While we await today’s FOMC non-action, let’s edumacate ourselves as to a new definition, via Wordspy, we get today’s word of the day:
slowflation
(n.):
An economic state characterised by slow growth and high inflation. [Cf. stagflation.]
>
Example Citations:
Stagflation light. Slowflation. A
variety of terms are floating around to describe the current state of
the economy: growth that’s too slow and inflation that’s too high for
Federal Reserve comfort.
The nicknames refer to the stagflation of the late 1970s and
early ’80s, when the country endured not only disco, but double-digit
price increases, slow growth and high unemployment.
—Sue Kirchhoff, "Economy searches for a new word S-word," USA Today, May 2, 2007
The risk that the U.S. real-estate market’s woes might affect stocks
and bonds is front and center for Raj Sharma, a private wealth adviser
with Merrill Lynch in Boston. Merrill’s North American economist, David
Rosenberg, recently warned against a combination of slower growth and
faster inflation ("slowflation") that the real-estate slowdown would exasperate.
—Suzanne McGee, "Best in Class," Barron’s, April 23, 2007
Earliest Citation: The only question is whether the monetary tightening is enough to do
so. Consistently strong monetary expansion suggests it is not. Still
higher interest rates are probably needed, leading to a politically
unpopular, perhaps budget-wrecking, economic slowdown. It may turn out
to be "slowflation" rather than stagflation, with growth modest, but positive.
—"Monetary blues," Financial Times, June 18, 1998
We should call this what it really is: Fedflation. By allowing unrestrained growth in money supply the Fed has turned over the reigns to the market movers. The Fed really can’t control the economy because economics is based on actual supply and demand of goods and services while the Fed only has a small degree of influence of the supply and demand of debt.
Ignoring currency supply excess is fueling the bubble, causing worldwide inflation, while the world economies react to actual, physical forces.
Fedflation, AKA Bubblation.
I looked up the word stag: “An animal, especially a pig, castrated after reaching sexual maturity”
Sounds about right.
Subflation: Substandard growth. Sub Rosa inflation statistics. Subconcious subliterate populace. Subsistence wages.
So what is the fun of a stag party??
Fedflation, AKA Bubblation.
I have fascination with Fedflation causing the Bubblation. It’s not just us expanding the money/credit double digits.
Worldflation.
Next step: “ConFLAgraTION”?
I like Fedflation. Sounds about right.
I used to think that the best hedge against inflation was gold or quality real estate, but now perhaps China is it. Gains of 1-3% day in and day out will almost keep up with the losses in our buying power!
can anyone explain why Fed decided 2% was a magical number for inflation target?
We have all heard that the Fed has lost control of the ability to restrict credit through Fed Policy because of global liquidity. My question is, “would Helicopter Ben raising rates a measly .25 not restore Fed credibility?”. Who expects them to do this? Nobody.
As Mish just pointed out M Prime is below zero while M3 [courtesy of Nowandthefuture] is running at 12%.
This is no prediction but only a remote possibility. The Brits will have their meeting tommorow and are expected to raise.
Ben could do worse. This would allow him to continue to put a floor in for the $USD while letting the players know that the Fed is still relevant.
Lakshman Achuthan, managing director at Economic Cycle Research Institute in New York, comments on why he expects the Fed to keep interest rates unchanged:
“I think people just don’t have a clear idea or framework to deal with the economy we have got right now. We have an economy that’s growing healthy, it has tight labor markets, but for the time being, underlying inflationary pressures are easing.”
“The key thing is that there’s not going to be any kind of recessionary information” out of economic reports. Concern for a recession “is completely off the table. In the fall we had some vulnerability, but now we have none.”
Market is up..woohoo. Concerns on inflation in the FOMC statement means nothing in this market
I think Ben just missed a golden opportunity unless he has a gentleman’s agreement with the other FCB’s on also holding their rates steady.
If not, the $USD will be in trouble LARGE!
Spectre,
If $USD is in trouble over this fed decision, why is GLD losing ground now?
Because metals including Gold, although the charts are much much better for Gold, will break down soon. Gold won’t stay down, but will be cut down a notch like the industrial metals if for no other reason than sympathy.
I’m focusing on the $USD against other currencies. Rising rates from the Brits and EU will be bad for the dollar regardless of Gold.
Just my 2 cents.
The dollar will be going nowhere for a while….save this post.
