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The Fed's 2% Inflation Target: The Ultimate Keynesian Con Job
Submitted by David Stockman via Contra Corner blog,
The old adage that if something is repeated often enough it is soon assumed to be true couldn’t be more apt with respect to the Fed’s 2% inflation target. Last week, Bloomberg had a piece that did exactly that, describing how “Federal Reserve officials are hunting for new tactics to raise price increases to their target” because “inflation is descending toward the danger zone”.
In fact, the September meeting notes cited several officials who worried that “inflation might persist below” the committees target for “quite some time.” Accordingly, the Bloomberg author, Craig Torres, pulled out his editorial pen and offered his opinion as if it were objectively obvious:
The Fed needs a clear strategy for getting the inflation rate higher after falling short of its 2 percent target for 28 consecutive months.
Well, now. Twenty-eight straight months of misses. Let’s see, even using the Fed’s systematically understated measure of inflation, the PCE deflator ex-food and energy, consumers’ savings and paychecks have lost 3.3% of their purchasing power during the last 28 months.
Apparently, had they instead suffered a 4.7% loss of purchasing power (2% inflation for 2.33 years) everything would be copasetic. Instead of remaining in a funk, as has been evident since it unexpectedly snowed last winter, they would have been spending up a storm. Presumably the US economy would have long ago hurtled through that pesky “escape velocity” barrier.
Isn’t it amazing that over the relatively brief period in question that shrinking the purchasing power of the dollar by 4.7%% versus 3.3% could make such a profound difference. Or maybe not.
But don’t expect the “journalists” at Bloomberg to even ask. Like their “competitors” at the WSJ and Reuters, they are about as mainstream, lazy and intellectually sloppy as they come. In this case, it is not likely that a writer who cites two ex-central bank true believers as his main source—-former Fed governor and macro-model peddler, Larry Meyer, and former Bank of England policy committee member and current Keynesian snake oil salesman, Adam Posner—-would trouble himself with proof that a 2% annual gain on the CPI is a proven economic elixir.
No, the 2% inflation mantra has been repeated so early and often by Fed speakers, their court economists and the Wall Street stock peddlers known as “strategists” that it appears to amount to the monetary equivalent of the Pythagorean theorem. Even then, the literalist presentation of the matter in the Bloomberg story sets a new standard for credulity.
Supposedly, if inflation is a tad on the weak side, or even remotely veers off in the direction of the dreaded “deflation” zone, consumers will sit on their wallets waiting for prices to fall further. Soon you are sliding down the slippery slope into the maws of a deflationary malaise, and then Great Depression 2.0. So Bloomberg even found a consumer to illustrate this point.
It was a rather prosperously proportioned lady in an appliance store who would apparently be put out of a buying mood if prices were not increasing with sufficient vigor. And Bloomberg even included that proposition in the caption, lest any reader miss the point:
Consumers anticipating falling prices may postpone discretionary purchases. This can combine to create a vicious circle of less spending and further downward pressure on prices.
So it must be true. Its right there in the (online) papers.
For the life of me, therefore, I can’t figure out how the Apple shoppers pictured below are still even functioning. Prices of their favorite i-Gadgets have been falling for years—but here they are lined up an Apple Store as far as the eye can see fixing to spend up a storm.
Ok, digital age products are different. I get that. Not only do their prices drop consistently, and sometimes even plunge precipitously, but they also give you huge increases in function and quality. So what’s involved, apparently, is some kind of consumer addiction to getting more bang for the buck in this allegedly idiosyncratic corner of the marketplace.
Unfortunately, that doesn’t explain the graph below which is distinctly not new age, but the BLS wholesale price index for all finished consumer goods less food. Year-in-and-year-out since Alan Greenspan’s arrival at the Fed in August 1987, it has risen at relatively consistent annual rate—- averaging 2.4% over the 27 year period as a whole. The occasional minor dips in the rate of increase have absolutely no correlation with consumer spending rates over the period.
The only serious dip is during 2008-2009 when the oil price plunged from $150 per barrel to less than $40, and took the whole index with it. But consumer spending skidded during that period due to the fact that jobs and incomes were plunging owing to the Great Recession—- not because oil prices were crashing from speculative peaks that were undone by the laws of supply and demand.
What is embodied in the above chart is actually the “stuff” sold at Wal-Mart outside of the food department—where presumably people need to eat whether prices are rising or falling.
As it happened, Wal-Mart’s slogan was not “everyday rising prices” but “everyday low prices”. During the 27 years pictured above, it is absolutely certain that Wal-Mart’s average prices did not grow anything close to the 2.4% CAGR embedded in the BLS index. Yet its domestic sales nevertheless soared by orders of magnitude more than the growth of consumer spending during the same period.
