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Crafty_Dog
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« Reply #750 on: July 30, 2014, 07:14:52 PM »

Improving Economy, Weaker Guideposts To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 7/30/2014

Apparently, an improving labor market and higher inflation are not enough to get any signal from the Federal Reserve that short-term interest rates should be higher or QE should end faster than they thought before.

The Fed did what almost everyone expected, leaving short-term rates unchanged and continuing to taper by $10 billion per meeting. As a result, the Fed will buy $25 billion in bonds in August and remains on a path to end quantitative easing at the end of October.

The Fed did make some important changes to the wording of its statement. On the labor market, it removed language saying the jobless rate “remains elevated.” It’s about time considering how consistently the unemployment rate has been dropping faster than the Fed has anticipated.

But the Fed also added important new language, saying “a range of labor market indicators suggests that there remains significant underutilization of labor resources.” So, despite the jobless rate approaching the Fed’s long-term objective, the Fed isn’t going to provide any firm guideposts on how changes in the labor market are going to influence monetary policy. This is very opaque – the opposite of transparency.

Meanwhile, the Fed acknowledged inflation is approaching its long-term target of 2% and removed language about how inflation running persistently below 2% could hurt the economy. However, it’s important to note that what matters most to the Fed isn’t actual inflation but its own forecast of future inflation. And the Fed has yet to issue a forecast that shows inflation higher than 2%.

Unlike the last meeting in June, there was one dissent from a Hawk. Philadelphia Fed bank President Charles Plosser, who thought the Fed shouldn’t pre-commit to leaving rates low for a “considerable period” after QE ends. After his editorial in the Wall Street Journal, we thought Richard Fisher, President of the Dallas Fed would dissent, but surprise, surprise, he voted with the majority. We assume he was mollified by the minor changes in language to the Fed statement.

Overall, today’s statement is consistent with our view that the Fed is already behind the curve and will end up accepting higher inflation in the longer-run than its current 2% target. Fed policy is easy, the Fed is making a commitment to keep its balance sheet larger for longer, and it sees no real urgency to raise rates. All of this will create a boost for equity markets and the economy over the next 12-24 months. And we still think the bond market does not appreciate the danger it faces.
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Crafty_Dog
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« Reply #751 on: August 18, 2014, 03:48:03 PM »

   Monday Morning Outlook
                                       
                                       
                                        Jackson Hole: A Recipe for Inflation To view this article, Click Here
                                       
                                        Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
                                       
                                        Date: 8/18/2014
                                       

                   

                                       
On Thursday, The Federal Reserve Bank of Kansas City’s annual retreat in
Jackson Hole, WY will start. The topic of discussion is: “Re-Evaluating Labor
Market Dynamics.”

The title itself says a lot about the Fed’s current mindset. Economists have
been studying labor market dynamics for many, many decades, if not centuries. So,
why does the Fed need to do any re-evaluating?

The answer: the unemployment rate is still 6.2% and other measures of the labor
market are far from robust. This is true even though the Fed has spent trillions on
bonds, boosted its balance sheet to record levels and cut interest rates to zero.

Maybe the Fed should “re-evaluate monetary policy,” or study “the
impact of fiscal policy on the economy” or find “the actual efficacy of
QE.” With all those juicy, and important, policy topics available, why study
the labor market?

Back when Ben Bernanke was Chairman of the Fed, he targeted a 6.5% unemployment rate
to start tightening. Now, Fed Chair Janet Yellen says it’s more complicated
than that. There are more important measures of labor market health.

What’s interesting about all of this is that the Fed is becoming a poster
child for “mission creep.” When the Fed first started in 1913, its job
was to protect the value of the US currency. Then, with passage of the Federal
Reserve Reform Act of 1977, the Fed received a dual mandate – to keep
“the unemployment rate” and inflation low.

This dual mandate was a mistake. The Fed has control over one thing – the
amount of money circulating in the economy. But, money itself cannot create jobs, or
fewer part-time jobs, or increase the labor force participation rate. If printing
money actually created wealth, then we should allow every citizen to counterfeit
their own currency. Of course, this would not work. Counterfeiting is illegal
because you get something for nothing.

No monetary policy expert has argued that the US experienced the crisis of 2008
because the Fed was too tight. And no one, with credentials, argues now that the US
economy is growing slowly because money is scarce.

In other words, monetary liquidity was not, and has not been, a problem for the
economy. As a result, any findings by the Fed that the labor market is not
performing at its full potential can be seen as proof that monetary policy is not
the tool for the job.

As the US learned in the 1980s, over the long-term, a single policy lever cannot
accomplish more than one policy objective. Monetary policy controls inflation in the
long run. Fiscal policy impacts the real economy (GDP and unemployment).

The Fed has now been easy for over five years, so it is impossible to argue that
monetary policy is being used as a short-term tool. If the labor market is still
having problems it must be because fiscal policy is harming potential growth. With
government spending, and especially redistribution, much higher than in the 1990s,
regulation a huge and growing burden, Obamacare, and higher tax rates, it’s no
wonder employment and incomes are lagging.

Unfortunately, the Fed does not see it this way. It is willing to maintain
abnormally, and artificially, low interest rates because the US hasn’t reached
so-called full employment. But those artificially low rates may cause other
problems, like a bubble in some sector, which the Fed has now decided to deal with
using “macro-prudential policy tools.” It sounds really technical, but
it's essentially playing “whack-a-mole” once excesses from easy money
pop up. In effect, the Fed wants to use monetary policy as a long-term policy tool
and deal with short-term monetary problems by using regulatory tools.

In reality, the existence of financial market excesses should prove that Fed policy
is being mishandled. But the Fed will choose to view excesses as a mistake by
financial institutions themselves. Blame the other guy, always.

This is a recipe for falling behind the curve. The Fed is already there and is
likely to stay there for some time to come. 
                                       
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Crafty_Dog
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« Reply #752 on: August 18, 2014, 03:55:42 PM »

second post

StealthFlation Defined………………by BDI



StealthFlation:

An intractable economic condition that inevitably arises as unlimited units of
currency compulsively pursue nonproductive wealth assets in a grossly over-leveraged
economy which has been artificially reflated in a desperate and misguided attempt by
monetary authorities to synthetically engineer growth via extreme monetization. 
Preventing the real economy on the ground from seeking the healthy normalization and
natural balance of free market forces necessary for genuine productive economic
growth.

Also known as; wishful thinking, and robbing Peter to pay Paul.



This entirely synthesized approach to capital formation has brought us the following
disastrous results:

1)  Stealth incendiary inflationary risks to the economy due to latent money velocity

2)  Repeat massive unstable asset bubble dislocations

3)  Gross misallocation of genuine productive investment capital, stifling the
crucial SME sector

4)  Excessive market volatility which stymies business development and trade

5)  Lethargic economic activity and growth

6)  Massive off-shoring of the manufacturing base

7)  Facilitates fantastic fiscal deficit spending sprees

Cool  Decreases income & real job creation

9)  Extreme income inequality

10)  Eviscerates the very essence of money itself



Brought to you by The Savant @ StealthFlation , Stop by for Shelter from the Storm

http://slopeofhope.com/2014/08/stealthflation-defined-by-bdi.html#more-37227


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Crafty_Dog
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« Reply #753 on: August 19, 2014, 08:18:36 PM »


Data Watch
________________________________________
The Consumer Price Index Increased 0.1% in July To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 8/19/2014

The Consumer Price Index (CPI) increased 0.1% in July, matching consensus expectations. The CPI is up 2.0% versus a year ago.
“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) was unchanged in July and is up 1.8% in the past year.

Food prices increased 0.3% in July, while energy prices declined 0.3%. The “core” CPI, which excludes food and energy, increased 0.1%, below the consensus expected 0.2%. The gain in core prices was led by owners’ equivalent rent. Core prices are up 1.9% versus a year ago.

Real average hourly earnings – the cash earnings of all employees, adjusted for inflation – were unchanged in July and unchanged in the past year. Real weekly earnings are up 0.3% in the past year.

Implications: Consumer prices continued to move higher in July, though only at the tepid 0.1% pace the consensus expected. Although consumer prices are up a moderate 2% from a year ago, the year-over-year number masks an acceleration. The CPI is up at a 2.5% annual rate in the past six months and up at a 2.8% rate in the past three months. (!!!)  Since the start of 2014, consumer prices are up 2.4% at an annual rate versus the 1.2% pace in first seven months of 2013. Owners’ equivalent rent (what homeowners would pay if they were renting their homes from soemone else) led the way in July, up 0.3%, accounting for most of the increase in the overall index. Owners’ equivalent rent, which makes up about ¼ of the overall CPI, is up 2.7% over the past 12 months and will be a key source of the acceleration in inflation in the year ahead, in large part fueled by the shift toward renting rather than owning. And while energy prices declined 0.3% in July, muting the rise in the overall CPI, we expect this measure to move higher in the months ahead, continuing the trend higher we have seen over the past twelve months. The worst news in today’s report was that “real” (inflation-adjusted) average hourly earnings remained flat in July and are unchanged in the past year. Plugging today’s CPI data into our models suggests the Fed’s preferred measure of inflation, the PCE deflator, probably increased 0.1% in July. If so, it would be up 1.6% from a year ago, barely below the Fed’s target of 2%. We expect to hit and cross the 2% target later this year, consistent with our view that the Fed starts raising short-term interest rates in the first half of 2015.
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Crafty_Dog
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« Reply #754 on: August 22, 2014, 11:58:33 AM »



Hawks Crying Wolf

By PAUL KRUGMAN
AUG. 21, 2014


According to a recent report in The Times, there is dissent at the Fed: “An increasingly vocal minority of Federal Reserve officials want the central bank to retreat more quickly” from its easy-money policies, which they warn run the risk of causing inflation. And this debate, we are told, is likely to dominate the big economic symposium currently underway in Jackson Hole, Wyo.

That may well be the case. But there’s something you should know: That “vocal minority” has been warning about soaring inflation more or less nonstop for six years. And the persistence of that obsession seems, to me, to be a more interesting and important story than the fact that the usual suspects are saying the usual things.

Before I try to explain the inflation obsession, let’s talk about how striking that obsession really is.

The Times article singles out for special mention Charles Plosser of the Philadelphia Fed, who is, indeed, warning about inflation risks. But you should know that he warned about the danger of rising inflation in 2008. He warned about it in 2009. He did the same in 2010, 2011, 2012 and 2013. He was wrong each time, but, undaunted, he’s now doing it again.

And this record isn’t unusual. With very few exceptions, officials and economists who issued dire warnings about inflation years ago are still issuing more or less identical warnings today. Narayana Kocherlakota, president of the Minneapolis Fed, is the only prominent counterexample I can think of.

Now, everyone who has been in the economics business any length of time, myself very much included, has made some incorrect predictions. If you haven’t, you’re playing it too safe. The inflation hawks, however, show no sign of learning from their mistakes. Where is the soul-searching, the attempt to understand how they could have been so wrong?

The point is that when you see people clinging to a view of the world in the teeth of the evidence, failing to reconsider their beliefs despite repeated prediction failures, you have to suspect that there are ulterior motives involved. So the interesting question is: What is it about crying “Inflation!” that makes it so appealing that people keep doing it despite having been wrong again and again?

