Fed says prices will stop going up

[hugolp]

So the Fed and its propagandists (Krugman and the rest of the gang) denied again and again that commodity prices were going to affect consumer prices. They said it was not an issue and accused the people warning about the rise in commodities and how it was going to affect the economy as fear-mongers and economic ignorants.

Yesterday the Fed admitted that the price of commodities have pushed the price of consumer goods up.

The Fed also said taht this rise in prices will not last. I think we could not get a better confirmation that prices will keep rising in the future. Stagflation here we go!

http://www.economicpolicyjournal.com/2011/06/federal-reserve-admits-price-inflation.html

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[scooter]

So the price of bitcoins is going down?

[realnowhereman]

So the price of bitcoins is going down?

Bitcoins are, from some perspectives (if we could ignore price volatility from their newness), a hedge against inflation of your national currency.

If prices of everything else go up, then the price of bitcoins should go up too.  The ratio of bitcoins to commodity prices should remain the same (obviously they won't, as there are other factors).

[Aristotle]

Well, when you take out certain commodities, notably oil and products that heavily depend on it, then inflation does indeed look low.  So, monetary inflation is low.  Another way to prove this is to look at all the other currencies of the world, and look at how much the prices of commodities have gone up in relation to their currencies.  You will find that the price of these commodities have gone up in all currencies and countries.  The price spikes are most likely due to supply, demand, and speculation on future supply and demand.  Similar to the oil shocks we've had before.

[hugolp]

Well, when you take out certain commodities, notably oil and products that heavily depend on it, then inflation does indeed look low.  So, monetary inflation is low.  Another way to prove this is to look at all the other currencies of the world, and look at how much the prices of commodities have gone up in relation to their currencies.  You will find that the price of these commodities have gone up in all currencies and countries.  The price spikes are most likely due to supply, demand, and speculation on future supply and demand.

EDIT: Also, this does not explain why the Fed and Krugman said commodity prices would not affect consumer prices and called names to the people saying the contrary, while now admiting that commodity prices have indeed affected consumer prices.

You mean the rest of the currencies that central banks are also printing like crazy? Have you seen the balance sheet of the ECB? Bank of England? Any of the BRICS? Saying that commodities are going up in the rest of the currencies supporst the idea that its due to monetary causes.

But the best indicator is this:

Last year, from April 23rd through to August 27th, the Fed allowed its balance sheet to shrink from $1.207 trillion to $1.057 trillion for a 12% contraction as QE1 drew to a close.

Now over that interval ...

    S&P 500 sagged from 1,217 to 1,064.
    S&P 600 small caps fell from 394 to 330.
    The best performing equity sectors were telecom services, utilities, consumer staples, and health care. In other words — the defensives. The worst performers were financials, tech, energy, and consumer discretionary.
    Baa spreads widened +56bps from 237bps to 296bps
    CRB futures dropped from 279 to 267.
    Oil went from $84.30 a barrel to $75.20.

Source.

So now there are two options:

1. The monetary expansion of the Fed is promoting speculation and inproductive consumption, that stops when the Fed stops injecting money (more like expectations, but lets simplify a bit).

2. The price of petrol is mainly affected by supply and demand, so on April 23rd a new petrol field was opened making the price go down, just to be closed on August 27th when prices stopped going down... Or maybe people stopped using the car between those dates as well.

Now you tell me which one you think is the correct one. The Fed propagandist are selling a story that is basically nonsense. There might be some changes in supply and demand, because there are always changes in supply and demand, but a big part of the price is due to the influence of monetary policy and the expectations it creates.

Similar to the oil shocks we've had before.

The "so-called" oil shocks were in big part due to monetary policy mixed with geopolitical events that had a resonating effect due to the monetary policies of that time.

[Miner SiX]

If there is no inflation there is no pay increase

[Aristotle]

EDIT: Also, this does not explain why the Fed and Krugman said commodity prices would not affect consumer prices and called names to the people saying the contrary, while now admiting that commodity prices have indeed affected consumer prices.

Why are you lumping Krugman and the Fed together?  Krugman works for the NYT, and he regularly disagrees with the Fed's policies (he thinks the Fed hasn't been worrying enough about jobs lately).  I have not been able to find Krugman saying commodity prices would not effect consumer prices.  I did find him saying this: http://www.nytimes.com/2010/12/27/opinion/27krugman.html ,  I remember the Fed saying something like the price of iPads have not gone up   I don't really pay much attention to the Fed's PR campaign.  Can't really trust things like that.

I, personally, have a lot of respect for Krugman.  He warned of the dot-com bubble, housing crisis, federal deficit when the economy was doing ok, etc...  His biggest argument is that government should spend during recessions, and save during normal times to smooth everything out and keep things stable.  Now, I don't agree with the system we have (basing economies on debt is crazy), but as far as working with the system we have, Krugman makes a lot of sense.

