Posts filed under “Think Tank”

Gasoline Prices

The higher than expected build in gasoline prices in today’s weekly DOE data is sending front month gasoline futures down 2.5%. This may result, in the next few days, in the very first decline in retail gasoline prices at the pump since April 28th, as measured by the daily AAA national unleaded gasoline price survey. During this period, the average retail price has risen from $2.05 per gallon to $2.68 as of yesterday. Prices bottomed at $1.62 on Dec 30th. This $1.06 rise in gasoline prices since Dec results in an extra $146b annualized that consumers need to cough up.

Category: MacroNotes

Morning stuff

The May CPI rose .1% headline, .2% less than expected but the core gain of .1% was right in line with forecasts. Headline CPI y/o/y fell 1.3%, the most since April 1950 and was .4% greater than expected. The core rate rose 1.8% y/o/y. In the CPI, food prices make up a larger portion than…Read More

Category: MacroNotes

Governor Kevin Warsh: Defining Deviancy

Defining Deviancy
Governor Kevin Warsh
At the Institute of International Bankers Annual Meeting, New York, New York
June 16, 2009

In a seminal essay delivered about 16 years ago, Senator Daniel Patrick Moynihan offered a striking view of the degradation of standards in society.1 He observed that deviancy–measured as increases in crime, broken homes, and mental illness–reached levels unimagined by earlier generations. As a means of coping with the onslaught, society often sought to define the problem away. The definition of customary behavior was expanded. Actions once considered deviant from acceptable standards became, almost immaculately, within bounds.2

Society moves on, as it were. Well-meaning efforts are periodically made to treat its failings. But if these efforts prove less than successful, citizens and policymakers alike tend to grow increasingly accustomed to the unfortunate statistics. Every bit the reformer throughout his decades of public service, Moynihan seemed reluctantly resigned to society’s construct: “In this sense, the agencies of control often seem to define their job as that of keeping deviance within bounds rather than that of obliterating it altogether.”3

Given the financial crisis, deep contraction in the real economy, and extraordinary fiscal and monetary responses, I cannot help but wonder what constitutes deviance in economic terms in 2009 and beyond. What level of real economic output and unemployment is expected and, more important, accepted? And what level of volatility constitutes the “new normal”?4 As I will discuss, we must be wary of macroeconomic policies that–in the name of stability– may have the effect of lowering trend growth and employment rates.

In Moynihan’s framework, will we in the official sector be accepting of periods of significant financial and economic distress, however infrequent? That is, will deviancy be defined down with the understanding that a rare crisis is the price for dynamic, robust economic growth? Or will the official sector say, “Never again–not on our watch,” and become less tolerant of deviations in economic and financial conditions? Under the mantle of reforming capitalism, will policymakers instead define deviancy up, and seek to guarantee stability in our economic affairs?

I suspect that, for a time, policymakers will be more attracted to this latter path. Stability is a fine goal, but it is not a final one. Long after panic conditions have ended, stability threatens to displace economic growth as the primary macroeconomic policy objective. But we must recognize that the singular pursuit of stability, however well intentioned, may end up making our economy less productive, less adaptive, and less self-correcting–and in so doing, less able to deliver on its alluring promise. This fate, however, does not have to be ours. The U.S. economy is capable, in my judgment, of delivering more.

The Growth Experiment5
This most recent boom and bust is not, as they say, our country’s first rodeo, but it may turn out to be the most consequential since World War II. And, here, I am not just talking about the near-term peak-to-trough changes in growth and employment levels, which are likely to prove significant.

Policymakers are revealing new policy preferences and prescriptions–fiscal policy, trade policy, regulatory policy, and monetary policy, chiefly among them. Long after the official recession ends, the choices being made may significantly alter the contour of the U.S. economy. The harder question that remains is whether these changes will prove beneficial.