Well, when economic myths persist, the explanation usually lies in politics — and, in particular, in class interests. There is not a shred of evidence that cutting tax rates on the wealthy boosts the economy, but there’s no mystery about why leading Republicans like Representative Paul Ryan keep claiming that lower taxes on the rich are the secret to growth. Claims that we face an imminent fiscal crisis, that America will turn into Greece any day now, similarly serve a useful purpose for those seeking to dismantle social programs.

At first sight, claims that easy money will cause disaster even in a depressed economy seem different, because the class interests are far less clear. Yes, low interest rates mean low long-term returns for bondholders (who are generally wealthy), but they also mean short-term capital gains for those same bondholders.
Continue reading the main story Continue reading the main story

But while easy money may in principle have mixed effects on the fortunes (literally) of the wealthy, in practice demands for tighter money despite high unemployment always come from the right. Eight decades ago, Friedrich Hayek warned against any attempt to mitigate the Great Depression via “the creation of artificial demand”; three years ago, Mr. Ryan all but accused Ben Bernanke, the Fed chairman at the time, of seeking to “debase” the dollar. Inflation obsession is as closely associated with conservative politics as demands for lower taxes on capital gains.
Continue reading the main story
Recent Comments
libdemtex
false

Sooner or later we will have some inflation and the wingers can say they were right.
Larry Hoffman
25 minutes ago

Mr. Krugman, once again, points out the prognosticators who keep making the same "WRONG" prediction. The most amazing thing about them is...
Bob Burns
25 minutes ago

Great column. I've been having this same argument with my investment advisor for 6 years and so far he's been left to manufacturing "facts"...

    See All Comments
    Write a comment

It’s less clear why. But faith in the inability of government to do anything positive is a central tenet of the conservative creed. Carving out an exception for monetary policy — “Government is always the problem, not the solution, unless we’re talking about the Fed cutting interest rates to fight unemployment” — may just be too subtle a distinction to draw in an era when Republican politicians draw their economic ideas from Ayn Rand novels.

Which brings me back to the Fed, and the question of when to end easy-money policies.

Even monetary doves like Janet Yellen, the Fed chairwoman, generally acknowledge that there will come a time to take the pedal off the metal. And maybe that time isn’t far off — official unemployment has fallen sharply, although wages are still going nowhere and inflation is still subdued.

But the last people you want to ask about appropriate policy are people who have been warning about inflation year after year. Not only have they been consistently wrong, they’ve staked out a position that, whether they know it or not, is essentially political rather than based on analysis. They should be listened to politely — good manners are always a virtue — then ignored.
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« Reply #755 on: September 17, 2014, 05:40:37 PM »

Rate Hikes Approaching To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 9/17/2014

We count five major takeaways from today’s activity at the Federal Reserve.

First, quantitative easing (QE) still looks on track for winding down at the end of October. As expected, the Fed announced it would cut its purchases of Treasury securities and mortgage-backed securities to $15 billion in October and expects to announce an end to QE at the next meeting, which is October 29th.

Second, the median view among Fed officials is for a slightly faster increase in short-term rates. Back in June, the consensus was for the top of the federal funds target range to be 1.25% at the end of 2015; now it’s 1.5%. Previously the consensus was around 2.5% for the end of 2016, now it’s 3%. As a result, it now looks like the Fed will start raising rates by April 2015, perhaps even as early as the first quarter. To confirm this, look for the Fed to dump the “considerable time” language later this year.
Third, once it starts raising rates, the Fed will try to control the federal funds rate by using the interest it pays banks for holding excess reserves. It will also use reverse repos to help control the funds rate, but only as much and as long as needed. The Fed says it won’t use reverse repos for other purposes.

Fourth, the Fed isn’t going to outright sell securities from its portfolio to unwind its bloated balance sheet. After starting to raise the funds rate, the Fed will eventually allow its balance sheet to shrink in a passive way, by letting securities gradually mature without full reinvestment. The Fed is particularly reluctant to sell mortgage-backed securities (MBS), but may eventually do so several years down the road to clean up some long-dated securities on its books that won’t mature anytime soon. Long-term, the Fed intends to go back to holding almost all Treasury securities, not a large portfolio of MBS.

Last, where there’s smoke, there’s fire. Two Fed officials dissented from the statement, both Philadelphia Fed Bank President Charles Plosser and Dallas Bank President Richard Fisher. More importantly, both dissents were from hawks, which suggests that if the Fed makes any changes in policy or projections at the next couple of meetings, it’s more likely to get more hawkish than more dovish.

The Fed also made some minor changes to the language in its statement, noting that the unemployment rate is little changed since the last meeting and the economy is expanding moderately after the downside surprise in Q1 and sharp rebound in Q2.

The bottom line is that the Fed has been and will remain behind the curve. Nominal GDP – real GDP growth plus inflation – is up 4.2% in the past year and up at a 3.7% annual rate in the past two years. A federal funds target rate of nearly zero is too low given this growth. It’s also too low given well-tailored policy tools like the Taylor Rule.
Hyperinflation is not in the cards; the Fed will keep paying banks enough to keep the money multiplier depressed. But, given loose policy, we expect gradually faster growth in nominal GDP for the next couple of years. In turn, the bull market in equities will continue to prevail and the bond market is due for a fall.
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Crafty_Dog
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« Reply #756 on: September 26, 2014, 12:32:03 PM »



http://dealbook.nytimes.com/2014/09/25/buoyant-dollar-underlines-resurgence-in-u-s-economy/?emc=edit_th_20140926&nl=todaysheadlines&nlid=49641193
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Crafty_Dog
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« Reply #757 on: October 06, 2014, 02:51:58 PM »

Monday Morning Outlook
________________________________________
Inflation: What Inflation? To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 10/6/2014

Who hasn’t heard forecasts of “Hyperinflation?” They’ve been all over the web and TV ever since the Federal Reserve started a huge expansion in its balance sheet, called Quantitative Easing, back in 2008. Among other things, these forecasts called for a dollar collapse, dire problems for the banking system and 1970s, or Weimar Republic-like, inflation.

We have consistently disagreed with these forecasts. Yes, the monetary base has expanded rapidly. But banks have held the vast majority of this QE as excess reserves. These reserves just sit at the Fed, earning 25 basis points, but other than that, gathering electronic dust. They haven’t boosted inflation as feared. And we don’t believe they are responsible for economic growth, or the rising stock market, either.

In economic terms, the velocity of money collapsed in the Panic of 2008 and, although there are some recent signs of a revival, it’s nowhere near bouncing back to where it was before the Panic. What QE has accomplished is reducing the money multiplier in a significant way.

To be clear, even though we never expected hyper-inflation, we did expect inflation to rise more than it actually has over the past few years. We thought inflation would be at least 3% by now, maybe even 4%. And yet, the Consumer Price Index is up only 1.7% in the past year while the Fed’s preferred measure, the PCE deflator, is up only 1.5%.

We still don’t expect inflation to stay this low, but for a number of reasons, we now expect any move higher over the next few years to be very gradual, maybe half a point per year. This isn’t enough, all by itself, to get the Fed to move rates much higher than it currently projects.

Here’s why we expect only a gradual rise in inflation.

First, the Fed is fully prepared to increase the interest rate it pays on excess reserves. And while this doesn’t guarantee the money supply won’t expand, the Fed is also ready to use higher capital standards and Chinese-like bank rules to hold back lending, which will contain money growth and loans.

Second, real economic growth should pick up over the next couple of years to close to 3% versus the average of roughly 2% growth per year since the recovery started in 2009. This extra growth could help soak up some of the loose monetary policy.

Third, and lately the most important reason for a very gradual slog higher in inflation, is the huge headwind coming from the energy sector, where the combination of horizontal drilling and fracking is transforming production. Supply is simply booming and prices are falling. Back in 2005, the US was importing ten times as much oil (petroleum and petroleum products) as it was exporting; now that ratio is down to 1.9 and headed lower. In the next few years, the US could easily become a net exporter of petroleum.

These forces are creating disarray in OPEC. Saudi Arabia is willing to accept lower prices for oil, undercutting other oil exporters in the Middle East as well as Russia. West Texas Intermediate, which was $104/barrel in late June is now below $90/barrel, and probably has further to fall.

Gold is below $1,200/oz., a clear sign that inflationary fears are receding. We still think it has further to fall.

As a result, even though the Fed will start to raise short-term rates next year, the rate hikes will be gradual. We don’t expect 50 basis point hikes at any single meeting anytime soon. More likely, the Fed will raise rates at one meeting and then pause at the next, in an attempt to damp volatility.

In turn, long-term rates will work their way higher, but not by leaps and bounds. We expect both equities and the 10-year Treasury yield to move higher later this year. While we look for 10-year yields to end this year below 3%, we look for something like 3.5% by the end of 2015 and 4% in 2016.

Most important for investors, is to understand that a 4% yield on the 10-year Treasury (the equivalent of a 25 price-earnings ratio) is not a headwind for the stock market. Based on next year’s forecasted earnings, the S&P 500 P-E is less than 15 today. That leaves plenty of room for equities to rally.

And even if the Treasury yield goes above 4%, that’s OK for equities as long as interest rates rise primarily because of improvement in real GDP growth rather than inflation.
The bottom line is that our outlook for inflation has shifted downward, but not dramatically. We still expect more inflation, just not enough to cause serious concern for at least the next couple of years. This is good news for the stock market and the economy.
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Crafty_Dog
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« Reply #758 on: October 15, 2014, 09:05:20 PM »



Risk of Deflation Feeds Global Fears
Falling Commodities Prices Pressures Central Banks
By Jon Hilsenrath and Brian Blackstone
Oct. 15, 2014 8:26 p.m. ET

Behind the spate of market turmoil lurks a worry that top policy makers thought they had beaten back a few years ago: the specter of deflation.

A general fall in consumer prices emerged as a big concern after the 2008 financial crisis because it summoned memories of deep and lingering downturns like the Great Depression and two decades of lost growth in Japan. The world’s central banks in recent years have used a variety of easy-money policies to fight its debilitating effects.

Now, fresh signs of slow global economic growth, falling commodities prices, sagging stock markets and declining bond yields suggest the deflation risk hasn’t gone away, particularly in the often-frenetic eyes of investors. These emerging threats come as the Federal Reserve is on track this month to end a bond-buying program that has been one of the main tools in its fight against falling prices.

The deflation concern is particularly pronounced in Europe and Japan, two economies where policy makers are struggling to come up with solutions to counter especially slow economic growth.

However, recent declines in commodities prices suggest that downward pressure on inflation—if not all-out deflation—could become a wider-ranging phenomenon, and one with some mixed implications for economies like the U.S. and emerging markets.

Investor worries about the global economy appeared to gather force Wednesday. European stock markets sagged; the Stoxx Europe 600 index fell 3.2% to its lowest level since last December. U.S. stocks pared steep losses, but still finished down for the fifth straight day; after falling more than 450 points at one point, the Dow Jones Industrial Average fell 173.45, or 1.1%, to 16141.74.

Meantime, yields on 10-year U.S. Treasury notes fell to 2.091%, their lowest level since June 2013, and are down nearly a percentage point from the beginning of the year. Bond yields fell to new lows in Germany, too. Crude-oil prices dropped further; crude futures on the New York Mercantile Exchange fell to $81.78 a barrel, the lowest level since June 2012.

The deflation concerns are particularly acute in Europe, where annual inflation in the 18 nations that use the euro was 0.3% last month, a five-year low that is far below the European Central Bank’s target of just under 2%.

