Today’s’ topic for the Blogger’s take is this:  Given the concerns raised by the Fed, what is really the bigger threat to the economy: Slowing Growth or Inflation? 

Does the risk of a decellerating macro environment present a bad option (My pal Kudlow thinks we see 2% GDP all next year, whch certainly ain’t recessionary). Others think a mid-cycle slow down will lead to a re-acceleration of inflation.

Which presents the greater threat to the economy? The blogger’s take:

I think slowing growth would do more to harm the economy right now.  Investors
around the world put their money where they can get the best return, and
frequently that means they invest in the United States.  Slowing growth limits
the opportunities to attract capital, and filters through the economy in a
negative way.

-Rob May, Businesspundit.com

~~~

As the Fed stays on pause here it is natural to debate the
trade-off between inflation and economic activity. While important in the short run, the bigger
question is what should the Fed focus on in the long run? On that question the answer is quite
clear. Inflation.

If we think for a moment behind what drives real economic
activity, absent a horrible policy mistake, monetary policy is not all that
important. However the ability to
maintain inflation within a reasonable range and keep inflationary expectations
from entering into real economic decision-making is important. In addition, that goal remains within the
policy reach of the Fed.
We would point you to a Federal Reserve paper
and an interview
with the author
by James Picerno of the Capital
Spectator
. In it they
explore the determinants of behind stock market booms on a global basis. The paper finds that low inflation, kept under
control, was by far and away the key factor underlying stock market booms. Enough said.

~~~

I find it amazing that people think that a blunt instrument like interest rates
can cure rising energy prices or utility bills.

CPI is a lagging
indicator.
Wages are a lagging indicator.
Energy demand is relatively
inelastic.

The Fed being enormously wrong at major turns is legendary. I
think the question is not how fast they hike next year but when the downturn
gets going how fast they start cutting.

We are not going to have either growth or
inflation as I see it.

-Mike Shedlock, Mish’s Global Economic Trend Analysis

~~~

Slowing
growth is more important, by far. Through its history, the Fed has basically
perfected the art of killing off growth. Stopping inflation? Eh…not so
much. In fact, I would say that slowing growth is itself an inflation threat. Personally,
I’d like to see the Federal Reserve much less federal, and far more
reserved. Monetary policy is always and everywhere a human phenomenon.

As a
general rule, $13 trillion economies don’t start or stop on a dime. Since
1990, when one quarter of GDP growth is above trend (3%), there’s a 60%
chance that the following quarter will also be above trend. Conversely, when
growth falls below trend, there’s a 64% chance that the following quarter
will also be below trend.  

In
other words, once you’re stuck in slow growth, it’s hard to break
out. During the last recession, we had 11 straight below-trend quarters. We
finally broke out, but now the outlook is looking shaky. The last two quarters,
and three of the last four, have been below trend.

Inflation,
on the other hand, is—and has been—well contained. The 12-month
core CPI has bounced between 1% and 3% for ten straight years. Not once has it
left that range. And it’s been over 15 years since it hit 4%, which was during
a period of below-trend growth. That’s not a coincidence.

-Eddy Elfenbein, Crossing Wall Street

~~~

Piscataqua
Research
has a new report out on the consumer crunch. It is an important
read. The gist of it: they estimate that in 2006, consumers used new debt to
provide 90% of their cash flow for investing (mostly residential property), and
debt service. In other words, it’s Minsky’s definition of a Ponzi finance
scheme. They go on to suggest that in 2007 new liquidity will be nigh
impossible, and will lead to a large drop in both consumption and household
investment. Perhaps more signs of the times, is this bomb from Best
Buy
this morning. Canary in coal mine Dell cuts 30%
of monitor panels orders. Nucor
reports a slowdown. Which pretty much leaves Pig Man Goldman
Sachs
and their bonus
Boyz
to carry (pun intended) the economy. Or have they slashed, burned and
gamed enough already?

