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Stagflation is an economic condition of increasing inflation and slowing economic growth.  This situation places interest rate policy makers in a quandary.  If they raise rates to slow inflation, the economy will continue to slow, possibly leading to a recession.  If they let inflation run, they run the risk of letting inflation get out of control, possibly leading to early stage hyper-inflation.  In other words, no matter what the Fed does, they are bound to inflict pain on someone.

Talk of stagflation has increased over the last few months.  Below are the latest entries in the dialog.

The first entry came from Fed Chair Bernanke in a speech on June 5:

Real gross domestic product grew rapidly in the first quarter of this year, but the anticipated moderation of economic growth seems now to be under way.  Consumer spending, which makes up more than two-thirds of total spending, has decelerated noticeably in recent months.  One source of this deceleration is higher energy prices, which have had an adverse impact on real household incomes and weighed on consumer attitudes.  As had been expected, recent readings also indicate that the housing market is cooling, partly in response to increases in mortgage rates.  To be sure, the data on home sales and construction have been somewhat erratic from month to month, reflecting weather conditions, statistical noise, and other factors.  However, overall, housing activity has softened relative to the high levels of last summer, and the rate of house-price appreciation appears to have lessened.  A slowing of the real estate market will likely have the effect of restraining other forms of household spending as well, as homeowners no longer experience increases in the equity value of their homes at the rapid pace seen in recent years.

Here is the Fed Speak translation: the economy is slowing.  People are spending less and the housing market is cooling off.

Bernanke continues:

Consumer price inflation has been elevated so far this year, due in large part to increases in energy prices.  Core inflation readings--that is, measures excluding the prices of food and energy--have also been higher in recent months.  While monthly inflation data are volatile, core inflation measured over the past three to six months has reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of maximum long-run growth.  For example, at annual rates, core inflation as measured by the consumer price index excluding food and energy prices was 3.2 percent over the past three months and 2.8 percent over the past six months.  For core inflation based on the price index for personal consumption expenditures, the corresponding three-month and six-month figures are 3.0 percent and 2.3 percent.  These are unwelcome developments.

Here is the Fed Speak translation: inflation is higher than we want it to be.  The markets interpreted this speech as indicating the Fed would continue raising rates.  This was the event that sent the markets tumbling.  I should note Bernanke's speech yesterday appeared to mollify traders concerned about the path of interest rates.

Speaking before the Economic Club of Chicago, Bernanke said inflation expectations had "fallen back somewhat" and that the impact of high energy prices on the economy has been limited. That offset worries from earlier this week when core consumer and producer price data rose above expectations.

His comments suggested the Fed may have room to pause in its two-year-long cycle of interest rate hikes in the next few months, investors said. Fed fund futures have fully priced in an interest rate hike at the Fed's next policy meeting on June 28-29.

Bernanke needs to work on his public relations abilities.

Two articles from yesterday's news highlight the growing talk of stagflation.  First is this article from the LA Times:

The consumer price index, the prices consumers pay for goods and services, rose 0.4% in May, in line with expectations, the government reported Wednesday. But core consumer prices, which exclude volatile energy and food costs, increased 0.3%, above the expected 0.2%.

A day earlier, the government reported that producer prices excluding energy and food rose faster than expected last month.

The series of bad inflation news makes it all but certain, economists say, that the Fed will raise its key short-term interest rate by 0.25 percentage point to 5.25% when its policy-setting committee meets this month.

A separate Fed survey of regional economic conditions released Wednesday showed that the economy was slowing, led by declines in home sales and manufacturing, and that inflation was on the rise.

Other recent data -- including retail sales, employment and wage data from April and May -- suggest that the Fed's previous rate hikes are slowing the economy. Economists said more increases by the Fed would run the risk of inducing a recession -- and wouldn't have much effect on inflation anyway because it was largely driven by the global demand for oil.

"The economy could be facing a bout with stagflation," said Peter Morici, a University of Maryland business school professor. "My feeling is we're headed for a tragedy here."

Dean Baker, co-director of the Center for Economic and Policy Research, said he also viewed stagflation as a possibility as credit tightening further damps the housing market and puts a crimp on the spending of homeowners.

"The May price data provides grounds for concern on several fronts," he said.

"I think we're in for some tough times."

There is also this article from the Asia Times Online:

Core producer prices - producer prices less food and energy - rose 0.3% in May. This was consistent with the consensus of forecasters and raises the likelihood that the Fed will raise interest rates. Inflation remains above Fed Chairman Ben Bernanke's target range. The only question now is how many more interest rate hikes will we get? The outlook for inflation is significantly colored by energy prices.

Gasoline prices surged in May. The average retail price of gasoline in May was $2.95 per gallon, up from $2.79 in April. Gas prices hit $2.99 per gallon on May 15 but then eased. In June gas prices are rising and will likely surge as the July 4 weekend approaches.

Until recently, strong productivity gains have permitted producers of most final goods and services to absorb higher fuel prices and wage increases without pushing up prices too much. However, May increases in both core producer and consumer prices indicate that energy price increases are spreading widely through the economy, and the hawks will have the upper hand at the June Fed meeting.

All of these stories point to the same thing.  The economy is slowing and inflation is becoming a concern.  Productivity gains may not be able to absorb these increases, which will force producers to pass-on the increased prices to consumers.  More importantly, energy is causing the basic problems.  Energy costs are like water; they seep into every economic nook and cranny.  Energy is consumed from extraction of raw materials to the consumer buying an item and driving it home.  It's everywhere.  As energy rises, prices all along the supply chain increase.

All of this is just talk.  However, more people are talking about the same thing, implying the evidence is pointing people to the same conclusion.

Update [2006-6-16 9:6:29 by bonddad]:: The following is from Fed Governor Poole of the St. Loius Fed from a speech yesterday.

Federal Reserve Bank of St. Louis President William Poole warned Friday that rising gasoline and oil prices may be adding to inflation pressures in a way not detected by current data.

"Statistical studies to detect pass-through from recent energy price increases have failed to show significant effects in U.S. price data, but stories about widespread pass-through are becoming increasingly common," Poole said in comments delivered to a South Korean banking conference.

In other words, the official inflation meausres may be understating inflation.

Originally posted to bonddad on Fri Jun 16, 2006 at 05:24 AM PDT.


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Comment Preferences

  •  trade? (2+ / 0-)
    Recommended by:
    Cedwyn, sodalis

    From what I've read, the dollar is being propped up at hazardous levels by the Chinese and Japanese supporting our trade deficit.  Where does this fit into the stagflation picture?  Or is that a chicken-and-egg question?

  •  This seems like the obvious... (8+ / 0-)

    result of increased energy prices. Our economy is built on cheap energy, and without it of course inflation will rise and growth will slow down. I'm not an economist, but that seems pretty predictable. There won't be an easy way out of this situation, but our policy makers aren't even discussing solutions, so it puts us in a bind.

    •  asdf (8+ / 0-)

      energy is a big part of it.

      "You think you can intimidate me? Screw you. Choose your Weapon." Eliot Spitzer

      by bonddad on Fri Jun 16, 2006 at 05:37:42 AM PDT

      [ Parent ]

      •  Can i ask a stupid question?? (5+ / 0-)
        Recommended by:
        cookiebear, 3goldens, wildcat6, Ellicatt, Lashe

         Who benefits when the markets get the jitters.  When you see the recent losses on the markets.  Who wins and who loses???

        "machine men with machine minds and machine hearts! You are not machines, you are not cattle, you are men"

        by Boru on Fri Jun 16, 2006 at 05:40:09 AM PDT

        [ Parent ]

        •  adsf (13+ / 0-)

          No such thing as a stupid question.

          Traders -- people who trade stocks etc. for a living -- are the primary beneficiaries because they are better equipped emotionally and financially to deal with the intense swings.

          "You think you can intimidate me? Screw you. Choose your Weapon." Eliot Spitzer

          by bonddad on Fri Jun 16, 2006 at 05:41:46 AM PDT

          [ Parent ]

        •  come on (8+ / 0-)

          Hey gay marriage and flag burning are more pressing issues than this.Please dont add any minor issues like the economy!"snark.

        •  Wealth vanishes (4+ / 0-)
          Recommended by:
          MamasGun, johnfire, Boru, corvo

          I know this is a tough concept, but all that wealth just disappears. Its all built on confidence to begin with, when the confidence falters people sell stocks and move into cash. Think about it this way, if everyone in the US wanted the money that was in their bank account today, what would happen? Should the Fed print all those dollars to answer the demand, then the worst kind of inflation would occur, and the dollars you already have would be instantly worthless.
          don't fret too much, because this activity is precisely the result Bernanke was looking for when he proposed continued hawkishness while there are signs the economy is slowing. so he popped a bit off the commodity bubble, and the DOW is still at 11K. all that gold buying was giving his dollar a bad name. central bankers hate gold, it undermines confidence in their fiat currency.
          and frankly i am surprised that the market bought this crap. but again the DOW is only about 800 points from its all time high? through all this consternation. i gotta give Ben B credit.

          next you will see the dollar rising, and that could be the coup de grace. when rates start to fall, Ben the hawk will be in real trouble.

          "Everything is chrome in the future..." Sponge Bob Square Pants

          by agent double o soul on Fri Jun 16, 2006 at 08:10:12 AM PDT

          [ Parent ]

        •  If you know bet right, you make a killing (0+ / 0-)

          i.e. Joe Kennedy.  

          He made a killing on the stock market, got out of it just before the crash.  Afterwards found plenty of ways to become even richer in the hard time that followed.

          This is doubly true of those who seem to know what is going to occur.

          Talking to yourself again, Black Adder? Yes, it's the only way I can be sure of intelligent conversation.

          by Predator Saint on Fri Jun 16, 2006 at 11:40:12 AM PDT

          [ Parent ]

  •  check out the trade departments foreign holding (10+ / 0-)

    report issued y'day.

    not a good sign.

    -Freedom is merely privilege extended unless enjoyed by one and all- -9.50, -5.74

    by redstar on Fri Jun 16, 2006 at 05:43:10 AM PDT

  •  More on the 'Harvard' soft-landing study (12+ / 0-)

    The "Harvard" report on housing referenced yesterday in your diary was co-authored by Rachel Drew.  Here's her biography:

    Prior to joining Harvard, Drew worked at National Economic Research Associates in San Francisco as an Analyst in the Telecommunications Regulatory Group, and before that as an Economic Analyst in the Antitrust Practice at Foley and Lardner in Washington D.C. She has a BA in Economics and Mathematics from Dartmouth College.

    Notice she has a bachelor's degree only.  Now, in case you wanted to know who the National Economic Research Associates are (per the NY Times):

    National Economic Research Associates (NERA) is a powerhouse in the world of economic consulting. NERA belongs to the Mercer family of consulting firms, which is in turn owned by professional services giant Marsh & McLennan Companies (MMC).

