Wednesday, August 25, 2010

The Economic Indicators are Really Mixed

First the CPI and PPI. They continue to increase albeit with a recent flattening out. If we look at the annualized percent rate of increases we obtain the following:

We see the dip during the peak of the recession and we see a somewhat flat but positive growth. This implies a certain positive inflation in costs. Recall the the PPI leads the CPI at leads in general terms.

Sumner as what I assume is a Keynesian has recently stated:

OK, I’m ready to throw in the towel. I just made the mistake of checking Drudge. His website is frequently shameless, but you have to admit he often picks up the zeitgeist. All the news about the economy is dreary. Then I looked at Bloomberg and here are the latest TIPS spreads:

5 year conventional T-bonds 1.33%, Indexed bonds 0.08%, TIPS spread 1.25%

10 year conventional T-bonds 2.50%, Indexed bonds 1.03%, TIPS spread 1.47%

Both have been falling like a stone. This suggests that a sharp slowdown in NGDP growth is very likely. Until now I’ve tried to remain an optimist, disappointed in the pace of recovery, but assuming that we were at least muddling forward. But it is now clear that we are no longer recovering.

So let’s put this fiasco into perspective. What can we compare it to? As far as I know, there are four great recessions/depressions with near zero rates...

Milton Friedman once noted that ordinary people were shocked when told that unelected Fed officials were free to simple double the money supply anytime they wished. I think the same thing is true of changing the value of the dollar, as when FDR arbitrarily decided each dollar would be worth 60 cents (in gold terms.) People seem OK with interest rate targeting, but anything else seems radical. But interest rate targeting doesn’t work anymore. So we are stuck.

Nick Rowe uses the analogy of balancing a long pole in your hand. If you want the top to go left, you move your hand right. By analogy, if the Fed wants inflation/growth (and long term rates) to go up, they lower the fed funds rate. But if you bump up against a tall wall, then you may not be able to move your hand in the direction required to move the pole in the other direction. You are stuck. The only solution is to rely on some other method–such as directly grabbing the top of the pole.

The Fed needs to raise NGDP growth by some method other than lowering nominal rates. It is up against the wall. That means they need some other policy tool. It might be the printing press (QE), negative IOR, price level or NGDP targets, dollar devaluation, etc. But it can’t be done by manipulating the fed funds rate. And for some reason the Fed seems paralyzed....

What Sumner seems to be saying is that we are headed for deflation if not in it already. The CPI and PPI indices seem to belie that but as we have shown a day or two ago the yield curve is starting to flatten near zero. The long term expectations are that things will just get worse and that with deflation long term the 30 year Treasuries will actually yield much higher than the indicated rates. On the other hand, we also looked, at the same time, at the CBO report and that assumed even in the worst case the inflation at a modest rate to achieve the maximum debt to GDP percent which kept the US from becoming Greece.

Thus if we are truly seeing deflation and deflation long term then the CBO must recalculate but worse the debt we are piling on gets even bigger and debt as a percent of GDP explodes!

Before looking at indices we look at consumer debt. The most recent numbers are below. Frankly the large jump is not understood. Perhaps it is a result of the new Financial Bill but we are examining this blip.

Now back to some statistics. Consider the indices below:

These are industrial indices indicative of future economic growth. The recession is clearly documented in all. However there is both a flattening and some downturns which should raise concerns.