Significant new consumer liquidity is impossible for two reasons. Nearly
three-fourths of the total, or $7.75 trillion in US mortgage financing took
place in 2004-2006. I would argue that the 2004 mortgage vintage of $2.773
trillion now has collateral at levels roughly where it started, or soon will be.
Any collateral appreciation that remains is dissolving, especially in light of
the developments in the subprime market, which I expect to spread to the Alt A
markets. I don’t see the prime market as immune at all either, especially if a
contagion breaks out in the financial sphere. The 2005 vintage of $3.027
trillion is break even at best on appreciation, and really down more like 10% as
a rule. And 2006 vintage mortgages of an estimated $2.5 trillion, are almost all
showing depreciation

-Russ Winter, Winter (Economic & Market) Watch

~~~

Good stuff, thanks guys.

Category: Blog Spotlight

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

12 Responses to “Blogger’s Take: Slowing Growth, or Inflation?”

  1. Robert Coté says:

    Ans: Falling dollar.

  2. Philippe says:

    Still wondering why food and energy are not part of the core inflation ?
    Still wondering why the debate between the bond market (long term yield curve) and the Fed inflation concern were so much apart in the last two years ie bond market has been seing no or little inflation and a recession since 2005, are they now getting closer in their view? why and how is it possible? more convincing power from the new Fed authorities ?
    Still wondering why academic theories for term of exchange ie foreign exchange currency market which would punish inflation differential, current account deficit worked so well when applied to Asian currencies in 1998 and Russia has been not so vindicative with the USA look at the yen dollar look at the Swiss dollar? no convincing power from any authorities?
    But make no mistake money illusion cannot last! see how the central banks are changing now the breakdown of their foreign currency reserves.

  3. dgoverde says:

    Eddy,

    What time frame are you using to define the trend?

  4. Eclectic says:

    Yahoo Finance has a poll that asks (paraphrasing): “Does the 1% sales rise in Nov indicate a stronger economy than was generally thought?”

    At approx 3 am E.S.T., Thursday, Dec 14th, the ‘no’ answer appeared to garner approx 57% of the approx 15,750 responses.

    I’m sure Yahoo would confirm the poll is not scientific, but I certainly don’t think the results indicate a very high investor confidence level regarding the Nov sales figures.

    It would be interesting to see how the poll results change as the day rolls by, or if it changes at all. Maybe some of you could report the results at certain times during the day.

    A question: Do you think persons who are analytical about econometric and market information in the wee hours of the day would be predisposed to be biased in one direction or the other regarding their views of the Nov sales figures?

  5. Cherry says:

    There was a intial 1.5% gain in Retail Sales in December 2000 to, was the same question asked? What is the fascination with them anyway?

    Back to the inflation/growth arguement. Bernanke left him some wiggle room to lift rates further(a couple more .25bp’s probably). If the dollar keeps on falling, he may have to lift to 600bp’s.

  6. Jack says:

    Shedlock seems to have it RIGHT! I don’t have an economic model to run, but I did live through the last “energy crisis”. Higher energy prices, as we import 70% of our oil is an external price increase about which (in short run) we can do little and though it increases prices of nearly everything it’s certainly not demand pull inflation, and tends to create its own deflationary effect as precious little discretionary income is mopped up paying energy bills.

    And where is the danger of inflation? Some estimate we’re operating at just 70% of capacity and in the “global economy” surely our capacity can be quickly ramped up by “offshoring” which I suspect kept inflation in check during the Clinton era.

    While unemployment “looks” pretty low, were we to experience a bit higher growth, I’m sure there are millions excess “jobless” biding their time in low paid havens of underemployment, and NO wage gains in the lower 50% of wage earners for most of a decade would seem another signal that we hardly have to try to clobber inflation.

    As for raising the interest rate that corporations might use to invest in plant and equipment here? Hey, I’ve got an idea; skip that pricey upgrade on the refinery or building a new plant here, take a fifth of the capital and build or move the plant to China or India.

    Others here have wisely remarked on the housing downturn, a business I’m close to, and one that uses primarily things mfg in the US, plus what seems to be left out of the “rose glasses” view of the turndown is that new home buyers stretch out and buy furnishings etc. which are mostly mfg here as well, and that carpenters etc are prone to buy new P/U’s etc with there first few checks and are often vulnerable to dumping the “Smart Lease” after a tough winter.

    What should we be doing? Take the Fed foot off the brakes, let the economy run and instead of treating Mexico as “those people” to be “fenced out” find ways to use their excess labor (in Mexico) and become inclusive instead of exclusive as Euro has done with including Spain/Portugal in the Common Market. Half the Mexican population is under 30, energetic, eager to work, and we’ve a choice of rejiggering “”NAFTA”" et al to find a win-win or that we’ll soon see a lot more of their 100 million population here, fence or no fence, not to mention a flurry of “terrorism” where OUR policies have forced their agricultural folk off the land.

