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It's Supposed to Work, Dammit! Further Adventures in Keynesian Theory
- Auto Sales
- BLS
- Bureau of Labor Statistics
- Christina Romer
- Commercial Real Estate
- Consumer Prices
- Core CPI
- CPI
- ETC
- Foreclosures
- Green Shoots
- Gross Domestic Product
- Japan
- M1
- Monetary Policy
- Money Supply
- Obama Administration
- Real estate
- Reality
- Recession
- recovery
- Regional Banks
- Same Store Sales
- Stagflation
- Unemployment
From The Daily Capitalist
The core Consumer Price Index fell for the first time since 1982--0.1%--in January. Economists are lauding this deflation as a good thing on the theory that it gives the Fed more flexibility: in keeping interest rates low, as they have been doing, they don't have to worry about inflation. I'm not sure what they mean by that since it has been the policy of the Fed to try to create inflation as a way to get out of our recession. It hasn't worked.
If I'm not mistaken, just a few months back economists were worried about a deflationary tailspin and a further decline in employment. It was felt that whenever the Fed needed to, it could, and should, gin up a little inflation and bail us out of a deflationary spiral. There has been no shortage of credit poured into the economy by the Fed, otherwise the Fed wouldn't need an exit strategy, yet the very thing stimulus and easy money was supposed to prevent, deflation and unemployment, stubbornly refuse to disappear. The Fed points to green shoots (GDP Q4 gain of 5.7%) such as the increase in manufacturing activity, auto sales, and health care expenditures. But ...
It is not a coincidence that WalMart experienced it first ever decline in its U.S. same store sales. WalMart, which accounts for about 10% of all retail sales in the U.S., noted that heavy discounting (deflation) in food and electronics lowered the overall value of its sales. The strong corporate profits we are seeing so far have resulted from efficiencies rather than increased sales for the most part, and this can't continue much longer--you can only fire so many people, shorten work week and cut slack to a point and then sales have to kick in. As well, inventory restocking will only boost the economy so far until the consumer goes shopping again.
According to classic Monetary and Keynesian theory, flooding the economy with money stimulates the economy, causes prices to rise, and consumer spending and general economic activity resume. Why hasn't the Fed's inflationary policy worked? Why is credit continuing to dramatically contract? Why are prices falling?
Why? Because the liquidation of unprofitable economic ventures created during the boom and massive related debt, is not over. Bank credit remains tight, money supply is declining (M1 MULT), since December 2008 real average weekly worker earnings have fallen by 1.5 %, residential real estate defaults remain high (3 million foreclosures expected this year), home prices are still falling, and commercial real estate values are collapsing, posing a huge threat to regional banks.
Consumer saving continues to rise, and consumers are paying off their debts. While consumer spending has been rising (2% in the last quarter), that will taper off now that personal saving has resumed its climb after a holiday hiatus.
It's also easy to overlook municipal and state government fiscal crack-ups, but they will have an impact on the economy as they struggle to raise taxes, slash spending, or go bankrupt. They will be seeking capital from the same tight markets that businesses look for capital and, since governments have borrowing advantages, there will be a crowding out impact.
The Fed points to green shoots (GDP Q4 gain of 5.7%) such as the increase in manufacturing activity, auto sales, and health care expenditures as evidence of an improving economy. They and the Obama Administration point to monetary policy and fiscal stimulus as the reason. Let me state a basic rule of economics here: there is no way empirically to know if they are right or wrong. Based on historical evidence of past employment of these economic remedies, these policies have failed wherever used. The best example is Japan which pursued these same remedies and have been mired in economic stagnation for 20 years (average GDP growth 0.06%).
Based on a careful examination of theory, fiscal and monetary policy such as the ones Christina Romer claims are responsible for an improving economy, can never work.
What we are seeing as "improvement" are two things: normal business cycle recovery, and the temporary impact of fiscal stimulus. Fiscal stimulus is a one-time shot and wears off quickly because no lasting economic activity is created. On the other hand, high unemployment, shorter work weeks, declining prices, higher consumer savings and lower consumer consumption, drive companies' efficiencies as they struggle to maintain their businesses as the economy tries to right itself.
