The Skeptical Optimist

FQ.08.13: Favorite Quote for This Week

What shall we do about the board of directors? ... The board was elected to act in place of the owners.  The board's responsibility is to sit in judgment on the management, especially on the performance of the chief executive, and to reward, punish, or replace the management as the board, in its wisdom, sees fit.  That is what is supposed to happen.  That is what may appear to happen.  But it doesn't.
—Harold Geneen

Where's the inflation? (installment 2)

I'm still waiting for inflation to reveal itself.  The Dallas Fed just published some new PCE inflation results, and I also checked the Cleveland Fed's CPI inflation. (PCE = personal consumption expenditures; CPI = consumer price index.)  It still seems to be hiding just around the corner. 

Keeping in mind that the proper goal is controlling inflation to within a band of 2%-3%, I see even less evidence of inflation danger in the latest numbers than I did a few days ago.  (As I've said before, I like the trimmed-mean methodology, because it trims the month-to-month, near-meaningless noise out of the results.)

The charts are below.  Can you spot any problem yet?  I can't; as long as prices and wages inflate at a predictable 2.5%, we don't have a problem.

Click to enlarge: 

On the other hand, I do not try to forecast inflation or interest rates, so I'll just have to keep a close eye on the actuals.  Lots of pundits (and also lots of journalists) are still forecasting an inflation spike.  Hmm, maybe next month...

So, where's the inflation?

I waited too long to update the inflation and interest rate tracking charts, but here they are.  First thing that hit me last night after posting the numbers was: Where the heck is the inflation that's been making so many headlines?  Or, more precisely, why isn't the higher than normal CPI inflation showing up in any of the other inflation indicators? 

Click to enlarge:

Nominal interest rates are falling across the board, the bond market thinks inflation is 2.3%, and the trimmed mean PCE inflation rates are between 2% and 3%, just where we'd like to see them.  As I've said before, there's not a single best indicator of inflation, but if I had to pick one, it would be the trimmed mean PCE (the two red lines in the second chart); sorry, I don't see an inflation problem. 

Not yet, anyway.  If inflation is supposedly just around the corner... well, that's where doomsday has been lurking for the forty years I've been watching, so I guess it's not a surprise. 

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FQ.08.12: Favorite Quote for This Week

I think those people who say they believe in a gold standard are fundamentally being very anti-libertarian because what they mean by a gold standard is a governmentally fixed price for gold.
—Milton Friedman

Comment authentication is on

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The Fed vs. the gold standard: Tyler Cowen nails it

Monetary economics confuses just about everybody, including economists.  But I hope it will confuse a lot fewer people now that Tyler Cowen has given us 68 minutes of his time to explain it in the most concise and accurate fashion I've ever come across.  I listened to the interview yesterday (Russ Roberts questioning Cowen), and plan to listen to it again today. 

The first 45% of the interview is about the Fed: mistakes it has made in the past, how it's been performing in recent decades, why its discount rate is essentially ineffective, why its (target) fed funds rate is THE KEY to monetary policy, and why an inflation target of 2%-3% is just about optimum. 

The next 45% of the interview is about fiat money vs. the gold standard.  On the objectivity scale, I rate Cowen in the top 1% (and Roberts, too, for that matter); Cowen explains in easy-to-understand language why a gold standard would make little or no sense, and why our fiat money system, managed by the Federal Reserve, is working just fine, thank you very much.  I hope Ron Paul and his Fed-bashing supporters listen to it, even if they decide not to admit they did. 

The last 10% is about the political economy of monetary policy.  Politics is always in the picture, isn't it?

Here's the link: Cowen on Monetary Policy, at Russ Roberts's EconTalk website. 

The whole interview is the best 68 minutes you could spend if you're the least bit interested in (but slightly confused by) how our money system works.  Russ Roberts is a maestro at conducting objective interview sessions on timely economics topics, and whenever his opinion differs from that of his interviewee, he has always known how to disagree without being disagreeable.  That is a rare talent, in case you haven't noticed from your web surfing.  I hope Russ keeps up his EconTalk effort indefinitely; he deserves some kind of award for this valuable project.