    I tell you this in light of the following exchange from the "Calculated Risk" blog yesterday:

    Rachel Drew, was quoted in Business Week: A Soft Landing for Housing?
    Drew notes that the Harvard study was based on the state of the market at the end of 2005 and admits her optimism has been tempered a bit by the slowdown that's occurred so far this year. "The first-quarter numbers showed the housing market slowing a little faster than we expected," she readily admits. But for the most part, she stands by the conclusions of the report.

    Which led to this riposte from the comments section:

    "the housing market seems to of apparently hit a brick wall. no one expected that. "

    The housing bubble blogger did

    BTW Bonddad, yesterday you said "thanks" while I had to "work," so excuse me for a tardy "you're welcome."

    •  asdf (17+ / 0-)

      No problem with the tardy you're welcome.

      Please accept the following not as an attack but instead as an observation in general.  While her bias is good to know, I think it's very important to accept that someone's bias or professional affiliation does not mean their conclusions are wrong.  There are many conservative economists who have a more bullish view of the economy who have made good points about what is happening.  That is not to say they could not be wrong.  But, their analysis in general is pretty solid.  Boy, I hope that came out right.  

      As I mentioned ysterday, the general consensus among economists is the housing market will cool without crashing.  The point is, she could be right but we won't know until after this thing plays out.

      "You think you can intimidate me? Screw you. Choose your Weapon." Eliot Spitzer

      by bonddad on Fri Jun 16, 2006 at 05:59:38 AM PDT

      [ Parent ]

      •  The specuvestors are still out there though... (2+ / 0-)
        Recommended by:
        cookiebear, besieged by bush

        There was a funny thread over at

        discussing how the specuvestors believe prices in their own areas are peaking, so they are chasing profits in new areas.  Some of these idiots are buying properties in New Mexico, Idaho, and Texas sight unseen.

        •  A lot of them are not idiots... (5+ / 0-)
          Recommended by:
          JWC, MamasGun, McJulie, corvo, Lashe

          A lot of the land speculators will make their money and then some back no matter when they buy, those buyers have the capital to carry property on average 10-15 years before begining development or sale.

          Its the local flippers who are getting crushed! (And it s wonderful too). The flippers are a large reason for the over-inflation of house prices in many major metropolitan areas. Traditionally house prices appreciate a few points over inflation, giving you a real return of 2-3% on your leveraged investment, and a nominal return of 4-7% annually. But flippers were using cheap money, sometimes as low as 2.5% rates to buy homes, and resell them within a quarter at 25%-50% appreciation, artificially inflating the property prices over what the market could actually bear. This is also partially to blame of appraisers, and the governments (state and federal) are working to correct that problem in the future (appraisals that meet the contract value, not the true value).

          The housing market is in a position now where the money is no longer cheap, incomes do not match the house prices (often not even close), and the market is being flooded with homes for sale. The housing market has already soften, and we are seeing asking prices come back to earth. The line of thought right now is that the home prices will stagnate and wait for incomes to catch up, but that probably won't be sustainable, look for negative equity to kick in somewhere between Q3 and Q4. (Median incomes levels are actually falling).

          In the county in which I live in, Fairfax, the median home price (on the market) is $522,000 roughly, the median household income is $77,000 roughly. At the current interest rates, assuming one has a car, some debt and bills, and is putting 20% down, the most a household at 77,000 can afford (after property tax, and insurance is included) is a $233,000 home, HALF the price of the average home price on the market. What kind of home is that in Fairfax County? A 1 bedroom condo, roughly 700 sq ft (assuming no condo association dues). So while these people may not be able to afford to buy, its the local flippers who are getting stuch with the homes they bought and have yet to sell. They don't have the capital to carry the homes, and if they get out now, they will be getting out with most likely, at minimum, a $10,000 loss or more (taxes, stamps, closing costs, realtor fees, etc.). Good Ridance!

          General and Supreme Commander of the 82nd Chairborne: I've killed people for less!

          by patsprouseyo on Fri Jun 16, 2006 at 07:50:42 AM PDT

          [ Parent ]

          •  Also, the NAR is predicting (0+ / 0-)

            only a 0.8% increase in propert values at the end of 2006! Yes POINT 8 PERCENT!!! If you bought in January, and sold in December, you'd lose money!

            General and Supreme Commander of the 82nd Chairborne: I've killed people for less!

            by patsprouseyo on Fri Jun 16, 2006 at 07:53:22 AM PDT

            [ Parent ]

            •  Do you have a link? (0+ / 0-)

              Where are they saying this and why is it not in the MSM?

              OK. Maybe that is a stupid question...

              •  It is in the MSM (0+ / 0-)

                But! Its not in the best interest of the NAR, the Builders, the Banks, the government to promote the idea of people losing money on property in 2006, or 2007...

                The NAR will go on NPR and say "Its still a seller's market" or "soft landing" or "home prices are still appreciating" etc. And while its partially true, its not as soft as they are making it out to be. By no means is it a bubble bursting, prices aren't correcting to 2000 levels (and they may over time, most likely will, they have done so in the past).




                General and Supreme Commander of the 82nd Chairborne: I've killed people for less!

                by patsprouseyo on Fri Jun 16, 2006 at 08:04:02 AM PDT

                [ Parent ]

                •  The Real Estate industry is (2+ / 0-)
                  Recommended by:
                  MamasGun, corvo

                  very self protecting.

                  Remember before the internet when you had to go thru a travel agent to book airlines and hotels and they got a nice commision for simply having access to SABRE.

                  Then SABRE was opened up and we have Travalocity, Expedia etc.

                  The realtors are protecting MLS and their commissions


                  by naufragus on Fri Jun 16, 2006 at 08:15:41 AM PDT

                  [ Parent ]

                  •  Oh boo! Thats only half-true. (2+ / 0-)
                    Recommended by:
                    judy99, NearlyNormal

                    Real estate sales and booking a vacation are not equivolents. First, there is no such thing as a "set" commission, commissions are negotiable. Second, the Realtos OWN the MLS! They ought to protect it, it's theirs!

                    People really don't appreciate what real estate brokers /agents do for their clients. The average person will buy or sell 2-3 homes in their lifetime. A realtor does  on average 2 to the times that much in one year (for their clients). The discount brokers (1% listings etc.) are actually going out of business, this happens in every real estate cycle. At 1% they cannot afford to carry the listings.

                    Here is what a Realtor does for you:

                    1. on average they will net you 15% more on your home sale (more than covers the commission, btw)
                    1. all the marketing expenses come out of their pocket, an add in the Washington Post classified (just letters) costs anywhere from $120-$300 for a weekend day(when people look for homes in the paper), so thats $240-$600 a week for Sat & Sun classified. A small block add costs upwards of $2000 for a day! This is for one house! The average time on the markey is 45-60 days, or 5-6 weeks! Think about it! And the Realtor wants to get paid for their services!
                    1. a good Realtor should help you stage your home to maximize your return
                    1. a good Realtor will negotiate for you, with your best interest in mind, and help you be protected in your sales contract
                    1. they open your home, and show your home to potential buyers so you don't have to! If you make 40k a year, the 3-8 hours a week that you'd spend having to show the home is somewhere between $60 and  $160 dollars of value a week, multiply that by 6 weeks and thats almost $1000 of value to you! Think about having to take off work early to open your home up, or having to deal with other people's BS, or trying to weed out who is serious or not!
                    1. protect you from predatory investors

                    And on and on...Are all Realtors worth their money? NO! of course not, thats why you should interview them, not just pick the first one through the door (like 60%+ of sellers do).

                    But you also have to remember our industry (real estate), has the consumer's best interest in mind, thats how WE make money, when you make money!

                    General and Supreme Commander of the 82nd Chairborne: I've killed people for less!

                    by patsprouseyo on Fri Jun 16, 2006 at 08:33:04 AM PDT

                    [ Parent ]

                    •  doesn't justify.... (0+ / 0-)

                      agree with all your points - wouldn't buy a house w/o a realtor.  but, that doesn't justify keeping the mls data to themselves.

                    •  Not saying you dont provide a service (1+ / 0-)
                      Recommended by:

                      I have worked in RE so I know what information you have access to that the buyers dont.  


                      by naufragus on Fri Jun 16, 2006 at 09:18:49 AM PDT

                      [ Parent ]

                    •  Sold 2 houses on our own (1+ / 0-)
                      Recommended by:

                      And a 3rd through a realtor.

                      I'm sure our experience is nowhere near representative of most peoples' experiences (we've never had a house on the market fore more than 2 days), but we got nowhere near the value of a 6% commission out of our realtor.

                      Democracyfest July 14 - 16, 2006: The toolkit for taking back our democracy, disguised as a fun-filled weekend.

                      by mataliandy on Fri Jun 16, 2006 at 10:54:13 AM PDT

                      [ Parent ]

                      •  Yes, I've had the same experience. (1+ / 0-)
                        Recommended by:
                        I think six percent is outrageous these days. If you have a house worth $700,000, which isn't unusual these days, you are paying over 40,000 to the real estate agent.

                        I've sold houses by myself and with a realtor.  If you have an inexpensive house, sell it yourself.  You can hire a lawyer to do all the paperwork for less than a thousand dollars.   Spend your money on putting ads in the paper that really make your house sound great and say  "Realtors welcome 3%".  That way, if a realtor wants to sell it, they are getting what they would get anyway if their client bought another realtor's listing. You can also do your own open houses.

                        The only problem with this scenario is if you have a very expensive house. Most people who are going to pay  a lot of money aren't looking for ads in the paper.  However, it could still be worth a try.

                        The problem with listing it, in my experience, is that the realtor does one important thing -- he/she brings in all the other realtors to see it.   However, often that and maybe an ad and a couple of open houses, if you are lucky --is all you will get.  If it doesn't sell right away, they often get busy and hope that some other realtor will sell your house for them from MLS.   Then you are stuck with that realtor for however long your listing is and you can't take any action yourself.

                        So, I agree with Democracyfest on this one.

                •  Please Quote the Correct Number (0+ / 0-)

                  .8 percent is for NEW homes.

                  NAR is predicting 5.3% for EXISTING homes.

                  Big difference between these two. And certainly they are not saying a .8% increase in property values by the end of 2006. They are saying a 5.3% increase in existing home median sales price. BIG DIFFERENCE. You will have to wait with the rest of us to call them out on this number. We shall see.

                  •  My fault - sort of (0+ / 0-)

                    I had those addresses from a few print outs that I had from meetings last week. (as you should be able to tell from just opening them up and the print option popping up, which just happened to me :) )

                    But let me be clear why it is "Sort of" my fault and not wholely. The NAR clarified and changed their release. An AP printed from the original release. It has been updated elsewhere on that AP story in some resources, but not by MSNBC. Example here.