With inflation so low, it wouldn’t take much of a shock—such as weakness in Germany’s economy or geopolitical tensions in nearby Ukraine—to tip the whole region into a deflationary downturn. Some eurozone countries, such as Italy, have already tipped into deflation. Even countries outside the currency bloc are feeling the pain. Sweden’s statistics agency said Tuesday that consumer prices fell 0.4% in annual terms last month after a 0.2% fall in August, well below its central bank’s 2% target.

The risk of deflation in Europe is “a real worry,” Harvard University professor and former Federal Reserve governor Jeremy Stein said in an interview. “The right prescription [for policy makers] is to be aggressive.”

ECB President Mario Draghi acted against deflation risks in June and September, pushing the central bank to slash interest rates to record lows each time—including a negative rate on bank deposits at the ECB—and unveiling new bank-lending and asset-purchase plans for asset-backed securities and covered bonds.

But there is little consensus for more-dramatic measures—the kind of monetary stimulus the Fed, the Bank of England and the Bank of Japan have deployed—namely large-scale purchases of government bonds to raise the money supply.

The head of Germany’s central bank, Jens Weidmann, has signaled his opposition to such bond buying, and other members of the ECB’s governing council appear sympathetic to his argument that with government and corporate borrowing costs already superlow, the policy wouldn’t even do much good.

“I am very much for a steady-hand approach, and I think this is what we are doing,” Austria’s central bank governor, Ewald Nowotny, said in an interview last week.

Hard fiscal problems are part of Europe’s problem. Last week, Standard & Poor’s stripped Finland of its triple-A credit rating and downgraded France’s outlook. On Tuesday, Fitch put France on review for a possible downgrade.

Struggling economies such as France and Italy face a tough choice: Take additional austerity measures to shrink budget deficits, inflicting more pain on their economies, or attempt to flaunt the EU’s budget rules calling for low deficits, which could damage their credibility in Europe.

ECB chief Mario Draghi, shown in Washington this past weekend, faces opposition to further measures to combat deflation in the eurozone.R Reuters

The resistance Mr. Draghi faces has shaken the faith of some investors that policy makers in Europe will address the threat.

“Market valuations, especially for rich countries, have been well above what was warranted by fundamentals. What kept them up there was a belief that central banks were markets’ best friends,” said Mohamed El-Erian, chief economic adviser at Allianz Group. “Most people now recognize that the ability of central banks to address what ails the global economy is weaker than they believed.”

Meanwhile, Japan had recently begun to stir sustained growth, which helped to push its inflation rate above 1%, after years of on-again, off-again deflation. But inflation decelerated again in recent months as the economy softened after an April sales-tax increase meant to restrain mounting government debt. Many private economists forecast a slip back below 1% this year.

Japanese officials must now decide whether to follow through on another planned sales-tax increase that could dent growth even more. And the Bank of Japan is weighing whether it needs to provide even more stimulus. BOJ Governor Haruhiko Kuroda launched new asset purchase programs last year to reverse two decades of deflation and has pledged to persist until he reaches the 2% target.

Japan’s struggles to exit deflation, even with massive central-bank stimulus, illustrate just how difficult it is for an economy to pull out of the trap, once it has settled in.

A weak global outlook “has to be a worry for every economy,” Reserve Bank of India Governor Raghuram Rajan told The Wall Street Journal in an interview last week.

The U.S. confronts much different circumstances than Europe and Japan. U.S. inflation had been rising toward the Fed’s 2% objective earlier this year but now faces a downward tug amid the weakening global growth and a strengthening U.S. dollar. The Labor Department reported Wednesday that producer prices in the U.S. fell in September. Sharp drops in commodities prices this month could add to downward pressure.

Yet falling commodities prices have silver linings. For one, the decline is being driven in part by a U.S. energy production boom—not just sagging global demand for goods. Moreover, falling gasoline prices are a boon to U.S. consumers: One rule of thumb is that every one-cent drop in the price of gasoline amounts to a $1 billion boost to U.S. household incomes, and gasoline prices have dropped by 13 to 17 cents from a year ago, according to the automobile group AAA.

“All else equal, when energy gets cheaper, we benefit,” Mr. Stein said.

Meanwhile, the Fed is on track this month to end its bond-buying stimulus program launched in September 2012. And Fed officials have largely stuck to their line that they expected to start raising short-term interest rates by the middle of 2015. Still, traders in futures markets have been pushing up the prices of contracts tied to the Fed’s benchmark interest rate—a sign they see diminishing odds that the Fed will follow through on that plan.

Harvard’s Mr. Stein said he didn’t think the U.S. central bank needed to alter its thinking much in light of recent developments. “I wouldn’t dramatically revise my expectations,” he said. “The balance of the job-market news in the U.S. has been very positive.”

A Commerce Department report Wednesday showed U.S. retail sales dropped in September, but many economists are sticking to estimates that the U.S. economy expanded at a rate in excess of 3% in the third quarter, potentially the fourth time in the past five quarters it exceeded 3%. Moreover job growth has been stronger than Fed officials expected.

Write to Jon Hilsenrath at jon.hilsenrath@wsj.com and Brian Blackstone at brian.blackstone@wsj.com
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« Reply #759 on: October 15, 2014, 10:48:07 PM »

Yes, I'm looking for the post.
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« Reply #760 on: October 17, 2014, 07:05:17 AM »

So yesterday the Fed hinted it might continue easing.  It is so hard not to be cynical that this is just another political stunt before and election to buttress the markets.

Any comments?   I mean Yellen is a liberal as are many of the Fed people.  undecided

Could this be any more convenient for the Crats and the self chosen One?
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« Reply #761 on: October 27, 2014, 04:20:39 PM »

 
http://www.themercury.com.au/china-to-start-direct-trading-between-yuan-singapore-dollar/story-fnj3twbb-1227104025083


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« Reply #762 on: October 29, 2014, 10:41:49 AM »

Peter Schiff says what goes up must come down and that the end of QE will plunge the market and the economy into recession.  Though he is labeled an eternal and extreme pessimist, the Fed must agree somewhat with his view noting their fear and reluctance over all these years to right-size money supply and interest rates.
http://etfdailynews.com/2014/10/22/rick-santelli-ending-qe-will-plunge-u-s-into-severe-recession/


On the other side of the coin, I don't agree with this but found it to be a strong defense of QE and at least partly true:
(The writer owns a private equity investment company.)

I want to offer some perspective on QE. As an investor and professional participant in the markets and a conservative, I thought I would try to offer something of a defense of the Fed and its decision to pursue what has been called QE, printing or what I remember being called open market purchases in my macroeconomic classes. The opposing case is typically what I think of as a populist case that doesn’t really reflect an understanding of some important topics which inhere to a functioning capitalist economy and, very importantly, our fractional reserve banking system and the need for liquid (i.e. functioning) markets with a bid and offer.

Let’s first consider a world without the Fed and without QE. In effect this is what we experienced, briefly, when Lehman went bankrupt, when Washington Mutual was seized by the FDIC (and lots of other banks essentially became insolvent). If you think about it, when that happens – markets freeze and liquidity evaporates — savers lose all of their savings. Depositors at a bank are savers. Buyers of money market mutual funds are savers. When Lehman went bankrupt, their related money market mutual funds “broke the buck” – they were worth less than par.

The only thing that prevented this phenomenon from spreading was the willingness of the Fed and the Treasury to replace the banks as providers of liquidity and backstop deposits and so forth.

During the Depression, the Fed did nothing like QE and the Treasury wanted to force liquidation of excess assets and inventories and debts. The result is economic cataclysm, especially in a leveraged economy with a fractional reserve banking system. Banks cannot liquidate and satisfy their depositors need for cash. Deposits are borrowings for the bank. They in turn lend out the money they have on deposit to generate a return, and this pays savers a return. But when an economy goes into recession, this system malfunctions because the credit that originally justified the loan can no longer support it. This is the natural course of the business cycle. But the banking system on the way down is equivalent to the problem of a fire in a crowded theater. Everybody cannot get out at once. Not even close. It’s a fire in a vault really. Those lines of depositors waiting to take their money out cannot be satisfied.

It is easy to castigate the Fed and the Treasury for “bailing out” lenders and management teams, but the truth is more complicated. They were backstopping a system which holds the savings for the vast majority of Americans. As for the continuance of QE, I would revert to the Depression data and again observe that the Fed allowed the money supply to collapse by 1/3. This was devastating to the economy. Allowing monetary contraction through forced liquidation (which is the policy antidote to QE) would be beyond cataclysmic – it would make the Depression or today’s Greece a walk in the park. Unemployment would be 30%, people’s savings would be wiped out all at once – and the beneficiaries would be a tiny fraction of wealthy who would be able to buy assets for pennies from desperate sellers.

The primary criticism viz QE is that we are destroying the dollar and sowing the seeds of inflation. Maybe. But we are currently not inflating. At all. Commodity prices are falling or have fallen dramatically – gold, oil, you name it. The dollar has strengthened viz its alternative currencies, including gold and silver. There may be particular areas of price rises, but that means it’s not a uniform monetary phenomenon. Measured inflation is tame. One of the “inputs” which drives inflation is something called monetary velocity, or the speed with which people spend their money on items. As it did in the depression, it has collapsed. During the depression, it was this particular input which was responsible for the collapse in the money supply. You can think of QE as effectively offsetting the decline in velocity.

Monetary authorities always dance on the head of a pin in this way, trying to balance all of these inputs and avoid catastrophe. It’s a difficult task.

The truth is, the deflationary forces in the global economy are extraordinary. Technology, innovation, credit, freer movement of capital and labor – all of these forces have combined to create massive excess capacity in most of the world. This is fundamentally deflationary. Those who long for deflation are being a bit glib (which we would get without monetary intervention, believe me). William Jennings Bryan railed about being nailed to a cross of gold. That’s deflation that arises from the gold standard – truly hard money). He was a populist. In today’s world, modest deflation would – as it always does – redound to the benefit of lenders (unless it also consumed them to in a deflationary spiral , as it likely would in the end). Rapid inflation is to the benefit of borrowers at the expense of lenders. There is a reason why all of these quasi populist, socialist third world countries inflate and destroy their currencies rather than deflate. Stable, predictable and modest inflation is probably best for us all, dancing on the head of the pin.

