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Tuesday, August 01, 2006

PCE

Ed Breen wrote a comment on the other thread that I wanted to post as a new topic. This will have to do until I can figure out how to get everyone registered to post on their own. I'm very much learning this software.

Ed Wrote:
David, thank you for the space. What do you think of the PCE today, looks like the Core year on year may be 2.4. The GVM was looking for 2.1. This does not help BB pause in August...and the economy is approaching a break point.

7 Comments:

Blogger David Wood said...

Ed,

I am mainly concerned that the Fed will overreact and send us into a recession.

My view is that, due to moderate U.S. monetary base growth, and the recent implosion of the Japanese monetary base, that the inflation problem is already handled. We just have to work our way through the 18 to 24 month lag.

I'm hoping that the Fed recognizes the lag factor, but wouldn't bet on it.

7:05 AM  
Blogger ebreen said...

I generally agree that the growth of the U.S. and world economy would absorb the excess dollar liquidity that is presently in the system. The problem is that the fed's tool of FFR increases attacks the economic growth that would absorb the liquidity. At the same time the FFR increases reduce demand for dollars...so the imbalance that causes inflation is not reduced by the fed actions of the last two years. I think it is less about overreacting than it is about acting with the wrong tool. FFR increase attacks growth not inflation. There is a difference.

11:43 AM  
Blogger David Wood said...

Yes. And the error is compounded by the Fed's lingering Phillips Curve mentality, which has them thinking that attacking growth is the correct target.

Congress could handle the problem instantly with another tax cut aimed at marginal rates for both individuals and corporations. I think we both know the odds of that happening.

Much of the problem is that the fecklessness of our legislators means that the Fed ends up trying to manage the economy instead of managing the money supply. And speaking of wrong tools; the money supply is absolutely the wrong tool to manage the economy. Greenspan's attempts to do so are what has us in this position today.

12:36 PM  
Blogger Henry Meers said...

David,

Thanks for the forum.

I was reading Bloomberg's "Flying on One Engine" this morning, which has a very good piece by Bear Stern's John Ryding taking the Phillips Curve apart (p. 169).

The lags you mention are what really worry me. This constant raising of rates doesn't give the Fed any time to see if it has chosen the right "price". We have covered this elsewhere; Ed Breen had an excellent three-choice menu for the Fed.

What I would like is some data on the 18 to 24-month numbers you chose. The Republicans in Congress need to see that, because they are happy with the economic headlines they are reading, as they should be, but are missing a lot of forward-looking indicators waving warning flags.

3:26 PM  
Blogger David Wood said...

Hi Henry. I'm glad you're here.

The 18-24 month lag comes from my own research over many years of correlating money supply with inflation. I use it as one of my basic predictors. It has its flaws, as other factors enter in (e.g. money demand changes from economic growth or lack thereof), and it is often difficult to see where the money is being created. Most recently, for instance, it took me a long time to realize that in this latest cycle the money wasn't being created in domestic money supply, but in international reserves. But as a general rule of thumb, the 18-24 month lag works fairly well. I can't point you to any figures, though, other than looking at money supply growth rate graphs compared to inflation 11/2-2 years later.

8:34 PM  
Blogger Henry Meers said...

David,

I found Luskin's update of a chart of gold compared to a two-year moving average of gold from 1987 to '06 that someone was nice enough to post at my request.

It shows the funds rate under Greenspan esentially tracking gold until he gave his "irrational exuberance" speech, whereupon he held it flat and the average fell to its $250 low in '02 (1999 actual?). That's where Bernanke may be today. Sir Alan had to really drop the funds rate from 2001 to '04 (before the attack) and gold took off like a rocket in '02, going through $350 in '04 -- on its way to $730. "Deja vu all over again".

3:32 PM  
Anonymous judith said...

guys, guys, guys..... you must not have been paying attention to what JW was saying AT THAT TIME (his comments at Talkshop).
Look:
1. deflation started in 97
(why? fiscal changes)
2. next - AG was reducing 'cash' as much as he could..... cause he did not understand the NASDAQ
3. JW was cruising thru Talkshop (around late summer of 02, I think).... and then made the comment" "what can Allen be thinking......"
[do a search while you can.... it is all there for a few more days]
4. fact: Dec 02 = gold back up to ~$350/oz (look at a chart for gold for the last qtr of 02.... it will 'blow your socks off')
5. fact: read AG's speech on 12/19/02
6. fact - market bottomed about Oct 20, 02 ..... I remember... cause I bought a lil THAT day.
(a lil birdie told me to)
7. fact: you can look back at what I was telling you then.... re AG "finally listening"
8. fact: my sources are confidential, but GOOD
9. ahh do believe JW 'covered' for some folks plenty of times....for good reasons, no doubt

DANG

doncha hate it when that happens?!
HA!

7:34 PM  

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