                    So yes, it makes a difference. And we'll have to wait to see if it bears out. I am inclined though to believe that if the builders growth in prices slows, existing homes will slow as well. We'll have to see.

                    Thanks for the catch :)

                    General and Supreme Commander of the 82nd Chairborne: I've killed people for less!

                    by patsprouseyo on Fri Jun 16, 2006 at 09:01:39 AM PDT

                    [ Parent ]

            •  I think you misrepresent the number (0+ / 0-)

              They are saying .8 percent for NEW home median sale price.

              EXISTING home median sale price is still up 5.3%.

          •  Its not the flippers in my hood (0+ / 0-)

            The average home price is $200-250.  If the house has been updated or improved maybe $350.  They have held steady in that range for sometime.  If you were going to flip here you needed to have done before the Bush years

            Now developers are buying these $200K homes, tearing them down and building McMansions on the lots.

            The new construction averages about $600K.  I have friends who if they sold their home could get maybe $195 in its current condition yet next door is an $800 house.


            by naufragus on Fri Jun 16, 2006 at 08:10:36 AM PDT

            [ Parent ]

            •  Egh...the 800k home should increase the value (0+ / 0-)

              of the lot (not the existing home). So if lets say your street had 20 homes on it last year. The lots were all .25 acres, and all worth 50k, and the homes were all 2800 sq ft ramblers worth 150k. If 5 of those homes were bought, destroyed and replaced with an 800k McMansion, and more builders/investors/buyers were interested in buying up more old homes and building their own, the lot's value will go up. Maybe your 200k property is now worth 220k, or 230k, and that is ALL due to the lot value.

              Where do you live?

              General and Supreme Commander of the 82nd Chairborne: I've killed people for less!

              by patsprouseyo on Fri Jun 16, 2006 at 08:18:46 AM PDT

              [ Parent ]

        •  Yep. (0+ / 0-)

          From the Albuquerque Journal

             Sunday, May 22, 2005

             Investors Snap Up Albuquerque Properties and Push Prices Higher

          Albuquerque real estate agent Norm Merlock sold 24 houses worth a total $4.6 million in one weekend last month.

          None went to local residents.

          Instead, all of the buyers were California real estate investors.

          Such sales are part of a trend that home builders and real estate agents say is driving up prices in the Albuquerque metro area and making it more difficult for local buyers to find homes.

          "I've seen properties that shouldn't sell for more than $150,000 go for $200,000," said John Sheffer, a real estate agent with the Vaughan Company Realtors.

          The going rate for homes in our neighborhood is skyrocketing.  The house we bought for $104k 2.5 years ago can now be put on the market at $150k. At least in our neighborhood, the trend is owner-occupied, not investment. So far, that is.

          We in America do not have government by the majority. We have government by the majority who participate - Thomas Jefferson(-3.38, -3.38)

          by awnm on Fri Jun 16, 2006 at 08:41:47 AM PDT

          [ Parent ]

      •  given the level of spin.... (7+ / 0-)

        it's good know who's paying everyone's salary - and if there is the potential for conflict.

        that said, what matters most is the quality of their argument, the accuracy of their data and their intellectual honesty about past predictions.

      •  housing markets rarely crash (1+ / 0-)
        Recommended by:
        meaning, the price of residential housing rarely actually goes down and almost never goes into freefall, correct?  except in cases of economic catastrophes of course

        "No human race is superior; no religious faith is inferior.
        All collective judgments are wrong. Only racists make them."
        ---Elie Wiesel<

        by bleargh on Fri Jun 16, 2006 at 06:22:27 AM PDT

        [ Parent ]

        •  Yes. (2+ / 0-)
          Recommended by:
          MamasGun, Lashe

          The general consensus is for a period of price stagnation.  

          "You think you can intimidate me? Screw you. Choose your Weapon." Eliot Spitzer

          by bonddad on Fri Jun 16, 2006 at 06:24:11 AM PDT

          [ Parent ]

        •  Not really true (6+ / 0-)
          Recommended by:
          selise, mataliandy, Thistime, skrymir, corvo, Lashe

          I can think of a couple of examples where property values crashed recently.

          1.  New England early '90's.  The real estate market fell as much as 30%.
          1.  Texas/Arizona in the late 80's.  This was one reason for the S&L debacle.
          •  unless you have more (0+ / 0-)
            I think this fits in the "rarely" category

            it depends how you define "free fall" whether either of these go in the "almost never" category

            do I sound like an economist?  :-]

            "No human race is superior; no religious faith is inferior.
            All collective judgments are wrong. Only racists make them."
            ---Elie Wiesel<

            by bleargh on Fri Jun 16, 2006 at 06:58:15 AM PDT

            [ Parent ]

            •  Yes (3+ / 0-)
              Recommended by:
              bleargh, Elwood Dowd, Lashe

              you do.

              Here is another example - San Jose in 2003.

              It is not frequent, I agree.  But to call it rare...

              Ah hell, I guess rare is as vauge as "reasonable person".  I make my living arguing over what a reasonable person would do....

            •  What I have been reading (0+ / 0-)

              in the past couple of weeks is that buyers are offering 20% below asking price and sellers are forced to take offers


              by naufragus on Fri Jun 16, 2006 at 07:23:03 AM PDT

              [ Parent ]

              •  Many sellers ask too much (0+ / 0-)

                For example, in Madison many near-downtown FSBO sellers ask for more $100K over assessed value. Really, though, their homes merit roughly $25K over assessment (according to comparable sales). If you were to look at the listings you'd think all 3BR homes on the near eastside go for $300K or so. If you look at actual sales data, you'd see that many homes actually sell in the vicinity of $240K.

                I wouldn't say the prices are going down, but you can't get $100K over assessment in Madison like you might have been able to in 2004-5. Inventory is too high now.

                •  Asking too much (1+ / 0-)
                  Recommended by:

                  A two-acre lot adjacent to ours sold three years ago for $40k on an asking price of $60k.  A three acre lot adjacent to us on the other side went on the market a year ago for $325k (recently reduced to, not kidding, $299,999.95).

                  (For the record, we bought our 10-acre parcel in 2000 for just over $100k with a home on it.)

                  Ok, the three acre lot has some "river frontage."  However, that "river" is mudflat most of the day, the other adjacent lot is a half-acre with an aging trailer home and the view across the river is a sprawling, abandoned manfacturing plant (which, interestingly enough, appears to have been Photoshopped out of all the pics posted with the online listing).

                  Our guess is that the owners of the thre-acre parcel only recently heard about the "party" and are trying, belatedly, to cash in.  Most folks who know the property are thinking, "Yeah. Good luck with that."

                  Private life is all about managing pain. In business and government, this means externalizing and deferring costs whenever possible.

                  by sxwarren on Fri Jun 16, 2006 at 10:04:34 AM PDT

                  [ Parent ]

                •  We're seeing a lot of that while house hunting (0+ / 0-)

                  Our area (city of 80,000-ish in the midst of a large rural area) hasn't had any huge runups in the last several years, and valuation has been a nice, SLOW, steady growth. Good time to buy here, we understand. (Ran buy vs rent calcs from a few different places - we're definitely better off buying.)

                  Lots of places locally going on the market a bit high, and eventually selling for less. Many of them have the caveat "existing lender approval required", indicating that the people selling the house owe that much - or more - on their existing mortgage. Hard to negotiate under those circumstances...

                  We're careful; I check property tax records on places we're interested in to get a rough idea of valuation. It's not an appraisal, but if it's within 10-20% of the asking price, I generally consider the asking price to probably be somewhat reasonable and the house worth checking out. (We do have a great Realtor who's a veritable fount of useful info.)

                  Occasionally there are exceptions - if there's a big difference (30-40% or more), but the listing notes a lot of renovations (updated kitchen/ bath, siding, new roof/ furnace/ garage/ addition, that kind of thing) it may still be reasonable.

                  Hell of a lot nicer looking now than when I was looking (in a major metro area) in 1999. Wasn't even worth bothering with putting in a full-price offer then; everything was going 10-30% over asking price with bidding wars. That was seriously f'ed up.

                  Ignorance killed the cat. Curiousity was framed.

                  by Lashe on Fri Jun 16, 2006 at 10:34:56 AM PDT

                  [ Parent ]

          •  Daisycolorado pointed out (0+ / 0-)

            several months ago there are other markets (southern CA, Colorado, New York, etc), however all of those housing market "crashes" happened because of other economic reasons.  For instance Houston fell apart in the late 80's due to the bust in oil.  Jobs fled Houston, people had to move, the housing market had several sellers for every buyer.  Hence too much supply, not enough demand.

            How can the be replicated nationally (I guess a repeat of the Spanish Flu would be one way)?

            The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.

            by deathsinger on Fri Jun 16, 2006 at 07:22:25 AM PDT

            [ Parent ]

            •  How get a national housing crash? (3+ / 0-)
              Recommended by:
              MamasGun, Lashe, NearlyNormal

              Well, in the case of the dotcom's, I well recall a Barron's cover the weekend after Nasdaq 5000 entitled, "Burning through cash?" pointing out that a fair number of dotcom's were only a few months away from running through all of their cash.  Nasdaq crash started that Monday.

              In the case of housing, it may be that there are enough homeowners/speculators with toxic mortages such as "interest only" ARMs and "stated income" ARMS, that when those reset, they similarly will be "burning through cash" and only a few months from disaster.

              We know that housing inventory is still increasing dramatically, and affordability is at record lows.

              That could be enough to trigger a national crash (although Wall Street seems to be betting against that scenario, and I'm skeptical) -- although personally I do think there will be enough pain for it to be a "hard landing."

              In any event, I'm also skeptical of a builder-backed study relying on household formation citing in large part divorces as somehow propping up the market.

              •  There is one major difference between (0+ / 0-)

                stocks and housing.  I can sell all of my stock portfolio, put the money in a hole if I want to.  I cannot, however, just stop living somewhere.

                As far as maybe enough toxic mortgages, I haven't seen the numbers, but I doubt it.  What percentage of homes (not mortgages, my father and father-in-law have homes, but no mortgage) have those types of loans?

                The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.

                by deathsinger on Fri Jun 16, 2006 at 08:01:47 AM PDT

                [ Parent ]

                •  %age of toxic loans (0+ / 0-)

                  I can't give you a link offhand, but I know there have been studies in localities in Florida, for example, where it was something on the order of 30-40%, even I think a few times over 50% of all mortgages in 2004-5.

                  What I haven't seen, and I don't think there are published statistics on, are mortgage refinancings where the homeowner takes out all the equity on a house that has inflated from, e.g., $200k to $400k, and takes on a new, toxic, ARM mortgage.  I'm not sure anybody knows that (or if they do, they're keeing it to themselves while they are busy making a ton of money speculating in the financial markets!)

                  •  Again mortgages (0+ / 0-)

                    in a two year period.  What percentage of homes does that comprise?  In my subdivision 3 homes have sold in the past 2 years (yes I realize that in many places in FL it is higher), but still I don't think that 10% of homes turn over in a year or even two.

