As noted yesterday, Traders were none too happy with BB’s testimony, setting them straight on the errors of their ways last week.
The always astute Bill King points out that this should not have been a surprise. Bill notes that a speech the Chairman made earlier in the month at Stanford, Bernanke explicitely noted concerns about Globalization and his inflation worries:
"On the other hand, not all aspects of globalization and trade reduce inflation. For example, globalization has been associated with strong growth in some large emerging-market economies, notably China and India, and this growth likely has contributed to recent increases in the prices of energy and other commodities. During 2003-05, for example, China alone accounted for nearly one-third of the growth in both global real gross domestic product (GDP) and oil consumption.
It is difficult to assess the exact extent to which increased demand by developing countries has contributed to the run-ups in commodity prices in recent years, as these prices are also affected by supply conditions and other factors. However, one study estimated that, if the share of world trade and world GDP enjoyed by non-industrial countries had remained at its 2000 levels, then by 2005 real oil prices would have been as much as 40 percent lower, and real metals prices 10 percent lower, than they actually were (Pain, Koske, and Sollie, 2006).
Accordingly, in the past several years, the effect of growth in developing economies on commodity prices has been a source of upward pressure on inflation in the United States and other industrial economies.
When the offsetting effects of globalization on the prices of manufactured imports and on energy and commodity prices are considered together, there seems to be little basis for concluding that globalization overall has significantly reduced inflation in the United States in recent years; indeed, the opposite may be true. (emphasis added)
Now, I am cherry picking a few paragraphs out of a 4324 word speech. And the Fed Chairman, like all economists, is two-handed.
However, a careful read of his full speech, along with some intelligent context, makes it clear that the Fed remains quite concerned about Inflation on the one hand, and slowing economy on the other. Pick a hand, and draw your own conclusions.
We>
Source:
Globalization and Monetary Policy
Remarks by Chairman Ben S. Bernanke
At the Fourth Economic Summit, Stanford Institute for Economic Policy Research, Stanford, California
March 2, 2007
http://federalreserve.gov/boarddocs/speeches/2007/20070302/default.htm
We have had global low cost producers on line for some time. As they have expanded, their natural resource demand increases world wide costs. We have bottomed out in the net deflationary effect of trade and technology. We are in a phase of rising costs minus the housing debacle.
Copy error alert:
At the end of your Bernanke globalization piece you meant to say Q4 2006 (not 2007)
TG
~~~
Good catch — I fixed that
Thanks
If I sum up all the blog posts I’ve read in the least month. They all seem to support a view that fundamentals are not likely to get better in the next 12-18 months: growth, inflation, margins, and so on.
However many stocks don’t look expensive on most valuation metrics. Risk seems mispriced for the moment but it’s hard to call a overall secular direction from here.
As any CB’r worth his salary will tell u, its not massive increases in money supply that are inflationary; it is, rather, how much of those increases that trickle down to the masses that matters. (wages, wages, wages…) So, yes, having 2 billion of the world’s pop w/ rising incomes is definetely inflationary.
Didn’t Bennie already tell us that the revision to 4Q GDP is on the up side?
…though I don’t know what effect data from 4 months ago s/ have on today’s stock prices.
My hand:
Dr. Anke ain’t worried about inflation. His greatest worry is de-flation, that might be popped by some incident related to a blow-up in housing and subsequent blow-up in the derivatives-hedged debt instruments that inflated the housing industry in the first place.
He’s worried that they haven’t been able to jawbone rates high enough, fast enough, to have ever developed any perceived leverage for Mr. Bernanke’s tour of duty that the Fed might still have an ability to control the long rate, which their jawboning to date has hardly budged.
If he’s so worried about inflation, Barringo, why not raise ’em? I know that if I have to worries and one is greater than the other, I’ll address the greater worry. Don’t you agree?
—
Go and read his speech again about the relative size of private GSE portfolio debt holdings relative to what’s controlled by the Fed. He just made it a couple of weeks ago, and I figure the coffee stains on it haven’t even had time to set permanently yet:
http://tinyurl.com/2ljun5
Here’s a couple of [quotes from it relative to my comment]***followed by additional comments that only Eclectic can make so poetic:
[Financial crises are extremely difficult to anticipate, and each episode of financial instability seems to have unique aspects, but two conditions are common to most such events. First, major crises usually involve financial institutions or markets that are either very large or play some critical role in the financial system. Second, the origins of most financial crises (excluding, perhaps, those attributable to natural disasters, war, and other nonfinancial events) can be traced to failures of due diligence or “market discipline” by an important group of market participants.]