You mean the rest of the currencies that central banks are also printing like crazy? Have you seen the balance sheet of the ECB? Bank of England? Any of the BRICS? Saying that commodities are going up in the rest of the currencies supporst the idea that its due to monetary causes.

Taiwan has been going through a lot of deflation.  Prices have still increased.

But the best indicator is this:

Last year, from April 23rd through to August 27th, the Fed allowed its balance sheet to shrink from $1.207 trillion to $1.057 trillion for a 12% contraction as QE1 drew to a close.

Now over that interval ...

    S&P 500 sagged from 1,217 to 1,064.
    S&P 600 small caps fell from 394 to 330.
    The best performing equity sectors were telecom services, utilities, consumer staples, and health care. In other words — the defensives. The worst performers were financials, tech, energy, and consumer discretionary.
    Baa spreads widened +56bps from 237bps to 296bps
    CRB futures dropped from 279 to 267.
    Oil went from $84.30 a barrel to $75.20.

Source.

The starting date chosen is "conveniently" right at a peak before a fall-off in oil prices, and the end date right before a rally.  This makes me believe the source was being dishonest.  But, anyways, oil is very volatile; you have to look at overall trends, and not just a couple points in time.

So now there are two options:

1. The monetary expansion of the Fed is promoting speculation and inproductive consumption, that stops when the Fed stops injecting money (more like expectations, but lets simplify a bit).

Yes, you may have a point there.  But that's not the same thing as monetary inflation.

2. The price of petrol is mainly affected by supply and demand, so on April 23rd a new petrol field was opened making the price go down, just to be closed on August 27th when prices stopped going down... Or maybe people stopped using the car between those dates as well.

Oil, silver, gold, etc... are extremely noisy (volatile).  They go up and down all the time.  These markets are casinos for the rich.  However, the overall long-term trends should, in theory, reflect real world conditions.  If you look at the chart of oil prices over the last few years, you'll see that the peaks and valleys like the one presented above are very common, and not out of the ordinary at all.

Now you tell me which one you think is the correct one. The Fed propagandist are selling a story that is basically nonsense. There might be some changes in supply and demand, because there are always changes in supply and demand, but a big part of the price is due to the influence of monetary policy and the expectations it creates.

Hmm. Possibly.  Maybe you and I only disagree over semantics and technicalities

The "so-called" oil shocks were in big part due to monetary policy mixed with geopolitical events that had a resonating effect due to the monetary policies of that time.

Not sure if you can chalk everything up to monetary policies; just seems like an easy way out.  Economies are complex systems, and monetary policies are just one component.  The oil shocks in the 70s were caused by decreased domestic production and discovery coupled with rising demand.  If you're not familiar with the concept, you may want to read up on Peak Oil: http://en.wikipedia.org/wiki/Peak_oil

If there is no inflation there is no pay increase

WTF?  Sarcasm?

[hugolp]

EDIT: Also, this does not explain why the Fed and Krugman said commodity prices would not affect consumer prices and called names to the people saying the contrary, while now admiting that commodity prices have indeed affected consumer prices.

Why are you lumping Krugman and the Fed together?  Krugman works for the NYT, and he regularly disagrees with the Fed's policies (he thinks the Fed hasn't been worrying enough about jobs lately).

I lump them together because Krugman is a Fed apologist. He might disagree here and there with some of their policies, but he wants and defends a central bank system. He is an apologist of the system.

Btw, price inflation does not create sustainable jobs. Its not something the Fed can do.

I have not been able to find Krugman saying commodity prices would not effect consumer prices.

There you go: http://krugman.blogs.nytimes.com/2010/12/27/commodity-prices-and-inflation/

I, personally, have a lot of respect for Krugman.  He warned of the dot-com bubble, housing crisis, federal deficit when the economy was doing ok, etc...

Actually, he didnt call the housing crisis. Krugman always writes one thing and a couple of week later he writes the contrary. When the time comes he chooses one as proof he is right. Check this video @ 2:55 (http://www.youtube.com/watch?v=MnekzRuu8wo) Krugman says that he does not know if there is going to be a recession or not, in December 2007, when we were less than a year from the crash. How is that calling the housing crisis? He didnt. In some of his writtings he said there could be a crisis and in some others he said that maybe not. So when the housing crisis arrive he said: Hey! I called it. Its how he works.

Btw, Krugman also said after the dotcom bubble that the USA needed lower interest rates and more investment in housing... How did that work? I dont understand why he is getting away when he is guilty of helping create the housing bubble.

His biggest argument is that government should spend during recessions, and save during normal times to smooth everything out and keep things stable.