                    The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.

                    by deathsinger on Fri Jun 16, 2006 at 08:31:38 AM PDT

                    [ Parent ]

                    •  Mortgage VS Margin (0+ / 0-)

                      I think that what scares me the most about the housing market is that the mortgage application has become a joke. Anybody can go in a get a mortgage. Zero down. No Doc. No Problem.

                      No brokerage in their right mind would lend out money on these terms to by a speculative investment, but the mortgage/banking industry think this is fine.

                      When your stock investment goes south and you are on margin you have to come up with cash quick. When your house investment goes south and you have a mortgage you still have to come up with cash, but it is a slower process. It is still a margin call, even if people don't want to think of it that way.

                    •  Including the refinancings, a lot (0+ / 0-)

                      but sorry, I don't have time to run down a link for that percentage right now.

                      Have a nice weekend.

                •  Hole (0+ / 0-)

                  If you sell your stocks and put your money in a hole, then wouldn't you want to move into that hole to protect your money? Maybe you'd want to keep your house so people wouldn't suspect you'd moved to the hole, but still I'd say what the hey, sell the house too, and make the whole hole commitment.

                  What's been good enough for the Democratic Party, should be good enough for you.

                  •  I think you mistake the size of my (0+ / 0-)

                    portfolio.  The hole required wouldn't accomodate my cat, let alone me...

                    The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.

                    by deathsinger on Fri Jun 16, 2006 at 08:29:54 AM PDT

                    [ Parent ]

          •  Considering appreciation is critical to (0+ / 0-)

            break even, a flat market is still a loser for an owner. With that said, housing markets certainly do decline in real dollars, I lived one of those declines.

        •  I don't know.. (5+ / 0-)

          I am no expert on this and while the value may not go down, the price you can actually get for the house might. We bought a townhouse in the early 90s in the suburbs of Chicago. A year later, we had to move and we lost 10k on the townhouse. As a newly married couple, we had to borrow money from our parents to SELL our house and it took us a year and a half to find a buyer. So while the value might not have dropped, there were so many homes on the market due to overbuilding that our home was no longer able to fetch a decent price. This probably wasn't as bad for single family homes though. We will never buy a condo/townhouse again and are much more careful about looking at the local markets and housing booms. We currently live in Florida and we are concerned by the overbuilding here. There are many many houses for sale. Fortunately, we can sit tight and let it all pass us by this time. We also own much less than our house is worth.

          •  Yep, 'hard landing' if you have to sell. (3+ / 0-)
            Recommended by:
            Lisa, mataliandy, OsoDelMar

            Suppose your city can support the sale of 100 houses a month, and last year there were only 80 for sale, priced between $150-$175 per square foot, with a median price of $160.  Basically, they all sold.

            This year, there are 300 houses for sale, priced between $125 and $190 per square foot, again with a median price of $160.  Odds are, generally speaking, only those houses priced at about, say $140 per square foot are selling.

            So, looking at the "asking prices", it's a soft landing.  If you have to sell, though, ain't no such thing!

            I think that may be what is happening now, but I don't know.

            •  in new england.... (0+ / 0-)

              there were people laid off and looking for a new job.... but, if they couldn't find one w/in commuting distance they could be in trouble.  couldn't afford to sell their house at a loss and couldn't afford not to take the job in another state.

              recipe for split families....

              thankfully, i don't think that situation latest very long.  but for the people affected by it.... bad news.

            •  It's a lot easier to sell stocks than houses (2+ / 0-)
              Recommended by:
              Athena, Lashe

              Houses are just not that liguid. In a bad market, some houses just won't sell.

        •  I mentioned this in another thread (2+ / 0-)
          Recommended by:
          selise, Lashe

          There are many 1930s townhomes and duplexes in the area.  In the 90's i was nearly priced out of the neighborhood because of rents doubling.

          I am looking to buy one of these and rent out one unit to pay the note.  I had several freinds who did this back in the 90's (but they had to sell because they lost their jobs in the early bush years.  They made about 100K profit though)

          Because of over building of new construction, rents have plummeted.  Even if I rented out both sides, it would still barely cover the payments.

          There is one cul-de-sac that everyone wanted to live in.  Properties were rented within an hour of a sign going up.  Someone literally had to die for there to be a vacany.  Now there are a few buildings that have been for sale nearly a year.  There is some new construction a block away thats been on the market now for nearly 2 years.

          by naufragus on Fri Jun 16, 2006 at 06:56:17 AM PDT

          [ Parent ]

        •  You can also lose a lot (3+ / 0-)
          Recommended by:
          Lisa, selise, Lashe

          You can also lose a lot of money on a property if you rent it out.  I got soaked on my first house - I had to move and it wasn't selling, so I rented it to my mail carrier, thinking, "she's got a job, she should be trustworthy".

          She trashed the place - ended up selling at a big loss.

        •  Not True (7+ / 0-)

          Let us examine this a little bit closer.

          We all have heard "Housing has never gone down." from realtors and others over the past few years. This comment comes from the fact that the NAR pricing has never shown a nationwide yearly median house price decline since they started tracking these numbers.

          They started tracking house prices in the early 70's. That is not that long when dealing with long term "investments" like housing. There have surely been actual declines in periods before then on a national level, but there is not good information. For example the census data only goes back to 1940, and only shows the data in question every ten years. census median home price Of course this number has not dropped in any 10 year period either.

          Why median price and not average price? Has the average price decline in any year during that time frame?

          More importantly, the price they are quoting is the price of only the homes that actually sell. Most people would not actually sell a home that has gone down in value. For example, you bought a $500,000 house last year and would like to sell it now. You realize that the market has gone down and it is only worth $450,000 now. (A minor 10% correction. Prices in Northern Virginia were down 8% from Aug 05 to Feb 06.) If you, like a lot of people recently, did not put down a down payment on this property you would have to show up at closing with a check for $50,000. Most people would not do this. They hold onto the house until the market comes back and they can sell and break even. This is what happened in the 90's. Lots of people sat on properties they had overpaid for in the late 80's and early 90's. They couldn't sell until around 2000, when prices finally got above what they had paid in 1990-91.

          In addition, many people (especially with exotic loans) would rather be foreclosed on by the bank then sell at a loss. You bought without any money down. There is no downside for you, only the bank.

          There have been regional downturns year on year, but the overall median has still gone up. "Location, Location, Location". If your house is in the wrong location and drops 20% in value, but the national median still goes up are you still going to be OK?

          They are also looking at nominal numbers and not real numbers. Shouldn't we adjust the house price for inflation?

          I'm not sure what you mean by "freefall", but I would think that my definition of "freefall" for the housing market is probably a 10% nominal drop year on year. That would have a huge impact on the US economy. You can't make direct comparisons from the stockmarket to the housingmarket because they are so different. The stockmarket can "freefall" 25% in one day and will have an impact that is mostly shock value. The housing market is much slower to do anything, but the impact is generally much larger. The IMF has a study that shows the impact on the economy of a housing bust is twice as great as a stockmarket bust.

          Finally, we must remember that this is a housing bubble we are dealing with today. Anytime you are dealing with a bubble you are dealing with irrational behavior. That is why prices go up so much higher then any rational person would take them. All bubble markets act the same way. Prices spike and then drop. It is not a "free market". We are operating under group think or a mob mentality.

          For more information check out:

          •  I heard it from a bank dude (1+ / 0-)
            Recommended by:
            Wow you completely snapped me out of my meme-repeating stupor.  Thanks.  I've always been wary of housing+mortgage industry propaganda but that one slipped through the filters.

            Of course it's implied when they say that, that you won't sell your house at a loss if you don't have to.

            Another mistake a lot of us make is talking about a homogeneous market.  And also as you point out trying to compare housing to the stock market.

            I appreciate your comment very much.  It's a great start on a potential diary that might be timely too...

            "No human race is superior; no religious faith is inferior.
            All collective judgments are wrong. Only racists make them."
            ---Elie Wiesel<

            by bleargh on Fri Jun 16, 2006 at 09:58:16 AM PDT

            [ Parent ]

            •  Read the bubble blogs (1+ / 0-)
              Recommended by:
              I am getting really disturbed by a lot of Kossacks' dismissive attitudes toward a housing crash--and the amount of conventional wisdom being repeated, all of it wrong. I'd hate to see a Kossack lose his or her shirt by not being prepared.

              First, enough with idea that there can't be a national housing crash. We've just gone through a national--indeed, a worldwide--housing bubble. This has been, in fact, an international credit bubble, not a housing bubble, which explains why it was so widespread. The downside will be equally global.

              And the soft-landing scenario is no longer espoused by economists other than David Liar-rrhea at NAR. That's to be expected. This entire runup was fueled by unrealistic expectations of impossible continuing appreciation. When new marks stop buying into a Ponzi scheme, it doesn't "cool down"--it stops.

              Please, read the blogs. You'll discover there's far more overbuilding than you ever imagined (in the next year alone, San Diego will release onto the market a 10-year supply of condos!!) You'll find that speculators were a much bigger part of this game than anyone realized. And you'll also learn that housing has not slowed--in many markets, buying has come to a screeching halt.

        •  Some differences (1+ / 0-)
          Recommended by:

          While I completely agree with past history and think your conclusion is probably sound, there is some reason for concern. We have rarely had this much debt, and are exiting a period of historically low interest rates. This may be a unique situation. Add to that the fact that much of this economic expansion has been in construction, real estate and finance, and it has the potential of setting up a viscous cycle. (A downturn in housing causes layoffs in real estate, finance and construction. Those people lose their homes, causing further depression, etc.)This is just beginning to occur.

          Then we have a bunch of sub-prime buyers and speculators in risky loans, plus rising health and energy costs.....This could get very ugly. Kevin Phillips talks about the end of empires and how they rack up huge debts, drawing a parallel to the current U.S. situation. I worry this is going to end badly.

          Impossible is nothing

          by DrSpike on Fri Jun 16, 2006 at 03:16:09 PM PDT

          [ Parent ]

      •  What Selise said (3+ / 0-)
        Recommended by:
        Lisa, selise, bonddad


        No problem, I just didn't have the time yesterday to go further into the bias issue.

        I am busy crunching some housing numbers, and I ought to be able to post them next week.  So far, they seem to be supportive of a "soft landing" scenario, but they are only "asking" prices which creates the obvious problem that, especially with bloated inventory, the only "selling" prices might be much more drastically reduced.

        Anecdotally, while I was "working" yesterday I was dealing with someone who manages resort condos for a living.  He told me the high water mark in one development was $800k last year; this year there are identical units selling for $400k.  That sounds, ummm, not so soft!