***the pitch.
[Both of these conditions apply to the current situation of Fannie Mae and Freddie Mac (Eisenbeis, Frame, and Wall, forthcoming). The two GSEs are certainly large, having a dominant presence in U.S. mortgage markets and a substantial role in other financial markets, particularly in public debt and derivatives markets. Beginning in the mid-1990s, the GSEs began to rapidly increase the quantity of mortgages and other assets that they purchased and retained in their portfolios. From the end of 1990 until the end of 2003, the combined portfolios of Fannie Mae and Freddie Mac grew more than tenfold, from $135 billion to $1.56 trillion, and the share they hold of outstanding residential mortgages increased from less than 5 percent to more than 20 percent.](footnote 5)
***A big fan into strike one.
[Moreover, to finance their own holdings of MBS and other assets, in 2005 the two GSEs together issued almost $3 trillion in debt. Today, the two companies have $5.2 trillion of debt and MBS obligations outstanding, exceeding the $4.9 trillion of publicly held debt of the U.S. government (Lockhart, 2007). The activities of the GSEs are not confined to debt markets; because the GSEs engage in extensive hedging activities, these companies are among the most active users of derivative instruments. Thus, by any measure, the GSEs have a significant presence in U.S. financial markets.](footnote 6)
***Dr. Benber N. Anke drives a grand slam into the cheap seats deep in left-center field.
—
And, now, he’ll just be called “Helicopter Ben” when and if he has to bend his knees to his monetarist heritage and cut rates to satisfy Wall Street.
But cutting them before didn’t solve the core problems we have (they actually facilitated them), and cutting them again now won’t solve them this time either.
Monetarist policies are not stimulative. The money suppy is not s-t-i-m-u-l-a-t-i-v-e to economic output. It can only restrain but never stimulate.
Hello!… knock, knock… Both Adam Smith and David Hume more-or-less told us that more than two centuries ago.
But, it’s only the fun things that old Adam told us that make it onto the “Greatest Story Never Told Show.”
I’m sure [you read it correctly] but let’s correct it anyway:
“I know that if I have [two] worries and one is greater than the other, I’ll address the greater worry. Don’t you agree?”
Two handed, or two faced?
If the 10 yr Treas doesn’t end the day higher, I’ll eat my tin foil hat…
…and become very worried about what is to come. What if “Fight to Quality” no longer means USD.
Eclectic
In his prepared testimony, BB mentioned the word “inflation” 27 times; he mentioned the word “subprime” 8 times; and he mentioned the word “recession” not at all.
Dr. Freud would not concur with your deflation analysis.
Rising incomes in China et al. are not a priori inflationary (to global goods prices) if Chinese labour remains lower cost than that of the developed world and if the developed world continues to replace its higher-cost workers with lower-cost Chinese (and Indian, etc.) versions, as seems to be the case.
But it is appropriate to flag increased commodity demand as an inflationary outcome of globalization. Jean Claude Trichet made this very point last year when emphasizing why the ECB targets headline rather than core inflation.
When the offsetting effects of globalization on the prices of manufactured imports and on energy and commodity prices are considered together, there seems to be little basis for concluding that globalization overall has significantly reduced inflation in the United States in recent years; indeed, the opposite may be true.
Fortunately for the US consumer, only FOOD and ENERGY prices have inflated significantly.
Prices of PC’s and TV’s have dropped. So it’s all good…
“Rising incomes in China et al. are not a priori inflationary (to global goods prices) if Chinese labour remains lower cost than that of the developed world and if the developed world continues to replace its higher-cost workers with lower-cost Chinese (and Indian, etc.) versions, as seems to be the case.”
Hmmm! Maaaaybe! Somehow, there is a variable missing in that equation: the behavior that Indian and Chinese workers are already showing with growing incomes and new opportunities. In a word, they want to consume more.
Even with a fraction of the purchasing power of a western worker, the mere number of them makes global inflation more likely than not.
And one can bet his last n’gwee (For the nekulturny: n’gwee: subunit of the Kwasha, the official zambian currency ) that there are powerful political reasons to help these workers become consumers.
