Inflation
remains quite low: Over the 12 months ending in December, prices for
all the goods and services purchased by households increased by only 1.2 percent.
He did mention the pesky problem of inflation in some of those “non core” things that we spend money on:
We have
recently seen significant increases in some highly visible prices,
notably for gasoline. Indeed, prices of many commodities have risen
lately.
Ben made it clear to me (and the market) that he was not going to slow
down QE2. The monetary pedal will remain stuck to the metal:
We will review the asset purchase program regularly in light of incoming information and will adjust it as needed to promote maximum employment and stable prices.
Bernanke continues to sell QE on the basis that inflation is too low. He
was very specific in his definition of inflation. I’ll repeat his words
from above:
Prices for all the goods and services purchased by households increased by only 1.2 percent.
Bernanke is using the CPI to defend QE. The CPI is the wrong measure for many reasons. Not the least of them is hedonics pricing.
The definition for hedonic is “relating to pleasure”. That sounds
good, but when it comes to the CPI hedonics creates big distortions.
The most common example is with technology. Consider an Apple computer.
In 2006 it cost $2,499 to buy a 15-inch Mac Book Pro with a 2.0 GHz
processor. Five years later you can buy a 15-inch Mac Book Pro with a
2.53GHz processor for only $1,999. Adjusted for inflation and
considering the increased capacity of the newer Apple the actual cost of
“pleasure” has fallen by more than 30%.
When you add in one component of the index that is “falling” in value at
a rapid pace and add it to another item that is actually rising you get
an index that says that prices aren’t going up. Absolute hogwash.
Ben actually understands that weird things like hedonic pricing models
distort CPI as a measure of inflation. He chooses to use this statistic
as it supports his QE policy. He’s wrong and he knows he’s wrong. But
the head of the globe’s central bank keeps blowing smoke at the press
and lying to the public.
The good news is that the bond market is not buying into Bernanke's spin. At the moment that is the only crowd that counts:
Articles on this topic:
Bruce, I have a basic question on bond rates that has me puzzled. There are many voices on ZH saying that high inflation is inevitable. It seems like long term bond rates of <5% is incompatible with that view. As if the people who are putting their (or other peoples) money where their mouth is believe 4.7% is sufficient for a 30 year loan? That seems crazy. Is it because the bond traders view all the bonds as a short term investment, so a 30 yr T-bill is just a levered bet on how interest rates will change in the near term. Somehow this doesn't seem to add up. At it's core it's a long term loan at a low interest rate, isn't it all denominated in nominal dollars?
Anyhow, I appreciate you sharing your thoughts.
5 percent doubles every 14 years. This is basic exponential math applied to linear growth in M2.
M2 grows when you create money out of thin air such as making a mortgage or a REIT or but you don't create the exponential components. It's basically exponential mathmeticians versus linear mathematicians.
The fed has to rapidly flip bonds to put the exponential component into the "real" component to make it viable. When you raise rates you suck wealth out of the lower and middle class who borrows.
A 4.7 percent mortgage creates say 200k for the mortgage through the money creation system. But the repayment is 70/4.7=14.9 years. Which means a 30 year mortgage is going to need to suck a bit under 400k out of the system to be repaid since you are reducing the loan as you go with payments. The feds mandate of price stability is rediculous because they are an exponetal mathematics entity. All they create is a little bit of counterfeit money and a big huge mountain of debt.
The system always inflates in aggregate. It deflates some components as it runs such as worker pay, buying power etc. If your salary isn't expressed an exponential inflation IE 50,000 dollars per year + 3 percent per year. You are being deflated against it.
The fed will blatently monetize and blatently churn the bond market through it's primary dealers who will be the source of inflated cash. As they do it though everything will skyrocket. They will simply try to use peoples ignorance of "growth" and exponential functions to pick winners and monopolists in industry and farming and everything people need. Which is why so many companies are laying off yet still mysteriously "growing" in profits. It's the deflation cycle with only some participating in it while some lie. Much money laundering and backdoor cash transactions are taking place. The linking of this weird strange growing money machine to the real world market will hit commodities first then explode wages in emerging markets which will come back to america as hyper inflation. They are shooting for 70's style inflation but they'll screw up.
http://www.youtube.com/watch?v=F-QA2rkpBSY
Stop blaming the workers, the president that is driving the ship!
From this day on replace the name Ben with Obama.
Bruce i sent you a love letter below zero govt comment.
[SYSTEM CONNECTED ... Node 2001:0db8:85a3:0000:0000:8a2e:0370:7334]
[RECV OPT - Charset ISO 8859-1 / AES1024 (Decrypt Enable)]
Trying to reach anyone... anyone... The world is a different place. After an unfortunate incident, a zombie virus has been released and has turned most of the United States into a war-zone of frantic survival. We're deep in the financial district. I can see the facade of the New York Stock Exchange, Federal Hall, and the Bankers Trust building. We're blocked off. NYPD has put up large barriers, but we have no idea how long they'll last...
