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Posted by Chris Scott (98.201.17.58) on 14:20:22 11/01/07
In Reply to: major theme recap posted by warren mosler
It seems that the Fed is operating under a different pyschological framework with Bernake. Rather than viewing inflation as the primary risk; the declining housing market, associated credit contraction and subsequent debt deflation are viewed as the primary risks. The solution is to follow an unofficial policy of devaluing the dollar. This line of thinking would tie back to Bernake's study of deflation and the Great Depression. Countries that left the gold standard and devalued their currencies in the early 30's faired much better than those that maintained tight money and remained on a gold standard.
I'm not saying that this makes economic sense for our current conditions, just that this seems to be the framework through which the fed is viewing things.
: Subject: major theme review
:
:
: My two major themes have been gradual weakness due to lagging demand
: due to the deficit being too small, and higher prices due to the
: saudis setting ever higher prices.
:
: I had thought the higher prices would keep the Fed from cutting and
: instead trigger hikes, even as the economy drifts weaker.
:
: Instead, the Fed has now cut twice even in the face of the strongest
: possible warning signals for inflation. The cuts were due to fear of
: systemic failure via the 'credit crunch' with the caveat, as in 98,
: that they would be quick to 'take them back' as 'liquidity' recovers
: and inflation remains threatening. Clearly the inflation has
: deteriorated substantially since the August meeting when the Fed did
: not cut due to inflation concerns. The way they put it is they don't
: want to 'turn a relative value story into an inflation story' by
: 'adding to demand and monetizing the price increases.'
:
: This latest 25 cut was out of fear that since the markets were fully
: pricing in 25 cut not to cut might have been disruptive to the point
: of triggering a 'liquidity relapse.' And to make sure the Fed
: wouldn't face that set of circumstances again in December their
: statement made it clear their posture was now 'neutral.'
:
: It is still my position that 'inflation' is putting an upward bias on
: Fed policy, and that over the next few weeks this will likely
: intensify. cpi is released Oct 15 and with the run up in gasoline
: could go from 2.8 to perhaps 4% year over year and up a similar amount
: year to date, with the forecast for 07 over 4% as well. While core is
: expected to rise .2, it too could move higher. Note that owner equiv.
: rent rose .3 last month and tends to trend.
:
: Along with higher cpi, crude could easily be higher and, as in the
: previous quarters, exports could move q4 gdp estimates higher.
:
: While 'trade flow' and the low US budget deficit are working in favor
: of the $US, world portfolio flows ('inventory adjustments') are
: working against it, and can be the stronger force for as long as it
: continues. At least some of these global portfolio adjustments are in
: reaction to Fed activity and US foreign policy, including the recent
: sanctions on Iran, which are also giving cover to the Saudis (and
: perhaps Russians) as they raise price.
:
: Given the above, before the December Fed meeting an increasing number
: of mainstream economists could be estimating the 'right' fed funds
: rate at 7-8%. The 'forward looking' inflation rate will be north of
: 4%, so the 'neutral' ff rate will be 6-7%, and some premium over that
: is considered necessary to 'lean against the wind' of higher
: inflation. And the Fed will probably agree and be formulating a way
: to get ahead of the inflation curve, economic weakness not
: withstanding, as they firmly believe that price stability is a
: necessity for optimal long term growth and employment.
:
: It is also not impossible for Congress to become critical over the
: escalating rate of inflation as they believe it hurts the purchasing
: power of their constituency and that inflation is robbing working
: people of their savings.
:
: comments welcome
:
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