The fact that the core CPI is declining and credit is still contracting is a direct answer to Keynesians who believe they can turn a spigot here and there and "control" the economy. It's not working. It never has. It never will.
At some point, as balance sheets are repaired and banks resolve their bad debt and capital problems, credit will ease. At that point the Fed will be face a huge dilemma. They know that there is a potential for very high inflation if the Base Money supply morphs into M1 money supply. If they pursue their exit strategy with gusto, a rise in interest rates would limit credit and money suppl. But I can already hear the politicians' cry for the Fed to ease credit to "save the recovery." What will they do? Remember that debtors (such as Your Government) loves inflation.
Get ready for stagflation.
A word on the CPI as a tool of analysis. The inflationistas always like to find fault in the CPI numbers as being highly inaccurate, but I don't think it is worth quibbling about. I'm not suggesting that we should accept fake numbers, but rather we have to look at something to analyze and right now the BLS numbers are the best we have to measure deflation/inflation on a consistent historical basis. (Yeah, yeah gold, oil, etc., etc.) These same critics readily accept the BLS numbers when they show inflation; they just don't like it when reality conflicts with their theory. One could argue that if the CPI accounted for falling home prices rather than the home rental equivalent, the decline would have been greater. Whatever.
One more word. The headline of the original WSJ report on the CPI numbers was"Core Consumer Prices Fall for First Time Since 1982". The same story, rewritten later that day was entitled:Flat Prices Bode Well for Economy. The first story disappeared. Go figure.
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very much agree, and this is nice little graph on consumer credit, just to show how it looks. M0 is just what it is - M freaking 0... You can print as much as you want (japan did) and be in deep deep deflation...
http://macroblog.typepad.com/.a/6a00d8341c834f53ef012877819add970c-popup
Order you know your shit about Japan and IRS etc,
The current bond market situation intrigues me and i'm really thinking that a safe route is UST's due to my terrible gut feeling on equities(Dow 3k is easily plausible). Know a lot of people with money tied up at Edward Jones et al who would be wiped out with current capital allocated so heavily to equities/muni bonds.
Would you favor allocating more to long or short duration UST's..or avoid them entirely? I'm very new to bonds but this seems to be a very favorable play for the long term for those not apt to devote hours on end to swing trading.
Seems like most people advocating shorting the bond market aren't factoring in negative real cpi. Am I far off here?
you not off on negative cpi. However there is supply/demand issues and i will not be loading on duration here You will have much better entry point.
Also, I am not so sure, that as retail investor you should be activley trading UST. I recommend PIMCO Total Return Fund. Bill Gross is bond king, and they invest in bonds globaly. They been shortening duration, so its better to follow what they doing. Guys are top notch: www.pimco.comHowever, there is one retail product offered by US Treas to US citizens. Its inflation indexed product with a nice coupon. I series bonds. I am big fun of these and i think its the best product availible in all UST markets!
http://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm
No active trading for me. I am simple person more suited to investing in myself these days.
Just enjoy learning about this stuff, some day I may have a lot of money of my own to manage. I know many people who have money under poor management and am concerned. Your info helps me a LOT.
Thanks for your reply, i'm grateful
you welcome. And look at I bonds. Strangley its such a nice product and so little known by general public. There is limitation of 10,000 per year invested per SS#, so i been buying them for very long time, bit by bit..
The FED chart clearly shows the trend as down. Their chartists must have overlooked this inconvenient truth:
http://tinyurl.com/yjqxrwc
Thanks Econophile for your excellent post & order6102 for the chart. The consumer credit trend is down no matter what the FED minions tell us as they are satellites of the FED mother ship. Debate them as you will, but they are not relevant. The big lie continues...
When I started reading this post, I got this image of the Geithner & Bernanke adopting plasticized grins while saying "look at these numbers! aren't they great? everything is getting better! we can keep the rates down safely!" while they're realling thinking "oh shit it's not working...".
What is your avatar? I see two hands and what looks like a
hard to tell with these little pictures. what do you think it looks like?