All in all, while he gets tremendous criticism (as did Volker, Greenspan and now does Yellen), Bernanke probably deserves a great deal of credit and a big thank you from all of us, wealthy, middle and lower classes. Middle classes have been more significantly damaged by tax policy and Obamacare than anything else (i.e. fiscal transfers away from them). But the Fed really has preserved the stability of the banking and monetary system from which we all derive extraordinary benefit.
(more at link)
http://www.powerlineblog.com/archives/2014/10/in-defense-of-qe.php
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« Reply #763 on: October 29, 2014, 11:11:45 AM »

To follow a post of what I disagree with, I would like to post Steve Hayward of Powerline (famous people reading the forum?) expressing my view:

"One factor that ought to be mentioned as to why the enormous monetary growth hasn’t led to inflation, in addition to the factors mentioned above, is the collapse in “velocity,” i.e., the speed with which money turns over in the economy basically.  This factor—”V” in the famous basic equation of monetarism that Friedman made famous, “MV=PQ”—fell sharply during the recession of 2008-2010, and has kept falling since then.  You can see the chart from the Federal Reserve below.  I believe this is unprecedented in the history of Post-WWII recessions, but I haven’t gone back and looked.  There are some reasons to think a new, lower level of velocity might endure, but if it doesn’t?"
http://www.powerlineblog.com/archives/2014/10/in-defense-of-qe.php


--------------------------------------------------------------------------
The collapse of velocity will endure until economic policies change.  The policies we call Obamanomics really started with political-electoral shift that elected Pelosi-Reid majorities (see hayward's velocity chart or any other economic chart).  This shift of power ensured that higher levels of taxes and regulations were coming zapped the energy our of the economy - what economists measure as "velocity".  The new levels of ever-expanding money supply are not too great for this continually collapsing economy, but it is a case of applying the wrong "solution" to the wrong problem.  It is what I call putting more gas in the tank when two or three tires are flat and what Brian Wesbury calls the "Plowhorse economy".  Moving forward without velocity. When we do re-energize this economy with pro-growth policies we also have to address the oversupply of money that was poured in for this period of doldrums.  If you squeeze the money supply before the pro-growth policies fully take hold, you will get what those like Peter Schiff predict.  Witness the recession of 1981-1982.  If you wait even longer to fix what is really wrong while pouring in more and more money, the correction later will be all the more difficult.
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« Reply #764 on: October 29, 2014, 12:47:08 PM »

Interesting posts Doug.

With regard to the proffered justification of protecting savers, unless I am missing something the author fails to address the protections in place by FDIC, SIPIC, and the like. 
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« Reply #765 on: October 29, 2014, 03:45:50 PM »

Interesting posts Doug.
With regard to the proffered justification of protecting savers, unless I am missing something the author fails to address the protections in place by FDIC, SIPIC, and the like. 

Yes, savings would have been insured but I don't think the author was referring to the small amount of savings that the little guy doesn't have anyway.  I think he is saying that in a complete meltdown the little guy would lose everything else too, such as his job, his home, and the local businesses.  His argument has possible merit when looking at the moments of panic, where total financial collapse was possible, and maybe he justifies the extra-constitutional response we took, bailing out investment houses that were not federally guaranteed, and providing unprecedented liquidity.  He is assuming FDIC would have been overwhelmed as well.  But I agree with you that it is wrong to ignore the corrosive cultural effect that comes from punishing savings over such a long period of time that new generations now have no idea why they should save.  We are not in a panic meltdown economy; this is a "plowhorse economy".    )

He also misses the damage done by QE.  We overinflated stock returns (more money chasing a fixed number of shares of a fixed number of businesses) while we pushed interest rates on savings down to zero.  The small to medium player has to put funds at risk that otherwise would be insured, or else receive no return and no benefit of compounding interest. 

Also, a point inferred in the original piece is that accommodative monetary policy enabled irresponsible fiscal policy.  If not for the extreme actions of the Fed, the fiscal policy makers would have been forced to make better choices.  We don't even borrow all the money that we spend but don't collect from taxes.  How does anyone see that as anything other than unsustainable?  And that takes us back to Peter Schiff's point, what happens when QE ends?
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« Reply #766 on: October 29, 2014, 04:44:37 PM »

Research Reports
________________________________________
Fed Ends QE, Rate Hikes Now on Radar To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Senior Economist
Date: 10/29/2014

We count five key takeaways from today’s policy statement from the Federal Reserve.

First, the Fed clearly raised its assessment of the economy. Most notably, it deleted its long-standing reference to “significant underutilization” in the labor market, changing it to say that the underutilization in the labor market is “gradually diminishing.” This may not seem like much, but at the Yellen Fed a better assessment of the job market is a necessary step before raising rates and that hurdle is now much closer to being cleared. In addition, the Fed strengthened its language on consumer spending and completely deleted a reference to fiscal policy restraining economic growth.   

Second, quantitative easing is finished by the end of the week, as previously projected. This doesn’t mean the Fed’s balance sheet will suddenly go back to normal. Instead, the Fed will keep reinvesting principal payments from its holdings to maintain the balance sheet at roughly $4.4 trillion. Look for the Fed to keep reinvesting principal through at least late 2015.

Third, the Fed is taking a more nuanced view on inflation, comparing market-based measures (such as the five-year forward inflation rate), which have diminished recently, to survey-based measures, which have remained stable. The Fed pointed out that energy prices should hold inflation down in the near term but inflation should still head back up toward its target of 2%.

Fourth, the Fed maintained its commitment to keep rates at current levels for a “considerable time,” but added language saying rate hikes could happen sooner or later depending on how closely actual economic data match its forecast. We think this means the Fed is getting very close to removing the “considerable period” phrase. Look for the Fed to remove the language at the mid-December meeting, when Chairwoman Yellen will have a chance to fully explain the Fed’s reasoning at the post-meeting press conference.     

Last, the two hawkish dissenters at the September meeting are now back on board with Fed policy while the lone dissent at today’s meeting was a dovish one from Minneapolis Fed president Narayana Kocherlakota, who wants the Fed to commit to keeping rates low until inflation hits 2% and wants to keep quantitative easing going at the current slow pace at least through the end of the year.

The bottom line is that the Fed has been and will remain behind the curve. We believe the first rate hike could come in the second quarter of next year. But nominal GDP – real GDP growth plus inflation – is up 4.3% in the past year and up at a 3.8% annual rate in the past two years. A federal funds target rate of nearly zero is too low given this growth. It’s also too low given well-tailored policy tools like the Taylor Rule.

In the meantime, hyperinflation is not in the cards; the Fed will keep paying banks enough to keep the money multiplier depressed. But, given loose policy, we expect gradually faster growth in nominal GDP for the next couple of years. In turn, the bull market in equities will continue and the bond market is due for a fall.
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« Reply #767 on: November 19, 2014, 10:22:15 AM »

http://www.telegraph.co.uk/finance/commodities/11226240/Putin-stockpiles-gold-as-Russia-prepares-for-economic-war.html
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« Reply #768 on: November 19, 2014, 11:35:01 AM »

Interesting , , ,
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« Reply #769 on: November 19, 2014, 12:41:54 PM »


Yes, Putin is an interesting adversary, very calculating.  With low oil costs I'm surprised he has excess currency.  I suppose he can't buy dollars or euros right before he triggers the next crisis to drive oil prices up. 
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« Reply #770 on: November 19, 2014, 12:51:30 PM »

Do crises drive prices up in the current context?  The middle east is in an accelerating burn, and oil prices are falling , , ,

Off the top of my head this looks more like a play to play for time if/when there is a run on the ruble.

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« Reply #771 on: November 20, 2014, 10:36:22 AM »

Do crises drive prices up in the current context?  The middle east is in an accelerating burn, and oil prices are falling , , ,

Off the top of my head this looks more like a play to play for time if/when there is a run on the ruble.

Great points.  In other crisis, in Iraq, Iran, the Gulf, Libya, threat of war anywhere, it seems that all crisis drive up the price of oil.  Why not now?

In Iraq, ISIS the aggressor wants control of the oil production and revenue, not disruption.  It's quiet in Iran while they build their nuclear arsenal without objection.  America is gushing with oil from fracking and Saudi is boosting supply while global demand is likely flattening.

For Russia, their crisis is the falling price of oil.  Their current conflict is Ukraine today and maybe the Baltic States tomorrow.  Since the Russian side is both the energy producer and the attacker, I guess there is no current threat of disruption to make the oil futures market nervous.  Ukraine relies on Russian gas and oil, so they would not attack those supply lines even if they could.

Agree, he is setting aside reserves as safely as possible to protect the Ruble, or for himself somehow.   What we never know is what global trouble Putin has in mind next. 
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« Reply #772 on: November 20, 2014, 01:37:10 PM »

Data Watch
________________________________________
The Consumer Price Index (CPI) was Unchanged in October To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Deputy Chief Economist
Date: 11/20/2014

The Consumer Price Index (CPI) was unchanged in October versus the consensus expected decline of 0.1%. The CPI is up 1.7% versus a year ago.
“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) declined 0.1% in October, but is up 1.3% in the past year.
Energy prices declined 1.9% in October, while food prices increased 0.1%. The “core” CPI, which excludes food and energy, rose 0.2% versus consensus expectations of 0.1%. Core prices are up 1.8% versus a year ago.

Real average hourly earnings – the cash earnings of all workers, adjusted for inflation – rose 0.1% in October, and are up 0.4% in the past year. Real weekly earnings are up 0.9% in the past year.

Implications: Next time you see an energy engineer, remember to give them a hug. They deserve it. Energy prices fell for a fourth straight month in October and continue to mute rising prices elsewhere for consumers. Consumer prices are up a modest 1.7% in the past year and the key reasons is America’s booming energy production and, as a result, lower world oil prices. The gasoline index is down 5% in the past year and now stands at the lowest level since February 2011. Given the continued drop in oil prices in the first half of November, look for another tame reading on overall price gains in next month’s report. However, there are sectors where inflation is moving higher. Food and beverage prices are up at a 3.1% annual rate in the past six months and up 2.9% in the past year. So if you only use the supermarket to gauge inflation, we understand thinking the headline reports are too low and that “true” inflation is higher. In addition, housing costs are going up. Owners’ equivalent rent, which makes up about ¼ of the overall CPI, rose 0.2% in October, is up 2.7% in the past year, and will be a key source of any acceleration in inflation in the year ahead. One of the best pieces of news in today’s report was that “real” (inflation-adjusted) average hourly earnings rose 0.1% in October. These earnings are up 0.4% from a year ago and workers are also adding to their purchasing power because of more jobs and more hours worked. Plugging today’s CPI data into our models suggests the Fed’s preferred measure of inflation, the PCE deflator, was probably unchanged in October. If so, it would be up 1.4% from a year ago, still below the Fed’s target of 2%. We expect this measure to eventually hit and cross the 2% target, but given the bonanza from fracking and horizontal drilling, not until next year. In other news this morning, new claims for unemployment insurance declined 2,000 last week to 291,000. Continuing claims fell 73,000 to 2.33 million, a new low for the recovery. Plugging these figures into our employment models suggests nonfarm payrolls are growing 200,000 in November, with private payrolls up 191,000.
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« Reply #773 on: December 12, 2014, 11:37:26 AM »

The Producer Price Index (PPI) declined 0.2% in November To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Dep. Chief Economist
Date: 12/12/2014

The Producer Price Index (PPI) declined 0.2% in November, coming in below the consensus expected decline of 0.1%.  Producer prices are up 1.4% versus a year ago.
Energy and food prices led the index lower, down 3.1% and 0.2% respectively.  Producer prices excluding food and energy were unchanged in November (-0.1% among just goods).
 
In the past year, prices for services are up 1.9%, while prices for goods are up 0.4%. Private capital equipment prices rose 0.2% in November and are up 1.4% in the past year.
 
Prices for intermediate processed goods declined 1.0% in November, and are down 0.3% versus a year ago.  Prices for intermediate unprocessed goods fell 1.3% in November, and are down 1.7% versus a year ago.
 