  •  bernancke's speech (10+ / 0-)

    I am no economist, heck i have a hard time balancing my 'checkbook" and if it contains numbers it all looks chinese to me BUT I do try and follow along when people like greenspan and now bernancke give major speech's that will effect the market' yesterday's speech.

    what bothered me about that speech is that one of the main drivers of our economy and our country seemed to be left out of the equation and the projections....average people.

    I heard about long term and short term projections...i heard about about international markets, i heard about averageing out in the long run blah blah blah but i heard very little about how this is all negatively effecting average america's, with families to feed and mortages to pay and emergencies to save for.

    Bernancke pretty much sluffed over all this by saying the american consumer is resilient.  

    so not being an economist i need to ask a much of a role does consideration of the plight of the average working american play in making fed reserve policy?? in making ANY economic policy?  

    "if all the world's a stage, who is sitting in the audience?"

    by KnotIookin on Fri Jun 16, 2006 at 05:53:55 AM PDT

  •  struggling to understand (3+ / 0-)
    Recommended by:
    selise, DrSpike, corvo

    First off could you explain the recent upward trend in stocks? It seems that they were headed down for about two weeks largely (we were told) because of the fear of inflation and the ensuing interest rate hikes by the Fed. Then when the inflation numbers came out and were worse than expected, stocks started going up again, WTF?
    Secondly, if energy prices are possibly the single biggest factor in drving inflation, and they are going to continue to inevitably increase, why is the Fed convinced that raising interest rates will do anything to quell inflation?
    Third, since enrgy prices affect everything we buy, is it really possible to seperate out it's effect to arrive at a so-called "core" rate of inflation?
    Thank you by the way for your many informative diaries, it's like taking a class in economics. Sadly I can't claim to be one of your better students.

    •  asdf (2+ / 0-)
      Recommended by:
      cookiebear, MamasGun

      Yesterday's bounce was a technical bounce, meaning the charts of the markets were oversold based on technical indicators.

      Raising interst rates slows the economy which slows demand which slows purchases which slows purchases of stuff.

      "You think you can intimidate me? Screw you. Choose your Weapon." Eliot Spitzer

      by bonddad on Fri Jun 16, 2006 at 06:02:12 AM PDT

      [ Parent ]

      •  Oaky (0+ / 0-)

        I can see the logic behind slowing things down, to a point, but it still seems that inflation is just plain inevitable with rising energy prices being the prevasive influence they are. Since this cannot be stopped by the Fed, that of course leads to the Stagflation you are warning of, but I have to ask, is this hyper concern with inflation justified?
        I realize we don't want enything like what was seen in Germany before the war, but is inflation of any kind so horrible that it requires killing off all growth to prevent?
        Is the Fed being myopic?

        •  Stocks are inflated now (0+ / 0-)

          Just look at the evidence.  They are way over valued

          The steep increase from 1995 to even now is untenable.

          •  not enough to conclude....? (2+ / 0-)
            Recommended by:
            Sanuk, OsoDelMar

            don't see how your graph leads to your conclusion.  not disagreeing with your conclusion - just how you got there from the graph.

          •  not sure I understand the correlation (0+ / 0-)

            Okay stocks have gone up rapidly as more and more people have become investors. Greater demand for them has driven up prices, which seems like classic supply and demand stuff to me. Does that necessarily relate to the cost of goods? Also, what is the harm in the prices of stocks going up if more people want to buy them?
            This is the key to my question, I don't see the mere fact that inflation is occuring as such a tragedy, as long as it doesn't grow to the absurd levels where you need wheelbarrow loads of cash to buy bread, and I just don't see that happening, regardless of the fact that stock prices are rising.
            Is it worth killing the economy to stop inflation?

          •  This graph (1+ / 0-)
            Recommended by:

            shows the problem with using absolute numbers.

            For example, stocks doubled from 85 to 95.  In percentage terms, the increase from 95 to '05 is no actually less.

          •  That graph is incredibly misleading (1+ / 0-)
            Recommended by:

            That is linear as opposed to logarithmic.  Look at a logarithmic graph; we have had steady growth for a long time.

          •  earnings (2+ / 0-)
            Recommended by:
            airwave, rcbowman

            Since the bull market began in 2003, corporate earnings have risen roughly twice as fast as stock prices, indicating stocks have a way to go before they are considered overvalued....


            P/E ratios are back in reasonable territory because of this (after being absurd a few years back). The Republican premise is that corporations can do well even as the middle class is squeezed. They may be right; they may be wrong. They are morally wrong even if they're economically right. But if they're economically right then stocks are not overvalued.

      •  You certainly dismissed that fairly quickly (0+ / 0-)

        When the market goes up, it is due to a "technical" bounce, yet when the markets dropped precipitously last week, it was due to a failing economy.

        The past two days were the first two back-to-back double digit days for the DJIA in 3 years.  Technical, to be sure.

        •  asdf (1+ / 0-)
          Recommended by:

          The markets dropped right after Bernanke's speech that I cited above.

          The markets rebounded yesterday because every technical indicator indicated the market was oversold.

          "You think you can intimidate me? Screw you. Choose your Weapon." Eliot Spitzer

          by bonddad on Fri Jun 16, 2006 at 09:10:35 AM PDT

          [ Parent ]

  •  the only good news (2+ / 0-)
    Recommended by:
    Lashe, lightfoot

    here is that the shit will hit the fan while Bush is still in office. I was concerned that he'd skate out in time, but it looks like the downturn will occur on his watch.

    SO how does the admin play it? They came into office talking up a recession. I was going to ask what will be their spin and what will be their policy, but we've learned over and over that politics IS policy for these guys.

  •  Though scary, I've enjoyed your recent posts (1+ / 0-)
    Recommended by:

    I have really been into watching my 401k investments over the past year or so (instead of picking a few funds and forgetting about it as it seems many do).  International funds have been performing well until a couple months ago.  Now it seems everything is trending downward (cash, bonds, stocks).  If things keep going as they are will there be any such thing as a "stable asset"?  
    Also, a really stupid question (I mean it bonddad, this one is stooopid):  What the hell does "asdf" stand for?  

    "I can't take his money, I can't print my own money, I have to work for money. Well, why don't I just roll over and die!" - Homer S.

    by woobie on Fri Jun 16, 2006 at 05:56:57 AM PDT

    •  asdf (0+ / 0-)

      Same here.. after the early May rate hike, things have been down.

      asdf is just filler because you have to put a subject line. you'll see aoeu from a dvorak keyboard user (TealVeal, and sometimes myself are the only ones here I think..)

    •  I am very invested internationally (0+ / 0-)

      And the emrging markets did take a hit this spring - a big one.

      This was after some increadible years.  

      My main fear generally is about global aggregate demand.  The emerging markets are not creating enough domestic demand, and are therfore reliant on exports - particularly to the US.

      As some point, the ability of the US to run larger and larger trade deficits will stop.  

  •  Krugman today (10+ / 0-)

    I'm getting this second-hand, from Atrios, but the question seems good:

    Fed officials now seem worried that we may be seeing the start of another round of self-sustaining inflation. But is that a realistic fear? Only if you think we can have a wage-price spiral without, you know, the wages part.

    •  you beat me to it.... (2+ / 0-)
      Recommended by:
      Elwood Dowd, lightfoot

      my question also  - not your '70s- type stagflation then? something else?  seems we run into the most problems (econ-wise) when the problem is new (or the experts think it is) and there is no well understood action to take.

      •  70s type stagflation (2+ / 0-)
        Recommended by:
        MamasGun, blue jersey mom

        70s type stagflation was characterized by oil price hikes, which I guess is your point.

        Per my crude understanding, stagflation means that prices increase without job or wage growth. Presumably this is due to higher prices for a truly fundamental commodity such as oil. "Regular" inflation is a purely monetary phenomenon-- i.e. a guy gets paid more to work a day but then has to spend more to buy a loaf of bread. The value of labor relative to bread remains more or less constant, with the thing that changes being the value of the money used for the transaction.

        The 70s stagflation era ended (very broadly speaking) as the North Sea and North Slope oil provinces came into production. We experienced ~20 years of cheap oil, lots of economic growth, the Clinton boom years, etc. Hard to see where additional oil production will come from this time.

        Admittedly this is a super-simplified analysis, but it seems compelling to me. I'm willing to be educated.

    •  A great point (1+ / 0-)
      Recommended by:

      See my post below on productivity.  Note unit labor costs are not rising....

  •  Productivity gains? (2+ / 0-)
    Recommended by:
    MamasGun, ms badger

    A lot of what comes out statistically as productivity gains amounts to offshoring jobs to where they are done more cheaply, thus leading to lower unit labor costs.  I wonder if this process is nearing a point of diminishing returns.  

    Once you've sent all the manufacturing to China and Mexico, and the software jobs to India, how much is left to send?  Maybe that's one of the reasons inflation is beginning to be felt.  

    With all his noble still bears in his bodily frame the indelible stamp of his lowly origin--Darwin

    by MadScientist on Fri Jun 16, 2006 at 06:02:32 AM PDT

    •  i wonder... (1+ / 0-)
      Recommended by:

      how much of productivity gains are from offshoring vs. working longer hours vs. technology improvements.

      am i the only one who doesn't know this?

    •  Productivity is growing (4+ / 0-)
      Recommended by:
      selise, opinionated, MamasGun, fat old man

      And here we are talking about US productivity.

      Data here:

      Here are some comments I have seen recently here about these gains:

      1.  It because people are working longer hours:

      Not true, the rise in productivity is growing faster than hours worked.

      1.  It's because of offshoring

      Not true - this is US productivity - ie work done within the US

      Moreover, there is no evidence of a slowdown in productivity.

      Take a step back, people.  Technology (including the Internet) is making people more productive.  

      What is worrying about Bernanke's statement is that inflation must be between 1 and 2 percent.  This conclusion has enourmous implications that really merit further review.  In fact, this is a prime example of how fundemental assumptions in economics are left unchallenged in the popular press.

      I can assure you a AFL/CIO economist could talk for hours about how this narrow range will make it very difficult for workers to see any wage increase at all.  

      •  The data doesn't show that (7+ / 0-)

        If I understand it properly.

        The "hours" that the BLS tracks are compensated hours. An exempt employee will -- I believe -- be counted as contributing 40 hours per week whether s/he works 40, 45, or 50. (Since we don't fill out timecards, the BLS has no reliable data to use any other number.)

        The BLS also doesn't know if WalMart is making some employees work off-the-clock.

        I believe there is an IT-related improvement in productivity -- but the BLS data doesn't rule out longer unpaid hours having a greater role.