Imagine what would (will) happen if(when) China becomes a consumer nation. Would they need to buy all these US Treasury bonds? Why would they even CARE? Slowly, but surely, they would decrease their buying of all this paper that can be inflated anyway. Why take the risk if they wouldn’t have to?
What would that do to the financial well-being of Uncle Sam? To the viability of a political system so eager to avoid the tough decisions?
Francois
“Hmmm! Maaaaybe! Somehow, there is a variable missing in that equation: the behavior that Indian and Chinese workers are already showing with growing incomes and new opportunities. In a word, they want to consume more.”
This whole globalization think, in my mind, benefits US CEO’s WAY more than it benefits us worker bee consumers. If I were the government– and I know I’ll be ripped to shreds for suggesting this– I’d force companies that use Chinese or Indian labor to pay Social Security on the foreign workers they employ. This would bail out OUR SSA, and would make foreign workers incrementally less cheap– they would take away fewer American jobs.
Macro Man, I’m actually doing this to give MarkM has daily fix, but you may enjoy it as well:
Tuco, “In-flato,” Benito, Juan, Ramirez sits in a bath tub full of bubbles enjoying a quiet moment in the upstairs of a near demolished hotel. Unseen to us is the other end of the leather strap around his neck. But, we’ve paid attention earlier and we know it’s a pistol under the water.
In walks our unknown gunslinger we’ll call Bennie, a one-armed bandito with green teeth, survivor of the opening scene gunplay with Tuco.
Not many live to tell of it, but Bennie’s only lost his arm, and he’s ready for some Big Mouth Bombastia in the form of revenge. He figures all Tuco’s got to play with under the water is his manhood, but he’s in for a surprise, because at the other end of that strap is an Econo-45 Special, full of de-flato bullets.
Bennie (surprises Tuco, walks in and around the tub, revolver pulled, threatening Tuco): “You wanna know how long I’ve been thinkin’ about catchin’ up with you, Tuco In-flato!… how long I’ve dreamed about this moment… how long I’ve had to think about you and this ARM (adj rate mortgage) you shot off!… and now, I’m gonna get my chance to go after you, you T-U-C-O In-flato you!…”
Tuco In-flato draws a bead on the gunslinger, eyes locked on the boasting fool, no fear in has face, a slight puzzlement instead – we see the slight rustling of the bubbles and Tuco’s eyes tell us what will happen):
Bennie: “Yeah… that’s right!… Yeah, and now I’m gonna………”
We hear the quick ‘chik-chik’ of a hammer cocking and then Tuco unloads the little lead valentine from the bubbles that we knew would come from the de-flato Econo-45.
Tuco, standing, bubble-coated, cocks and shoots him again, spinning the dying man… and then finishes him with another final de-flato shot.
Tuco (at the dead man): “If you’re gonna shoot… Shoot!… Don’t talk!”
Key the music:
http://tinyurl.com/22dhsq
See sample:
1. IL Buono, IL Cattivo, IL Brutto
Frankie, that’s a good argument whose only flaw is its lack of factual backing. Import growth in both India and China has slowed to well below the pace of the last several years. Yes, to a degree this is a function of terms of trade (relatively static oil prices, etc.), but until recently much of the expansion of China’s trade surplus was a result of soggy import growth rather than super-robust export growth.
One need only look at trends in manufactured goods inflation globally (very low to negative)versus services inflation (high) to see that the supply side (the marginal factory worker is a low wage earner) outweighs the demand side.
Tom B, I won’t rip you to shreds, but I will suggest that the the other #^ billion residents of planet Earth don;t actually believe that they owe the American worker/consumer anything, least of all a living.
Eclectic, I might be the only one, but I really have no idea what you’re on about with these stories.
Francois, quoting you:
“And one can bet his last n’gwee (For the nekulturny: n’gwee: subunit of the Kwasha, the official zambian currency ) that there are powerful political reasons to help these workers become consumers.” end quote.
—
For entirely ornamental reasons, that’s the most interesting paragraph that’s been written on the Big Pic in months!… I plan to find some way to use the phrase: “bet your last n’gwee” as soon as is practical.
Tom B, quoting you:
“This whole globalization think, in my mind, benefits US CEO’s WAY more than it benefits us worker bee consumers.” end quote.