The problem is this is nonsense. Its long to explian so if you are interested we can go in more detail into this only.

Now, I don't agree with the system we have (basing economies on debt is crazy), but as far as working with the system we have, Krugman makes a lot of sense.

No.

You mean the rest of the currencies that central banks are also printing like crazy? Have you seen the balance sheet of the ECB? Bank of England? Any of the BRICS? Saying that commodities are going up in the rest of the currencies supporst the idea that its due to monetary causes.

Taiwan has been going through a lot of deflation.  Prices have still increased.

This does not answer my argument. Taiwan is so small that its monetary policies do not have influence over a commodity market. But I have to admit that I dont follow Taiwan monetary policies with detail so I really dont know what they are doing. Anyway, its not important.

But the best indicator is this:

Last year, from April 23rd through to August 27th, the Fed allowed its balance sheet to shrink from $1.207 trillion to $1.057 trillion for a 12% contraction as QE1 drew to a close.

Now over that interval ...

    S&P 500 sagged from 1,217 to 1,064.
    S&P 600 small caps fell from 394 to 330.
    The best performing equity sectors were telecom services, utilities, consumer staples, and health care. In other words — the defensives. The worst performers were financials, tech, energy, and consumer discretionary.
    Baa spreads widened +56bps from 237bps to 296bps
    CRB futures dropped from 279 to 267.
    Oil went from $84.30 a barrel to $75.20.

Source.

The starting date chosen is "conveniently" right at a peak before a fall-off in oil prices, and the end date right before a rally.  This makes me believe the source was being dishonest.  But, anyways, oil is very volatile; you have to look at overall trends, and not just a couple points in time.

The dates are not chosen conveniently. He is just showing the period choosed by the Fed to reduce its balance. Its not David Rosenberg choosing the dates, so there can be no dishonesty on his part. He is just saying that when the Fed was easing the price of petrol was going up. When the Fed stopped easing and contracted the balance sheet, the price of petrol started going down. Finally when the Fed started easing again the price of petrol started going up again.

This is not random.

Yes, you may have a point there.  But that's not the same thing as monetary inflation.

Depending on the monetary aggregate you choose, but its just a matter of definitions and its not important here.

Oil, silver, gold, etc... are extremely noisy (volatile).  They go up and down all the time.  These markets are casinos for the rich.  However, the overall long-term trends should, in theory, reflect real world conditions.  If you look at the chart of oil prices over the last few years, you'll see that the peaks and valleys like the one presented above are very common, and not out of the ordinary at all.

Yes, they are volatile and you can add some populism, still it does not explain why they went up when the Fed was easing, went down when stopped and went up again when the Fed started to ease again. You can decide to ignore the empircial correlation but then you wont understand what is going on.

Not sure if you can chalk everything up to monetary policies; just seems like an easy way out.  Economies are complex systems, and monetary policies are just one component.  The oil shocks in the 70s were caused by decreased domestic production and discovery coupled with rising demand.  If you're not familiar with the concept, you may want to read up on Peak Oil: http://en.wikipedia.org/wiki/Peak_oil

I know the history. And I am not denying that there were some disruptions on the supply due to conflicts (that is what I meant by geopolitical events) but there was no peak oil (and I dont deny that we might get some day to peak oil or that we might be close, its just that we werent at peak oil back then). But the USA had been manipulating the price of gold since the 40's even before Bretton Wood, and finally it could not respond to its obligations and Nixon defaulted. This was expected since Bretton Woods was flawed. But the point is that the rise in the price of gold meant heavy price inflation for the USA. The arabs said publicy at the begginning fo the 70's that they would peg the price of oil to the price of gold, and so it happen. The USA government tried to blame them and said they were a cartel, but it is completely understandable that the arabs wanted something that they deemed worthy in exchange for their most precious resource and refused to accept a currency that the USA government could print "at will". Then you have Nixon asking the then chairman Burns to print more to create a mini-bubble to win the election and it was the perfect storm: Stagflation.

[hawks5999]

If there is no inflation there is no pay increase

Your pay increase of 2% with inflation of 4% doesn't really equal an increase now does it?

[billyjoeallen]

So the price of bitcoins is going down?

Bitcoins are, from some perspectives (if we could ignore price volatility from their newness), a hedge against inflation of your national currency.

If prices of everything else go up, then the price of bitcoins should go up too.  The ratio of bitcoins to commodity prices should remain the same (obviously they won't, as there are other factors).

I agree with this analysis, which should be troubling to those us us who consider deflation due to an unwinding of fractional reserve banking a real possibility. The dollar economy faces massive deflationary headwinds due to credit saturation and requires massive money printing and deficit spending to just break even.  Such money printing and deficit spending is likely to continue and even increase, but that is far from guaranteed. Political pressure to reduce spending and stop quantitative easing is significant and growing.  I recommend reducing debt levels and de-leveraging as a way to mitigate this risk.