From the mid-1980s through 2007, U.S. real gross domestic product (GDP) growth averaged more than 3 percent per year, and was less volatile than in previous decades. The average unemployment rate was less than 5-3/4 percent, a full percentage point less than in the previous 15 years. Most notable was the realized acceleration in labor productivity in the mid-1990s.

The bipartisan, pro-growth policies that predominated during this period contributed meaningfully to these gains. Tax and spending decisions generally sought to expand the economic pie. Trade policies were aimed at opening new markets to U.S. products and services, and removing barriers domestically. Regulatory policies permitted failure, and relied in equal parts on capital requirements, regulatory standards, and, no less important, market discipline. As a result, businesses were well positioned to adopt new efficiency-enhancing technologies and processes to excel in the pro-growth environment. These policies helped drive significant productivity gains, and remarkable U.S. and global prosperity.6

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Category: Federal Reserve, Think Tank

Moral Hazard and the Crisis

Volcker: Hedge funds don’t need to be regulated like banks. Keynote address by former Federal Reserve Chairman Paul A. Volcker to a meeting of the International Institute of Finance in Beijing, June 11: ~~~ Another important common concern is the “too big to fail” syndrome — the presumption that an institution is so large or…Read More

Category: Bailouts, Federal Reserve, Think Tank


You know the concept of globalization is not some temporary phenomenon that got great press during the great global boom of 2003-2007 when the first ever BRIC summit happened today and world policy was discussed. To put into perspective, the cumulative GDP of Brazil, Russia, India and China is about $7 trillion, half the size…Read More

Category: MacroNotes

Have stock markets run away from reality?

Have stock markets run away from reality?

The predictions of the members of the Barron’s mid-year Roundtable discussion over the weekend were in agreement that the March lows of the stock markets would not be broken. This reminded me of one of the famous “Investment Rules” of Bob Farrell, legendary former chief stock market analyst at Merrill Lynch. Rule # 9 stated: “When all the experts and forecasts agree, something else is going to happen.”

Meanwhile, many stock markets yesterday registered their worst single-session percentage losses in a month. Commodities also faced heavy profit-taking, but government bonds rallied and the US dollar strengthened against a basket of currencies. “We could be seeing one of those occasional all-change signals in short-term trends,” said David Fuller (Fullermoney).

Richard Russell, veteran writer of the daily Dow Theory Letters, commented on Monday: “I’m of the opinion that this bear market rally is in the process of topping out. When a counter-trend rally tops out within an ongoing primary bear market, the odds are that the stock market will break to new lows during the period ahead. That means that the stock market will break below its March 9 lows in coming weeks. A violation of the March 9 lows would be a shocker to most investors, and it would be a forecast of an even worse economy coming up.”

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Category: Think Tank

economic data

May PPI rose just .2%, .4% less than expected and is down 5% y/o/y. The core unexpectedly fell .1% vs a forecasted gain of .1% and is up 3% y/o/y. At the headline level, the 2.9% gain in energy was partially offset by a 1.6% drop in food prices. Keeping a lid on the core…Read More

Category: MacroNotes


Ahead of the PPI report today, CPI Wednesday and capacity utilization today within the IP report, which will be the measure of the output gap that some have hung their hat on as keeping a lid on inflation, the inflation/deflation talk needs to remember disinflation as the middle ground. Disinflation is a decline in the…Read More

Category: MacroNotes

More comments from Fed members

Following Fed Pres Evans opinion that the backup in treasury yields is due to “better economic data,” Fed Pres Bullard believes it’s a “little of both” the economic outlook and inflation prospects and Fed Pres Fisher believes that supply (fed by government deficits) is the main factor. It’s no coincidence that one week before the…Read More

Category: MacroNotes

FOMC’s Evans

FOMC voting member Evans is giving his say of what main factor led to the recent rise in bond yields and believes its a reflection of “better economic data” that’s been above his earlier forecast and thus implicitly not inflation or government spending. On inflation, he still sees the risk of disinflation, saying it’s “very…Read More

Category: MacroNotes