—
Now, I’ll quote Adam Smith from his [“Wealth of Nations,” Book I: On the Causes of Improvement in the Productive Powers. On Labour, and on the Order According to Which its’ Produce is Naturally Distributed Among the Different Ranks of the People. (Conclusions of the Chapter) – Adam Smith – 1776], found here:
http://tinyurl.com/22c9e9
“The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public.” …and then later he says:
…”The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men whose interest is never exactly the same with that of the public, who have {generally an interest to deceive and even to oppress the public}, and who accordingly have, upon many occasions, both deceived and oppressed it.”…end quoting, {emphasis mine}.
—
My guess is that these words of Adam Smith won’t make it to the “Greatest Story Never Told Show.”
The CEOs you reference are in very many ways equivalent to the “dealers” referred to by Smith. Their best interests, and those of their closest associates, are often disguised as the best interests of the American public.
The reason that Adam Smith’s work is always quoted as one important means of defending unrestrained free-market capitalism is because it’s ever so easy to routinely define a failure to provide these dealers with the enabling rules and regulations they want for their own purposes, as rather being the restraints against free-market enterprise supposedly spoken about by Adam Smith.
What Adam Smith taught us about such as: the improved productivity in a pin factory that comes from appropriately ordered division of labor; the necessity for the Crown to not overburden commerce with taxes and absurd regulations in pursuit of its own financial greed; and about how the randomly distributed attributes of national or international geographic regions and their attending resources would normally and properly best allocate economic resources to production (in other words; corn might best be produced in England and wine best produced in France) – in none of these dissertations of his did he mean that the whole fabric and security of a society might be upended solely for the purpose of always supporting unrestrained free-market capitalism.
Too, he would’ve found the notion of paying workers in the Third World 10 cents an hour to make mid-level tennis shoes that sell for $100 in the U.S. as an abhorrent distortion of everything he taught and wrote about free-markets.
He’d have also, in my opinion, recognized the true costs of that 10 cent production to be way higher than 10 cents, and thus in the long run possibly not so economically efficient as “the dealers” who import them would have us believe.
tjofpa,
I’ll take my tin hat off to you, but you got really close to having to make a sandwich out of it.
Barringo,
Wanna put a couple of n’gwee on what the 10-y-T’ll do?
This maddening insanity regarding the supposed production of ethanol efficiently from corn as an alternative fuel for U.S. consumption — the very notion of which will bring primal, stark fear to the hearts of any informed individual with the slightest capacity for common or scientific sense, knowledge or enlightenment — is going to lead to the NEXT blow-up of Econo-Americana, and if you don’t believe it… then mark you calendar that it was said by Eclectic this day, March 30th, 2007.
It is simply the next example of unrestrained free-market capitalism run amuck. Within 5 years (probably far sooner) it will produce another wasteland of burned-out, financially busted farmers, equipment dealers and ag-centered banks… along with probably another steep decline in farmland prices and commodity prices ranging from chicken feed to feeder cattle to oink-oink bellies.
It is the ag equivalent of housing’s liar loans and the bloated secondary investment portfolios of the GSEs all rolled together.
It is a trainwreck a-comin’ and its history will be die-cast before the first kernel of corn sprouts in Iowa.
By the time the harvest comes in, we’ll be ass-deep to a giraffe in corn… just about the time the world economy decides to take a downturn lead by Econo-Americanan worsening woes from tightening credit standards and a depressed housing industry and associated job losses.
“his maddening insanity regarding the supposed production of ethanol efficiently from corn as an alternative fuel for U.S. consumption — the very notion of which will bring primal, stark fear to the hearts of any informed individual with the slightest capacity for common or scientific sense, knowledge or enlightenment”
Exactly correct. When General Sherman burned the tobacco fields in the South in the Civil war, it was regarded as a near war crime. Now, Iowa wants to burn THEIR OWN fields in the name of short term profit.
Aside from the fact that the corn-based ethanol produces essentially no net energy gain, it drives up the cost of food, increases our trade inbalance, and presumably degrades the environment through increased fertilizer run-off (I’m not an ag expert, but isn’t corn a crop that rquires lots of nitrogen?).
Any chance the Dems can (will?) kill this puppy? It’s a Bush thing. I can think of five proposals that would save more energy at lower cost without breaking a sweat.
Tom B,
There’ll be lots of Democrats and lots of Republicans all raising corn together.
We’ll be ass-deep in Democrat corn and ass-deep in Republican corn… and ass-deep in Jimmy Crack Corn.
And I don’t care.