[Grant]

I agree with this analysis, which should be troubling to those us us who consider deflation due to an unwinding of fractional reserve banking a real possibility. The dollar economy faces massive deflationary headwinds due to credit saturation and requires massive money printing and deficit spending to just break even.  Such money printing and deficit spending is likely to continue and even increase, but that is far from guaranteed. Political pressure to reduce spending and stop quantitative easing is significant and growing.  I recommend reducing debt levels and de-leveraging as a way to mitigate this risk.

This makes a lot of sense, only im curious who are the dollar hoarders ? They got to be either the most stupid or the most brilliant people in the world. I still have a hard time figuring how an inflationary currency can endup deflating after the money supply is doubled and even trippled (during a time when its economy is in a recession, it would have made sense if the deflation happened as a consequence of a boom).

It's not like when the banks that receive this additional cash just hold onto it as the best investment they could imagine, they convert it quicky to assets that give better returns, where does the money go ?

[billyjoeallen]

I agree with this analysis, which should be troubling to those us us who consider deflation due to an unwinding of fractional reserve banking a real possibility. The dollar economy faces massive deflationary headwinds due to credit saturation and requires massive money printing and deficit spending to just break even.  Such money printing and deficit spending is likely to continue and even increase, but that is far from guaranteed. Political pressure to reduce spending and stop quantitative easing is significant and growing.  I recommend reducing debt levels and de-leveraging as a way to mitigate this risk.

This makes a lot of sense, only im curious who are the dollar hoarders ? They got to be either the most stupid or the most brilliant people in the world. I still have a hard time figuring how an inflationary currency can endup deflating after the money supply is doubled and even trippled.

It's not like when the banks that receive this additional cash just hold onto it as the best investment they could imagine, they convert it quicky to assets that give better returns, where does the money go ?

If you understand the inherently inflationary nature of fractional reserve banking, then you should logically see how the unwinding of such would be deflationary.  When Banks lend out deposits, the money is basically in two places at once: in the depositors account AND in the funds distributed as a loan. this effectively doubles the money supply (minus the amount held in reserve). The important thing to understand is that money lent out eventually finds it's way into another demand deposit account where it is lent out (and doubled!) again. This process repeats many, many times, effectively multiplying the money supply over and over.  If there is a run on the bank, this process works in reverse. if there is a massive run on the entire banking system (what almost happened in 2008), a deflationary collapse becomes inevitable.  This is why the FED printed money like crazy, lent at zero interest, and bought hundreds of billions in toxic assets.  A bank that is leveraged 20:1 and suffers a >5% impairment of assets in effectively insolvent.  Depositors who become aware of the situation rationally withdraw their money and hide it under the mattress. This makes the bank even more insolvent and in desperate need of a bail-out. Pretty much every large bank in the world faces this situation right now. 

[Bazil]

I agree with this analysis, which should be troubling to those us us who consider deflation due to an unwinding of fractional reserve banking a real possibility. The dollar economy faces massive deflationary headwinds due to credit saturation and requires massive money printing and deficit spending to just break even.  Such money printing and deficit spending is likely to continue and even increase, but that is far from guaranteed. Political pressure to reduce spending and stop quantitative easing is significant and growing.  I recommend reducing debt levels and de-leveraging as a way to mitigate this risk.

This makes a lot of sense, only im curious who are the dollar hoarders ? They got to be either the most stupid or the most brilliant people in the world. I still have a hard time figuring how an inflationary currency can endup deflating after the money supply is doubled and even trippled (during a time when its economy is in a recession, it would have made sense if the deflation happened as a consequence of a boom).

It's not like when the banks that receive this additional cash just hold onto it as the best investment they could imagine, they convert it quicky to assets that give better returns, where does the money go ?

Well the Europeans are abusing the euro like a cheap hooker.  Gold and silver prices are astronomical and lots of economists think it's in a bubble.  So people have to turn to the US dollar.  The deflation occurred because all of the funny money was disappearing as banks foreclosed on delinquent homeowners.  I think we are having huge inflation right now though with our consumables, like gas and food.  But what do you know, they don't include those items when they measure inflation, because it paints a rosier picture.

[MoonShadow]

So the price of bitcoins is going down?

If it were only that simple.

The relationship between Bitcoin and any particular fiat currency, reflected as they are in their relative prices, are complex enough taken alone.  But they really can't be taken alone, as each is affected somewhat by the influences of the other currencies and the relative influences of their respective economies.

[qualia8]

The Fed's predictions on just about everything from unemployment to growth to inflation are *consistently* over-optimistic.  Why does anyone even pay attention anymore?