Friday, November 29, 2013

The Fed Thinks Price Inflation Has Stabilized

File for future reference for when price inflation starts to soar.

Marc P. Giannoni and Hannah Herman, economists at the New York Fed, believe price inflation has stabilized:
Since the early 1990s, the PCE deflator has remained remarkably close to a 2 percent trend line. It has continued to track this trend since the beginning of Chairman Bernanke’s tenure in January 2006, despite a dramatic financial crisis and the Great Recession. By committing to stabilizing inflation over the long run, the FOMC is de facto at least partially stabilizing the price level around a trend line. 
As can be seen, they have no theory to explain their view that price inflation has stabilized, other than to project past trends into the future. The problem with this, of course, is that there are no mathematical constants in the world of economics and thus trend extrapolation is about as valuable as fortune cookie reading.

The real problem is massive money supply growth that eventually will push prices higher at a much more rapid rate than 2%. Exact timing is difficult, but if money supply growth continues the way it is now, the price inflation is not likely to be very far away.


  1. Money printing pushes prices higher, production increases, unemployment falls while inflation slows.

    1. Which is why things have been going so swimmingly in Argentina the last 40 plus years. In 2012 alone, M2 for the ARS was 39%. Of course the good news for Argentines is that by their government's reckoning, inflation was only around 12% during the same time, with unemployment just above 7%.

      Keynesian prosperity provides such a wonderful economy to live in, I can't wait until the US has it again too.

    2. Jerry, I understand that you won't reply, because your posts are just little drive-by bombs to get the readers riled up. But usually you do better than this. But for the benefit of other readers, especially newer ones, I will parse your one-sentence post.

      "Money printing pushes prices higher." -- I'm amazed to see you write this because your other inflation posts usually gloat about how wrong Peter Schiff and other Austrians have been in predicting inflation for the past five years while the CPI's inflation rate has remained low. So what are you now saying? Are you now admitting that prices will eventually rise and the Austrian theory will be vindicated? Also, whether or not the CPI is an accurate measure of price inflation (which it is not), Mises in Human Action goes to great lengths to explain that monetary inflation affects prices in infinitely variable ways. If consumer demand for a good is falling, then the price can fall even in the face of massive monetary inflation, just not as far as it would have fallen without the inflation. Also, steady progress in productivity will tend to decrease the prices of all goods absent monetary inflation such that monetary inflation of say, 7%, can manifest itself in a general 2% price inflation. Finally, price inflation can be altered by a change in the money relation - peoples' desire to hold larger or smaller cash balances due to economic uncertainty, or fear of future inflation.

      "Production increases" - As Mises and Rothbard explain, a monetary inflation in the form of credit expansion will often stimulate production of higher order capital goods, because the credit expansion, and accompanying lower interest rates, sends the incorrect signal that there is an increased demand for future goods with more indirect, and time-consuming methods of production. Thus, entrepeneuers commence long-term, capital intensive, production projects that would be unsustainable in the absence of the false signals emitted by the credit expansion, and which represent a gross misallocation of scarce real savings. When the credit expansion slows, stops, or even reverses, as it always must, the media and Statist economists label them as "excess capacity" but they are really half-finished, or idle production facilities for which real demand does not exist.

      "Unemployment falls" - Maybe, maybe not. You might not remember the stagflation of the '70s when both inflation and unemployment were high. This was just after Nixon defaulted on the US promise to redeem to foreign banks to redeem its paper money in gold at par. "Slammed the gold window shut," as they called it. But even when unemployment does fall as a result of a fiat money credit expansion, the workers are employed in building those longer-term, unsustainable production facilities and increased retail outlets for which there is no real long-term demand, resulting in even worse unemployment later when reality catches up. There is also some increased employment from the fall in real wages as wages inflation usually lags consumer price inflation. However, all this means is that the supply and demand axiom is manifest in the fact that companies will demand more labor if the real price for it falls. Also, workers quickly catch on and will either quit or demand wage increases to counter their falling real wages, with unemployment increasing either way.

  2. Facts show money supply is no longer growing ... rather money supply is dwindling.

    The greatest risk is not inflation but implosion.

    Yet, what they do not present is that systemic risk has gone off the scale .... systemic risk has literally gone off the scale.

    Fiat money, that is Credit, AGG, and Currencies, DBV, and CEW, died October 23, 2013, with the bond vigilantes calling the Interest Rate on the US Ten Year Note higher from 2.48%, which has destroyed not only US Treasuries, TLT, but also Emerging Market Bonds, EMB.

    The death of fiat money has been transferred to a growing number of investment sectors, such as Timber Production, WOOD, Design Build, FLM, Utilities, XLU, Industrial Miners, PICK, and Metal Manufacturers, XME, seen in their combined ongoing chart

    And the death of fiat money has been transferred to Nation Investment, EFA, in particular the Emerging Markets, EEM, Emerging Market Financial Institutions, EMFN, Emerging Market Mining, EMMT, and Emerging Market Infrastructure, EMIF; examples being Indonesia, IDX, Thailand, THD, and Philippines, EPHE, and Brazil, EWZ, EWZS, BRAF, BRXX, Chile, ECH, and Peru, EPU, as well as Developed Nations, Australia, EWA, KROO, and New Zealand, ENZL.

    Of note, the death of money is causing monetary deflation in the US, as the stock of M2 Money is on the decline from its peak of 10,988 on 10-21-2013 to 10,922 as of 11-22-2013 ....

    When the death of fiat money is transmitted to World Stocks, VT, and Global Financial Institutions, IXG, there will be a worldwide credit crisis and financial system breakdown known as Financial Apocalypse, foretold in Bible Prophecy of Revelation 13:3-4, and this will be the genesis event for regional governance and totalitarian collectivism to rule the world in each of the world’s ten regions, and for totalitarian collectivism to occupy in each of mankind’s seven institutions, as foretold in Bible prophecy of Revelation 13:1-4.

    Holding cash, which pays almost nothing, has been most unattractive, especially when compared to the much higher yields available on alternative investments, such as Leveraged Buyouts PSP, paying 9.9% Junk Bond, JNK, paying 6.2%, Energy Partnerships, AMJ, paying 4.2%, and Global Telecom, IST, paying 3.8%. Those who have been holdouts in credit instruments, have lost principle, Mortgage Backed Bonds, MBB, have lost 1.8% over the last year.

    An inquiring mind asks what constitutes safe money? Are money market funds, safe? Will they be able to maintain their constant $1.00 value, or will they “break the buck”? During QE, business-loan based short term bond funds, such as FLOT, were safe investments, in that they were ever increasing in value; of note, this fiat investment traded sharply lower as world stocks peaked. When the bond vigilantes called the Interest Rate on the US Ten Year Note, ^TNX, higher from 2.48%, on October 23, 2013, on the exhaustion of the world central banks authority, the “money good” attribute of this short term bond funds failed, and serves as ominous warning to those who thing money market funds are safe.

    Out of waves of sovereign, banking, and corporate insolvency, a new monster, the beast regime, with feet of a bear, mouth of lion, and camouflage of a leopard, is coming to rule mankind, displacing the banker regime, and it is making its claw-hold in Europe with its paws well secured in the German coalition agreement, which paves the way for social attacks throughout Europe, and its mouth announcing the militarization of German foreign policy and attacks on democratic rights, as Christoph Dreier of WSWS reports German Grand Coalition: A Government Of Social Austerity And Militarism.

  3. "The greatest risk is not inflation but implosion." As Murry Rothbard explains, the only way for deflation to occur is to have had a previous inflation. Implosion is a return to reality.