Implications:  Still no sign of inflation in producer prices. After a surprise to the upside in October, producer prices declined 0.2% in November coming in slightly lower than the consensus expected. The decline in overall producer prices was all due to the goods sector, where prices fell 0.7%, primarily due to energy. Energy prices fell 3.1% in November and are down 6.7% in the past three months (-24% at an annual rate), a testament to fracking and horizontal drilling. Although energy prices have dropped further in December and may decline into early 2015, that trend won’t last forever. As a result, our forecast is that the US suffers neither hyperinflation nor deflation for the next few years. Instead, it’s going to be a slow slog upward for inflation. Prices further back in the production pipeline (intermediate demand) show that it will take a while for inflation to move up. Prices for intermediate processed goods are down 0.3% in the past year while prices for unprocessed goods are down 1.7%. Regardless, with the labor market improving rapidly now that extended unemployment benefits are done, the Fed is still on track to start raising rates around the middle of next year. These rate hikes will not hurt the economy; monetary policy will still be loose and will likely remain that way for the first couple of years of higher short-term rates. Counterintuitively, higher short term rates may boost lending as potential borrowers hurry up their plans to avoid even higher interest rates further down the road. In other words, the Plow Horse economy won’t stop when the Fed shifts gears.
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« Reply #774 on: December 14, 2014, 02:37:14 PM »



Monday Morning Outlook
________________________________________
The Myth of QE: Why Rates Are Headed Higher To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 12/8/2014

It’s a myth; an abused narrative. Those who disagree are called economic heretics. What are we talking about? The idea that Quantitative Easing (QE) drives interest rates down. This myth has a fervent following even though virtually no evidence supports it. 

Yes, the Federal Reserve has done a massive amount of QE. And, yes, interest rates have been low. But, correlation does not equal causation. Just look at Europe, where the European Central Bank (ECB) has allowed its balance sheet to contract in recent years – Quantitative Tightening. Yet, interest rates are even lower than they are in the U.S. Not just German and French 10-year bond yields, but Italian and Spanish as well.

Federal Reserve Chair Janet Yellen understood this back in December 2008, when she said, “As Japan found during its quantitative easing program, increasing the size of the monetary base above levels needed to provide ample liquidity to the banking system had no discernible economic effects aside from those associated with communicating the Bank of Japan’s commitment to the zero interest rate policy.”

In other words, by ending QE, the Fed is implicitly ending its commitment to low rates. As a result, the 2-year Treasury yield has jumped from 0.31% in mid-October to 0.64%. Not because of tapering, but because rate hikes are now expected.

There is no mystery here. QE signals a low interest rate policy. In Europe, the ECB keeps threatening to start QE again, which is the same thing as saying don’t expect rate hikes.

It’s the promise to hold interest rates low that matters, not the actual bond buying. When the Fed (or any central bank) indicates it will hold overnight rates at zero for one year, then 1-year yields will be close to zero. The same holds true if the promise is for two years.

In other words, QE is just another version of “forward guidance.” As that guidance shifts, interest rates will rise. That’s happening in the U.S. right now.

Since mid-October, the Fed has increased its holdings of bonds with 1 to 5-year maturities by $58 billion. At the same time it has decreased its holdings of Treasury bonds with maturities five years and longer by $52 billion.

Nonetheless, the 2-year Treasury bond yield is soaring, while the 10-year Treasury bond yield has remained stubbornly stable. The yield curve is flattening – exactly the opposite result that supporters of QE have claimed would happen.

It’s a magic elixir. In Europe, by not doing enough QE, the ECB is supposedly causing deflation, which, in turn, holds bond yields down. In the U.S., QE itself was supposedly holding interest rates down. In Japan, interest rates were already low, and QE was supposed to boost growth, but instead a renewed recession is underway. It’s the Wizard of Oz. Please don’t look behind the curtain.

What does all this mean? Well, first it means QE isn’t magical. We do not believe QE boosted economic activity or equity values in the US, nor did it keep interest rates down. All it did was boost bank holdings of excess reserves.

This is why tapering has not hurt the U.S. economy or equities. Job growth has accelerated, GDP, too, and the stock market has reached record highs.

What’s missing from just about every conversation about central banks is their inability to offset the damage done by excessive taxes, government spending, or regulation. Europe and Japan will continue to underperform the U.S. as long as their governments spend more as a share of GDP.

The bottom line: The U.S. has turned the corner. Government policy is headed in a better direction, growth is picking up and interest rates are now headed higher, probably for quite some time. But, it’s not because QE is over, it’s because the Fed can no longer justify a zero percent overnight interest rate. “Forward guidance” is kaput. That means higher interest rates are on their way.
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« Reply #775 on: December 15, 2014, 04:38:44 PM »

Oil Price: Looks Reasonable To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 12/15/2014

A former economic colleague, and mentor, used to say: “In the Bible, it says an ounce of gold will buy a fine suit of clothing.” We have read the Bible, and we haven’t found this, although there could be some high-powered math, using talents, cubits, frankincense and myrrh that make it true.

Nonetheless, the point stands – over long periods of time, relative value remains somewhat constant. Gold is trading at $1,210/oz. today and that’s about the cost of a fine suit.
There are suits that cost more, and less, but, well, you get the point.

The reason we bring this up, is that the same “relative price relationship” should hold true for other commodities over time. The gold-oil ratio (using West Texas Intermediate crude prices) has averaged 15.8 over the past 30 years – meaning one ounce of gold would buy 15.8 barrels of oil.

In 2005, the ratio reached a low of 6.7; in 1986, it hit a high of 30.1. From 1990-1999 oil prices averaged $19.70/bbl and gold prices averaged $351/oz – a ratio of 17.8. Today, oil is $57/bbl and gold is $1,210/oz., meaning an ounce of gold will buy 21.2 barrels of oil.

In other words, relative to history, either oil is cheap or gold is expensive. Looking at other commodity price relationships, like silver, shows the same thing. One interesting fact is that in the past 30 years, the CPI is up 126%, while oil is up 116%, showing that, right now, with oil prices down almost $50 from their recent peak, oil has risen about the same as a broad basket of consumer goods.

This doesn’t mean that oil prices can’t fall further. After all, markets do what markets do. What it does mean is that the recent collapse in oil prices is not a sign of broad deflation. It is result of a shift in the “oil supply curve” to the right, due to new technologies in energy – horizontal drilling and hydraulic fracturing. Remember, the supply curve slopes upward from the lower left to the upper right. When a new technology increases supply at any price, like the invention of the tractor did with crops, the entire supply curve shifts. When this happens, output rises and prices fall, unless there is a shift in demand.

These days, two things are happening to keep a lid on demand. First, developing economies, like China and Russia are experiencing slower growth. Second, new technologies – like LED lighting, more efficient computer chips and less waste in office buildings, homes and manufacturing – are reducing energy consumption. For example, an iPad uses $1.36 of electricity every year, while a desktop computer uses $30 of electricity per year.

So, a right-ward shift in the supply curve is occurring at the same time demand is falling short of what was previously expected. In other words, the decline in oil prices is due to macro-economic forces, and those forces are mostly good, not bad. As a result, the drop in oil prices is a good sign, not one that indicates economic problems. The drop in stock prices last week, if it was based on the idea that falling oil prices are a negative thing, is temporary.

More importantly, most relative price indicators suggest the oil price decline has gone too far. Using the current price of gold, a barrel of oil is fairly valued near $77. Alternatively, comparing oil to multiple different prices, including a fine suit of clothing, oil is fairly valued somewhere between $55 and $70/bbl.

Bottom line: stocks and oil have fallen too much. Stocks should rebound soon and, barring a collapse in gold, we look for stability and then rising prices for oil in the years ahead.
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« Reply #776 on: December 15, 2014, 07:03:39 PM »

Crafty is trying to stir it up again...    wink

Stocks are up because corporate profits are up; P/E's are up also.  Corporate profits are up for reasons like being able to hire fewer workers to achieve the same output (improved productivity), while over-regulation is locking out competing startups and disruptive innovation, and more money is chasing fewer companies.  It's not like the US or world economic growth is on fire.

Wesbury was right about stocks - they went up during all this time of zero interest rates and unprecedented QE.  Good for him. (Said with a little Elizabeth Warren-style sarcasm.)

Now we have "tapering", which is even more QE (at a slower rate) on top of all previous QE.  It is not a reversal of QE.


Wesbury:  "Yes, the Federal Reserve has done a massive amount of QE. And, yes, interest rates have been low. But, correlation does not equal causation."

Proof of causation isn't the question or issue.  Correlation is enough. Low interest rates accompanied QE, and if we are done with QE, then we are done low interest rates. No Latin lecture on Post hoc, ergo proptor hoc is required.  If QE and low interest rates are coming and going hand in hand, what difference does proof of causation make?

Look at it more closely.  When the federal government was in deficit in amounts of a trillion a year for multiple years, it did not have to go out and find willing buyers for all those bonds.  If they did have to, they also would have had to raise the yield way up to do that, which is the interest rate.  QE was the government "buying" their own bonds with an accounting entry, without having to first secure the funds anywhere and without having to offer an attractive interest rate to a buyer.  That looks like causation of lower interest rates to me.  Oh well.


Here is Scott Grannis trying to explain how QE is not money creation:  "I suspect that a great number of market participants and observers do not fully understand how QE works. The myth that QE means the Fed is "printing money" persists. All the Fed can do is buy bonds from banks and "pay" for them by crediting the banks' reserve account at the Fed. This is equivalent to the banks selling bonds to the Fed and simultaneously lending the money to buy them. (Zero interest is lending?  Sounds more like crony graft.) It is also equivalent to the Fed acting like a massive hedge fund, borrowing money at a short-term interest rate (0.25%) that it sets in order to buy notes and bonds. It is also equivalent to the Fed "transmogrifying" notes and bonds into T-bill substitutes. (Gruber, is that you?) No money creation is involved in the QE process. Money is only created if banks use their reserves to back up an increase in lending. Banks have only recently started to do this in earnest."
http://scottgrannis.blogspot.com/2014/03/saving-lending-and-tapering-combine-in.html  (Quote is from the comments section.)

Reserves are created out of thin air (an accounting entry) but that isn't money creation unless someone, by chance, uses that money created as money, which they are now starting to do (as of last March).  So QE IS money creation?  


Wesbury quoting Janet Yellen (December 2008):  “As Japan found during its quantitative easing program, increasing the size of the monetary base above levels needed to provide ample liquidity to the banking system had no discernible economic effects aside from those associated with communicating the Bank of Japan’s commitment to the zero interest rate policy.”  [Japan has been having nothing but economic trouble before and since Dec. 2008.  Zero interest rates screws up nearly everything and so does a lot of other unforced errors they are committing.]

(Back to Wesbury) "In other words, by ending QE, the Fed is implicitly ending its commitment to low rates. As a result, the 2-year Treasury yield has jumped from 0.31% in mid-October to 0.64%. Not because of tapering, but because rate hikes are now expected.  There is no mystery here. QE signals a low interest rate policy."

Splitting hairs to me, that sounds like causation.  

"[QE is ending,] ... interest rates will rise. That’s happening in the U.S. right now."  - Wesbury again.


On a better note, here is Wesbury caught reading the forum:
Wesbury: "What’s missing from just about every conversation about central banks is their inability to offset the damage done by excessive taxes, government spending, or regulation.

Doug, preciously: [That is] "applying the wrong solution to the wrong problem", "like putting more gas in the tank when the tires are flat". http://dogbrothers.com/phpBB2/index.php?topic=1948.msg84398#msg84398

Wesbury closes: [QE is over] That means higher interest rates are on their way.