2012
In fact, nominal PCE grew at an annual rate of 5% during the period or by only two-fifths of Wal-Mart’s 12+% CAGR. That is, as a result of scouring the earth for the lowest prices available, its market share of the American consumer’s wallet rose dramatically. Low and often falling prices did not drive consumers away; it attracted them in droves.
The Wal-Mart saga alone knocks the 2% inflation story into a cocked hat. The latter is a complete myth made of whole cloth.
Indeed, the very idea that the hard-pressed main street consumers of America - most of whom have virtually no discretionary income to spend after the basics anyway— will go on a buyer’s strike if they don’t get enough inflation is just plain ludicrous.
That Keynesian central bankers peddle this nostrum with a straight face is amazing in itself, but it is at least understandable because it gives them a reason to keep the printing presses humming. That journalists like Mr. Torres at Bloomberg repeat it with no questions asked is even more remarkable. It proves that the impending replacement of financial journalists with robo-writers may not be so bad after all. It won’t make any real difference.
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There is no longer a step for asking questions in journalism.
"We are only targeting to steal 2% of everyone's hard earned money."
"Deflation" (lower prices) looks to be here for awhile. MANY commodities are lower, especially in 2014. I look at the US$, 10-Year Treasury rates, the Baltic Dry Index (shipping rates for bulk commodities), crude oil & gasoline prices, iron ore, steel and copper prices and US ag prices (very weak in 2014).
Coffee and the S&P 500 are behaving differently, but give me little confidence...
A chart heavy article...
"Deflation First, Then Inflation?"
http://goo.gl/NRArHa
I posted this a couple weeks ago now I think, but it seems worthwhile posting again. The changing definition of inflation has worked to mask reality from the public, and continues to do so. I encourage everyone to read this article by Michael F. Bryan from the Fed Reserve bank of Cleveland which does a great job explaining this changing definition.
This guy is so right on in his analysis, that I'm sure he must have been fired and blacklisted from anything the Fed has been involved in since.
https://www.clevelandfed.org/research/commentary/1997/1015.pdf
edit: Taken from the end of the article
...Annually.
It is happenining... finally..
take the vol while it is here... http://www.hedge.bz
Everything the Fed says and does is BY, ABOUT and FOR THE BANKS. All about keeping them solvent. End of story.
That's fucking hilarious: allegedly retailers want to unload their floor but can't because consumers, perceiving price drops, wish to wait until prices reach bottom. Koo koo ka choo
As a labeled "Millenial" We perceive our parents shit going on sale for cheap real soon, if our parents don't sell, then your friends parents will. If they don't sell then we'll wait for liquidation of big box. We don't give a shit, We'll wait out this idiotic FED fuckery like a siege on the Boomers. Millenials have seen the Tech bubble, The Education bubble and the Housing bubble. Next bubble is the Reality bubble. Stack hard and fast bitchez.
The 'Consumer' mentioned in the article was pictured looking at fucking refrigerators!! You might be a millennial but I'm sure you're smart enough to know the difference between needs and wants. You'll find out that when YOUR refrigerator breaks, you won't wait for a big box bankruptcy before buying a fridge. Then again, if you're still living in Mom and Dad's basement, I guess that's their problem, isn't it!?
I paid almost $23 dollars for an omlet and coffee in SFO this weekend. Fuck the central bankers and their damned inflation targets.
You mean they can't counterfeit a second note to pay back a previous counterfeited note without driving down the value of all counterfeited notes thus increasing the acceptable price of everything the wage earner is forced to pay for in those counterfeited notes?
Balderdash!
Where did they come up with that...certainly not Princeton or Haaahvaaahd!!! ;-)
Well I boycotted Walmart in 07 and haven't stepped foot in one store since... As for inflation? Fuck their stats, even the dumbest of dumb sheep are realizing somethings wrong when you drop a hundred dollars at the nearby Bel Air and walk out with 2 bags of pretty much nothing...
'prospersouly proportioned lady'.....
The Fed can clearly see
but few sane persons agree:
The type of “flation”
with no hibernation?
The one that starts with “de”
“Federal Reserve officials are hunting for new tactics to raise price increases to their target” because “inflation is descending toward the danger zone”.
in my best james carville voice:
It's the debt overhang, stupid
The DAX cash contracts are trading down another 1.00%.
DAX 8,709.50 8,812.43 8,852.00 8,704.50 -102.93 -1.17% 20:59:58
Little fanboy doesn't like the truth?
I assure you that the responsible people at the Federal Reserve have everything well under control. The chances of all hell breaking loose are zero to nil.
You can take that to the bank.
