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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

Category: Inflation
June 13, 2013 at 10:23 AM

What’s going on with the markets

Japan’s Nikkei has entered bear territory. Other Asian markets have suffered sell-offs, too. The Dow Jones Industrial Average swooned Tuesday and is staging only a cautious recovery today. The Wall Street Journal’s estimable David M. Wessel wrote, “The tectonic plates of the world economy are shifting, moving the yield on the 10-year Treasury to the highest level in more than a year and shaking financial markets from Tokyo to Mumbai and Johannesburg to São Paulo.” Is the world returning to something like normal, where America grows again, China does a soft landing to slower growth and the Japanese economy can finally find its footing?

Or is it a harbinger of more volatility in financial markets—perhaps the result of a misreading of the Federal Reserve’s policy intentions by the markets or a premature move by the Fed to cut back on easy money—that yields an unwelcome increase in market interest rates before the U.S. economy achieves what Fed Chairman Ben Bernanke once called ‘escape velocity’?

The question of what the Federal Reserve will do is rightfully a preoccupation. Can it make the pivot to slightly tighter money without tanking the markets? And can emerging markets continue to thrive on the “hot dollar” trade now that Treasuries are becoming more appealing? A couple of charts explain what is not happening.


Comments | More in Banking, China economy and business, Federal Reserve, Inflation, Interest rates | Topics: Japan

July 18, 2012 at 10:00 AM

The specter of hyperinflation

All this money the Federal Reserve “printed” to bail out the banks and prop up the economy must eventually swing back as hyperinflation, particularly if the central bank engages in another round of easing as growth slows further or stalls. So goes the argument of the likes of stock broker/gold bug/Austrian School investor Peter Schiff. Ron Paul and House budget boss Paul Ryan have voiced similar concerns. We have plenty to worry about, but is hyperinflation near the top of the list?

Throughout the turmoil of the past five years, Treasuries and the dollar have remained safe havens for world investors. A weaker dollar would actually help American exporters and, combined with modest inflation, would, oops, lower our debt to the People’s Republic of China. The actual problem the world has faced has been deflation. Inflation is nearly nil in America from a macro standpoint.

The high inflation that Americans of a certain age remember, the 1970s, was caused by two major events: The oil-price shocks and a Federal Reserve that lacked the will and political support to stop it for fear of raising unemployment. When Jimmy Carter appointed Paul Volcker as Fed chair, and Ronald Reagan backed him, he induced a severe recession that killed the inflation for a generation.


Comments | More in Deflation, Inflation

March 13, 2012 at 11:57 AM

Beyond Fed-speak, does the central bank have an exit strategy?

“There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – there are things we do not know we don’t know.”

— Donald Rumsfeld

I think of the former Defense Secretary’s line as I parse today’s statement by the Federal Reserve’s Federal Open Market Committee. It notes a modest recovery, unemployment easing but still high, all the stuff we know. The markets may be cheered by the lines that the FOMC “expects to maintain a highly accommodative stance for monetary policy” until 2014. We do not know.

The Fed is betting on several known unknowns, for example that inflation will remain low, with high gasoline prices being a temporary phenomenon. The central bank expanded the monetary base (“printed money”) significantly to battle the deflationary pressures of 2008-2009. Not to get all Ron Paul on you, but will all those dollars just magically fade away? Or will they roar back as hyperinflation? The latter is unlikely. But we do not know. Neither does the FOMC, except perhaps for dissenter Jeffrey Lacker, president of the Richmond Fed, who would tighten sooner.


Comments | More in Federal Reserve, Inflation

July 14, 2011 at 9:40 AM

Bernanke won’t sail on the QE3 anytime soon

“There is uncertainty about whether there is a durable recovery.”

— Ben Bernanke

There, the chairman of the Federal Reserve has finally caught up with the reality-based community. Yet in his testimony before Congress today, Bernanke said the central bank wasn’t yet ready to begin a QE3, a follow-up to the $600 billion in “quantitative easing” that wrapped up last month. Still, “we have to keep all options on the table.”