Yep, don’t overuse gold. Weakening economy is not good for gold(nor Oil). But have gotten a bit skiddish.
Gold’s rise to hyperinflation or mass deflation is a panic.
thank goodness i don’t take bear blogs too seriously else i’d be out serious cash. couple of more months of this and i can buy another house as an investment and make even more. demise of the US economy because of subprime? what a crock.
In the omnicient and sagacious words of Jim Cramer, it’s no time to panic, just time to buy.
Quote Spectre: “My question is, “would Helicopter Ben raising rates a measly .25 not restore Fed credibility?”. Who expects them to do this? Nobody.”
This assumes the Fed has some type of control, which they do not possess. According to Bloomberg, the 3-month T-bill yield is 4.85% – the Fed target rate is 5.25. The Fed cannot enlarge that spread without sucking in a massive amount of liquidity to protect the higher target.
The Fed is at the mercy of what bonds want to do. I believe the Fed knows well that inflation is out of hand, but the best they can do at this point is to resist chasing the T-bill down by lowering the tartet rate.
I give Ben credit for holding – it’s the best he can do Greenspan would have cut by now. Ben has also done a good job managing the excess reserves. Too bad he wasn’t born in Vienna or else he’d try eliminating some of the currency oversupply, as well.
Come to think of it, this might be his plan – to hold rates as the bonds lower, thereby creating a spread that will more slowly extract excess liquidity than a large increase that would cause a collapse.
Go ahead, Richard. Buy my house.
Quote Richard: “demise of the US economy because of subprime? what a crock.”
Where do you find the concept that only subprime is involved? A subprime-led collapse has never been mentioned. Subprime lending standards applied to other areas such as Alt-A loans and LBOs has been discussed, but even then it was in the context of a larger bubble.
I agree that a collapse based only on subprime is indeed a crock – but that claim has never been made.
You’re suffering from “Snowflation.”
That’s when you’ve just been snowed by the Fed. Nothing changed… nada… zip… zero.
Bill Gross got it right… it’s only now that elements that will drive the Fed are beginning to come into play.
I’m still game to play “cluck-cluck” Barringo. You feelin’ lucky?
Here is some incredible information about the effects of inflation: From Charles Morris at Commonwealth Magazine:
“Much of the data documenting the income shifts has been collected by two economists, Emmanuel Saez, of the University of California at Berkeley, and Thomas Piketty at the École Normale Supérieure in Paris. Their study is based on analyses of the entire database of personal federal income tax returns.
The figures are startling. Since 1980, a period of prolonged stagnation in inflation-adjusted median incomes, the income share of the bottom 90 percent of families has fallen by about 17 percent. Even the very upper-middle class folks in the 90-95 income percentiles barely kept their shares constant, while the top one-thousandth and top ten-thousandth have more than doubled and tripled their shares. The top ten-thousandth, fewer than 15,000 taxpayers, now collect 3 percent of all personal income.
This has been a historic development. Not since 1928, hardly the proudest year in American economic annals, has the share of the very richest been so high.”
A debt-based central banking system is an undisclosed tax whose primary effect is on the working class. Is there any wonder the polarization of wealthy versus poor is growing?
Hey…where’d Barry’s FOMC rate release post go? It was on the main page a little while ago…
“Bill Gross got it right… it’s only now that elements that will drive the Fed are beginning to come into play.”
Agreed. Totally agree. Credit crunch 101 coming to a theater near you. The Fed has lost control.
re: “Snowflation” — I think that’s when you spend too much time listening to that Republican water mule and fact fabricator Tony Snow.
;-)
I don’t want to EXACERBATE Suzanne McGee’s spelling problems but I’m EXASPERATED with this professional writer’s lapse.
According to Bloomberg, the 3-month T-bill yield is 4.85% – the Fed target rate is 5.25. The Fed cannot enlarge that spread without sucking in a massive amount of liquidity to protect the higher target.
Winston:
Can you extrapolate on this? What does “sucking in a massive amount of liquidity” mean? Not saying you’re wrong, I just don’t understand.
A Grim Fairy Tale
Once, not so many years ago as history flies, a group of children gathered in the new playground hewn from the surrounding forboding forest.
They played all day, but as twilight approached one young lad noticed shadowy figures slipping in and out between the nearby trees. Arthur was a precocious child, and remembering that some number of years ago environmentalists had attempted to reintroduce wolves to the forest, he began to gather his toys. “I think there are wolves in the forest,” he said to the other children, pointing out the shadowy figures moving closer still. “We should stop playing and go.”