  - Right.
« Last Edit: December 15, 2014, 09:13:52 PM by DougMacG » Logged
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« Reply #777 on: December 15, 2014, 11:35:36 PM »

Good post grin
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« Reply #778 on: January 06, 2015, 06:48:11 PM »

I'm claiming an I-told-y'all-so on this one  cheesy 

http://www.wsj.com/articles/the-double-edged-dollar-1420589991

The Double-Edged Dollar
The rising buck is good for consumers, but watch out for overshooting.
ENLARGE
Photo: Getty Images
Jan. 6, 2015 7:19 p.m. ET
0 COMMENTS

The most important economic story these days is the relentless rise of the dollar, with effects good and ill. We’d be more confident of the benefits if the world’s central bankers appeared to be navigating this monetary weather with any kind of rudder.
Opinion Journal Video
Editorial Page Editor Paul Gigot on foreign exchange trends and why a stronger greenback helps the U.S. economy. Photo credit: Getty Images.

As notable as the magnitude of the greenback’s rise has been its rapidity: 13% against the euro and some 15% against the yen since the end of June. Capital that had flowed into emerging markets since the world financial panic is now heading back to the land of the free and its relative economic strength.

In some ways this is good news for the U.S. because it marks a recovery from the weak-dollar Bush and Obama years and echoes of the strong-dollar mid-1980s and late 1990s. Both strong-dollar eras featured disinflation, falling interest rates, investment flows into the U.S. and economic booms. They were also notable for falling prices for commodities traded in dollars, such as oil, which nearly reached $10 a barrel in 1998 as the dollar soared. One reason Bill Clinton survived impeachment is that gasoline sold for 89 cents a gallon.

The greenback’s current rise is contributing more than is commonly understood to a similar plunge in oil, with the world price falling to $51 a barrel from $112 as recently as June. Gasoline has fallen by more than $1 a gallon in much of the country. This is great news for consumers who can now devote less of their after-tax income to energy.

All other things being equal, we prefer a strong and stable dollar to a falling one. But note the word stable. Currency volatility has costs, as Nobel laureate Robert Mundell teaches, and movements as far and fast as the dollar’s could create some economic wreckage.

One consequence is the rush out of emerging markets of the kind that hasn’t been seen since the late 1990s. Energy- and commodity-related stocks and bonds are also taking a hit, and there may be major casualties. The U.S. Farm Belt and oil patch will suffer. While the pain follows an extended boom, this will be small consolation to over-leveraged companies and investors. Texas and other oil boom states should adjust their budgets now.
ENLARGE
Photo: wsj

Readers may recall that the late 1990s saw the Asia currency crisis, the collapse of Long-Term Capital Management, and the first run on the ruble. Bad things happen amid rapid price shifts. In the 1990s the Federal Reserve could and did help the economy adjust to those shocks by cutting interest rates, but the Fed has no such leeway today with its short-term rate set at near-zero.

Perhaps the best reason for mixed feelings is that much of the dollar’s rally is rooted more in economic weakness overseas than in U.S. strength. The global economy has slowed sharply, with Japan, France and Russia in recession, China decelerating as it adjusts to previous malinvestment, and Europe overall barely growing.

Japan and Europe are contributing to the dollar’s surge by actively pursuing yen and euro devaluation—cheered on by the U.S. Treasury. The play is to help their exporters ride on the back of what they hope will be an accelerating U.S. expansion. For Europe and Japan, monetary policy has become the default alternative to supply-side economic reform.

But as Japan has shown since Prime Minister Shinzo Abe and the Bank of Japan began their weak-yen policy in 2013 (see nearby chart), devaluation may help some exporting companies but it can’t stimulate domestic competition and demand. It isn’t likely to work much better for Mario Draghi and the European Central Bank.

The U.S. Federal Reserve, meanwhile, is signaling a possible monetary move in the opposite direction, getting off zero-bound interest rates for the first time in more than six years. This lack of central bank coordination contributes to currency volatility, as each nation pursues what it sees as its own economic interests, no matter the impact abroad.

San Francisco Fed President John Williams gave currency traders a jolt on Monday by saying the strong dollar means there is less urgency for the Fed to raise rates or begin reducing its $4.5 trillion balance sheet. But delay runs the risk of increasing the distortions in financial markets caused by the Fed’s monetary exertions, especially if U.S. growth accelerates. And the irony of the last year is that U.S. growth has increased even as the Fed ended its program of bond purchases.

The biggest danger would be if the dollar overshoots on the strong side, as it arguably did in the 1990s. This could mean far more destruction here and abroad, in the commodity economy in particular, including to the U.S. energy boom. As U.S. companies suffer from Japanese and European competition, protectionist pressure could increase just as President Obama and Republicans are trying to pass trade-opening legislation.

All of which is a reminder that there is no free market in currencies, because their supply is controlled by the world’s central banks. The major central bankers need to pay attention as much to currency fluctuations as they do to their national economies. A stronger dollar would help the world more if it were also stable.
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« Reply #779 on: January 07, 2015, 02:01:55 PM »

We Are Entering an Era of Shattered Illusions

By Brandon Smith - www.alt-market.com - January 7, 2015


The structure of history is held together by two essential and distinct kinds of links, two moments in time to which no one is immune: moments of epiphany, and moments of catastrophe. Sometimes, both elements intermingle at the birth of a singular epoch. Men often awaken to understanding in the midst of great crisis; and, invariably, great crises can erupt when men awaken. These are the moments when social gravity vanishes, when the kinetic glue of normalcy melts away, and we begin to see the true foundations of our world, if a foundation exists at all.

Catastrophe occurs when too many people refuse to accept that around us always are two universes at work. There is the cold, hard reality that underlies everything. And on the surface is a veil of deceit and compromise. The more humanity compromises vital truths in order to enjoy the comfort of illusions, the more mind-shattering it will be when those illusions fall away. These two worlds can coexist only for short periods of time, and they will always and eventually collide. There is no other possible outcome.

I think it could be said that the more polarized our realities become, the more explosive and disastrous the reaction will be when the separation is removed. I feel it absolutely necessary to relate this danger because today humanity is living so historically far from the bedrock of reality, political reality, social reality and economic reality that the stage has been set for a kind of full spectrum destabilization that has never been seen before.

Though my analysis tends to lean toward the economic side of things, I am not only speaking of shattered illusions in the financial realm. In my next article, one last time I plan to go over nearly every mainstream economic statistic used today to misdirect the public (from national debt to unemployment to inflation to retail sales and corporate profits) and expose why they are false while giving you the real numbers. Most of my regular readers are familiar with much of this information, but I think it important to consolidate it all in a single article so that we can take stock of where our society sits fiscally as we enter 2015. For now, though, I want to discuss the core problem of self-deception, the problem that makes all the rest of our problems possible.

When the initial phase of the global collapse was triggered in 2007 and 2008, there was a substantial explosion in interest and education in terms of liberty issues and alternative economic awareness. I remember back in 2006 when I had just begun writing for the movement that the ratio of people on any given Web forum or in any given public discussion was vastly opposed to alternative viewpoints and information — at least 50-1 by my observations. We were at the height of the real estate frenzy; everyone was buying houses with money they didn’t have and borrowing on their mortgages to purchase stuff they didn’t need. Life was good. The shock of the credit crisis came quickly and abruptly for most people, and there has been a considerable shift in the kinds of discussions many are willing to entertain about our future. Yet the idea that such things can happen despite a consensus of social and geopolitical health does not seemed to have soaked into the thick skulls of average people.

Time, unfortunately, has a magical ability to erase vigilance. It’s not that the public has necessarily forgotten that danger can strike anytime anywhere (though some of them have). Many of them know full well that our culture is floating on a paper-thin ship in a turbulent sea. However, the disturbing trend today reveals that people have decided they do not care. “Taking the blue pill” is the rising rally cry from the so-called “new normal.” Yes, the economy is an illusion, the political system is an illusion and the various global conflicts our society participates in are mostly illusions. But we “can’t do anything about it,” so we might as well profit from these illusions while we can, right?

It has been said that during the economic collapse of the 1930s that the Great Depression was a depression only for the 30 percent of people that had lost everything. For the employed and the financially secure, the depression was much like any other time. This is the point at which we stand today in the collective mindset. With nearly a third of the U.S. population kicked off the unemployment rolls and approximately half the country dependent on a government check of some kind for their survival, the current depression is only now beginning to feel like a depression for anyone. The soup lines have received a fresh candy coating of EBT cards and welfare payments, but the illusion is finally fading, and this should be of great concern to us all in 2015.

Even more frightening is our culture’s deluded sense of what a collapse actually looks like. For many, collapse is a cinematic and overnight affair, with zombies, nuclear bombs and mass panic. In real life, and throughout history, collapse is a process. Since at least 2008, the U.S. and the rest of the world have been experiencing that process. Everyone is waiting for equities to implode and for social unrest to erupt before they take the threat seriously, but these are not signals of collapse. These are the things that occur when a collapse has run its course. Collapse never occurs overnight. It takes years for the effects of social and fiscal breakdown to be visibly felt. And when they are felt, many people refuse to notice. Eighty years ago, America was halfway through the Great Depression, and mainstream economists were STILL claiming that recovery was right around the corner. Illusion and self-deception can be so powerful that the worst miseries can be normalized, at least for a little while.

And it isn’t only the general public that is stricken with crippling bias. There are those within the liberty movement who have bought into false paradigms for various reasons, and this threatens any progress we have made over the past several years. There are those who still think that the “conflict” between Eastern and Western politicians and banking elites is somehow real. There are those who believe that Russia and China, despite their numerous and undeniable ties to the global banking syndicate (information I have covered in multiple articles over the years), are the "good guys", while Western nations are the "bad guys", rather than them all being mere subsidiaries and franchises of the same monstrous globalist machine.

They hold onto this illusion, I think, because it is much more frightening to accept the reality that we are alone, that the liberty movement is the first and last line of defense against centralization, that the responsibility for the future of independence and individual freedom rests on our shoulders. It is much easier to fantasize that there are others out there, nations and governments with armies and capital, that are on our side and will fight our battles for us. This illusion will be a painful one for many in the movement as they begin to realize that the East is actually working in tandem with international financiers instead of working against them.

There are also those in the liberty movement who cling to the notion that the fight against globalism will be won without physical conflict. They believe that if we simply protest long enough, play the political and legal game long enough, nullify long enough, refuse to participate long enough, that the elitist edifice, an edifice which has existed for centuries and has manipulated historical precedence for just as long, will suddenly disappear in a puff of fairy dust.

The first problem with this strategy is that it relies on the assumption of time. Sure, anything is possible given ample opportunity. Perhaps the movement could grind away at the New World Order over the course of several decades until the majority of the masses are awake and aware (which is exactly how long it would take). However, I think it infinitely foolish to presume that we have decades to accomplish such a task. If the past has shown us anything, it is that tyranny does not respect reason and, at a certain point, couldn’t care less about image. Tyranny respects only power. It does not respect the protestations of ants it can crush under foot, but it will make a wide path around a rattlesnake ready to strike. While there is utility in the pursuit of intellectual and philosophical combat, if you are not willing to be the rattlesnake as well, then you are not going to affect change against such an opponent. You will eventually be stepped on.

The refusal to accept responsibility for one’s own defense is yet another product of fear — fear that the enemy is too powerful, that all resistance is futile. But resistance is only assured failure if resistance is never undertaken. Sheeple defeat themselves within their own minds before they ever stand up, and so they never stand. This is the only reason totalitarian elements ever achieve success. Again, many in the liberty movement are going to face a rude awakening when they realize they have relied too much on the notion of the system policing itself, instead of preparing for the worst-case scenario.

