Quote of the Day: That's Not a Central Bank . . .
The US Federal Reserve is the only central bank in the world that makes policy based on core inflation.
I find this beyond irresponsible -- it is indefensible.
I have decided to stop arguing with people about this. In the future, I plan on simply assuming they are suffering from blunt head trauma, and try to work up some empathy for their families, and move on to something they can actually understand and discuss intelligently . . .
Unlike the spendthrifts here in the US, other Central Bankers around the world understand what the true definition of inflation is.
Consider the following: The Reserve Bank of Australia hiked rates to an 11 year high (due to inflation concerns).
And, Miller Tabak's Peter Boockvaar points out that, over the past month, Iceland, Romania and Mexico have raised interest. While the RBA move was expected, the Australian $ rallied to a 23 1/2 yr high vs the US$.
All of this reminds me of that scene from Crocodile Dundee: That's not a Central Bank (pulls out 14 inch Bowie knife) Now THAT'S a Central bank!
Wednesday, November 07, 2007 | 11:25 AM | Permalink
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Comments
Moin,
Fleckenstein made this comment
"It’s obvious that using an applause meter to run the central bank is a terrible idea."
I think he has it right......
Posted by: jmf | Nov 7, 2007 11:34:03 AM
Where do you put your money ? Europe is becoming a Muslim nation as well as a welfare country, the Euro will eventually tank,as well as the country . China scary,biggest division between rich and poor, Canada usually follows the USA. Where do you put money?
Posted by: mal | Nov 7, 2007 11:41:09 AM
Just like it's all about "sub-prime" too...
The market, today, is speaking to the next "issue". ACA,RDN,NTG will tell the tale of the next one.
Ciao
MS
Posted by: michael schumacher | Nov 7, 2007 11:41:51 AM
I agree policy decisions based on core is ridiculous, but don't inflation expectations influence policy more? ISI has a good chart today showing the TIPS spread only at 2.4%...near a cycle low.
Posted by: HJ | Nov 7, 2007 11:52:29 AM
How can the Fed raise rates with the US economy as weak as it is? It's just not politically feasible.
And it's great that Rumania and Mexico are taking appropriate steps. But let's see China step up and acknowledge that their 1bn person economy cannot grow at 10% in perpetuity. Alot of the global heat is coming out of China (eg see growth in number of billionaires).
Perhaps they fill finally begin to do what they must following the olympics this summer. There often seems to be a hangover in the aftermath. Vancouber had an awful time following its big event.
By the way, I'm Canadian and I just don't know how much further the CAD/USD can move without significantly damaging our economy. We have a lot of manufacturing in Ontario and Quebec and significant tourism that will not be able to survive. The West will do ok based on oil and resources, but the rest of the country will face big challenges.
Posted by: robster | Nov 7, 2007 12:00:02 PM
"How can the Fed raise rates with the US economy as weak as it is?"
Why, simply deny it is weak, then go ahead. It's working for Wall Street.
Posted by: wally | Nov 7, 2007 12:12:53 PM
"How can the Fed raise rates with the US economy as weak as it is? It's just not politically feasible."
But our economy is the "greatest story never told"?!?! Larry Kudlow told me so!!!
Posted by: Florida | Nov 7, 2007 12:13:17 PM
That ain't Central Banking
That's the way you do it.
Money from nothing
and the Yen for free.
(Apologies to Dire Straits).
Posted by: Al Czervik | Nov 7, 2007 12:28:57 PM
Florida,
The economy is short term weak. However, although it has taken some serious body blows in the form of housing and hits the balance sheets of large financials, we are still seeing some job growth and positive GDP.
To my mind, that's a bloody freakin miracle and is attributable to some of the underlying strengths of the US economy - large relatively well-educated and flexible work force, low taxes, strong and stable institutions, strong military, diversified economy.
These strengths should not be underestimated in my view. With decent political leadership, the US economy will survive and emerge strengthened from these turbulent times.
Posted by: robster | Nov 7, 2007 12:35:58 PM
and RBA raised rates during an election campaign (a watershed one at that)
now that's independence
MS can't wait to see whether the PPT Cavalry takes a U Turn this afternoon or just charges into valley of death again
rgds pcm
Posted by: peter from oz | Nov 7, 2007 12:37:42 PM
Amen to that brother!
