U.S. Interest Rates & Inflation
UBS on yesterday's PPI data:
Whilst Bernanke took centre stage, macro data showed the increasing problems we face. Producer prices rose by 9.2% y/y, the highest by quite a margin since July 1981 when U.S. interest rates were still at 15.5%.
At the same stage retail sales growth, which is not adjusted for price changes, slowed to just 0.1%. This stagflation mix will I believe get worse as high energy prices turn whole economic models such as the free trade doctrine of comparative advantage, on its head, reversing globalisation.-UBS Macro Derivatives Sales Daily– Wednesday 16/7/08 London
To reiterate, the last time Producer prices were this high, the Fed had rates up in the double digits -- not at 2% . . .
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Wednesday, July 16, 2008 | 09:15 AM | Permalink
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Hopefully it will get so expensive to ship things from China that we'll have to bring all our manufacturing jobs back to the states. Then our economy will actually grow because of JOBS not bailouts and monetary policy.
Posted by: Greg | Jul 16, 2008 9:24:24 AM
"To reiterate, the last time Producer prices were this high, the Fed had rates up in the double digits -- not at 2% . . ."
and that is a major reason why we are F!@#$%..
CPI in at 12.112% YOY....but hey strip out energy and food and.......it's the short sellers fault.
Ciao
MS
Posted by: michael schumacher | Jul 16, 2008 9:25:58 AM
Great rant! Well put. It expressed a lot of my feeling. I completely enjoyed reading
Posted by: Susan | Jul 16, 2008 9:30:15 AM
With you here Barry these numbers were a killer. Particularly when you think consumer spending was to some extent inflated by the first rebate checks arriving. We're still in the early stages of the slowdown in consumer spending and to some extent I base that on my own psychological shifts although I'm at the higher end of the income curve. I've cancelled my plans for at least one possibly two European trips in second half, won't be ordering a couple of new suist from my tailor, and postponed some home improvements. Gin consumption remains constant however.
Posted by: John | Jul 16, 2008 9:38:36 AM
"Hopefully it will get so expensive to ship things from China that we'll have to bring all our manufacturing jobs back to the states."
If we had a less corrupt government, there would be significant tariffs on Chinese goods to correct for the fact they rape the environment and use essentially slave labor.
Posted by: tom B | Jul 16, 2008 9:43:13 AM
Things are already too expensive to ship from China. That is one reason steel producers in the US have such great pricing power. It sure as hell isn't because of demand.
US manufacturing is going to boom in coming decades but not because of anything to do with China.
Posted by: bdg123 | Jul 16, 2008 9:47:17 AM
Meanwhile Mark Haynes is caught up in a price increase of the WSJ to $2.
Posted by: Chief Tomahawk | Jul 16, 2008 9:50:55 AM
core cpi only up 0.3%
PHEW! I WAS WORRIED.
Posted by: nero | Jul 16, 2008 10:02:15 AM
Negative real interest rates (Fed funds less REAL inflation rates), during the period 1998-today, are all you really need to know to understand the successive bubble-blowing economy we've been participating in.
Gotta love Alan Greenspan. He didn't believe in government regulation but did believe that his wizardly control of the government's money monopoly could somehow create real growth. Milton Friedman must be be spinning in his grave.
Posted by: Donkei | Jul 16, 2008 10:34:21 AM
"Hopefully it will get so expensive to ship things from China that we'll have to bring all our manufacturing jobs back to the states."
"If we had a less corrupt government, there would be significant tariffs on Chinese goods to correct for the fact they rape the environment and use essentially slave labor."
Somehow I missed the merger of The Big Picture with The Huffingon Post.
Posted by: russ | Jul 16, 2008 11:06:11 AM
BR-
Why do you believe we are in a true inflationary environment? Did you happen to read the interview in the Wheedon publication with James Montier at Societe Generale?
~70% of inflation comes from unit labor costs, which have no upward pressure now or anytime in the foreseeable future. Anyone have success asking for a raise lately?
Oil and food prices are acting like a tax and are depressing demand. This will feedback into slower growth, less wage pressure, and lower inflation.