      •  thank you (3+ / 0-)
        Recommended by:
        gmhowell, sxwarren, lightfoot

        I posted above asking just why this hyper concern about inflation is justified, and no one has yet given me a good answer. I admit to being pretty naive about economics, which is why I have been enjoying these posts, but I just don't understand why a small amount of inflation is considered so tragic. If you are a farmer who borrows money to plant a crop, and the value of the crop rises while it grows, as the interest rate you pay on the loan becomes relatively less to what is available to others, it seems to me that you are making out okay as long as we don't have a runnaway spiral leading to worthless money. It makes sense to guard against that, but the Fed seems to be concerned with inflation above all other considerations and seems willing to kill off growth entirely to avoid it even when increasing energy prices make that impossible. Why is this a good thing? Anyone?, I really want to get a handle on this.

        •  maybe....? (4+ / 0-)
          Recommended by:
          Elwood Dowd, sxwarren, Cmyst, chacha1847

          my very simplistic world view - probably wrong as well as simple (hopefully one of the experts will jump in here and explain):

          inflation good for borrowers. bad for lenders.

          who had the most political power?  the folks with the money - that would (usually) be the lenders.

        •  You can go further (1+ / 0-)
          Recommended by:

          William Greider wrote a book about Volcker and the Federal Reserve (Secrets of the Temple) in which he argued that inflation has some very beneficial effects.

          If wages spiral up along with prices, workers don't suffer. The value of their homes, hich is the biggest single asset for most, tends to grow (IIRC) even more rapidly. Money that is tucked away safely in low-yield accounts is forced into circulation.

          It was a contrarian view, and didn't completely convince me. But "inflation is bad" is clearly an oversimplification.

        •  I have noticed that when the Fed Chairman (1+ / 0-)
          Recommended by:

          talks about "inflation", he is often using it as a code word for "wage inflation" (inflation from the perspective of corporations) other words, real rising wages for you and me.  This was definitely true for Greenspan and Paul Volcker, and I don't expect anything different from Bernanke. Their biggest fear is creating a shortage in labor that would allow workers some real leverage and bargaining power, and they have shown that they are willing to sacrifice potential economic growth as the price for pushing their underlying ideology and keeping the work force "in its place". As long as wage inflation lags behind core inflation, they can continue the "miracle" of squeezing blood from the rock.

          Insert Meaningful Signature Less Than 160 Characters Here.

          by lightfoot on Fri Jun 16, 2006 at 11:44:19 AM PDT

          [ Parent ]

      •  Also on outsourcing (3+ / 0-)
        Recommended by:
        selise, bara, lightfoot

        I believe it would in many cases play out something like this in the BLS numbers:

        Last year we ran our own call center in Omaha with US employees and spent $5 million on their wages, out of a total payroll of $50 million, and we generated $100 million in value-add. The BLS sees that as generating $2 per $1 of payroll.

        This year we outsourced the call center to India at a cost of $3 million / year. We pay the outsourcing firm a monthly fee, which is NOT payroll. The BLS treats that the same as if we had leased computer time and cut payroll. We are now generating $100 million of value-add for $45 million in payroll: $2.22 per $1.

      •  What are we producing (0+ / 0-)

        with all this productivity.  I cant think of 1 thing aside from movies that we even make here

        by naufragus on Fri Jun 16, 2006 at 07:00:38 AM PDT

        [ Parent ]

        •  Productivity rate != productivity (0+ / 0-)

          Building 100 widgets for $100 payroll cost has a productivity rate twice as high as building 1000 widgets for $2000.

        •  In 2004 (0+ / 0-)

          The US made 40.8 million metric tons of pig iron, 96.2 million metric tons of steel, 11,989,387 motor vehicles... Do I need to go on?

          The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.

          by deathsinger on Fri Jun 16, 2006 at 07:42:07 AM PDT

          [ Parent ]

          •  Ok, but... (0+ / 0-)

            How much of that pig-iron and steel now gets shipped to SE Asia to be turned into products for the US consumer market and into parts included in those "US made" autos?  How do the current percentages compare to 40 or even 20 years ago?

            I have the impression (perhaps wrong) that the US economy is no longer a net importer of such raw materials, no longer uses them to manufacture goods that are sold abroad - at least not to the extent that once prevailed.

            Private life is all about managing pain. In business and government, this means externalizing and deferring costs whenever possible.

            by sxwarren on Fri Jun 16, 2006 at 09:18:09 AM PDT

            [ Parent ]

            •  Your impression (1+ / 0-)
              Recommended by:

              is not correct at least in the case of steel.  The US is a net steel importer.  We exported only 7.3 million metric tons while importing 29.1 million metric tons.

              I am not sure of the time horizon you are using in the statement

              no longer uses them to manufacture goods that are sold abroad - at least not to the extent that once prevailed.

              If you are talking about the 1950's you are correct.  The US started running a trade deficit in the 1980's.  If you are comparing the 1990's, not so much.  A huge chunck of the increase in trade deficit in the last 7 years is due to the price of oil going from sub $20/barrel to over $70/barrel while total US oil production has fallen and usage has increased.

              The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.

              by deathsinger on Fri Jun 16, 2006 at 10:49:11 AM PDT

              [ Parent ]

      •  Productivity gains do not benefit the workers (9+ / 0-)

        who are the source of increased productivity.  We would expect, if the benefits of increased productivity were equally distributed, that these benefits would accrue for the majority of workers either in the form of increased wages or in an increase in leisure time without suffering loss in wages.  But the benefits of large productivity gains in the U.S have not been distributed equally.  In fact, it can be argued that increased productivity is harmful to the majority of workers, under our current economic system. A very interesting analysis of this phenomenom is studied in detail by Ian Dew-Becker and Robert J. Gordon, in their paper "Where did the Productivity Growth Go?" Their abstract begins with the observation:

        A basic tenet of economic science is that productivity growth is the source of growth in real income per capita. But our results raise doubts. This paper creates a direct link between macro productivity growth and the evolution of the income distribution at the micro level. Our most surprising result is that over the entire period 1966-2001, as well as over 1997-2001, only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth. Growing inequality is not just a matter of the rich having more capital income; the increasing skewness in wage and salary income is what drives our results. Stated another way, growth in median real wage and salary income barely grew at all while average wage and salary income kept pace with productivity growth, because half of the income gains went to the top 10 percent of the income distribution, leaving little left over for the bottom 90 percent.

        The authors come to what they call their "Stunning Micro Conclusion":

        A basic tenet of economic science is that productivity is the seed that creates the flower of a nation’s standard of living. But our results raise doubts. Our most surprising result from the large IRS micro data set is that over the entire period 1966-2001, only the top 10 percent of the income distribution enjoyed a growth rate of total real income (excluding capital gains) equal to or above the average rate of economywide productivity growth. The bottom 90 percent of the income distribution fell behind or even were left out of the productivity gains entirely. Another way to state our main results is that the top 1 percent of the income distribution accounted for 21.6 percent of real total income gains during 1966-2001 and 21.3 percent during the productivity revival period 1997-2001. Still another way to describe our results is that the top one-tenth of one percent of the income distribution earned as much of the real 1997-2001 gain in wage and salary income as the bottom 50 percent.
        Our results show that the dominant share of real income gains accruing to the top 10 percent and top 1 percent is almost as large for labor income as for total income.


        The post-1995 productivity growth revival did not automatically signal good news for the majority of American workers and households. Indeed, to the extent that the productivity growth “explosion” of 2001-2004 was achieved by cost-cutting, layoffs, and abnormally slow employment growth (as suggested in Gordon, 2003), then the historical link between productivity growth and higher living standards falls apart. Not only have the bottom 90 percent of American workers failed to keep up with productivity growth, many have been harmed by it.

        A very worthy and recommended article, with extensive data in the appendices.

        Source:  Where Did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income(with Ian Dew-Becker). presented at Brookings Panel on Economic Activity, September 9th, 2005, revised version forthcoming in Brooking Papers on Economic Activity, 2005, no. 2. CEPR Discussion Paper 5419, December 2005, and NBER Working Paper 11842, December 2005.

        Insert Meaningful Signature Less Than 160 Characters Here.

        by lightfoot on Fri Jun 16, 2006 at 08:31:34 AM PDT

        [ Parent ]

    •  Productivity (0+ / 0-)

      Productivity is generally output per worker per hour. So while profitability is helped by offshoring, it doesn't play directly into the productivity stat.

      A lot of the productivity gain is based on having finally figured out how to get efficiency out of computers. For instance, the whole just-in-time thing in retailing - where warehouses are rarely used anymore because through computer networking you can arrange to have the goods produced and shipped from the factories just in time to reach your stores as the shelves empty of them - avoids a whole lot of inefficiency. Warehouses essentially contribute nothing to the productivity of the economy. Also the flattening of corporate heirarchies is largely based on computer communications having obsoleted a lot of middle-management positions where the principle product was communication within the organization. So we've lost a lot of warehouse workers and a lot of middle management paper pushers. That makes us more productive with the workers we've got left, a higher proportion of whom are actually producing something.

      Computers have also been essential to offshoring. Those instant communications obliterate the former constraint of distance. Back in the early 50s most country-wide American firms maintained essentially separate operations either side of the Rockies - transportation and communication was just too much of an obstacle before Interstates and jet planes. By the 60s that had disappeared - it was as if the Rockies didn't matter any more. Now it's as if oceans don't matter.

      There's a lot of efficiency that's been gained by this. There may be a lot farther to go. Consider what happens when computerized, robotic assembly becomes cheaper than even hiring Chinese or Indonesian or Bangla Deshi workers.... I'm sure the Chinese have. And that's why they're working so hard, and saving so much, while they've still got an advantage.

      •  I think that's incorrect (0+ / 0-)

        as I noted above.

        Outsourcing a particular function, such as a call center, moves money from the 'labor expense' to the 'external services expense' column. As a result "output per worker per hour" increases -- just as if that the company had cut headcount by leasing robots instead of paying a foreign call center.

  •  I had a conversation with a stockbroker... (0+ / 0-)

    a few months ago.  He was pushing something or another that I didn't like the smell of.  I asked him what would happen if we had stagflation.  He was speechless.

    •  Hmm.... wonder why? (4+ / 0-)
      Recommended by:
      MamasGun, Cream Puff, rcbowman, lightfoot

      Is it because the idea of "stagflation" is so tied in with the idea of "failed president Jimmy Carter"? People can't believe that an actual Republican would preside over stagflation?

      One reason Bush is Worst President Ever: he combines the worst flaws of all our recent presidents, then adds a few of his own. Now, if we can just get him to get caught with his pants down, he'd be batting 1000...

      •  We need to tie 'stagflation' to Dubya/GOP (0+ / 0-)

        This is perfect. And this might keep the GOP out of the White House for as long as the perception of Jimmy Carter's administration kept Dems out of the White House.

        Failed President George W. Bush. Keep that meme going.