Please, help us...
yjpswvxkjed3kqen.onion
https://www.torproject.org/
__-_=+_-_0#-#34&$*(&$(#&$ ... DISCONNECTED
[SYSTEM NODE PATH LOST - SYSOPT SESSION ENDED]
generally the prices for hookers has gone down. where many escort agencies would sharge 500$ in 2007 now they are all low balling at 150-250
Nice pun. 'Low' humor.
Bruce Krasting
Did you chuck this pile of hogwash together in 2 mins? It was absolute junk, like your mindless crap on Swiss banks. Try harder before you dump stuff this way
I assume you were fully versed on that matter of hedontic calculations in the CPI prior to today. Sorry to have bothered you. Try not reading next time.
Bruce the troll still loves you.....i mean if i could love a man and not in a nasty way but a nice way....you know greek agape but hold the pederasty.
No sheep, either, and it's a deal!
Invective is the product of a weak mind, even if sometimes it is enjoyable. Perhaps you can do better ... or not.
While not defending Benny in the least, it seems he is doing exactly what he said he would do and he is doing it with the approval from the top levels of our government.
Bernanke:
"I think it’s entirely unfair to attribute excess demand pressures in emerging markets to U. S. monetary policy, because emerging markets have all the tools they need to address excess demand in those countries. It’s really up to emerging markets to find appropriate tools to balance their own growth."
Recall last summer there were extensive articles and discussions about the mercantilist Chinese etal and that they needed to de-peg to allow their currencies to float in order to for the global economies to re-balance. The bottom line was the US was no longer going to see its labor markets destroyed by this tactic.
This is the result and those countries who did not heed Bennies warning are in for a bad time. The Chinese risk major social unrest and possible political destabilization if they continue down this mercantilist path.
Now I do not approve of this approach, far from it. But what exactly does one expect?
sschu
The labour market in the US is primarly the result of an expensive general environment to operate.
The US is trying to suffocate China to kick out a potential rival for world domination. Keeping the world domination leadership is vital for the US. The US has exported a lot of internal issues and re-importing them will spell a disaster. And the main shield against reimportation of garbage poured on the exterior is remaining the world dominant power.
The whole scheme has little to do with the labour market. No matter what, the US general environment will remain much more expensive than many others in the world. The cost of a general environment shows on a wage bill.
The labour market in the US is primarily the result of an expensive general environment to operate.
Agreed, the US is our own worst enemy when it comes to labor costs as well as any manufacturing costs. Making the necessary changes is along drawn out process and will take years and huge political capital. It is just as easy to blame cheap east-asian labor costs.
The USA HAS to maintain the dollar as reserve currency and hurting the Chinese is fundamental to this. This is a high-stakes hard-ball geo-political game with economics/monetary policy as the primary weapon.
Note that I am not a proponent of these policies and this is just a theory.
Someone is going to get hurt real bad and be very unhappy.
sschu
hedonic adjustments are also used to inflate the GDP numbers
we get lied to twice - we are told that inflation is minimal because a computer costs less and then we are told that GDP is up because the hedonically-adjusted value of the computer has increased
Mish talking about Grossly Distorted Procedures (GDP):
"My biggest gripe with hedonics however, is not with CPI calculations but as applied to the GDP. That computer that sold for $1000 two years ago might sell for $800 today and have more memory and a faster CPU as well. Yes that is price DEFALTION for sure and perhaps needs to be adjusted in the CPI but is that any reason to adjust the GDP and say we sold more computers in 2005 although price wise sales were REALLY down?"
http://globaleconomicanalysis.blogspot.com/2005/05/grossly-distorted-pro...
And 48 oz to a half gallon - ask HSY.
Mr. Peters is a superb risk professional and we are pleased that he has joined AIG,” Mark Herr, a spokesman for the company, said in an e-mailed statement. “As is standard, he has agreed not to engage in business dealings with the FRBNY, the Federal Reserve Board or the U.S. Department of Treasury for six months.”
Where is the SEC to stop this conflict of interest, what a monoply rip off to the american people this incestous relationship between the fed scum and the insurance and primary dealers industry, this suck, do you hear me Shapiro, pull your head out of your ass and stop this!!!
So Bruce, it seems that the market has set up for a showdown, stocks vs. bonds going mano a mano. One group is very, very wrong and the other group is correct. How do you see it?
I don't see things clearly at all. How could I? The most significant factor (by far) pushing up stocks is monetary policy. The monetary policy now in place is ending in less than five months. NO ONE has a clue what will come next. I can't imagine a smooth transition.
Ben will have to "choose" what to do next in about 3 1/2 months. Ben doesn't know what he will do either. He is damned either way IMHO.
There are only 4 possibilities. Bonds up/down stocks up/down. I would give the least probability to the one that was up stocks/up bonds (lower rates). I actually lean to lower stocks and lower bonds (higher rates) at the most likely outcome.
But i do tend to drift to the dark side...
I am reaching the same conclusion. Maybe these late moves have been the bond boys bluffing, trying to force the Fed's hand into announcing QE III, which would ramp stocks and kill bonds.
It seems the ony viable way out with the least hassle would be to teach those long-bond shorters a dire lesson and give the SackFrost team a week or two off. Allow stocks to come off and (hopefully...) the money would move back into bonds.