If you think about the economic identity MV=PQ, then you can come to the conclusion that what we are really at risk for is "DEFLATION". The growth rate in M is flat or even falling (when you look at measure including credit aggregates) and V is dropping like a rock (ask anyone trying to finance anything right now about how slow things are moving). Using GDP as a proxy for Q (which is basically flat), then P must start falling.
I believe by this time next year the headline will say we risk deflation not inflation and congress will be calling on BB to get in his helicopter.
Posted by: PW | Jul 16, 2008 11:07:35 AM
"Somehow I missed the merger of The Big Picture with The Huffingon Post."
Somehow, it is possible both are trying to tell you something you missed.
Just possible! You never know...facts are such subversive beings. If need be, protect your belief system from these; heads have exploded for less that that.
Posted by: Francois | Jul 16, 2008 12:05:49 PM
"~70% of inflation comes from unit labor costs, which have no upward pressure now or anytime in the foreseeable future. Anyone have success asking for a raise lately?
Oil and food prices are acting like a tax and are depressing demand."
PW,
Are you saying that wages are part of inflation but food and energy (acting like a tax) are not?
Posted by: Francois | Jul 16, 2008 12:10:43 PM
To add to my previous comment...
Take a look at this:
http://www.everybodygoto.com/2007/10/12/what-people-eat-around-the-world/
Note the decline in cost and more of a focus on non-processed locally grown foods as cost decreases.
Posted by: Snark Based Reality | Jul 16, 2008 12:54:04 PM
The idea that our current situation is going to make it too expensive to buy things from China and return manufacturing jobs to the USA is a tad absurd. Do you source items from China? I do and even with a tripling of container costs it is still cheaper to finish it there and ship it to California than build a new factory anywhere in America, find hard working capable workers willing to accept sh*t wages, etc. etc. HOw is it that WalMart is the world's number 1 company in terms of revenue? Because the stuff they get from China is bought at such a huge discount they can resell it by a factor of 10 on most items! "Reverse Globalization"! Give me a break.
Posted by: Sinomania! | Jul 16, 2008 1:20:44 PM
"Somehow, it is possible both are trying to tell you something you missed."
Francois, I disagree. I don't see TBP blaming China, bemoaning loss of manufacuring jobs, and calling for trade tarrifs. BR made a very valid post about inflation and interest rates and the comments were filled with the economics equivalent of "Bush lied, people died".
On second thought you convinced me. Lou Dobbs for President.
Posted by: russ | Jul 16, 2008 2:52:20 PM
If you believe it is cheaper to manufacture in China, you don't understand lean manufacturing or the reason why Japan has invested so heavily in the US. Japan is the world's leader in lean manufacturing knowledge. Some day America will re-learn this fact. You are likely importing baby toys, other trinkets with minimal technology impact and labor-intensive manufacturing. The re-emergence of American manufacturing won't be to screw together a laptop or making hand-held hair dryers. Those jobs aren't coming back because we don't want them anyway. You are looking in the rear view mirror.
And, I'll bet you all of the tea in China it will happen because it must happen.
By the way, you might ask the 3000+ South Korean companies why they have already shut down manufacturing facilities in China.
China is headed for the shitter.
Posted by: bdg123 | Jul 16, 2008 3:18:36 PM
Manufactured products are comprised of components and subcomponents, often several levels deep, and all the manufacturing need not be done in one place. For example (according to a 2004 Forbes article) GE makes CT scanners in Milwaukee...however, some mechanical components come from Mexico and the displays are made in China.
Higher transportation costs will change the calculus of what-gets-done-where, but are unlikely to eliminate offshoring.
If these CT scanners had to be built *entirely* in the U.S., with American labor at all levels of the product structure, it would surely result in a considerable increase to the product costs and hence to healthcare costs.
Posted by: david foster | Jul 16, 2008 3:56:47 PM
Labor as a source of inflation is one of the great fallacies of modern economics. This country operated on a full employment model for longer than it has operated on the most incarnation of economics. As is the fallacy through which much of the way productivity is measured. That being, amongst other factors, through the destruction of wages.