        Kalifornia Kossacks: let's make November "Revenge of the Nerds: The Sequel!"
        Flush Ah-nuld down the toilet!
        Econ: -4.63 Soc: -6.92

        by MamasGun on Fri Jun 16, 2006 at 09:03:05 AM PDT

        [ Parent ]

      •  I wonder if (0+ / 0-)

        we could sponsor a sexy intern infiltrator who:

        • can talk baseball;
        • loves Jesus and quotes Leviticus, but doesn't try to interpret the Bible too much;
        • has her own parental conflict issues (so that Georgie can commiserate)
        • can pretend to be really dumb so Bush feels smarter around her.

        Oh, and it would be nice if she could get him to share a beer with her.  Might as well get him off the wagon too.

        Never play leapfrog with a unicorn.

        by Cream Puff on Fri Jun 16, 2006 at 09:14:30 AM PDT

        [ Parent ]

  •  Money quote from your diary: (0+ / 0-)

    Bernanke needs to work on his public relations abilities.

    Greenspan used to make comments only occasionally; Bernacke seems to be speaking out very frequently--causing some of these crazy ups and downs????

    •  He's a new guy (2+ / 0-)
      Recommended by:
      MamasGun, 3goldens

      so there will be some rough spots.  But, his statements are contradicting each other which is screwing everybody up.

      "You think you can intimidate me? Screw you. Choose your Weapon." Eliot Spitzer

      by bonddad on Fri Jun 16, 2006 at 06:23:37 AM PDT

      [ Parent ]

      •  probably not used to the spot-light... (0+ / 0-)

        it's got to be freaky to have everyone pouring over every word, trying to read what may amount to tea leaves...

        sorta like the old kremlinology - but probably with more pressure because there are more people doing it and more money at stake.

        on the other side - his language is more of an unknown to the tea leaf readers, and so can more easily be misunderstood... the tea leaf readers probably need some time to figure out how to decipher his statements too.

    •  Greenspan was dealing with a too-hot grill (6+ / 0-)

      Bernanke is realizing he's got a house fire. Bernanke knows the truth about the government numbers for inflation AND growth. He knows they've been bullshit. We've already got the "stag" and the "flation" is much worse than the numbers tell.

      I can't wait until Bush figures out he can't float all this until after the election in November.

      That's coming soon.

      You can't have year after year declines in real wages and still have real growth. These sons of bitches have been pushing each other out of the way to stew the last laying hen.

      •  questions.... (0+ / 0-)

        declines is real wages is "just" for about 80% of the population, no? some people are doing very, very well.

        also, for a while (in the 70s) weren't there increases in labor participation (women entering the workforce)?

        couldn't these, and probably other things, mean that the overall economy - as measure by GDP (a shitty measure, imio - In My Ignorant Opinion) was growing?

        of course, even if this is so, i don't see how it can continue forever.....

      •  Burning all the railroad ties from the tracks (0+ / 0-)

        ahead to make the train go faster in the short run that is getting shorter all the time.

        Private life is all about managing pain. In business and government, this means externalizing and deferring costs whenever possible.

        by sxwarren on Fri Jun 16, 2006 at 09:27:23 AM PDT

        [ Parent ]

  •  I'm 45 and have well educated friends (2+ / 0-)
    Recommended by:
    MamasGun, lightfoot

    who have never even heard the term stagflation (I guess we were all at Peter Frampton concerts in the 70's).  They look at me like I'm crazy when I use the term.  Until I explain it to them and talk about the real economic hardship it caused in our (apparently misspent) youths.....  Then they just look worried.

    "Victory means exit strategy, and it's important for the President to explain to us what the exit strategy is." -Governor George W Bush (R-TX)

    by espresso on Fri Jun 16, 2006 at 06:37:25 AM PDT

  •  No one wants to say the D-word (0+ / 0-)

    A few years back several futurists were predicting a depression.  At the time I just chalked it up to doom and gloom sensationalizing.  Many of the things they warned about are coming to pass.

    by naufragus on Fri Jun 16, 2006 at 06:41:01 AM PDT

    •  what things? (0+ / 0-)

      "Many of the things they warned about are coming to pass."

      just curious to know who said what ... got some links?  thanks.

      •  no... (4+ / 0-)
        Recommended by:
        selise, corvo, Lashe, lightfoot

        Its hard to go back 3-4 years....and some where radio program guests

        the real estate bubble... people being upsided down on their houses...

        the global markets, the dollar sell off, petro moving to euro's, national debt etc, the dimishing middle class. if not worldwide economic collapse a long term sustained downturn

        one guy was basically saying that the american dream was dead, that no longer would the next generation be better off than last.  

        by naufragus on Fri Jun 16, 2006 at 07:08:21 AM PDT

        [ Parent ]

        •  A new depression (5+ / 0-)
          Recommended by:
          MamasGun, sxwarren, corvo, Cmyst, chacha1847

          In the 20th century the US, Canada, Europe, and parts of Asia -- the so-called "first world" -- enjoyed the benefits of technology manifested in optimism, rising expectations, and progress, progress, progress.

          It couldn't be sustained -- not environmentally, and not economically. A lot of that prosperity was based on exploiting things with an obvious endpoint -- cheap oil, the capacity of the natural environment to absorb our junk, and the capacity of people in the poorer parts of the world to give us cheap labor and raw materials.

          Here in the US, one of the things we enjoyed in the 20th century was being central star player on the world stage. Woo-hoo! Lookit us! We're number one!

          All of that had to end, though, and it is in the process of ending, and it's going to hurt -- hence the possibility of something as catastrophic as the Great Depression. But maybe we can get through it better if we recognize the artificiality of some of our expectations.

          Why do we, as Americans, assume that all of us will someday own land? Why do we assume that our children will be "better off"? How do you define better off anyway? If future generations live in a world of tiny rental apartments overlooking the park, where nobody has a car, but a single cheap pill cures nearly all cancer, are they better off, or worse off?

  •  Oh the irony (13+ / 0-)

    One big reason we as a nation pursued neoliberal economic policies and gutted the legacy of the New Deal was the stagflation of the 1970s. Now we're being told that, 30 years of those policies later, we're back where we started?


    Not laughing at you, bonddad, just laughing at the general situation.

    Krugman makes a good point today - fears of inflation are somewhat overblown because there is no pressure on wages to rise. In that way neoliberalism, the conservatives who pushed it, and the Dems who meekly went along all achieved one of their central tasks and achieved it quite well - breaking the ability of labor, of working Americans, to press for better wages. A central tenet of neoliberalism is that worker power must be broken for the transfer of wealth to the richest percentage that is neoliberalism's goal. In that, we have succeeded all too well.

    I think Krugman's point about wages is the more important one, not his about inflationary fears. What we are seeing is an economy geared toward high spending, but a workforce that simply cannot afford to keep up. That's what's led to the overreliance on debt and credit cards to finance consumer spending - there is a growing and dangerous gap between wages and the average cost of goods. And nobody seems to be giving a shit about this situation.

    We need to generate pressure on wages to rise. We need to undo the neoliberal settlement of the 1970s.

    I'm not part of a redneck agenda - Green Day

    by eugene on Fri Jun 16, 2006 at 07:03:33 AM PDT

  •  Time lag may just look like stagflation (4+ / 0-)

    The core inflation rate that rose higher than expected is not a real problem. When energy prices initially rose, companies tried to hold off on passing on their higher costs. Now, with no end in sight to higher energy prices, companies have decided they must pass on these higher costs. The result is higher core inflation. However, as Krugman notes, there are no real increases in wages which is a big part of spiraling inflation.

    Also, the increase the Fed orchestrated in interest rates has slowed the economy, but the time lag prevented it from occurring until recently. But, it is working. And the result is just a little slower growth, not a shrinking economy. The slowing growth will cool inflation as planned. But, this is a lot different than true stagflation where the economy is showing little (or negative) growth while inflation continually spirals upward.

    In the long run, the higher energy prices will be good for us, since this motivates the development of  alternative energy sources today, which we need now in order to have these alternatives fully developed when we run out of oil and natural gas in a few decades.

    I don't think today we have to worry about stagflation, so much as other problems like federal deficits, trade deficits, growing personal debt, global warming, and developing alternative energy sources.

    Also, since Americans use 25% of the worlds oil and gas today, we are going to have to pay lots of money to continue being gluttens or else we have to make some changes.  

  •  Thin-air Standard (0+ / 0-)

        What is the difference between a $100 bill from a Parker Bros. Monoply Boardgame and a U.S. $100 bill?

         Absolutely nothing. They are both based on the Thin-Air Standard.

  •  conservation principles are everything (1+ / 0-)
    Recommended by:

    In some sense, we're always in a state of stagflation, since resources are finite and we have to share. The issue is whether the people who are going to hurt have been born yet. After a couple decades of Reaganomics, the shit has finally hit the fan.

  •  Sign of the Times (1+ / 0-)
    Recommended by:

    Cute story on the housing slowdown:

    It was about three months ago and agent Louise Pezzello of John Savoretti Realty in Franklin Square had a listing that just wouldn't sell.

    She advertised. She held open houses. She asked the seller to reduce the price (he declined). Her listing was soon coming to an end, and she was desperate.

    That's when she turned to St. Joseph.

    Someone told her that if she buried a statue of the Holy Family's foster father upside down in the yard of the seller's home that a buyer would come.

    "Within two weeks, we got our buyer," she said.

    "[T]hat I have no remedy for all the sorrows of the world is no reason for my accepting yours. It simply supports the strong probability that yours is a fake."

    by Heronymous Cowherd on Fri Jun 16, 2006 at 08:10:46 AM PDT

    Recommended by:

    I don't think stagflation will be a problem for one important reason i.e wages are not going anywhere fast. How can consumers pay more if their wages are stagnant? They are forced to make choices. The first thing to do with less is all those ill-thought discretionary automobile driving. Something that I suggest to monitor and to practice personally is pursuing barter as a means for enhanced survivall and satisfaction. Philosophically barter is a true value exchange and with each transaction one thumbs their nose at tax collectors and intrusive government policies.

  •  How Cycles (usually) behave (1+ / 0-)
    Recommended by:
    New Deal democrat

    I am going to make a few quick post here and plug the fact that this topic will be covered in my blog later today.

    The concerns expressed by the poster are genuine but for those of us who write about the economy these are not astonoshing.  We are nearing the end of a tighnening cycle and the concerns always are twofold:  Will these hikes be sufficient to abate inflation and will they be so much to have induced recession.  The standard Wall Street joke regarding this is that the inverted yield curves characteristic of the turn in cycle have successfully predicted 8 of the last 2 recessions.

    I am neither stating or implying that "there is nothing to worry about" or that "everything is OK."  There are always many concerns regarding the economy because it is so dynamic and so large and energy prices seem to be so far beyond our control.  I am stating that the present situation - the situation the economy is in when it approaches the end of a tightening cycle - is typical.

    There is a certain amount of angst that folks experience in such situations.  For example, I think that there is always anxiety in the cabin of an airplane when it is landing.  This says more about the human psyche than it does about air transportation safety.

