Blogger's Take: Slowing Growth, or Inflation?

Wednesday, December 13, 2006 | 07:00 PM

Today's' topic for the Blogger's take is this:  Given the concerns raised by the Fed, what is really the bigger threat to the economy: Slowing Growth or Inflation? 

Does the risk of a decellerating macro environment present a bad option (My pal Kudlow thinks we see 2% GDP all next year, whch certainly ain't recessionary). Others think a mid-cycle slow down will lead to a re-acceleration of inflation.

Which presents the greater threat to the economy? The blogger's take:

I think slowing growth would do more to harm the economy right now.  Investors around the world put their money where they can get the best return, and frequently that means they invest in the United States.  Slowing growth limits the opportunities to attract capital, and filters through the economy in a negative way.

-Rob May,


As the Fed stays on pause here it is natural to debate the trade-off between inflation and economic activity. While important in the short run, the bigger question is what should the Fed focus on in the long run? On that question the answer is quite clear. Inflation.

If we think for a moment behind what drives real economic activity, absent a horrible policy mistake, monetary policy is not all that important. However the ability to maintain inflation within a reasonable range and keep inflationary expectations from entering into real economic decision-making is important. In addition, that goal remains within the policy reach of the Fed.
We would point you to a Federal Reserve paper and an interview with the author by James Picerno of the Capital Spectator. In it they explore the determinants of behind stock market booms on a global basis. The paper finds that low inflation, kept under control, was by far and away the key factor underlying stock market booms. Enough said.


I find it amazing that people think that a blunt instrument like interest rates can cure rising energy prices or utility bills.

CPI is a lagging indicator.
Wages are a lagging indicator.
Energy demand is relatively inelastic.

The Fed being enormously wrong at major turns is legendary. I think the question is not how fast they hike next year but when the downturn gets going how fast they start cutting.

We are not going to have either growth or inflation as I see it.

-Mike Shedlock, Mish's Global Economic Trend Analysis


Slowing growth is more important, by far. Through its history, the Fed has basically perfected the art of killing off growth. Stopping inflation? Eh…not so much. In fact, I would say that slowing growth is itself an inflation threat. Personally, I’d like to see the Federal Reserve much less federal, and far more reserved. Monetary policy is always and everywhere a human phenomenon.

As a general rule, $13 trillion economies don’t start or stop on a dime. Since 1990, when one quarter of GDP growth is above trend (3%), there’s a 60% chance that the following quarter will also be above trend. Conversely, when growth falls below trend, there’s a 64% chance that the following quarter will also be below trend.  

In other words, once you’re stuck in slow growth, it’s hard to break out. During the last recession, we had 11 straight below-trend quarters. We finally broke out, but now the outlook is looking shaky. The last two quarters, and three of the last four, have been below trend.

Inflation, on the other hand, is—and has been—well contained. The 12-month core CPI has bounced between 1% and 3% for ten straight years. Not once has it left that range. And it’s been over 15 years since it hit 4%, which was during a period of below-trend growth. That’s not a coincidence.

-Eddy Elfenbein, Crossing Wall Street


Piscataqua Research has a new report out on the consumer crunch. It is an important read. The gist of it: they estimate that in 2006, consumers used new debt to provide 90% of their cash flow for investing (mostly residential property), and debt service. In other words, it’s Minsky’s definition of a Ponzi finance scheme. They go on to suggest that in 2007 new liquidity will be nigh impossible, and will lead to a large drop in both consumption and household investment. Perhaps more signs of the times, is this bomb from Best Buy this morning. Canary in coal mine Dell cuts 30% of monitor panels orders. Nucor reports a slowdown. Which pretty much leaves Pig Man Goldman Sachs and their bonus Boyz to carry (pun intended) the economy. Or have they slashed, burned and gamed enough already?

Significant new consumer liquidity is impossible for two reasons. Nearly three-fourths of the total, or $7.75 trillion in US mortgage financing took place in 2004-2006. I would argue that the 2004 mortgage vintage of $2.773 trillion now has collateral at levels roughly where it started, or soon will be. Any collateral appreciation that remains is dissolving, especially in light of the developments in the subprime market, which I expect to spread to the Alt A markets. I don’t see the prime market as immune at all either, especially if a contagion breaks out in the financial sphere. The 2005 vintage of $3.027 trillion is break even at best on appreciation, and really down more like 10% as a rule. And 2006 vintage mortgages of an estimated $2.5 trillion, are almost all showing depreciation

-Russ Winter, Winter (Economic & Market) Watch


Good stuff, thanks guys.

Wednesday, December 13, 2006 | 07:00 PM | Permalink | Comments (12) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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Ans: Falling dollar.

Posted by: Robert Coté | Dec 13, 2006 8:18:17 PM

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