Core PCE and Savings Rate

Submitted by
CalculatedRisk on Fri, 12/22/2006 - 9:08am (11 comments)
mark wrote on Fri, 12/22/2006 - 9:53 am

Brake? or break out into a dead run away from this mess?

Geoff wrote on Fri, 12/22/2006 - 11:11 am

Well, since they (the Fed) are not even considering the very realistic chance of a recession coming early in 2007, it wouldn't make any sense for them to stop worrying about inflation. They have to be consistent at least (or at least I've always thought they had to be) so given the very modest slowdown and then re-acceleration of the economy in their forecast, they really would believe that inflationary issues are still worth worrying about. But as we all know, they are doing something very similar to what they did in 1999-2000. Seeing the slowdown, and putting on a very brave face, so as not to scare the rest of the economy down the chute with what we already know is in or entering recession.

It's really not that complicated, especially if you've worked in the economics business, to know what is going on, but for some reason so many people still like to just throw out the "they're idiots!" line about all economists, conveniently forgetting that the vast majority of them are beholden to someone - and typically held hostage to the political beliefs/spin of the organization which cuts their paycheck. For a prime example, see Thornburg and what has happened to the UCLA forecast since he "left".

dryfly wrote on Fri, 12/22/2006 - 11:39 am

forgetting that the vast majority of them are beholden to someone - and typically held hostage to the political beliefs/spin of the organization which cuts their paycheck

I'd love to have been the fly on the wall on that long plane trip back from China - listening to BB & Paulson. I'd bet some of the mystery of why rates are where they are would be explained by listening to their perception of where the real risks are & the path ahead.

I'm not suggesting their perceptions are 'right'... only time will tell... but those men are not 'idiots'. They have their reasons - good or bad, right or wrong.

arbogast wrote on Fri, 12/22/2006 - 11:48 am

Is the Fed trying to have it both ways:

1) Baby boomers are moving out of the labor market.

2) Baby boomers and everyone else are going to pick up housing demand.

Do those two propositions mesh?

The question is whether the housing slowdown will knock the wheels off the economy.

We know that deflation feeds on itself: Japan. The moment people expect prices to go down, they stop buying. And when they stop buying, prices keep going down.

So, we will see the outcome of housing sooner rather than later. Later is too late. If volume continues to slide, it's curtains.

And it's all psychological.

Message to George Bush: "Ease up on the war in Iraq, if you don't want negative psychology to penetrate into the housing market. Ain't nobody out there Mr. President who thinks we're ever going to win in Iraq."

dryfly wrote on Fri, 12/22/2006 - 11:58 am

Whatever... it looks like the bond market noticed (some serious flattening though still 'inverted)

Bloomberg Bond 'Dashboard' 

--Andrew wrote on Fri, 12/22/2006 - 1:56 pm

Dryfly, I agree with you on the Bond market and its disagreement with the Fed on whether to worry about recession or inflation. However, what has me curious is why the Bond market seems to be discounting the possibility of a long term drop in the dollar.

Maybe I'm not understanding how the Bond market works as well as I should be. Because the way I see it, if I was a Bond trader (particularly if I was representing foreign concerns such as petroleum producers) I'd be asking for a higher interest rate for US federal and corporate bonds to offset the growing risk of a dollar exchange rate drop.

So the question I have is whether this possiblity is already "baked in" to the bond prices and rates and I'm not noticing it being there. Or are we are still experiencing a myopic misplaced view of the strength of the US economy/dollar due to tradition, momentum and/or the Bretton Woods II arrangement? If so, are we then still likely to see the "Wiley E. Coyote" moment mentioned by Paul Krugman when the market realizes that the US dollar is overvalued and/or that US inflation higher than advertised and that the deal they thought were getting from the higher US equities and bond interest rates aren't such a deal after all.

Economist's View: Krugman: Will There Be a Dollar Crisis?

dryfly wrote on Fri, 12/22/2006 - 3:39 pm

Andrew - I don't have the answer and your questions are all good ones. Maybe CR or somebody else here.

I understand why the bond market could be inverted due to Asian intervention (gotta spend those arbitrage bucks somewhere & you can't buy US oil companies with them) but you are 100% right to be baffled why Gulf OPEC states play along... I suppose it is because they also remain coupled to a dollar peg but 'why peg' is another conundrum (not like pegging to the dollar makes us import more or less oil, eh?).

A little while back I asked Setser this in the comments of one of his posts - great answer but even he's uncertain.

Here... dumb question.

Whatever - it will play a big role on how this thing unwinds. We can rumble & bumble along quite a while more... until that Wiley E. Coyote moment... then we'll all take notice of the 'debt crisis'.

EZRider wrote on Fri, 12/22/2006 - 5:48 pm

The inflation outlook may change when the Democrats get their way and increase the minimum wage.

--Andrew wrote on Fri, 12/22/2006 - 5:59 pm

Dryfly, I read an article in the Financial Times a couple of weeks ago that said, according to the Bank of International Settlements, the Oil Producers were starting to shift from dollar to euro and other reserves. A bit scary if true.

FT.com / US & Canada - Oil producers shun dollar

" Oil producers shun dollar

By Haig Simonian in Zurich and Javier Blas and Carola Hoyos in London

Published: December 10 2006 20:11 | Last updated: December 10 2006 20:11

Oil producing countries have reduced their exposure to the dollar to the lowest level in two years and shifted oil income into euros, yen and sterling, according to new data from the Bank for International Settlements.

The revelation in the latest BIS quarterly review, published on Monday, confirms market speculation about a move out of dollars and could put new pressure on the ailing US currency. "

...

"The BIS, the central bank for the developed world’s central banks, is customarily cautious in its language. However, it noted: “While the data are not comprehensive, they do appear to indicate a modest shift over the quarter in the US dollar share of reporting banks’ liabilities to oil exporting countries.”

The review shows that Qatar and Iran, whose foreign exchange policy has sparked widespread market speculation, cut their dollar holdings by $2.4bn and $4bn respectively.

Such shifts may be modest compared with the total assets held, but they provide a crucial indication on future thinking.

Currency switches are likely to be progressive, subtle and discreet, as untoward attention could hit the dollar, lowering the value of depositors’ remaining dollar-denominated assets."

praetorian wrote on Sat, 12/23/2006 - 7:38 am

Ain't nobody out there Mr. President who thinks we're ever going to win in Iraq.

raises hand

I do. If we roll our sleeves up, keep out heads down and grind it out. We may not be as good at indiscriminately killing arabs as arabs are, but we are getting pretty good at killing the bad ones.

Now, on the other hand, I'm a moron. See, for example, my decision not to buy a house in the bay area in 2002 because "these prices are insane."

Warmest,
prat

Frank wrote on Sun, 2/10/2008 - 9:46 am

The secular increase in housing demand in recent years was apparently satisfied in many markets by the end of 2005. Nationwide, new home sales have fallen by 22 percent through October of this year.

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