Quote of the Day: That’s Not a Central Bank . . .

The US Federal Reserve is the only central bank in the world that makes policy based on core inflation.

I find this beyond irresponsible — it is indefensible.

I have decided to stop arguing with people about this. In the future, I plan on simply assuming they are suffering from blunt head trauma, and try to work up some empathy for their families, and move on to something they can actually understand and discuss intelligently . . .

Unlike the spendthrifts here in the US, other Central Bankers around the world understand what the true definition of inflation is.

Consider the following: The Reserve Bank of Australia hiked rates to an 11 year high (due to inflation concerns).

And, Miller Tabak’s Peter Boockvaar points out that, over the past month, Iceland, Romania and Mexico have raised interest. While the RBA move was expected, the Australian $ rallied to a 23 1/2 yr high vs the US$.

All of this reminds me of that scene from Crocodile Dundee: That’s not a Central Bank (pulls out 14 inch Bowie knife) Now THAT’S a Central bank!

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  1. jmf commented on Nov 7


    Fleckenstein made this comment

    “It’s obvious that using an applause meter to run the central bank is a terrible idea.”

    I think he has it right……

  2. mal commented on Nov 7

    Where do you put your money ? Europe is becoming a Muslim nation as well as a welfare country, the Euro will eventually tank,as well as the country . China scary,biggest division between rich and poor, Canada usually follows the USA. Where do you put money?

  3. michael schumacher commented on Nov 7

    Just like it’s all about “sub-prime” too…

    The market, today, is speaking to the next “issue”. ACA,RDN,NTG will tell the tale of the next one.


  4. HJ commented on Nov 7

    I agree policy decisions based on core is ridiculous, but don’t inflation expectations influence policy more? ISI has a good chart today showing the TIPS spread only at 2.4%…near a cycle low.

  5. robster commented on Nov 7

    How can the Fed raise rates with the US economy as weak as it is? It’s just not politically feasible.

    And it’s great that Rumania and Mexico are taking appropriate steps. But let’s see China step up and acknowledge that their 1bn person economy cannot grow at 10% in perpetuity. Alot of the global heat is coming out of China (eg see growth in number of billionaires).

    Perhaps they fill finally begin to do what they must following the olympics this summer. There often seems to be a hangover in the aftermath. Vancouber had an awful time following its big event.

    By the way, I’m Canadian and I just don’t know how much further the CAD/USD can move without significantly damaging our economy. We have a lot of manufacturing in Ontario and Quebec and significant tourism that will not be able to survive. The West will do ok based on oil and resources, but the rest of the country will face big challenges.

  6. wally commented on Nov 7

    “How can the Fed raise rates with the US economy as weak as it is?”

    Why, simply deny it is weak, then go ahead. It’s working for Wall Street.

  7. Florida commented on Nov 7

    “How can the Fed raise rates with the US economy as weak as it is? It’s just not politically feasible.”

    But our economy is the “greatest story never told”?!?! Larry Kudlow told me so!!!

  8. Al Czervik commented on Nov 7

    That ain’t Central Banking
    That’s the way you do it.
    Money from nothing
    and the Yen for free.

    (Apologies to Dire Straits).

  9. robster commented on Nov 7


    The economy is short term weak. However, although it has taken some serious body blows in the form of housing and hits the balance sheets of large financials, we are still seeing some job growth and positive GDP.

    To my mind, that’s a bloody freakin miracle and is attributable to some of the underlying strengths of the US economy – large relatively well-educated and flexible work force, low taxes, strong and stable institutions, strong military, diversified economy.

    These strengths should not be underestimated in my view. With decent political leadership, the US economy will survive and emerge strengthened from these turbulent times.

  10. peter from oz commented on Nov 7

    and RBA raised rates during an election campaign (a watershed one at that)
    now that’s independence
    MS can’t wait to see whether the PPT Cavalry takes a U Turn this afternoon or just charges into valley of death again
    rgds pcm

  11. Wayne commented on Nov 7

    Amen to that brother!