And finally, the globalists themselves suffer from a veritable fog of illusions to which I can speak only briefly.

We are stepping over the threshold of an age that will shatter the illusions of everyone, and the internationalists are no exception. The root pillar of elitist globalism itself is that some men are born to rule, while other men are born to serve. Some men are born kings, and other men are born slaves. The psychopathy of this belief system should be evident, but psychopathy also elicits blinding ego and hubris, which smothers any inherent questions of motive. I do not think the elites ever actually consider the validity of their own philosophies. I am relatively certain their manner of viewing the world is much like that of a cult, a religious sect driven by the brutality of zealotry rather than the empowering nature of understanding.

Such men cannot be reasoned with. In fact, zealots often revel in their ability to trample all other world views as they grasp for complete dominance of their ideology. The illusion of rightness is far more important to them than actual truth, and this is their greatest weakness. Hidden under all the posturing and power grabbing, deep in the recesses of their own assumed omnipotence, I sense an ever present terror within the globalist culture. I sense a brand of terror that comes only from the seed of doubt.

The incredible array of propaganda leveled at the public, the constant war gaming and mind gaming against the citizenry, the endless hailstorm of legal maneuvering designed to erase our sense of connection with our natural rights and liberties, the tidal wave of fearmongering, and all the manipulations and scapegoats and elaborate theatrical displays, all reek of fear. For if the globalists were truly as omnipotent as they pretend to be — if they really were all-knowing philosopher kings born to rule — then they would already have their New World Order. They would not need lies. They would not need the threat of force. The undeniable power of their ideology would be enough if their ideology actually had any validity. Lies are designed to hide lack of validity and lack of strength. The globalists are, at bottom, a hollow shell desperately clamoring for substance.

What may appear to be the "thoroughness" of the elitist con is actually a form of micro-management that exhibits a fundamental doubt of success. The globalists wish they could predict the future, but they cannot. So they are just as afraid as most of humanity. I believe we are entering an era in which they will feel the stark pain of shattered illusions and the destruction of their own fantasies, no less felt than the pain of the rest of the world.

Our mission as an opposing force to globalism is to come to terms with our own illusions and to erase them, to stop compromising and to stop waiting for the final shoe to drop and to take positive action now rather than after the endgame develops. This means preparation and organization for the worst-case scenarios. This means making one’s family, neighborhood and community as self-reliant and secure as possible. The excuses have to stop. The distractions and intellectualized silver bullet solutions have to stop. Hard work and risk are all that are left, all that matters. If we do this, and if we do this now, then victory is possible. In any contest of strength and will, he who knows himself best, he who sheds all illusion, will be the winner.

 

 

 

REMINDER:  Alt-Market's winter donation drive is now underway!  If you would like to support the publishing of articles like the one you have just read, visit our donations page here.  We greatly appreciate your patronage.

 

You can contact Brandon Smith at:

brandon@alt-market.com
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« Reply #780 on: January 15, 2015, 03:26:27 PM »

http://blogs.wsj.com/briefly/2015/01/15/what-happened-with-the-swiss-franc-the-short-answer/



The Swiss National Bank shocked markets Thursday by abandoning the cap it had set for the past three-and-a-half years on the Swiss franc’s value against the euro.

The decision came despite repeated assurances from SNB officials in recent months that the central bank was committed to defending the currency cap, which has been credited with protecting Switzerland’s export-dependent economy from turmoil in the neighboring eurozone, and limiting the risks of deflation.

Yet the costs and risks associated with keeping the franc from strengthening too much against the euro—which requires the SNB to purchase assets denominated in non-franc currencies, particularly the euro—have become too great. In ditching the cap, the SNB sparked a dramatic rally in the franc, and raised doubts about its own credibility.

Here are five questions about Thursday’s move.

    Why did the SNB cap the franc’s value?

    During the eurozone’s debt crisis, the Swiss franc, long considered a safe haven in times of stress, appreciated sharply against the euro. That threatened the country’s manufacturers, which sell a significant share of their exports to the eurozone. In September 2011, the SNB set a goal of keeping its currency from rising beyond 1.20 francs to the euro.
    Did it work?

    The Swiss economy has expanded more rapidly than the eurozone’s in recent years, but inflation remains near zero, suggesting the economy hasn’t escaped the risks of deflation.
    Why scrap the peg?

    The SNB said that while the franc is still strong, “the overvaluation has decreased as a whole” since they set the cap. Analysts also said the target would have come under increased pressure in coming weeks, particularly if the European Central Bank launches quantitative easing next week as most analysts expect, increasing the supply of euros and likely leading to further euro depreciation.
    What does it mean for the SNB?

    The central bank faces two immediate problems: its credibility and the potential for major losses on its balance sheet. The reversal may make it harder in the future for Swiss policymakers to persuade investors that its declared intentions are its real intentions. In addition, because the SNB holds a big chunk of its balance sheet in assets denominated in foreign currencies that will have fallen in franc terms, it faces large losses on those holdings.
    What are the lessons for other central banks?

    The Swiss case shows how hard it is for central banks to maintain supposedly temporary, emergency measures for long periods, and insulate their economies against major external developments. It also underscores how hard it is for smaller central banks such as Switzerland’s to hold back the tide of markets that are driven by the policies of larger central banks such as the ECB and the U.S. Federal Reserve.
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« Reply #781 on: January 15, 2015, 03:31:05 PM »

second post

Data Watch
________________________________________
The Producer Price Index Declined 0.3% in December To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 1/15/2015

The Producer Price Index (PPI) declined 0.3% in December, coming in above the consensus expected decline of 0.4%. Producer prices are up 1.1% versus a year ago.
Energy prices led the index lower, down 6.6%. Food prices declined 0.4%. Producer prices excluding food and energy rose 0.3% in December (+0.2% among just goods).
In the past year, prices for services are up 2.2%, while prices for goods are down 1.2%. Private capital equipment prices rose 0.1% in December and are up 1.6% in the past year.
Prices for intermediate processed goods declined 1.7% in December, and are down 2.3% versus a year ago. Prices for intermediate unprocessed goods fell 5.0% in December, and are down 8.6% versus a year ago.
Implications: Still no sign of inflation as producer prices fell for the fourth time in five months. The decline in overall producer prices can all be attributed to energy, which fell 6.6% in December and is down 12.9% versus a year ago, a testament to fracking and horizontal drilling. Although energy prices have dropped further in January, that trend won’t last forever. As a result, our forecast is still that the US suffers neither hyperinflation nor deflation. Instead, it’s going to be a slow slog upward for inflation. “Core” prices, which exclude food and energy, show deflation is not setting in. Core prices rose 0.3% in December and are up 2.1% in the past year. However, prices further up the production pipeline remain quiet. Prices for intermediate processed goods are down 2.3% in the past year while prices for unprocessed goods are down 8.6%. Regardless, with the labor market improving, the Fed is still on track to start raising rates around the middle of the year. These rate hikes will not hurt the economy; monetary policy will still be loose and will likely remain that way for the first couple of years of higher short-term rates. Counterintuitively, higher short term rates may boost lending as potential borrowers hurry up their plans to avoid even higher interest rates further down the road. In other words, the Plow Horse economy won’t stop when the Fed shifts gears. In other news this morning, new claims for unemployment benefits increased 19,000 last week to 316,000. We wouldn’t make too much of this as claims are often very volatile in January. Continuing claims fell 51,000 to 2.42 million. Plugging these numbers into our models suggests January will be another solid month with payroll growth again exceeding 200,000. On the manufacturing front, two separate measures of factory sentiment went in different directions in January, but both signal continued growth. The Empire State index increased to +10.0 in January versus -1.2 in December, while the Philadelphia Fed index fell to +6.3 from +18.7.
 
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« Reply #782 on: January 15, 2015, 04:53:36 PM »

If you want to find it, go shopping for food.
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« Reply #783 on: January 15, 2015, 07:18:45 PM »

Much of that can be attributed to the California drought.
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« Reply #784 on: January 16, 2015, 12:39:43 PM »

The Consumer Price Index Declined 0.4% in December To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 1/16/2015

The Consumer Price Index (CPI) declined 0.4% in December, matching consensus expectations. The CPI is up 0.8% versus a year ago.
“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) declined 0.5% in December, and is up only 0.1% in the past year.
Energy prices declined 4.7% in December, while food prices increased 0.3%. The “core” CPI, which excludes food and energy, was unchanged - the consensus expected a gain of 0.1%. Core prices are up 1.6% versus a year ago.
Real average hourly earnings – the cash earnings of all workers, adjusted for inflation – rose 0.1% in December and are up 1.0% in the past year. Real weekly earnings are up 1.9% in the past year.
Implications: The sharpest decline in energy prices in more than six years pushed overall consumer prices lower in December at the fastest pace since the Panic of 2008. But it wasn’t just energy prices keeping a lid on inflation in December. Even excluding energy, consumer prices were unchanged for the month, with declines in clothing, airfares, and auto prices offsetting increases in rent, medical care, and food. Consumer prices rose only 0.8% in 2014, largely due to plummeting energy prices, which have now declined for six straight months. Gas is below $2.60 per gallon in all of the lower 48 states (including high-tax Illinois, New York and even California). Given the continued drop in oil prices in the first half of January, look for another tame reading on inflation in next month’s report. However, the underlying trend in inflation is higher than the overall number. Although unchanged in December, “core” consumer prices, which exclude food and energy, were up 1.6% in 2014. Also, there are sectors where prices are rising faster. Food prices rose 3.4% in 2014, the largest gain since 2011. So if you only use the supermarket to gauge inflation, we understand thinking the headline reports are too low and that “true” inflation is higher. Meanwhile, housing costs are going up. Owners’ equivalent rent, which makes up about ¼ of the overall CPI, rose 0.2% in December, was up 2.6% in 2014, and will be a key source of higher in inflation in the year ahead. In other words, even though overall prices remain subdued, there is no broad, tight-money, induced deflation out there. One of the best pieces of news in today’s report was that “real” (inflation-adjusted) average hourly earnings rose 0.1% in December after a 0.6% jump in November. These earnings are up 1% from a year ago, signaling that living standards are increasing, but still at a slow pace.
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« Reply #785 on: Today at 11:24:46 AM »

Bitcoin and the Digital-Currency Revolution
For all bitcoin’s growing pains, it represents the future of money and global finance.
Paul Vigna and Michael Casey discuss their new book "The Age of Cryptocurrency" as well as the mystique and challenges facing Bitcoin and the virtual currency business. P.
Jan. 23, 2015 12:44 p.m. ET


About a half-billion dollars worth of it vanished from an online exchange in Tokyo. A prosecutor in Manhattan arrested the 24-year-old vice chairman of its most prominent trading body on drug-related charges of money laundering. Its founder’s identity remains a mystery, and last year, it shed two-thirds of its value, losing an additional 44% in just the first two weeks of January. In his year-end letter to investors, Warren Buffett’s advice about it was emphatic: “Stay away.”

The digital currency known as bitcoin is only six years old, and many of its critics are already declaring it dead. But such dire predictions miss a far more important point: Whether bitcoin survives or not, the technology underlying it is here to stay. In fact, that technology will become ever more influential as developers create newer, better versions and clones.

No digital currency will soon dislodge the dollar, but bitcoin is much more than a currency. It is a radically new, decentralized system for managing the way societies exchange value. It is, quite simply, one of the most powerful innovations in finance in 500 years.