Lastly, don't miss Tyler Cowen's blog, Marginal Revolution, if you haven't been there before. 

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End note: The power of "belief preservation"

I seriously doubt that Cowen's levelheaded, objective debunking of the gold standard idea will have much impact on anyone who is committed to preserving their chosen belief that the Fed is a sinister conspiracy, and that replacing the gold standard with fiat money was a tragedy.  Reason: "Belief Preservation" is one of the most powerful psychological forces going, and it affects all of us in varying degrees.  Belief preservation is resistance to change.  It's when we make up our minds—then subsequently spend inordinate amounts of mental energy fighting off any challenges to the mental commitment we've made, by taking in all evidence and arguments confirming our belief, and by ignoring evidence and arguments to the contrary.  It affects political blogs, left-leaning and right-leaning economics blogs, and just about anyone who has ever analyzed a problem and drawn a conclusion.  Belief preservation is especially powerful when we've made a commitment, in public or in writing, to a specific conclusion.  [Think which presidential candidate you're for—then try to think how big of a fall-campaign gaffe it would take to change your mind if your candidate won the nomination.  It would have to be a huge one—highly unlikely at that stage—and that's largely due to belief preservation.] 

That's why, even if Ron Paul and his supporters do listen to the Tyler Cowen interview, I do not expect many of them to admit it.  That's okay with me; I'd be happy if it just keeps them bottled up a little tighter in their conspiracy forums, and reduces the number of Fed-bashing sermons posted here in my comments section.

[My position on the gold standard is summarized at the bottom of this article.  Two different definitions of "inflation" are discussed in this article.]

Deficit Watch thru Feb 2008

There's nothing optimistic about the latest deficit numbers.  The economy's slowdown has caused receipts and outlays to diverge at a quickening pace.  The only half-decent news is that the deficit, at 1.9% GDP, is just about right for keeping the debt/GDP ratio level, for whatever that's worth.

Food for thought: It's obvious that the slowing economy is causing tax receipts to slow down, even with no change in tax rates.  Question for fiscal pundits: What would seem likely to happen to the economy, and therefore tax receipts, if tax rates were allowed to increase in 2010?   Question for political pundits: When do you think we'll start hearing about that from more than one of the three presidential candidates?

FQ.08.11: Favorite Quote for This Week

On January 24, 1961 ... a B-52, mainstay of the strategic nuclear bomber force, crashed near Goldsboro, North Carolina.  The plane carried two 24-megaton nuclear weapons... [One bomb] fell into a field where it was found intact.  According to Ralph Lapp, former head of the nuclear physics branch of the Office of Naval Research, five of the six interlocking safety mechanisms on the recovered bomb had been triggered by the fall.  A single switch prevented the accidental explosion over North Carolina of a nuclear weapon more than a thousand times as powerful as the bomb that leveled Hiroshima.
—Lloyd J. Dumas, Lethal Arrogance

The dollar's value: Same as in 1996; not quite zero yet.

Because of all the headlines about the dollar's drop, I thought it was time to check the official numbers again.  Sure enough, it's off its peak, back down to its 1996 level.  The good news: it's nowhere near zero yet. 

Here's the chart from the St. Louis Fed's website (link), to which I added the items in red.  Click to enlarge.

Jobs, Feb '08 vs Year Ago

A few days late, but here's (a) the chart of 12-month change in jobs by major category, followed by (b) the trends in jobs created and labor force participation rate.  Click to enlarge.

I've decided to quit calculating the average wage rates of the jobs lost versus jobs gained.  Any one of several algorithms can be chosen to spin the numbers in whichever direction one's chosen political ideology needs it to go—but I'm not into shooting an arrow into the wall, then carefully painting a red bullseye around the spot where it went in.  To avoid giving anyone that impression, the simple algorithm I had been using is now dead meat—so please draw whatever conclusions you'd like from the first chart. 

My take: The trends don't look as good as most of us would like, but these are not necessarily indicative of a recession yet.  I'll defer to Brian Wesbury's explanation, which can be found in the pdf file that will download by clicking this link.