Re: balance of risks and fed model pricing

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Posted by warren mosler (65.113.90.26) on 11:06:28 11/08/07

In Reply to: Re: balance of risks and fed model pricing posted by Aaron Krizik

how about rising tips break evens?

: Fed credibility is shot, at this point either Bernanke knows what is going to happen in the future (and has read "soft currency economics" and has connected the dots in calls for zero deficit by 2010) or market participants have inflationary expectations.
:
: Do these numbers reflect private sector beliefts of inflation expectations? (never mind the investment side with gold, dollar, etc.)
:
: --Quarterly Annualized Percent--
: 3Q 2Q
: 2007 2007
: =====================================
: ------------
: Nonfarm output per hour 4.9% 2.2%***
: Output 4.3% 4.2%
: Employee hours -0.5% 2.0%
: Compensation per hour 4.7% 4.4%***
: Real compensation 2.7% -1.5%***
: Unit labor costs -0.2% 2.2%
: Unit non-labor costs -0.7% 1.8%
: Price deflator -0.4% 2.1%
:
: --Year Over Year Percent--
:
: Nonfarm output per hour 2.4% 0.7%***
: Output 2.9% 2.0%
: Employee hours 0.5% 1.2%
: Compensation per hour 6.7% 5.9%****
: Real compensation 4.3% 3.1%
: Unit labor costs 4.3% 5.1%
: Unit non-labor costs -3.1% -3.0%
: Price deflator 1.4% 1.9%***
:
:
:
: : let me add something about the fed statement that risks are balanced
: : between risks to inflation and growth.
: :
: : the statement mixes metaphors. mainstream economics says long term
: : growth and employment is a supply side issue, and low inflation is a
: : NECESSARY condition for optimal long term growth and employment.
: :
: : That means if keeping inflation causes growth to suffer near term, so
: : be it, as the benefits of optimal long term growth far out weigh any
: : short term setbacks. Said another way, the cost of reeling in
: : inflation later is far higher than the cost of a recession today.
: :
: : so, as a point of logic, if there is any inflation risk, that risk per
: : se is an equal risk to long term growth and employment.
: :
: : So the idea of some kind of balance of risks between inflation and
: : near term economic performance is way out of mainstream theoretical
: : foundations.
: :
: : Mishkin just now said Fed must act to make sure oil prices don't
: : elevate inflation.
: : We may have reached the Fed's inflation tolerance level.
: :
: : He also just repeated that the best guess for oil prices is down.
: : that's because they believe the prices in the futures market reflect
: : consensus market expectations. Unfortunately they have failed to
: : recognize that the term structure of futures contracts for non
: : perishables is a reflection of carry and storage charges and supply
: : conditions. For example, if any commodity gets in short supply in the
: : spot market the futures will be lower than spot. So to assume that
: : commodity is going to fall in price is an assumption that a supply
: : shortage is going to cause a fall in price, which of course won't
: : happen unless supply conditions change. And even if it were perfectly
: : clear and discounted that supply conditions would stay tight forever
: : and never change, the 'backwardation' would still persist
: : indefinitely, as the markets put a premium on physical possession for
: : immediate use.
: :
: : What this all means is the Fed plugs in the futures prices for crude
: : oil and gasoline into its models, and the models use this info for
: : their inflation projections. So if they assume spot prices are
: : already 'digested' in current inflation numbers, futures prices for
: : crude that go down at a 10% annual rate for 08 are a deflationary bias
: : in the Fed's inflation models.
: :
: : Note that back when crude was in contango there was much more talk
: : from the Fed about inflation risks.
: :
: : Until they sort this out their forward looking models may never show
: : an inflation risk while commodities are in relatively short supply.
: :
:

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Subject:	Re: balance of risks and fed model pricing
Comments:	: : how about rising tips break evens? : : : : Fed credibility is shot, at this point either Bernanke knows what is going to happen in the future (and has read "soft currency economics" and has connected the dots in calls for zero deficit by 2010) or market participants have inflationary expectations. : : : : Do these numbers reflect private sector beliefts of inflation expectations? (never mind the investment side with gold, dollar, etc.) : : : : --Quarterly Annualized Percent-- : : 3Q 2Q : : 2007 2007 : : ===================================== : : ------------ : : Nonfarm output per hour 4.9% 2.2%* : : Output 4.3% 4.2% : : Employee hours -0.5% 2.0% : : Compensation per hour 4.7% 4.4%* : : Real compensation 2.7% -1.5%* : : Unit labor costs -0.2% 2.2% : : Unit non-labor costs -0.7% 1.8% : : Price deflator -0.4% 2.1% : : : : --Year Over Year Percent-- : : : : Nonfarm output per hour 2.4% 0.7%* : : Output 2.9% 2.0% : : Employee hours 0.5% 1.2% : : Compensation per hour 6.7% 5.9%** : : Real compensation 4.3% 3.1% : : Unit labor costs 4.3% 5.1% : : Unit non-labor costs -3.1% -3.0% : : Price deflator 1.4% 1.9%* : : : : : : : : : let me add something about the fed statement that risks are balanced : : : between risks to inflation and growth. : : : : : : the statement mixes metaphors. mainstream economics says long term : : : growth and employment is a supply side issue, and low inflation is a : : : NECESSARY condition for optimal long term growth and employment. : : : : : : That means if keeping inflation causes growth to suffer near term, so : : : be it, as the benefits of optimal long term growth far out weigh any : : : short term setbacks. Said another way, the cost of reeling in : : : inflation later is far higher than the cost of a recession today. : : : : : : so, as a point of logic, if there is any inflation risk, that risk per : : : se is an equal risk to long term growth and employment. : : : : : : So the idea of some kind of balance of risks between inflation and : : : near term economic performance is way out of mainstream theoretical : : : foundations. : : : : : : Mishkin just now said Fed must act to make sure oil prices don't : : : elevate inflation. : : : We may have reached the Fed's inflation tolerance level. : : : : : : He also just repeated that the best guess for oil prices is down. : : : that's because they believe the prices in the futures market reflect : : : consensus market expectations. Unfortunately they have failed to : : : recognize that the term structure of futures contracts for non : : : perishables is a reflection of carry and storage charges and supply : : : conditions. For example, if any commodity gets in short supply in the : : : spot market the futures will be lower than spot. So to assume that : : : commodity is going to fall in price is an assumption that a supply : : : shortage is going to cause a fall in price, which of course won't : : : happen unless supply conditions change. And even if it were perfectly : : : clear and discounted that supply conditions would stay tight forever : : : and never change, the 'backwardation' would still persist : : : indefinitely, as the markets put a premium on physical possession for : : : immediate use. : : : : : : What this all means is the Fed plugs in the futures prices for crude : : : oil and gasoline into its models, and the models use this info for : : : their inflation projections. So if they assume spot prices are : : : already 'digested' in current inflation numbers, futures prices for : : : crude that go down at a 10% annual rate for 08 are a deflationary bias : : : in the Fed's inflation models. : : : : : : Note that back when crude was in contango there was much more talk : : : from the Fed about inflation risks. : : : : : : Until they sort this out their forward looking models may never show : : : an inflation risk while commodities are in relatively short supply. : : : : : :
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