  12. Mike B commented on Nov 7

    I think the Japanese central bank is possibly more irresponsible than our central bank. When their manipulated inflation #s started to show them coming out of inflation, they changed their basket to include flat panel televisions. No joke.

  13. Francois Theberge commented on Nov 7


    “With decent political leadership, the US economy will survive and emerge strengthened from these turbulent times.”

    That is the kernel of the problem isn’t it?

    One can argue ad nauseam about the strengths and weaknesses of the US economy, but I can’t recall a more severe deterioration of the political climate and quality of leadership since Nixon.

    Big money pay to get favors and ordinary people do not want to finance elections. People get what they pay for, that is precious little.

    I do not see how economic policies tilted toward a few can do good for the many. Unless one believes in the trickle-down theory…the Laffer curve…that global warming is a liberal conspiracy targeted at destroying the US economy.

    Enough said.



  14. michael schumacher commented on Nov 7


    That is just wrong on so many levels….

    I hope you are able to defend those statements. You are going to have to…

    Petefrom OZ

    after going through what I did with this fire I have a new appreciation for what you go through almost every year. Not fun…

    On the PPT I gather they will always be on the job however it’s job just got a bit harder to accomplish as the momo it creates with the SPX (nightly at about 1:30am PST) is’nt carrying over with the same affect it has had. But I’m sure there is some sort of market altering news (i.e. that pushes it up) to come out soon….otherwise NOGO will have to actually take a hit in his “returns”.

    How are those buys from last thursday going??-LOL


  15. zao commented on Nov 7

    “I think the Japanese central bank is possibly more irresponsible than our central bank.”

    DISAGREE. The BOJ has kept rates low. But they were in deflation for a long time. Their real rate was significantly positive even when they had 0% overnight rate. Fed on the other hand is ignoring overall CPI and keeping real rates too low. went to -1% for a long time and then even when they went to 5.25%, they were below 2% real.

  16. peter from oz commented on Nov 7

    glad you got thru it michael
    premium price to pay for quality of life but worth it
    also natures way of spanking
    “This credit crisis, when all is out, will see $250 billion to $500 billion of losses,” London-based Janjuah said. “The heat is on and it is inevitable that more players will have to revalue at least a decent portion” of assets they currently value using “mark-to-make believe.”

    Morgan Stanley has the equivalent of 251 percent of its equity in Level 3 assets, according to Janjuah. Goldman Sachs Group Inc. has 185 percent, Lehman Brothers Holdings Inc. has 159 percent and Citigroup Inc. has 105 percent, Janjuah wrote.

    Merrill Lynch & Co., which wrote down $8.4 billion of subprime mortgage debt and related securities, has Level 3 assets equal to 38 percent of its equity “and may well come out of all of this in the best health,” Janjuah said.

    rgds pcm

  17. GreenMachine commented on Nov 7

    Consider life on planet earth 10-15 years from now. Then consider the following elemental investments: SQM (Lithium batteries), APD (Hydrogen fuel cells), CCJ (Uranium), CGW (Water ETF), BFRE (Carbon Ethanol). You could throw in UTX,EDR and ECOL for good measure.

  18. peter from oz commented on Nov 7

    BTW Janjuah Cief Strategist Royal Bank of Scotland (no slouches)
    just one of the buzzards the sky will fill with next year
    wait for the 10ks
    anyhow buzzards purpose is to stop spread of disease and contagion
    rgds pcm

  19. GDM commented on Nov 7

    I posted this same note a while back and got no real response, so here it is again. As long as you continue to bang the drum that the Fed should use headline not core inflation to guide policy, I’ll keep posting this unless and until you come up with a good argument as to why I’m wrong.

    There are 2 very good reasons to exclude food and energy costs from the measures of inflation used to drive monetary policy.

