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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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