That table is about as big as one of those one-person round jobbies at a crowded Starbucks. The Fed has flooded the market with cheap credit and dollars, bought up buckets of Treasuries, yet real unemployment is above 16 percent and what recovery there was is sputtering toward a double-dip. QE2 might have definitively stopped any chance of a deflationary spiral, the mistake the Depression Fed made — Bernanke promised Milton Friedman, Nobel scholar of that blunder, that the central bank wouldn’t repeat it.


Comments | More in Federal Reserve, Global economy, Inflation, Jobs/Unemployment

May 13, 2011 at 10:10 AM

The Fed and you: Serious inflation depends on where you sit

One of the many differences between the Federal Reserve and the rest of us concerns inflation. Look at today’s consumer price report, and we’re talking real money in terms of cost increases being absorbed by Americans at the gas pump and the grocery store. The pinch is worsened by flat wages for many, and millions who are unemployed.

On the other hand, these are the volatile elements outside the “core” inflation that matters most to Fed policy. Here, inflation is low so far. Some inflation is necessary in a growing economy, and the CPI is coming back from very low baselines in the Great Recession. The question we can’t yet answer: Whether the Fed’s unprecedented campaign to add money to the system in an effort to combat deflation and help the economy will come back as runaway inflation?

The effect of the hot money flowing out of quantitative easing is not to be discounted, especially in the market casinos and faster-growing economies such a China. Still, Americans don’t have many unions pushing for pay increases, for a fair share of record profits as happened in the 1960s. Now the average American is just happy to have a job. My inflation meter says “calm,” barring a shock, especially with oil. Click to the “continue reading” link and tell readers what you think.


Comments | More in Federal Reserve, Inflation

December 9, 2010 at 9:20 AM

With oil prices around $90, recovery is over a barrel

The “recovery” gained another enemy this week when the price of oil hit $90 a barrel on Tuesday (it was trading around $88 this morning). Higher oil prices translate into bigger costs for American households and the many petroleum-based products they use. This benchmark has long been seen by many economists as a point when oil prices start to harm the U.S. economy. They also are one of the biggest wild cards in the Federal Reserve’s bet that deflation — or at least disinflation — are the big dangers, rather than inflation.

You can always find a school of thought that oil prices are a creature of speculation. But the price rise has also been driven by higher demand in an Asia and parts of Latin America that are recovering while America and Europe lag. Oil & Gas Journal reports that third-quarter demand hit an all-time high. It’s also important to recall the new International Energy Agency report that concludes world conventional production peaked in 2006. That means higher prices ahead. Oilman T. Boone Pickens Jr., who correctly foresaw the $80 ceiling being shattered this year, predicts $100 a barrel oil in 2011.


Comments | More in Energy, Inflation

November 2, 2010 at 9:40 AM

The Fed prepares to start the presses, but new money won’t buy happiness

You can’t push on a string.

— John Maynard Keynes

The Federal Reserve’s policy-setting Federal Open Market Committee sat down today with one big agenda item: QE2. That would be “quantitative easing,” where the central bank tries to stimulate lending and spending by purchasing Treasury securities. How can it do that, you ask, dear reader? By printing more dollars.

The private sector is either sitting on huge amounts of cash or skating on thin ice, and few companies see big demand ahead. The housing boom is kaput. The White House and Congress are paralyzed on further stimulus (just wait until January, too) and the original stimulus too small and badly targeted. That leaves the Federal Reserve. Chairman Ben Bernanke, one of our foremost scholars on the central bank and the Great Depression, is determined to avoid the mistakes of the 1930s. That was when the Fed kept credit tight and accelerated a deflationary spiral (this was Milton Friedman’s most important contribution to economics).

Bernanke has a fragile coalition on the FOMC that agrees deflation — not inflation — is the biggest threat to the economy. And, by extension, that QE2 not only won’t worsen price stability, it could help with disastrous unemployment, a faltering recovery, etc. Watch for how much easing — will $500 billion be too little? Too little has also been seen on infrastructure investment, job creation, foreclosure relief, etc. It seemed the only time the right amount of power was applied was when we saved the bacon of the big banks and the shadow banking system.