    With a growing $750 billion trade deficit is it not time to figure out how to make somthing in North America to either sell to ourselves? or to export?

    Have we lost our nerve and our minds?

    Jack

    Shedlock rightly sez:

    I find it amazing that people think that a blunt instrument like interest rates can cure rising energy prices or utility bills.

    CPI is a lagging indicator.
    Wages are a lagging indicator.
    Energy demand is relatively inelastic.

    The Fed being enormously wrong at major turns is legendary. I think the question is not how fast they hike next year but when the downturn gets going how fast they start cutting.

    We are not going to have either growth or inflation as I see it.

    -Mike Shedlock, Mish’s Global Economic Trend Analysis

  7. Teddy says:

    Jack, why don’t the captains of industry in Mexico pay their new factory workers a decent and fair wage, instead of keeping it for themselves? Maybe NAFTA’s the reason that a politician with a communist ideology just barely lost the recent presidential election. Maybe CAFTA is dead on arrival after other countries saw what happened in Mexico. The USA Today had a small article last week about the “world wealth gap” where 1% of adults worldwide own 40% of the world’s household wealth and the bottom 50% own about 1%. If anyone in Congress brings up CAFTA again, I think I’ll have to puke. It wouldn’t help anyone in this country or in Central America except for a chosen few.

  8. teraflop says:

    Normally I just read (troll) but had to jump in on Mike Shedlock’s assertion, “Energy demand is relatively inelastic.” That may be true when it comes to drivers like flushing toilets and turning household lights on in the evening, but energy consumption at the wholesale level is highly sensitive to economic activity once you remove seasonal effects. For example, % power grid load skyrocketed in 1999-2000 period, as did prices (yet prices were affected by specific market inefficiencies and participants). We may like to think that America no longer manufacturers anything but there is still an industry running aluminum, steel, paper, and chemical plants that reduce outputs during recessionary periods.

  9. Mike says:

    Pal Kudlow???

  10. Jack says:

    Teddy thanks for the comments!

    Jack, why don’t the captains of industry in Mexico pay their new factory workers a decent and fair wage, instead of keeping it for themselves?

    …… Indeed, years ago we could have asked about those levels of inequality in Mexico looking down our noses, but today we’re within reach of the same levels of inequality. I suppose part of the answer is that they have SUCH a surplus of labor that few have any market power and I don’t recall any union organizer living to tell about it. So…. in many of these situations I guess I’d be more of a meddler than a “believer” in “the market” fixing everything and sponsor bilateral trade talks of the “we’ll do this to address your problems if you’ll do that to address ours”. Not sure what to do about the “free trade-devil-take-the-hindmost boys who are gleefully outsourcing so much of our work to China that their big problem is dealling with 10% plus growth rates while starving young Mexicans (half of Mexico is under 30) come here out of desperation. Hey! we could use a billion or so of “half-fence” money as seed money!

    Maybe NAFTA’s the reason that a politician with a communist ideology just barely lost the recent presidential election. Maybe CAFTA is dead on arrival after other countries saw what happened in Mexico. The USA Today had a small article last week about the “world wealth gap” where 1% of adults worldwide own 40% of the world’s household wealth and the bottom 50% own about 1%. If anyone in Congress brings up CAFTA again, I think I’ll have to puke. It wouldn’t help anyone in this country or in Central America except for a chosen few.

    ………Yeah, and THE Market, is largely the US market, and we could easily insist on something of a min wage that was close to a living wage in exchange for access to our markets. (It would be easier if our own min wage were closer to a living wage.)

    Sounds better to me than demonizing “them” and “fencing them” out. Or so it seems here in Alaska where we have 3,500 miles of border on the ocean, a couple thousand miles AK/Canada and 32,000 miles of coastline. Jack

  11. Teddy says:

    Jack, I think a much higher minimum wage, but still not close to a living wage is coming. I think that last month’s election means higher taxes are coming because supply side economics didn’t work. And if illegal aliens are given citizenship, then we should send the bill for their healthcare and their kids schooling and healthcare to Mexico because this country is broke.

  12. Jack says:

    Teddy: Mostly agreement. But without defending illegal immigration…. if a man is putting his work into our economy, and most often doing hard work for low pay we’d better be able to provide those services.

    BTW….. it’s interesting to note that there’s the same problem for our own low paid workers; those at “Walmart wages” or worse, have nothing to contribute to local gov for schools etc.

    In my personal view we’ve neglected and screwed Mexico for a century and are reaping the rewards of the Mex border being the line of Highest inequality in the world. The hope of NAFTA was to help, but it seems more than a bit dumb (or worse) to throw it out there and watch it fail and further disrupt their country w/o some sort of tune-up which it would seem could be beneficial to all.

    I was just in Mex and not counting touristas there are over a million US ex-pats living there and med care, dentistry and our own US made pills are a third or less of what they are here.

    Hopes of muddling thru? Jack