“Wolves!” mockingly cried one boy. “Those a just shadows from the limbs. No one believes in wolves any more.”
All the children laughed and turned back to their games and toys.
Ignoring the taunts from the other children, Arthur gathered his toys and raced home.
The next morning Arthur was awakened by the cries of his neighbors calling out the names of their children. He looked out his bedroom window to the playground, but all he saw was a pile of red-stained, shredded clothes and an empty toy box.
He turned and slumping against the wall wondered, Why didn’t they believe me? They saw the same thing I saw. Why didn’t they leave? From somewhere, a small voice answered with a message that young Arthur Doyle only much later realized would have a profound effect on the course of his later life.
The voice said, “They saw, Arthur, but they did not observe. They saw, but they did not observe.”
Quote J D ess: “Winston:
Can you extrapolate on this? What does “sucking in a massive amount of liquidity” mean? Not saying you’re wrong, I just don’t understand.”
A simple example of one method is what the BoC recently tried – increase reserve requirements. If the Fed target is 5.25% but banks are willing to lend at 4.75%, the Fed can increase the reserve requirements the banks must hold to make loans, thereby limiting the amount that banks can lend, thereby reducing the total of excess reserve. The Fed can also use reverse repos to pull money out of the reserve excess supply.
At this point that is all they can really do because of the risks of doing more. In theory, they could buy and sell treasury securities to manage the rates, but the reason they cannot is best explained by Bert Ely of Ely and company:
“Any attempt by the Fed to move interest rates generally by buying or selling large quantities of Treasury securities (several billion dollars, or more) over a day or two would quickly backfire because these transactions would cause the daily Fed Funds rate either to plunge to almost zero (the Fed buys securities, increasing excess reserves) or to skyrocket (the Fed sells securities, reducing or eliminating excess reserves). ”
You may want to read the entire article at:
http://www.cato.org/moneyconf/14mc-2.html
Hope this helps.
Quote: “can anyone explain why Fed decided 2% was a magical number for inflation target?”
This is an absolutely ludicrous and unjustibiable number and an admission that that money growth is inflation. Any inflation is a hidden tax.
The target for inflation should be zero. Period.
Here is a simple example of inflation as money debasement and not rising prices. Rising prices are simply economics, supply and demand.
Suppose canned string beats were found to be a cure for the common cold. In country #1, whose currency is backed by gold or silver so additional money cannot be created, interest rates are relatively high so no one wants to borrow. 10 sniffling shoppers who hold in total savings $1 each come to market but the market only has 3 cans of beets to sell that are priced at $0.05. The bidding starts and tops at $.50 per can. It could not go higher as other necessities are needed to be purchased from the $1 total unless debt is taken out.
Enter country #2, where a central bank furnishes debt money and money is simple to borrow and interest rates low. Same scenario applies, only in this country each shopper due to higher wages holds $5 and the intial price of a can of beats is $0.50. The bidding here is sporadic – some stop bidding at $1.50, others go on to $2.50, still others bid on to $3.50 and so on until the last bidders reach $5.00 per can – these last bidders are willing to take the risk that the cure will allow them to be more productive and thus pay off the cheap debt that they must incur now that all money is gone.
The difference in country #1 between $0.05 per can and $0.50 per can is economics, supply and demand.
The difference in country #2 betwen $0.50 and $5.00 is also economics, supply and demand, but spurred higher than supply and demand would imply because of cheap debt.
However, the difference between the $0.50 of country #1 and the $5.00 of country #2 is inflation – the devaluation of the #2’s currency caused by too many bills in circulation.
And country #1 isn’t too keen on holding or buying #2’s dollars or bonds anymore.
thank goodness i don’t take bear blogs too seriously else i’d be out serious cash. couple of more months of this and i can buy another house as an investment and make even more. demise of the US economy because of subprime? what a crock.
Posted by: Richard | May 9, 2007 3:25:15 PM
I’m not a bull or bear. Been there, done that and it sucks. The trend is your friend until it isn’t. I will say however that if you only have exposure to the American Market, you have gotten your head handed to you in the currency exchange rates and PM’s compared to the $INDU and $SPX over the last several years.
Sometimes it’s good to think in terms of capital preservation and not pick up nickels in front of a steam roller. We are not there yet IMHO.