Comments | More in Bailout, Federal Reserve, Global economy, Great Recession, Inflation

June 9, 2010 at 10:05 AM

The weakness in the wings of Bernanke’s deficit hawkishness

Fed Chairman Ben Bernanke told Congress today that America will continue to see a recovery, sort of. It won’t be enough to bring down unemployment much or refill the Treasury. If that’s a recovery, then I lost weight last night because I didn’t eat a second plate of cheese enchiladas at Mama’s.

He also warned again about the federal deficit, leaving it to our system of political paralysis to do something…or not. The reality is that, short-term, major federal government cutbacks will hurt the economy. The private demand simply isn’t there. Meanwhile, even returning to 1990s tax levels, much less those of the Eisenhower era, is off the table. So, too, is the issue of how long we can sustain wars without end. The result is sure to be combustible. If Americans are expected to endure what new British Prime Minister David Cameron said of his country — “decades of austerity” — then inequality of incomes, opportunities and sacrifice will simmer. Using the dreaded deficit as an excuse to cut growth-generating investments will be self-defeating.

Bernanke doesn’t dwell on the biggest causes of the deficit: In addition to overseas military commitments and ill-advised tax cuts, there’s that wee matter of spending vast sums to “save” the toxic, risky financial system. A red-ink spill to rival BP, of which he was ringmaster. In any event, we should hold the hysteria. Demand for Treasuries is high and the rates investors are accepting is low. Inflation is low. The dollar remains the world’s reserve currency. The deficit is high, but nowhere near that of Greece. That gives America time for a sober conversation and make some sensible, balanced choices. Can we do that anymore?


Comments | More in Consumer spending, Deficit, Inflation

May 24, 2010 at 10:00 AM

About that double-dip: Europe’s crisis isn’t the only chilling evidence

The end of May rolls around amid great anxiety. Even the oil spill in the Gulf of Mexico gives a dark back beat, symbolic of our complex challenges, institutional weaknesses, unrealistic appetites and how much we don’t know. The markets are trying to make a wobbly recovery this morning, but even a smidgen of bad news could send the indices south again.

The most ominous news last week didn’t concern the euro. Rather, it was the consumer price index, rising in April at the lowest rate since 1966. Alas, we don’t have a 1960s economy, with robust industry, worldwide economic dominance and a middle class with ever rising income and security. The CPI seemed to indicate that Fed Chairman Ben Bernanke’s sum of all fears remains: deflation. (Oil prices toppled, a real leading indicator of recovery or slowdown).

That, combined with the European situation and the ongoing unemployment crisis at home, would put us the closest to a double-dip that we’ve been since this very weak recovery began. It’s not weak for everyone, to be sure. The bailed-out banks are giving record bonuses, as well as increased perks and benefits.


Comments | More in Dollar, Eurozone, Federal Reserve, Global economy, Inflation, International economy, Outlook, Stock market

May 11, 2010 at 10:15 AM

Forget May flowers: Markers for a tumultuous month

Just a week and a half into May, the Dow took its worst point-drop in history and the experts are still searching for why, the European Union seemed near a crackup before ponying up a $1 trillion bailout — and Nordstrom opened in the Big Apple. Meanwhile, financial reform appears to be gutted — nicely played, big banks. A lazy springtime, it’s not. Here are some signposts to watch:

— Will the EU bailout work? The sum is huge and the markets are calmer, for now. But the fundamental problem remains: European monetary policy is divorced from the political policies of its member states. Another worry: What else is out there? If Greece is the equivalent of Lehman Brothers, more black swans will land across the pond. Long-term, the EU faces the same problem as the Fed, a rescue that entails more debt, even as a leveraged-based financial system motors along.

— Office 2010 launches for businesses on Wednesday, and every major rollout carries high stakes now that Microsoft is arguably a mature, “legacy” company fighting for its future against Google and others. First impressions are important.

— The tanker. Nothing may happen in the weeks ahead, but one thinks concerning EADS, “This is all you’ve got?” After all, the old partnership with Northrop Grumman brought along the support of Alabama senators. Might a surprise be coming? Some 11,000 Washington jobs would be part of a Boeing win.


Comments | More in Aerospace/Boeing, China economy and business, Eurozone, Federal Reserve, Inflation, International economy, Microsoft, Outlook

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