Posted by: Wayne | Nov 7, 2007 12:46:00 PM
I think the Japanese central bank is possibly more irresponsible than our central bank. When their manipulated inflation #s started to show them coming out of inflation, they changed their basket to include flat panel televisions. No joke.
Posted by: Mike B | Nov 7, 2007 12:49:09 PM
@robster
"With decent political leadership, the US economy will survive and emerge strengthened from these turbulent times."
That is the kernel of the problem isn't it?
One can argue ad nauseam about the strengths and weaknesses of the US economy, but I can't recall a more severe deterioration of the political climate and quality of leadership since Nixon.
Big money pay to get favors and ordinary people do not want to finance elections. People get what they pay for, that is precious little.
I do not see how economic policies tilted toward a few can do good for the many. Unless one believes in the trickle-down theory...the Laffer curve...that global warming is a liberal conspiracy targeted at destroying the US economy.
Enough said.
Francois
Francois
Posted by: Francois Theberge | Nov 7, 2007 12:56:47 PM
Robster-
That is just wrong on so many levels....
I hope you are able to defend those statements. You are going to have to...
Petefrom OZ
after going through what I did with this fire I have a new appreciation for what you go through almost every year. Not fun...
On the PPT I gather they will always be on the job however it's job just got a bit harder to accomplish as the momo it creates with the SPX (nightly at about 1:30am PST) is'nt carrying over with the same affect it has had. But I'm sure there is some sort of market altering news (i.e. that pushes it up) to come out soon....otherwise NOGO will have to actually take a hit in his "returns".
How are those buys from last thursday going??-LOL
Ciao
MS
Posted by: michael schumacher | Nov 7, 2007 1:02:33 PM
"I think the Japanese central bank is possibly more irresponsible than our central bank."
DISAGREE. The BOJ has kept rates low. But they were in deflation for a long time. Their real rate was significantly positive even when they had 0% overnight rate. Fed on the other hand is ignoring overall CPI and keeping real rates too low. went to -1% for a long time and then even when they went to 5.25%, they were below 2% real.
Posted by: zao | Nov 7, 2007 1:13:24 PM
glad you got thru it michael
premium price to pay for quality of life but worth it
also natures way of spanking
BTW
``This credit crisis, when all is out, will see $250 billion to $500 billion of losses,'' London-based Janjuah said. ``The heat is on and it is inevitable that more players will have to revalue at least a decent portion'' of assets they currently value using ``mark-to-make believe.''
Morgan Stanley has the equivalent of 251 percent of its equity in Level 3 assets, according to Janjuah. Goldman Sachs Group Inc. has 185 percent, Lehman Brothers Holdings Inc. has 159 percent and Citigroup Inc. has 105 percent, Janjuah wrote.
Merrill Lynch & Co., which wrote down $8.4 billion of subprime mortgage debt and related securities, has Level 3 assets equal to 38 percent of its equity ``and may well come out of all of this in the best health,'' Janjuah said.
rgds pcm
Posted by: peter from oz | Nov 7, 2007 1:16:43 PM
Mal,
Consider life on planet earth 10-15 years from now. Then consider the following elemental investments: SQM (Lithium batteries), APD (Hydrogen fuel cells), CCJ (Uranium), CGW (Water ETF), BFRE (Carbon Ethanol). You could throw in UTX,EDR and ECOL for good measure.
Posted by: GreenMachine | Nov 7, 2007 1:17:31 PM
BTW Janjuah Cief Strategist Royal Bank of Scotland (no slouches)
just one of the buzzards the sky will fill with next year
wait for the 10ks
anyhow buzzards purpose is to stop spread of disease and contagion
rgds pcm
Posted by: peter from oz | Nov 7, 2007 1:20:47 PM
I posted this same note a while back and got no real response, so here it is again. As long as you continue to bang the drum that the Fed should use headline not core inflation to guide policy, I'll keep posting this unless and until you come up with a good argument as to why I'm wrong.
There are 2 very good reasons to exclude food and energy costs from the measures of inflation used to drive monetary policy.