Labor is the source of many of the solutions required to implement lean manufacturing - something well trained industrial engineers in Japan clearly understand. And, something that many financially trained managers in America don't.
It's no surprise that Japan is a manufacturing powerhouse but has no natural access to commodities, energy and has often had a generally tight manufacturing labor market.
There are certain products that lend themselves to outsourcing such as high-labor, low-value products. That has always been the case and will remain the case. But, the next manufacturing boom will be in the U.S.
Posted by: bdg123 | Jul 16, 2008 4:18:48 PM
bdg123,
LCD display glass and wind turbines are hardly baby toys. I await your re-emergence of manufacturing in the USA with baited breath.
Posted by: Sinomania! | Jul 16, 2008 4:57:07 PM
LCD displays are no different than toys. Even the Japanese have generally chucked that business. The massive losses associated with the high capital expenditures, cyclicality of the product cycle and razor thin margins make it an awful business. The LCD-related business to be in is the tool and supply business that is dominated in both design and manufacture by American firms.
As far as wind turbines, I'm not sure what you are talking about........maybe China is the world's leader in design and production of large-scale wind turbines and the associated control systems. I haven't seen it.
Mark my word. I know I am right on this one. It's one of the easiest calls out there.
Posted by: bdg123 | Jul 16, 2008 5:08:05 PM
bdg123, I gave two examples, there are more, thin film solar cells - photovoltaics are another I have experience with. I'm old enough to remember the day when the average middle size US city had almost self-sufficient manufacturing. I grew up in a place that had a steel mill, glass factory, food processing plants, paint company, chemicals, the list goes on. Nearly all of those business are now shuttered. When I visit it is sad to see broken down neighborhoods and locals who live for welfare and meth. But they chose to stay there. You may find it hard to believe that China has sophisticated factories that design and build sophisticated product but it is happening. And with Japanese help, I might add. Go to even a mid size Chinese city most Americans have never heard of (Wenzhou or Ningo for examples) and you will be amazed at what you see. No amount of six sigma, lean manufacturing methods are going to recreate the USA's old manufacturing sector! And why would we want to? Aren't we supposed to be the "developed" nation spearheading the next wave?
Posted by: Sinomania! | Jul 16, 2008 5:38:21 PM
Now don't put words in my mouth. I never said anything about recreating foregone industries. I said the next boom in manufacturing would be in the U.S.
I'm not going to try to convince you of anything. You've got your mind made up. Let's just wait and see what unfolds. I am highly confident you are going to be caught well off guard. You may feel the same about my position. There is nothing in the world I am every going to say to convince you. And, that is as it should be. Let's let the market speak for itself over coming decades.
Posted by: bdg123 | Jul 16, 2008 7:24:29 PM
I'm with you but Bowyer's report about Chucky is just flat out playing politics...More than likely, someone from the inside (and perhaps from his district) brought it up to his attention. This is the Congress of pacification remember!
Chucky may be from NY but he's not that ballsy!
Posted by: jdizl | Jul 16, 2008 7:56:15 PM
I believe the destruction of credit will be more than enough to compensate for inflation. To say the obvious these things do not happen overnight. It took years for greenie's bubble economics to finally manifest into the mess we're in now. So it may take a few years for the destruction of credit to finally drive prices lower.
Posted by: omodes | Jul 17, 2008 2:01:33 AM
"...find hard working capable workers willing to accept sh*t wages, etc. etc."
Most people who pine for lost manufacturing jobs are loathe to invest their own labor or capital in them. Most people who pine for manufacturing jobs have never held one, especially have never held one for 20 or 30 years. Most people who pine for manufacturing jobs want someone else to invest money in the factories.
If it's such a great idea quit bitching and do one or the other.
Posted by: kidbuck | Jul 17, 2008 4:16:34 AM
Kidbuck
Surely that is why we are all here reading and commenting on blogs.
We are pontificators, whiners, cheerleaders, puffers etc etc. But certainly not doers:)
Ed
Posted by: Ed | Jul 17, 2008 6:40:33 AM
