in Washington.
Paulson must have noted what the Chinese did when Bush invited the Lama to the White House. He decided that now that we need them to bail us out it might not be wise to infuriate them more.Wise and funny man.
Because the job of a central banker is to protect the purchasing power of currency, -- Lacker
The Fed was chartered to provide liquidity to capital markets and prevent the repeat of the deflationary crashes of the late 19th and first decade of the 20th century.
It seems the toughest job of a central banker is to disguise the real rate of inflation and prevent the fear of inflation from increasing the velocity of transactions. More to the point, theyre failing on all fronts: real estate and its credit universe is deflating, financialized assets (shares, other bonds, derivatives, etc.) are topping and bag holders are anxious (VIX up), and a world awash in fiat currencies is bidding up the prices of real necessities (for Josh Stern).
The classic way that governments deal with huge debt problems is to inflate away debt.
True, Iceman. Hand in glove with this, they understate inflation to reduce COLA for reducing the drain from SS and all transfer payment programs. See: mock turtle | 12.19.07 - 4:53 pm |-- Purr-fect.
If prices are rising as a result of supply and demand, then trying to control them with monetary policy would be foolish.
Au contrare, Nemo. All changes in prices, everywhere, and at all times, are the result of monetary policy, or so said Milton Freidman. Inflation is the result of creating credit/money that increases at a faster rate than the supply (demand, for Josh Stern, et. al.) of stuff to buy. The financial con-artistry supports the ruse that increasing asset prices is good wealth, but increasing consumable prices is bad inflation. Its only a mis-direction, ala the 3 card Monty. Youre not looking where you should be, or have been fooled by slight of hand.
ac | 12.19.07 - 3:58 pm |- Great Post!
mock turtle | 12.19.07 - 4:17 pm |- That the pendulum is swinging back is certain. How the decreasing ability to consume cheap resources plays out could be more catastrophic and less contained in the system as-built. Given the ratcheting-up of global fundamental headwinds (financial, energy, water, resources, environmental, civil, political, conflict, etc.) the longer term prospects are so-so to ghastly. Inflation? Perhaps. 30 to 100 years of depression? Possible (though I hate to contemplate it.)
Dustdevil | 12.19.07 - 4:38 pm Bingo! Yahzee! We. Have. A. WINNER! Re: dryfly: 12.19.07 - 5:07 pm, It doesnt matter if central bankers are flooding credit to the big banks, its not a liquidity problem now. Its a solvency problem, and lenders are pulling back leaving the borrowers and their over-priced collateral in peril. Dustdevil has it spot-on. Lather-rinse-repeat, all the way down to collateral = to cash money. Remember the cliché: take the money and let the credit go. It was true in the 30s and will be again.
It's probably just a coincidence that the "futures" price of oil spikes every time they reliquify the crime families.
I'm sure that oil demand has suddenly grown 50% since they started pumping money into the insolvent speculator banks last August.
I think that PCE vs Core PCE graph would be more dramatic with a moving average, say 4-6 mos.
1) Re: inflation graph showing divergence of "core" from "total" CPI: The graph shows rates of increase, ie first derivative, and disguises the actual compounded difference in CPI
2) Look at:
Shadow Government Statistics - Home Page?
to see the CPI as calculated by pre-Clinton methodology. We've had 10% CPI in recent some years, not the 2% per year by current measure.
Newbies may wish to google "CPI" and "hedonic adjustment"
Inland Empire
...you may recall that core inflation was devised in the 1970s to filter out some of the more volatile consumer prices to get a better read on inflation trends. For several decades, core inflation seemed to work well...
Since when does 30 years make several decades? The credibility crunch continues.
A few key points:
Use overall PCE when thinking annually and long term. Use Core rates when looking at monthly stats. Ignore overall inflation at your peril. Except for now where a few years of 5% inflation is what we need to mitigate the effects of this housing debt crisis.
"Pondering" has it right, while core inflation may be of interest to economists and inside the Beltway denizens and Wall Street, the "man on the street", whose net income is not increasing is the one who most acutely meets the problems of overall inflation, especially the "volatile" fuel and food sector. The pct of income spent on same is much more volatile for the lower 60% of households. I have a hard time not seeing "stagflation" in 2008.
Monthly figures for Table 2.3.4U available following this link BEA : Page Not Found