Close Encounters Alien.
good try.
gremlin at the movie theatre
We have only one example of post-bubble economy and following balance sheet recession (R Koo). ITS JAPAN. And its teach us that if FED fail it will be just old boring deflation, not some magical stagflation. I spend many many years in Japan, and I can assure you its not fun. However, i am firmly IN FED WE TRUST camp and I think they doing good job reflation economy. I do hope that monetary stimulus and liqudity provisions will work magic. But we have to wait and see (it might not, and then it will be Japan 2.0) But expect any sort of stagflation? What you do with Phillips Curve?
The question that's burning me is...what about the variables of today vs. Japan.
1. US is importer not exporter...with the exception of exporting the...
2. world reserve currency
Did the Japanese crash drive a 10 year bear in commodities?
We are NOT Japan. Those who are expecting a "muddling through" scenario similar to Japan's last two decades are in for a shock. The dam is springing way too many leaks faster than Uncle Ben can apply puddy mud. I thought we'd make it until 2012 until this house cards totally collapses but the way things are unravelling in 2010, we won't get there.
I hope this helps.
+1. The situation in Japan today isn't even the same as was in the 1990's. The U.S. is not an export economy. And Japan is facing a situation where everyone now wants to export, and not import.
I agree we will probably follow a path like Japan's or go into a full fledge deflationary depression imo because I dont see the banks lending much anytime soon and the inflation reported is just due to carry trades going on now flowing into oil futures etc mostly...
Let's be clear....and make this simple....
Why should there be a label ....
Econ is econ....
We are talking about getting from point A to point B....
Not a label....
....................................
This is all about prices....and what effects them....
Credit and equity are the major xi's in this case....
So the question is ....what has changed about these xi's over time....
The policy change aspect was one of the major changes....
....................................
The securitization of "crap" being pased off as "gold" is all that happened....ie all that glitters is not gold....
AAA was really CCC....
And guess what the R agencies are still in business as usual....and all this came about via payment conflicts of interest....
It really does not matter what Wall Street invents and markets.....what matters is full disclosure about what is marketed....
Let us be very very clear....
What % of what was sold ....would have been sold if the rating was CCC ?
Answer ....almost none of it....
....................................
Which simply leads us to this conclusion....
The marketers of product have been given the channce and have proven themselves unworthy....
The labelers of product have been given a chance ...and have proven themselves unworthy....
Solution....CORRECT THESE VENUES....
.....................................
Exactly what to do......
1) Remake the securites exchange...
All securities should be represented on a factual basis via wiki format as to what they really are....
Participants will make their own judgements as to what they want to do with their own money....
Failure to provide fact based full disclosure on a timely basis will render the participating security in question nonqualified to be on the public exchange....
....................................
2) Provide for more efficient ....non gameable exchanges...
Defragmented....seamless worldwide
In the language and currency of choice....
Fully electronic and direct access....
No matching outside the exchange ....none...all in the open ....first come first served....
Make the short sale rule simple....no uptick rule....shares outstanding cannot be exceeded ....via electronic tag ....first come first served....size restrictions per account....
Margin 4:1 for intraday and overnight....
No account minimums....
No account maximums....but size restrictions will be implemented per account....
Transaction costs today run 20 cents per 100 units....
The public box houses are lumping in lots of add on costs such as advertising....salaries...buildings...etc....this is mostly not necessary today.....Today's marketplace is an internet world.....If one does not know how to logon to a computer....one should not be allowed to participate in the markets or even vote for that matter...as they could be nothing more than simple minded populists....
.....................................
That's it folks....
You can talk about Keynes.....Friedman....Mises....whomever...but they have nothing to do about getting from point a to point b....
Some excellent points. The operations of Al Capone, Madoff, Bernanke, Blankfein and Barney Frank are beneath and outside economic theory. It’s called fraud; i.e., unlawful gain, or to be more specific, robbery. If not reined in, the Fed and its operatives will gut the United States.
garbage talk,, of course point a to point b is traveled
on a course of food and poison .all ther time for the last 70 years . or on a course with freedom.
pure gibberish
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awesome piece. way to nail it, Econophile.