    1) Food and energy costs are driven by global supply & demand levels over which monetary policy has extremely limited impact. Oil prices are high not because interest rates were too low for too long but because of (a) strong demand growth globally, especially from emerging markets; (b) limited supply growth from underinvestment in exploration when oil was cheap and increased difficulties/cost of extracting oil from existing wells; and (c) political risk premiums arising from our intervention in the Middle East. Food inflation has to a large extent been driven by fiscal policy — ethanol subsidies diverted corn from the food supply and land from wheat production to corn production, leading to higher prices for corn & wheat and those foods which use them as feed.

    2) A recent Fed study demonstrates that reliance on headline vs core inflation results in increased volatility in rates and consequently increased variability in the level of unemployment, and outcome I think we would all prefer to avoid. Marc Shivers at The Talking Fed gives a great summary at http://talkingfed.blogspot.com/2007/10/mishkin-on-core-vs-headline-inflation.html

  20. michael schumacher commented on Nov 7

    Oil prices are high right now because of the NYMEX pit and not because of some demand curve analysis.

    As already stated this is the shoulder season….not a typically volatile portion of the year however when greed outstrips reality (the deliverable level of oil in Cushing , OK) you get the traders who bid up the price knowing full well that the current storage capacity at said facility can’t handle even a portion of the amount of contracts on the books for delivery EACH AND EVERY MONTH………..but the bidding goes on regardless of the actualities of taking delivery of oil that really does’nt exist.


    The crooks at the NYMEX did not get there hurricane to push up the price….they are doing it now and you are all (including me) paying the price for it.


  21. me commented on Nov 7

    ” Europe is becoming a Muslim nation ”

    So? You better learn to like Muslims and Chinese, they will be own us soon.

  22. zao commented on Nov 7

    I am sick of hearing how Fed can’t do anything to affect commodity prices. What do you propose they do with the inflation that comes from it? Ignore it and cut rates anyway. Well guess what, that is what they did in the 70s. Let me put some numbers on this.

    CPI Inflation in Germany (West Germany to be exact) in 1971 was 5.4%. In the US, 3.3%. Then the oil shock hit. The Fed and the Buba reacted differently. THe Fed accomodated the inflation a lot more than Buba did (just like they are doing now). Inflation in US averaged 8.5% over the next 10 yrs. In Germany, 5.4%.
    Ah! there must be a rub. Germany must have suffered lower growth. NOPE. Avg real GDP growth in Germany over the 10yr period was 2.4% while it was 2.5% in US. So we had much higher inflation here because they accomodated. Eventually, we suffered a dollar crisis in 1979 and then had to raise rates sky high while Germany negotiated throught the commodity shock much better.

    See any lessons there????

  23. Estragon commented on Nov 7


    The reason for increased food & energy prices really doesn’t matter, nor does the fact that monetary policy is unlikely to do much to control them.

    What does matter is the affect, if any, the increases have on aggregate price levels. If monetary policy is neutral, food/energy prices will be offset by declines in other prices, and aggregate prices will remain stable. If monetary policy is loosened too much (possibly because the increasing prices are excluded from the definition of inflation while the offsetting declining prices aren’t), aggregate prices may rise. If monetary policy is tightened too much in response to a transitory spike, growth may be needlessly impaired.

    You might make a policy decision to allow inflation to rise for any number of reasons, including those you note. Fair enough, but to ignore food and energy in policymaking is silly.

    I suspect the fed does take food & energy into account when setting policy, even though they supposedly have a focus on the core rate.

    Where I think the fed is really taking risks is in ignoring aggregate asset prices and global financial flows.

  24. mike e. commented on Nov 7

    The Aussies can’t control the price of commodities any more than the US Fed can. They can raise their rates to 15%…the only thing that will do is cause the Aussie economy to seize up and sputter (with the exception of BHP and all the other miners, which will continue to make money had-over-fist).

    We should just outlaw the trading of commodities. That will stop the shenanigans.

  25. peter from oz commented on Nov 7

    the PPT arrives early
    only reason I can see is oil off $2 from high
    maybe they need to get back to the major surgery on financials balance sheets

    rigging the Dow/S&P easy compared to that
    rgds pcm

  26. vancouberite commented on Nov 7

    “Perhaps they fill finally begin to do what they must following the olympics this summer. There often seems to be a hangover in the aftermath. Vancouber had an awful time following its big event.”

    yeah, we still haven’t recovered from the 2010 Olympics.