Another way, to announce QE III, stocks would ramp and Bernanke would find himself in a really deep corner in regard to the government being able to roll debt, which would cause Treasuries to tank, which would raise yields, etc. Option two is not an option, I think. So, I'm with you on that one.
Of course, the ultimate question is timing.
looking at matters from bernanke's point of view it might be rational. he sees us as little more than mere "consumers" (rather than spiritual human beings, or patriots wanting the best for our country) viewing life as little more than our desire to buy ipods or ipads.
so for him to say there's little inflation he might really believe it because he believes we really will substitute dog meat for ny strip so that we can buy the next iteration of kindle.
Bruce:
According to the BLS, hedonic adjustments are used in roughly 33% of the CPI. The great bulk of this is for rent and Owner-equivalent rent expense factors. My guess is that low interest rates have a much bigger impact on the rent and Owner-rent factors than does hedonics.
I'm sure they are understating inflation, but it is a very complicated process. Hedonics are very subjective too. But hedonics on goods/services, as ooposed to rent factors, is a tiny part of the CPI.
http://www.bls.gov/opub/mlr/2006/05/art2full.pdf
Cheers. Captain Willard
ZackAttack....you said it and are exactly correct! The gov't has a vested interest in suppressing cpi.
There is little hedonics in commodities, but they play a relatively smaller role in our economy than some others.
Hedonics is simply a smokescreen for increasing profit of the moneylenders at the expense of producers.
I don't see a lot of MacBooks out on the square in Cairo.
This is a great article on hedonics.
http://mises.org/daily/1873
So Genocidal Benron measures things you don't buy very often or even really need to exist, that are about the same in price but hedonically magically moved down in price to offset the things you have to buy or you die stuff that is soaring in price.
at least Greenspokes spoke in riddles when he lied, ZimBenron just plain LIES
In addition to hedonics, The Ben Bernank also believes in voodoo, human sacrifice and long walks in dewey meadows, accompanied by the sweet, soft sounds of Barry Manilow.
I personally prefer cannibalism, slices of human brain sizzling in olive oil, tastes like scrambled eggs when cooked just right.
The problem is - there ain't no hedonics in commodities, only in value added finished goods and there's a limit to the value that can be perpetually added to finished goods necessary to stay ahead of persistent commodity inflation which ultimately permeates everything.
This is dead-on accurate, but the fools tinkering with CPI/PPI seem to believe in hedonics for commodities as well.
Substitution of lower-price products when prices rise are claimed to "offset" price-increases seen in food/energy. So I can't eat steak anymore, sure, but that doesn't cause a problem because catfood is still in my price-range, and as a rational consumer, I'll just substitute that for other meat products. Or I can't afford premium gas, so I buy economy.
Or I can't afford electricity, so I use my coal-powered PC.
Makes you wonder whether the plastic rice story on ZH the other day has gotten some heads turning at BLS ...
Uncle Bens Plastic Rice ...
Sounds like another awesome product from Banzai Enterprising.
That's certainly a good point.
<dupe>
(goddamn, sorry....guess I'm not realizing the added value on this new computer yet)
<dupe>
Bernanke knows perfectly well if we included food/energy and actual real-world measures in the CPI, it would mean enormous COLA adjustments for every benefit on the planet. He's just telling the lie that he must tell.
CPI will never show a rise as long as incomes are stuck (which they have been for decades).
When the pie equals $100, that is all you can spend (unless you tap debt). So, sure, food goes up 10%, based on supply and demand, non-core items have to fall in price as there simply is less demand for those goods. There is no way around it. It's mathematically impossible for prices of all goods to keep going up and the purchasing power does not rise with it (unless you throw debt into the picture).
So, based on government math, if you used to spend 20% of you income on food and energy, and now spend 50%, because prices went up, there is no inflation. You just spend 30% less on something else (including savings, if you have any). But, net net, no price increase.
Welcome to government math!
I don't see a lot of MacBooks out on the square in Cairo.
Bruce great post as usual, Thank you. I travel/live (in Europe) regularly so I move in and out of the US a few times a year. As I re-enter US/Europe, the price increases are more evident to me. I notice that the price of almost every commodity that I use on a regular basis is moving constantly higher. Fruits, vegetables, bread, gas, clothes, ice cream, coffee...can't think of anything that went down in price. I find it hard to believe that anyone that shops for food, pays their own bills, fills up their car with gas etc thinks that prices for all the goods and services purchased by households increased by only 1.2 percent. Even hopium is up.
I'm waiting for the Hooker BOGO special.
"Hooker BOGO special"
is that "buy one get one" or "bang one get one"?
You know the potatoe may trump the megahertz but i got a 2008 odyssey van windshield replaced for 190 including labor. Next bid up 240 something ....incredible. that saved money for a lot of.potatoes.
Those windshields are huge. Dealer wanted 580... and i kid you not lap dances at this club near the oklahoma border are ten bucks and if you are nice you get the special treatment! Just tip them and buy them a drink.
Dp
Too much Red Bull, hoss.
:D
Having more trouble than usual today?
Dp