    The economy is structuraly sound:  unemployment is low, GDP growth is moderate even though the Fed has hit the brakes 16 times.  The entire focus is on inflation.  The question is solely this:  will the 16 Fed hikes and 2 more which are likely be sufficient to get inflation contained to the +2.0%-2.5% (core-CPI) by the end of the 4th Q.  To be precise I would measure this at year end by asking the following question:  is year-on-year growth in core-CPI below 2.5% for the 4th Q 2005.  If the economy were not is such excellent shape then the consequences of a "less than soft" landing would be much greater.  I am saying that the soundness of the economy give us a good bit of slack as the cycle turns.  In short, if the Fed overcorrected and GDP growth falls to 1% for 2 quarters folks will weep but the economy will snap back after rate easing.

    The comments about energy prices bleeding into the rest of the economy are important.  Our economy (GDP) is largely a service ecpnomy.  The correlation between GDP produced and BTUs consumed is weaker that it once was.  Nonetheless, many goods consumed here are produced abroad and consequently the impact of higher crude will show up to some extent in core-CPI.  In the longer run this situation will be relieved as:  1) more crude capacity and refinery capacity comnes omline in the next 16 months 2) higher rates slow the world wide demand for energy.

    What I find more intellectually interesting relevant to this topic is that starting with the end of Bretton Woods in 1972 interest rate policy rather than commodity based money policy (gold standard) or even the Bretton Woods system of fixed FOREX rates or even Friedmandesque control over the money supply have created the situation whereby inteset rate setting has become almost the entirety of the Fed's control over the economy.  From my perspective, that is more than a bit counterintuitive.

    -- Dick Lepre

    •  unreality (0+ / 0-)
      In the longer run this situation will be relieved as:  1) more crude capacity and refinery capacity comnes omline in the next 16 months 2) higher rates slow the world wide demand for energy."

      you don't live in real world do you? lol.

      Hey maybe Iraq will be a paradise of democracy and the neocon won't bash Iran and picking up a fight with them too.  And Bushco grow brain and doing diplomacy in earnest.

      And China won't spend all those money acquiring resources.

      yeah, and the world problem now is saving surplus...


      economists I swear, when right come down to it, economists are just bunch of numerologists.

      •  Huh? (0+ / 0-)

        I have no idea if your comment is serious.  Are you saying that 1) you do not know or believe that there is substantial infrastructue building in place to increase pumping of crude and refining thereof or that 2) higher interest rates will not slow down economic growth and consequently the demand for energy?

        And to answer your personal question, "No, I do not live in the real world.  I live in San Francisco."  And I am not an economist but a guy with a degree in physics who does mortgages for a living.

        •  infrastructure (0+ / 0-)

          what good is infrastructure if you don't own the oil. And all oil in the world is located in unstable area. all infrastructure in the world won't do jack if oil supply fluctuate 3-5%. It'll still translate to 50c-80c of gas price.

          what's more. Remember Katrina? There goes infrastructure.

    •  Hmmm (1+ / 0-)
      Recommended by:

      I believe there are many flaws in your post, but I'm going to pick on these two:

      1. more crude capacity and refinery capacity comnes omline in the next 16 months 2) higher rates slow the world wide demand for energy.

      I'm not sure what refinery capacity you think is going to come online in "the next 16 months," unless it's capacity that was shuttered per Katrina. It takes years and years and billions of dollars to build a refinery, and I am not aware of any that are in progress such that they could be brought online in a mere 16 months.

      And second, there is no evidence that higher rates will slow worldwide energy demand any time soon. Any decline in our own (North American) gluttonous demand for oil has so far been more than offset by increasing demand in places like India and China.

      Eventually higher rates should slow energy demand, but that point seems to be a lot higher than where we are now.

      •  answers (0+ / 0-)

        There are no new domestic refineries coming online.  There are increases pending in the capacity of the existing domestic refineries and there are large refineries being built elsewhere.

        I certainly agree with your point that there has been insufficient price inelasticity of demand.  A slowing of worldwide economic demand consequent to higher interest rates should slow the demand for energy.

  •  Bonddad, another good diary (1+ / 0-)
    Recommended by:

    There is one difference this time around than in the late 70's.  Namely in the 70's no one believed that stagflation could happen.  It was an unforeseen event.  At least this time around the Fed is aware of it and hopefully will act earlier in the cycle to prevent us from the full effect.

    The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.

    by deathsinger on Fri Jun 16, 2006 at 08:37:40 AM PDT

  •  Deflation Is Coming (2+ / 0-)
    Recommended by:
    MamasGun, bleargh

    becuase of high commodity costs and slowing US demand eventually the supply of foreign goods to the US will slow to a trickle. one definition of deflation is plenty of cash and nothing to buy. the real reason interest rates will head lower is the deficit, which must be funded by borrowing, and George Herbert Hoover Bush and his rubber stamp congress won't cut spending on Iraq or immigration. should they cut spending the problem would spiral out of control at an ever faster pace, because tax revenues would fall.

    We have to pay for this deficit spending through new bond issues which come at a time when the money we have sent overseas, where inflation is real, starts to head back to the US. as the stock market weakens investors reallocate to bonds. all this desire for bonds drives yields lower.

    then panic sets in. if I dont buy bonds now at 5%, tomorrow they'll be 4%. state and local government floats new bonds on top of old bonds, to get lower rates, driving up the supply. government spending goes higher, not lower, further acerbating the problem. Bernanke says, I will raise the rates, (which is incidentally why he is doing what he is doing right now, he is afraid of DEFLATION, the man is an expert on the Great Depression). THe market in yeilds goes lower anyway. The people in government are delighted. The stock market is delighted. Rates go to zero.

    so don't buy the inflation argument its a red herring. inflation implies there is real demand, and there is not. capital spending is zilch. the dollar is heading higher, because of all this money taking flight from countries where the inflation we exported, are now sending those dollars home. against a higher dollar US goods will not sell overseas.

    finally there is one more point, consumer rates are too high. look for more competitive CC rates, Capital One now has a consumers small business CC, with more attractive rates. Sure just call your living expenses your business and roll your consumer debt into one these lower business loans. CC rates are coming down, and all rates will come down. and simply put the government can't afford to bankupt a nation of consumers by letting interest rates take off unabated. however a deflationary crash is just as bad. in the end the Socialists win out, because the capitalists stop working when the profit margin vanishes, and who will make the trains run on time. George Orwell Bush is the new Politburo chief, and will go down in history as the guy who stuck a dagger in the heart of capitalism, democracy, and freedom.

    "Everything is chrome in the future..." Sponge Bob Square Pants

    by agent double o soul on Fri Jun 16, 2006 at 08:57:24 AM PDT

  •  Ignorant question (0+ / 0-)

    I know inflation is bad, but can someone explain why exactly it's so important to keep inflation low?  Is it because it chokes off investment without sky-high interest rates?  Does high inflation mean a hidden recession because real GDP is eroded?

    I wish I'd taken some economics in college.  Stupid 110-credit Engineering Physics major left little room for any electives.

    Never play leapfrog with a unicorn.

    by Cream Puff on Fri Jun 16, 2006 at 09:21:22 AM PDT

    •  asdf (0+ / 0-)

      inflation is a measure of either how fast prices are increasing or how much the dollar is decreasing.  

      If prices are rising quickly, than people can't purchase as much.

      "You think you can intimidate me? Screw you. Choose your Weapon." Eliot Spitzer

      by bonddad on Fri Jun 16, 2006 at 09:34:24 AM PDT

      [ Parent ]

  •  Hey, I'VE got an idea ... (0+ / 0-)

    We'll use some of our massive federal surplus to stimulate ...

    Oh. Yeah. The Bush thing.


    Quis custodiet ipsos custodes? (Who will watch the watchers?)

    by The Crusty Bunker on Fri Jun 16, 2006 at 09:22:02 AM PDT

  •  What's different this time. (2+ / 0-)
    Recommended by:
    cookiebear, blue jersey mom

    The economic conditions that prevailed during the stagflation of the late '70s were very, very different from what is happening now. The '70s inflation was an internal monetary event where the US simply printed money to cover the costs of the Vietnam war and the social spending of the era (food stamps, Medicare, Medicaid, infrastructure, etc.). This was made worse by a 400% increase in the price of gas (0.25/gal to 1.00gal).

    The stagnation part came from the reduced war spending at the conclusion of the Vietnam war, the end of the Apollo program (this was a HUGE spending item), a reduction in social spending by the Nixon and Ford administrations, and a general recession across the globe.

    This was when we learned about the delay between monetary policy actions by the Fed and their effects on the economy and the delayed effect of inflation caused by excessive deficit spending by the government.

    The thing that is very different today than 30 years ago is that the debt run up by the current government is not held by american financial institutions.  This debt is now mostly held by the Japanese and  Chinese central banks. The other difference between then and now is that in 1980 there was no competition for the US dollar - there was no other currency that was a viable international currency (even the English pound was not considered safe). Today, we have the Euro and the Yen, which, when combined with a basket of other currencies, is a viable alternative to the US dollar. Today, the US cannot control the value of it's own currency.

    The big danger today, IMHO, is that Japan and/or China will decide it is no longer to their benefit to prop up the US dollar. They could easily devalue the $US and cause the Fed to increase interest rates solely to maintain the dollar, thus disconnecting Fed policy from the economy. The possible result? Continued high interest rates not connected to any economic activity except to prevent a huge decrease in the dollar. This would be disasterous - a low-functioning economy with high taxes (to decrease the domestic budget deficit) and high inflation caused by an increase in the price of imports (oil & WalMart).

    I think it's going to be much worse this time around because of the externalization of US debt.

    -6.38/-3.79::'A man is incapable of comprehending any argument that interferes with his revenues.' Descartes

    by skrymir on Fri Jun 16, 2006 at 09:35:45 AM PDT

  •  Double digit inflation and interest rates? (0+ / 0-)

    I seem to remember double-digit inflation and interest rates in the 70s.

    What was happening there?

  •  Will Bernake (0+ / 0-)

    get to be the next Volcker?

    First they call you a traitor, then they pass the Patriot Act II, then they tap your phone, then you move to Canada. -- Mohandas Gandhi

    by roboton on Fri Jun 16, 2006 at 10:29:56 AM PDT

  •  Rent (0+ / 0-)

    One other thing pressuring core inflation up over the coming months will be rent, as demand for rentals increases (because of foreclosure on homes, and a generally less attractive real estate market) and landlords have some leverage to increase rates.

    The irony is that housing prices are NOT factored in to inflation readings, so official inflation numbers may have been artificially low during the real estate boom. Rentals, however, are counted in the readings.

    So now we may see inflation numbers actually start to catch up with the costs consumers face on a daily basis.

  •  OT (0+ / 0-)

    If business now controls the government, and increased GDP is not given to employees, and taxes have gone down as corporate profits have increased, why hasn't the stock market doubled?

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