We've been played by the big finance industry to believe that anything that affects their profitability is bad, bad, Bad! for the economy.
Bullshit. The economy does NOT require enriching them. Insofar as they are needed at all, it is to facilitate large international transactions with complex cross-competeing rules and regulations. They can make a nice little profit there, and that should be enough.
They should NOT be running domestic banking and loan markets, or controlling the mortgage business. Those types of banking should be done by regional entities who are accountable to their customers, and not to international shareholders.
We've been snookered over time into accepting a rapidly growing portion of our population that contributes nothing but takes a bigger and bigger piece of the nations wealth.
Well, in order to "create" inflation, they will have to "create" shortage of goods and labour. Any suggestions?
You do not have to do that to have inflation. All you need to do is print money out of nothing. Under your premise, the Fed could produce all they wanted as long as we ample goods and labor, and that is simply not true. We have it now with ample goods and labor.
Don't confuse the price/demand inflation. The results might appear similar. But what businesses and consumers do when they happen are very different.
The devaluing of the coin of the United States is a crime, punishable by death.
Agreeing to accept 2% inflation is agreeing to confiscation of two per cent of your purchasing power to benefit th Federal Government,annually.
I reject that offer. I want 0% inflation or less.
Frankly, that is a violation of the Fourth Amendment, the seizure of my assets without just compensation.
THEY need the 2%...we've been fed a line of horseshit about how we have to tolerate this confiscation of our buying power, so they can profit. Otherwise, bad things will happen...
Fuck them.
They have done an excellent job here dumbing down the masses haven't they. They steal our moeny at various rates since 1913. Then the thieves are the ones who wage the battle to slow the thievery to lower levels.
And now the dumb masses are so stupid they think the thieves are doing us a favor by getting the thievery back up to two per cent, for our own damn good.
canary in the coalmine is long dead
Good metaphor.
more articles on this topic please. i've always found it insane that the Fed can just nonchalantly declare that robbing you of 20-30% every decade is some obvious law of nature. that of course 2% inflation is an immutable law, like gravity. no one ever challenges that assumption.
even the anecdotal evidence the Fed gives - house fraus refusing to buy a new refrigerator unless they can't bottom-tick the price - is nuts. who behaves like that in the real world? either something is a good deal to you on an absolute basis, or it's not. either you need/want it now, or you don't. and is a consumer really less likely to buy something (other than potentially appreciable assets like a house or land) because prices are dropping, as opposed to holding off on the purchase because it's now too much for your budget?
in fact, if consumers really did behave that way then no one would ever buy a new car. after all, it only depreciates in value, and what's really the difference between new and 1 year old?
"no one ever challenges that assumption."
Many do...few are heard. None get elected.
If they believed that BS on prices, sales would be illegal, for they condition the buyers to wait for a better price.
" i've always found it insane that the Fed can just nonchalantly declare that robbing you of 20-30% every decade is some obvious law of nature."
"If they believed that BS on prices, sales would be illegal..."
I feel your pain... for both of you. But, the original "Oh NO! Not 1929 again!!!" story about deflation and all the descendents of that story are definitely the best stories from their standpoint, even though it's all a pile of horse shit (and I know a thing or two about horse shit!).
Consider the alternatives:
- the reason we're keeping rates low is that lots of our buddies are in huge carry trade positions and if we raised rates it would hurt them.,, uh!
- we're buying shitty assets from banks because they made stupid decsions and the stuff they own is stinking up their balance sheets.
- the phony economic activity generated by low rates and asset purchases make the adminstration look less bad than it really is, and that's very important to us (besides, none of us wants to "accidentally" catch ebola or have a "sudden" heart attack).
- the combination of low rates to punish savers, way higher than reported inflation to punish low income buyers, FATCA and other tax schemes to drive jobs off shore (gotta love our sister agency, the IRS!) are all practical necessities: you've have to keep the little people tied up in knots trying to make ends meet; otherwise, they'd have time to figure out what we're doing.
- we and all our buddies in the political class own real estate that is bubbled beyond belief... we have to find bigger fools so we can take profits before we can lower interest rates and risk prices in free fall. We're still exposed big time!
- and so on. The list of real reasons is a long one.
Obviously they can't tell the real story.
No my friends, the Fed's horse shit scare story about deflation works best from their standpoint.
Inflation keeps pace with the State funded invasion body count. Fwd FSA.
The Federal Reserve has failed to take serious efforts in pushing the government to take the necessary reforms needed to move the economy forward. Policy makers aided by the media thrive at presenting simplistic answers that solve both economic and society’s problems with little or no effort required from the masses.