  27. Jim M commented on Nov 7

    Folks, if the markets are killing the dollar because of inflation fears, why are long-dated bonds rising?
    Can’t this be seen as a revision of profitability forecasts in equities, based on consumer weakness stemming from housing and rising commodity prices? And that hits stocks and thus the dollar, while the falling dollar feeds back into commodity inflation. So the core matters, but mainly because it hurts an already shaky consumer who now has to pay more for bread and gas, and therefore has less to spend on other stuff. Tech baubles for the rich and upper-middle class, fine. The rest, weak. This also gives us the surge in the commodity currencies.

  28. zao commented on Nov 7

    Poole on the tape. saying



    Playing with fire…

  29. David commented on Nov 7

    Did you see CNBC TV host Jim Cramer stick a Bowie knife in the portraits or picture of people tonight, (Gisele Bündchen the fashion model, and New York Attorney General Andrew Cuomo). Is he crazy, he should be fired for threatening people like that.

  30. JJL commented on Nov 7

    In the face of all the terrible headlines and all common sense, all the talking heads on TV are saying the worst is over again! I guess it never gets old. The idea that things in the credit markets are going to improve relies heavily on the concepts of Suspension Of Disbelief and Deus ex machina to reconcile the massive problems going forward.

  31. Pat Gorup commented on Nov 7

    With respect to inflation the Fed and other analysts insist that it is benign. I guess none of them do their own grocery shopping or pay for gas. I went to the laundromat to wash clothes today after having returned from being gone six weeks. I found that the price to wash a load had increased by fifty cents and that quarter that used to buy me twelve minutes in the dryer now buys me eight. So, I bought more silver. What inflation?? Duh.

  32. Tom B commented on Nov 7

    “Where do you put your money ? Europe is becoming a Muslim nation as well as a welfare country, the Euro will eventually tank,as well as the country . China scary,biggest division between rich and poor, Canada usually follows the USA. Where do you put money?”

    Damn good question. The EU is like the US except any one of its migranty workers could be a psychokiller. China– the most evil place on Earth. More evil than us. Takes over neighboring countries at will– Mongolia, Tibet– Burma and Taiwan next? How can you trust their books? At least in the EU you might expect SOME adult supervision.

    Gold? Bonds? Commodities? I’m an individual investor; not an economist– all I know is cash sucks and I no longer trust my stock-picking radar, given Bernecke’s shenanigans.

    I like Canada– they’ll have warm-water resort beaches soon, the way the climate is going.

  33. Winston Munn commented on Nov 8

    Inflation is, always has been, and always will be a monetary event – to base policy of a monetary event by measuring prices is ludicrous. It’s like counting the number of apple seeds planted in Washington to determine the value of this year’s pineapple crop in Hawaii – there isn’t much correlation.

    So it really doesn’t matter if it’s cored, pitted, or skinned, until a model is created of monetary expansion + debt expansion, any silly price model will be putty, massaged into a desired shape.

  34. Winston Munn commented on Nov 8


    Washington, D.C.
    November 7, 2007

    In a speech tonight to the American Medical Association, Federal Reserve governor Frederic Mishkin commented that the deflationary spiral in Japan had been caused by the Bank of Japan not acting quickly enough to slash interest rates. He also quoted Federal Reserve chairman Ben Bernanke’s remarks that the Great Depression could have been prevented by strong intervention to aggressively increase credit availabiliy.

    “In fact,” Mishkin said, “we have now learned that virtually any human problem can be solved by early and aggressive intervention by the Federal Reserve to slash interest rates. In level 2 trials, cutting rates to the bone has been 100% effective in curing gout, Asian flu, beri beri, Malaria, MRSA, and Congo fever.”

    Shares of Merck dropped 20% in after hours trading but bounced back in premarket trading after the Federal Reserve announced an emergency rate cut.