1) Food and energy costs are driven by global supply & demand levels over which monetary policy has extremely limited impact. Oil prices are high not because interest rates were too low for too long but because of (a) strong demand growth globally, especially from emerging markets; (b) limited supply growth from underinvestment in exploration when oil was cheap and increased difficulties/cost of extracting oil from existing wells; and (c) political risk premiums arising from our intervention in the Middle East. Food inflation has to a large extent been driven by fiscal policy -- ethanol subsidies diverted corn from the food supply and land from wheat production to corn production, leading to higher prices for corn & wheat and those foods which use them as feed.
2) A recent Fed study demonstrates that reliance on headline vs core inflation results in increased volatility in rates and consequently increased variability in the level of unemployment, and outcome I think we would all prefer to avoid. Marc Shivers at The Talking Fed gives a great summary at http://talkingfed.blogspot.com/2007/10/mishkin-on-core-vs-headline-inflation.html
Posted by: GDM | Nov 7, 2007 1:24:30 PM
back from lunch to the cries of:
http://www.youtube.com/watch?v=n6cZUCa6Kyk
margin call.....get those brokers back in here!!!!
Ciao
MS
Posted by: michael schumacher | Nov 7, 2007 1:25:06 PM
Oil prices are high right now because of the NYMEX pit and not because of some demand curve analysis.
As already stated this is the shoulder season....not a typically volatile portion of the year however when greed outstrips reality (the deliverable level of oil in Cushing , OK) you get the traders who bid up the price knowing full well that the current storage capacity at said facility can't handle even a portion of the amount of contracts on the books for delivery EACH AND EVERY MONTH...........but the bidding goes on regardless of the actualities of taking delivery of oil that really does'nt exist.
AND THEY ALL KNOW IT.......
The crooks at the NYMEX did not get there hurricane to push up the price....they are doing it now and you are all (including me) paying the price for it.
Ciao
MS
Posted by: michael schumacher | Nov 7, 2007 1:35:21 PM
" Europe is becoming a Muslim nation "
So? You better learn to like Muslims and Chinese, they will be own us soon.
Posted by: me | Nov 7, 2007 1:38:28 PM
I can envision this scenario at the Fed/Treasurey and the SPY pit about right now:
http://www.youtube.com/watch?v=zLRj5erjhP8
Ciao
MS
Posted by: michael schumacher | Nov 7, 2007 1:40:35 PM
GDM,
I am sick of hearing how Fed can't do anything to affect commodity prices. What do you propose they do with the inflation that comes from it? Ignore it and cut rates anyway. Well guess what, that is what they did in the 70s. Let me put some numbers on this.
CPI Inflation in Germany (West Germany to be exact) in 1971 was 5.4%. In the US, 3.3%. Then the oil shock hit. The Fed and the Buba reacted differently. THe Fed accomodated the inflation a lot more than Buba did (just like they are doing now). Inflation in US averaged 8.5% over the next 10 yrs. In Germany, 5.4%.
Ah! there must be a rub. Germany must have suffered lower growth. NOPE. Avg real GDP growth in Germany over the 10yr period was 2.4% while it was 2.5% in US. So we had much higher inflation here because they accomodated. Eventually, we suffered a dollar crisis in 1979 and then had to raise rates sky high while Germany negotiated throught the commodity shock much better.
See any lessons there????
Posted by: zao | Nov 7, 2007 1:53:58 PM
GDM,
The reason for increased food & energy prices really doesn't matter, nor does the fact that monetary policy is unlikely to do much to control them.
What does matter is the affect, if any, the increases have on aggregate price levels. If monetary policy is neutral, food/energy prices will be offset by declines in other prices, and aggregate prices will remain stable. If monetary policy is loosened too much (possibly because the increasing prices are excluded from the definition of inflation while the offsetting declining prices aren't), aggregate prices may rise. If monetary policy is tightened too much in response to a transitory spike, growth may be needlessly impaired.
You might make a policy decision to allow inflation to rise for any number of reasons, including those you note. Fair enough, but to ignore food and energy in policymaking is silly.
I suspect the fed does take food & energy into account when setting policy, even though they supposedly have a focus on the core rate.
Where I think the fed is really taking risks is in ignoring aggregate asset prices and global financial flows.
Posted by: Estragon | Nov 7, 2007 2:00:34 PM