Quote Spectre: “My question is, “would Helicopter Ben raising rates a measly .25 not restore Fed credibility?”. Who expects them to do this? Nobody.”
This assumes the Fed has some type of control, which they do not possess. According to Bloomberg, the 3-month T-bill yield is 4.85% – the Fed target rate is 5.25. The Fed cannot enlarge that spread without sucking in a massive amount of liquidity to protect the higher target.
The Fed is at the mercy of what bonds want to do. I believe the Fed knows well that inflation is out of hand, but the best they can do at this point is to resist chasing the T-bill down by lowering the tartet rate.
I give Ben credit for holding – it’s the best he can do Greenspan would have cut by now. Ben has also done a good job managing the excess reserves. Too bad he wasn’t born in Vienna or else he’d try eliminating some of the currency oversupply, as well.
Come to think of it, this might be his plan – to hold rates as the bonds lower, thereby creating a spread that will more slowly extract excess liquidity than a large increase that would cause a collapse.
Posted by: Winston Munn | May 9, 2007 3:58:06 PM
The jury is out on Heli Ben. It’s yet to be seen whether he’s a Volker or Greenspan. Are you old enough to remember the Saturday Night Massacre when the rate went up 5%, not to 5%, an increase of 5%. If the Fed wants to remind folks about risk, let them raise it .25 when nobody is looking for one. Believe me that folks would be cleaning their pair of drawers pronto, and the market including bonds would know the Fed meant business. Right now every bully in the world is kicking sand in their face.
Spectre: No lack of respect intended, but this I believe to be an inaccurate depiction.: “Are you old enough to remember the Saturday Night Massacre when the rate went up 5%, not to 5%, an increase of 5%. If the Fed wants to remind folks about risk, let them raise it .25 when nobody is looking for one.”
What happened in 1979 and 80 was Volcker adopted a monetarist policy for the Fed, targeting money supply growth and not interest rates – the contraction of the money supply left interest rates to be set by the markets, not the Fed.
From Volcker at Ask.com:
“During 1979 and 1980 the FOMC, under Volcker’s leadership, sought to reign in double-digit inflation by setting strict money supply growth targets. This direction was in opposition to past policies that sought to control interest rates at the expense of higher money supply growth rates. The result of the switch in policy was a substantial rise in interest rates, with the prime rate peaking at 21.5 percent in December 1980. With higher interest rates, the economy fell into the worst recession in 40 years, causing unemployment to reach 10.7 percent in 1982.”
Volcker stopped inflation dead in its tracks by contracting the money supply; however, the recession put pressure on politicians to force the fed to ease – enter the Greenspan years.
Back to the same idiocy that created the bubble that Volcker had to pop. It’s like “The Two Faces of Eve” or a “good cop/bad cop” routine.
This is what I have been saying all along – the fed can only do one of two things: set money supply targets or set interest rate targets. As long as Ben is relying on interest rate targets (as a proxy for inflation targeting), the Fed has no control over money supply and hence no control over the very inflation that claim to fight. If they adopt a Volcker monetarist policy, it will be 1980 squared due to the immense bubble Greenspan helped create.
How do you want to die, the gun or the knife?
@winston:
thanks for the explanation and link.
Absolutely correct Winston.
Central Banks can never stimulate… It’s the great fallacy of Monetarism.
They can only facilitate economic expansion, but never stimulate it.
When Volcker took the actions he did, he understood that the system was sick and incapable of rational pricing of the net present value of future financial cash flows. That distorts the capacity of rational people to take capital expenditure risk.
Contrary to the popular belief presented in media, Bernanke hasn’t really been tested yet. If he responds with a rate cut to an economic downturn (inconsequential in my mind because of theories I have published here) that’s not absolutely traceable to a shortage of liquidity, he will take his first commanding action as Fed Chair, and he’ll possibly be setting the economy on the same path that Volcker had to halt.
Eclectic,
It’s my understanding that Greenie already set us on that path. That’s why I give Bennie failing marks, as he’s declined to unwind Greenie’s mess, preferring instead to screw his eyes tight shut and scream “Warp 12, Mr. Printing Press Operator!”
If Bennie had balls, this would end badly, but soon. He doesn’t, so it will end horrifically, though perhaps not until Bushie-boy is out of office, which I still believe to be the point.
It occured to me today that the definition of pychosis is an inability to distinguish the between fantasy and reality – hence, the accurate depiction should be: psychoflation.