Posts filed under “Think Tank”


July CPI was flat headline and up .1% ex food and fuel, both exactly in line with forecasts. But, because of rounding, the y/o/y drop in CPI was 2.1%, .2% more than expected and the biggest drop since ’49 while core CPI rose 1.5% y/o/y. Owners equivalent rent, 24% of the overall CPI, was flat, the first time it hasn’t risen since June ’03. While there has been a trend towards renting instead of buying, a combination of unsold homes turning into rentals and many moving back home or sharing apartments, have kept a lid on landlord pricing power. Energy prices fell .4% but since the end of the survey period, have risen right back. Food prices fell by .3%. Vehicle prices (6.9% of CPI) rose .3% after rises in the prior 3 months as the sharp drop off in production has given auto dealers pricing power and the clunker plan will add to that as many cars get destroyed. Apparel prices rose a strong .6% after a .7% gain in June. Medical care rose .2%.

Category: MacroNotes

Ricardian Equivalence

Ricardian equivalence

August 14, 2009

The Obama-Summers-Geithner federal deficit financing plan assumes success because it ignores the principle of “Ricardian equivalence.” And it is based on the assumption of the Alan Blinder-Robert Solow argument that over a longer term the outcome of government borrowing will be an offsetting higher wealth effect.

It will fail. We could see an offsetting positive wealth outcome if the borrowed money were all spent on productivity-enhancing societal improvements. Sadly, it is mostly spent on current consumption; hence, the Blinder-Solow argument fails.

Let’s examine Ricardian equivalence applied to the stock and bond markets.

David Ricardo (1773-1823) is ranked among the classic British economists, along with others like his good friend Adam Smith. He sponsored the notion that consumers were able to distinguish between currently financed government expenditures (through taxes) and debt financing of the same expenditures. Ricardian equivalence equalized them.

An American classical economist, Robert Barro, advanced and modernized this theory in his writings. Others like Thomas Sargent and Robert Lucas, Jr. were part of the chorus that argued that consumers and agents were “rational” and that “expectations” would act as a prompt and current adjusting force when government ran large deficits.

The risk of failure with those theories arises from what economists call “inconsistencies.” In today’s world those risks are both in time and in composition of the actors. For Ricardian equivalence to have a chance, there has to be homogeneity among the agents and policymakers in the economy. In the US today, we do NOT have it.

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Category: Think Tank

Industrial Production

July Industrial Production rose .5%, .1% more than consensus and it’s the first gain since Oct ’08. Capacity Utilization rate was 68.5%, .2% more than expected, up from 68.1% in June and rose also for the first time since Oct ’08. The rise in IP was led by a 20.1% gain in auto production as…Read More

Category: MacroNotes

At this point, what the market wants is different than what the Fed

The key CPI report is expected to be flat m/o/m but down 1.9% y/o/y, the biggest decline since 1949. The core rate though remains sticky and is expected to rise .1% m/o/m and 1.6% y/o/y. While the markets want inflation to be in line to less than forecasts because it will keep the Fed with…Read More

Category: MacroNotes

30 year auction

The 30 year bond auction was good as the yield was a touch below where the when issue was trading right before and the bid to cover of 2.54 was above the average seen this year of 2.32 and the 2nd highest going back to May ’08. Indirect bidders totaled 48.1%, about the same as…Read More

Category: MacroNotes

The FOMC Meets: Actions Speak Louder Than Words

Jim Bianco on FOMC Actions The Financial Times – Short View: Fed’s exit strategy Nobody is expecting the Federal Reserve to change its target Fed funds interest rate on Wednesday. It will remain at 0.25 per cent after the federal open market committee meets. But there has been a flurry of speculation that the Fed…Read More

Category: Federal Reserve, Think Tank

Business Inventories

June Business Inventories fell 1.1%, .2% more than expected and May was revised lower by .2% to a drop of 1.2%. Because sales rose by .9%, the inventory to sales ratio fell to 1.38 from 1.41 and is at the lowest level since Oct ’08 when it was 1.36. In addition to the drop in…Read More

Category: MacroNotes

Retail Sales and Jobless Claims

July Retail Sales unexpectedly fell .1% vs an expected clunker led gain of .8%. Ex auto’s, sales fell .6% vs an expected gain of .1%. Ex auto’s and gasoline, sales fell .4% vs forecasts of flat. Motor vehicles, parts sales rose a strong 2.4% due to the clunker plan but it seems that the spending…Read More

Category: MacroNotes

How much does free money work?

The first quantification of the impact that the stimulus of free money has on a particular sector comes out at 8:30 when July Retail Sales are reported and we see how much auto sales rose. Sales are expected to rise .8% but ex auto’s they are expected to rise just .1%. Jobless Claims, also of…Read More

Category: MacroNotes

An Update on the “Mini-TARP Employee Bonus Pool” Idea

Good Evening: Since Monday’s commentary, U.S. stocks have swooned and jumped without much to show for it. Sure, they went down by more than 1% on Tuesday and up by a similar amount today, but the major averages are just about back to the closing levels posted on Monday. Yesterday’s retreat was in part blamed…Read More

Category: Markets, Think Tank