What started as a program to support and prop up the economy has morphed into the main driver of economic data. Between the low interest rates that has propelled investors into high risk assets in search of a positive return on their money, and money being pumped into the system, the markets have become distorted and disconnected from the economy. The idea that investors will continue to pour money into the sky high equity market is flawed. More on this subject in the article below.
http://brucewilds.blogspot.com/2014/06/exit-strategy-from-qe-remains-elu...
Hey they are the experts right? So STFU. These are well edgucated highly respected people.
Inflation: too much money chasing relatively few goods.
There's a HUGE difference between "Too Much Money" printed, and "Too Much Money" because confident wage-earners are saving less (and spending more). The former gives you asset bubbles, the latter generates investment in the real economy.
The Fed's ignored the stagflation disaster going on in the real economy for 6 years, but now - when it's looking like it's gonna be pretty tough to keep asset prices rising - they're exploring "new options". Rest assured, their new strategies ain't gonna do dick for the real economy.
The goods they are chasing are collector cars, McMansions, and anything not paper or digital.
NO, no no, the excuse they have for stealing our wealth is to get unemployment down below 6%, er...er....waitaminute didn't they say they........aw, forgetaboutit.
That last paragraph says it all, they need to keep printing. As one of my favorite commentators says, "you can't taper a Ponzi Scheme"
I’ve been touting the ongoing bull market in T-Bonds as one of the best investment opportunities of our lifetime – a no-brainer, as far, as I can recommend. About the only way this bet can lose is if inflation returns with a vengeance. This has never been much of a worry for me, since, on the inspiration of C.V. Myers’ prescient 1976 book, I’ve been writing about the threat of deflation for more than 20 years.
Full Analysis: Inflation, Deflation, and Our Very Confident Bet in T-Bonds
I’ve been touting the ongoing bull market in T-Bonds as one of the best investment opportunities of our lifetime – a no-brainer, as far, as I can recommend. About the only way this bet can lose is if inflation returns with a vengeance. This has never been much of a worry for me, since, on the inspiration of C.V. Myers’ prescient 1976 book, I’ve been writing about the threat of deflation for more than 20 years.
Full Analysis: Inflation, Deflation, and Our Very Confident Bet in T-Bonds
I’ve been touting the ongoing bull market in T-Bonds as one of the best investment opportunities of our lifetime – a no-brainer, as far, as I can recommend. About the only way this bet can lose is if inflation returns with a vengeance. This has never been much of a worry for me, since, on the inspiration of C.V. Myers’ prescient 1976 book, I’ve been writing about the threat of deflation for more than 20 years.
Full Analysis: Inflation, Deflation, and Our Very Confident Bet in T-Bonds
I’ve been touting the ongoing bull market in T-Bonds as one of the best investment opportunities of our lifetime – a no-brainer, as far, as I can recommend. About the only way this bet can lose is if inflation returns with a vengeance. This has never been much of a worry for me, since, on the inspiration of C.V. Myers’ prescient 1976 book, I’ve been writing about the threat of deflation for more than 20 years.
Full Analysis: Inflation, Deflation, and Our Very Confident Bet in T-Bonds
I’ve been touting the ongoing bull market in T-Bonds as one of the best investment opportunities of our lifetime – a no-brainer, as far, as I can recommend. About the only way this bet can lose is if inflation returns with a vengeance. This has never been much of a worry for me, since, on the inspiration of C.V. Myers’ prescient 1976 book, I’ve been writing about the threat of deflation for more than 20 years.
Full Analysis: Inflation, Deflation, and Our Very Confident Bet in T-Bonds
I’ve been touting the ongoing bull market in T-Bonds as one of the best investment opportunities of our lifetime – a no-brainer, as far, as I can recommend. About the only way this bet can lose is if inflation returns with a vengeance. This has never been much of a worry for me, since, on the inspiration of C.V. Myers’ prescient 1976 book, I’ve been writing about the threat of deflation for more than 20 years.
Full Analysis: Inflation, Deflation, and Our Very Confident Bet in T-Bonds
I’ve been touting the ongoing bull market in T-Bonds as one of the best investment opportunities of our lifetime – a no-brainer, as far, as I can recommend. About the only way this bet can lose is if inflation returns with a vengeance. This has never been much of a worry for me, since, on the inspiration of C.V. Myers’ prescient 1976 book, I’ve been writing about the threat of deflation for more than 20 years.
Full Analysis: Inflation, Deflation, and Our Very Confident Bet in T-Bonds
2% inflation goal means we're just going to fuck you a little bit. It is nonsense dreamed up by psychopaths to sell to less financially inclined in order to gently rape them over the long term. It has nothing to do with a healthy economy.
first of all, you fucking retarted assholes, this is MONETARISM and not keynesianism.