If applied widely to the inner workings of our global economy, this model could slash trillions in financial fees; computerize much of the work done by payment processors, government property-title offices, lawyers and accountants; and create opportunities for billions of people who don't currently have bank accounts. Great value will be created, but many jobs also will be rendered obsolete.

Bitcoin has some indisputable flaws, at least in its current iteration. Its price fluctuates too wildly. (Who wants the cost of their groceries to vary by 10% from week to week?) Its anonymity has made it a haven for drug dealers. “Wallets” (as the individual software applications that manage bitcoin holdings are known) have proven vulnerable to cyberattack and pillaging, including the wallets of big exchanges such as Tokyo’s Mt. Gox and Slovenia’s Bitstamp.
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Even though the core program that runs bitcoin has resisted six years of hacking attempts, the successful attacks on associated businesses have created the impression that bitcoin isn’t a safe way to store money. Until these perceptions are overcome or bitcoin is replaced by a superior digital currency, the public will remain suspicious of the concept, and regulators will be tempted to quash it.

Like any young technology, bitcoin is a work in progress, but its groundbreaking core software program is constantly being improved. It is open-source and copyright-free, and thus accessible to anyone who wants to peer inside it, copy it, suggest improvements or create applications for it.

Inspired by this potential, “probably 10,000 of the best developers in the world are working on bitcoin,” estimates Chris Dixon, a partner at the venture-capital firm Andreessen Horowitz. This volunteer army has developed military-grade encryption to make bitcoin wallets more secure and insurable and also new trading tools to help stabilize the price. The faults of digital currency are being resolved.


The workings of bitcoin and other digital currencies can be confusing. When we think of a currency in the abstract, we tend to think of a physical currency in the offline world—a dollar bill or a gold coin—so we imagine bitcoin as some sort of digitally rendered equivalent, much as a Word document is a digital stand-in for a physical page of text.

But there is no such thing as the digital equivalent of a dollar bill. Bitcoins exist purely as entries in an accounting system—a transparent public ledger known as the “blockchain” that records balances and transfers among special bitcoin “addresses.” Owning bitcoin doesn’t mean having a digital banknote in a digital pocket; it means having a claim to a bitcoin address, with a secret password, and the right to transfer its balances to someone else.
Whether bitcoin survives or not, the technology underlying it is here to stay. ENLARGE
Whether bitcoin survives or not, the technology underlying it is here to stay. Photo: Bloomberg News

This ledger is what gives bitcoin its potential to disrupt global finance. In the current dollar-based monetary system, we entrust banks and other fee-charging intermediaries to act as gatekeepers to nearly every transaction. Those centralized institutions maintain closely guarded in-house ledgers and, with that information, determine whether their customers have enough credit to write checks, buy goods with credit cards or wire money.

With bitcoin, the balances held by every user of the monetary system are instead recorded on a widely distributed, publicly displayed ledger that is kept up-to-date by thousands of independently owned, competing computers known as “miners.”

To understand how it works and why it is more efficient and less expensive than the existing system, let’s take a single example: buying a cup of coffee at your local coffee shop. If you pay with a credit card, the transaction seems simple enough: You swipe your card, you grab your cup, you leave.

In fact, the financial system is just getting started with you and the coffee shop. Before the store actually gets paid and your bank balance falls, more than a half-dozen institutions—such as a billing processor, the card association ( Visa , MasterCard , etc.), your bank, the coffee shop’s bank, a payment processor, the clearinghouse network managed by the regional Federal Reserve Banks—will have shared part of your account information or otherwise intervened in the flow of money.

If all goes well, your bank will confirm your identity and good credit and send payment to the coffee shop’s bank two or three days later. For this privilege, the coffee shop pays a fee of between 2% and 3%.

Now let’s pay in bitcoin, assuming that your favorite coffee shop accepts it (more than 82,000 merchants world-wide already do). If you don’t already have bitcoins, you will need to buy some from one of a host of online exchanges and brokerages, using a simple transfer from your regular bank account. You will then assign the bitcoins to a wallet, which functions like an online account.


Once inside the coffee shop, you will open your wallet’s smartphone app and hold its QR code reader up to the coffee shop’s device. This allows your embedded secret password to unlock a bitcoin address and publicly informs the bitcoin computer network that you are transferring $1.75 worth of bitcoin (currently about 0.0076 bitcoin) to the coffee shop’s address. This takes just seconds, and then you walk off with your coffee.

What happens next is crucial. In contrast to the existing system, your transaction is immediately broadcast to the world (in alphanumeric data that can’t be traced to you personally). Your information is then gathered up by bitcoin “miners,” the computers that maintain the system and are compensated, roughly every 10 minutes, for their work confirming transactions.

The computer that competes successfully to package the data from your coffee purchase adds that information to the blockchain ledger, which prompts all the other miners to investigate the underlying transaction. Once your bona fides are verified, the updated blockchain is considered legitimate, and the miners update their records accordingly.

It takes from 10 minutes to an hour for this software-driven network of computers to formally confirm a transfer from your blockchain address to that of the coffee shop—compared with a two- to three-day wait for the settlement of a credit-card transaction. Some new digital currencies are able to finalize transactions within seconds.

There are almost zero fees, and the personal information of users isn’t divulged. This bitcoin feature especially appeals to privacy advocates: Nobody learns where you buy coffee, the name of your doctor or—if you’re into that sort of thing—where you buy your illegal drugs.

Because the fees in the current credit-card system are paid by merchants and because banks indemnify cardholders against theft of their personal data, such savings and privacy benefits often don't impress American consumers. But even if we don’t bear those costs directly, we pay them through hidden fees and pricier cups of coffee.

The advantages of digital currency are far more visible in emerging markets. It allows migrant workers, for example, to bypass fees that often run to 10% or more for the international payment services that they use to send money home to their families.

Bitcoin’s unidentified creator—a person or persons operating under the pseudonym of Satoshi Nakamoto —has provided a novel solution to a problem that has dogged societies for centuries: the distrust among strangers in commercial transactions with one another. In any exchange, how could someone feel secure unless there is a face-to-face handover of physical currency or some other valuable good?

When banks were invented in Florence in the late 1400s, a centralized solution emerged: People didn’t have to worry about trusting strangers anymore; they could just trust their banks to absorb the credit risk. Using internal ledgers to keep track of everyone’s balances, banks became the middlemen through which exchanges could now occur.

Banking unleashed the Renaissance, the Industrial Revolution and the modern age. But a new problem arose: As the world’s monetary intermediaries, banks became powerful—perhaps overly powerful—repositories of information and influence. The financial system was and remains vulnerable to bank failures, as we were painfully reminded during the financial crisis of September 2008.

One month after that meltdown, Satoshi Nakamoto released the initial document describing bitcoin. For the first time, people had a decentralized solution to the financial-trust problem. Here was a new form of currency that could be transferred online without involving fee-imposing, third-party institutions.

But many still ask: How can a bitcoin have value if it isn’t “backed” by gold or a government? If you can’t hold a currency in your hands, if it doesn’t bear some central authority’s insignia, how can it be worth anything?

Here we have to remind ourselves of some economic fundamentals: Money’s essence doesn’t reside in tangible currencies, which have no intrinsic value—beyond, say, a dollar bill’s modest usefulness as a bookmark. Much the same can be said of bitcoins, which are made up of bits and bytes.

In the broadest sense, money is, instead, an all-encompassing, society-wide system for keeping up with who owns or owes what. Physical currencies are simply symbols or tokens in that system, representing a shared standard of value for tracking wealth holdings. What Nakamoto’s blockchain invention offers is an online, decentralized and fully public mechanism for recording those shifting balances. It deals directly with the essence of money.

As promising as that idea may seem, there hasn’t been much public buy-in, largely because of the concerns about volatility, insecurity and criminality that have continued to dog bitcoin. Although many companies now accept bitcoin (the latest and biggest being Microsoft Corp. ), global usage of the digital currency averaged just $50 million a day in 2014. Over that same period, Visa and MasterCard processed some $32 billion a day.

Still, a “Who’s Who” of Internet pioneers is betting on a bright future for bitcoin. Ignoring its careening exchange rate, such investors as Netscape founder Marc Andreessen and LinkedIn founder Reid Hoffman put $315 million into bitcoin-related projects last year—triple the venture-capital investment of 2013, according to the digital-currency news site Coindesk. And 2015 has kicked off with an announcement by the digital wallet provider Coinbase of a $75 million injection of new funds by investors including the New York Stock Exchange and the venture arm of the Spanish banking giant Banco Bilbao Vizcaya Argentaria SA .

What most excites these investors is bitcoin’s promise as a platform whose future applications are almost unimaginably broad. They see a precedent in the core Internet protocols adopted in the 1980s, when no one foresaw such things as Facebook , Twitter or Netflix . Already, hundreds of specialized apps are being built on top of the digital-currency blockchain software, which is seen in this context as a kind of base operating system.

Some developers are building digital-currency tools for the world’s 2.5 billion “unbanked” people, in a bid to bring them into the global financial system. Others are packing additional information into the core programs to create applications well beyond currency transfers: software-managed “smart contracts” that need no lawyers, automated databases of digital assets and copyright claims, peer-to-peer property transfers and electronic voting systems that can’t be rigged.

A key idea here is that data in a blockchain ledger is made irrefutable by the computing consensus that goes into it. A blockchain is distributed across many independent computers rather than residing on a central server. So, unlike bank- or merchant-based data, such information is, in theory, invulnerable to attack or corruption. It is considered impossible for an outsider to hack thousands of computers simultaneously and there are no insiders to manipulate the central server’s software. This, in theory, makes blockchain data reliable and incontrovertible.

As innovation in digital currency accelerates, it will matter less whether Mom and Pop own bitcoin or even know what it is. Big multinationals and financial institutions could incorporate its decentralized technology into their payment and database systems while we obliviously keep using our dollars or euros.

If bitcoin thus becomes an ubiquitous if largely invisible part of the world economy, many believe that its price will rise. A small but growing number of hedge funds and family investment offices are betting on just that, taking stakes in bitcoin-investment vehicles.

But the growth of digital-currency technology has even more profound implications. It could reduce financial costs overall and leave more money in people’s pockets. At the same time, it could spell job losses—potentially rendering obsolete millions of positions in traditional intermediary services.

These aren’t idle concerns. Wall Street bankers and Federal Reserve staffers are discussing ways that this technology could make the financial system more efficient. Regulators in New York’s Department of Financial Services and elsewhere are designing rules to reduce the risks from digital currencies even as they encourage innovation. The governments of the U.K. and Mexico are exploring the use of blockchain technology to enhance financial networks and strengthen economic governance.

Despite the scandals and price swings in bitcoin’s brief history, the financial establishment is taking notice. One key reason, as former U.S. Treasury Secretary Lawrence Summers told us, is that the “substantial inefficiencies” of an outdated financial system make it “ripe for disruption.” That alone means it would be “a serious mistake to write off [digital currencies] as either ill-conceived or illegitimate,” Dr. Summers said.

In the end, the rise of digital currency may be a matter of evolutionary destiny. The Internet has disrupted and decentralized much of the world economy, but the centralized world of finance remains stuck in the 15th century. Digital currency can help it adapt and survive.

Adapted from “The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order,” to be published Tuesday by St. Martin’s Press.
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