    And oddly enough, my big toe stopped aching.

  35. Schnauser commented on Nov 8

    using core inflation numbers made sense when energy and food prices were volatile but range bound. as we can all see, this changed a few years ago. now that we are in a secular trend for higher commodity prices, it is inappropriate to continue to exclude energy and food. the central bankers will be the last people on earth to admit that the disinflationary era is over. the longer that financial nitwits pretend that nothing has changed, the more opportunity I have to amass my position in long life reserves in the ground.

  36. rickrude commented on Nov 8

    Where do you put your money ? Europe is becoming a Muslim nation as well as a welfare country, the Euro will eventually tank,as well as the country . China scary,biggest division between rich and poor, Canada usually follows the USA. Where do you put money?

    Posted by: mal | Nov 7, 2007 11:41:09 AM

    Where not to put it: USD and other currencies eg Yen.
    World wide competitive devaluation going on by central banks.

    Put it in hard assets and sleep well

  37. rickrude commented on Nov 8

    Did you see CNBC TV host Jim Cramer stick a Bowie knife in the portraits or picture of people tonight, (Gisele Bündchen the fashion model, and New York Attorney General Andrew Cuomo). Is he crazy, he should be fired for threatening people like that.

    Posted by: David | Nov 7, 2007 7:38:11 PM

    It should be broadcast in the Middle East…
    to show what americans are like

  38. Turbo commented on Nov 8

    Actually, you’re completely wrong on this, and I’m surprised nobody picked up on it. The ECB is the only major central bank that targets headline inflation exclusively.

    Japan – the inflation measure the BoJ uses includes energy but excludes food.
    UK – the rpix target includes food and energy, but excludes mortgage payments.
    Canada – targets 1-3% core inflation.
    Australia – targets 2-3% core inflation.
    Switzerland – has no explicit inflation target.

    I agree that US inflation is running higher than is being reported, and core and headline inflation (and asset prices for that matter) should be used to set monetary policy, but the Fed is far from being alone in not targeting headline inflation.

  39. RealThink commented on Nov 8

    In Louis XVI’s France, a few economists (e.g. Turgot), realizing that the state finances were on a crash course, argued that, in order to preserve at least part of the status quo, the nobility had to relinquish some of their privileges (specifically, their exemption from paying all taxes). Their stark advice fell into deaf years and the economists ended up quickly losing their jobs.

    On the other hand, most of that time’s economists, vying for the nobles’ favor and appointments, reassured them that things were working the way they were supposed to, and that there was no need to part with any of the practices that had been established by history. Their soothing advice was welcome by the nobles who, by following it, in a few years had parted with their lands or their heads.

    Today, a few economists realize that the US dollar status as the international trade and reserve currency is inherently precarious, arising as it does from its voluntary acceptance by foreigners:

    “It is the market that made the dollar into global money — and what the market giveth, the market can taketh away.”

    “At present, Americans and non-Americans alike make and receive international payments in dollars because they have confidence that dollars will, relative to other transaction vehicles, retain their value well in future commercial transactions. It is hardly science fiction to imagine a tomorrow in which this is no longer the case.”

    Benn Steil, Director of International Economics at the Council on Foreign Relations, 2007


    “Falling US interest rates would make the control of inflation even more difficult within the emerging world, eventually increasing the temptation to “go it alone” and leave the dollar to its own destiny. Might this lead to a dollar collapse, a loss of US monetary credibility and the end of an economic pax Americana?

    Perhaps this is a fairy-tale too far. … The story unfolding … may finish happily ever after. But it might, instead, end up like one of those novels from my namesake, a horrific mixture of weak growth, sticky inflation and, ultimately, a loss of confidence in the dollar’s status as a reserve currency.”

    Stephen King, managing director of economics at HSBC, 2007 Oct 1st,

    What almost no one realizes is the extent to which life-as-Americans-know-it depends on the US dollar keeping, at least in part, its current privileged status, and the consequences that the complete loss thereof can bring about: if paying for US exports becomes the only reason to hold dollars outside the US – as it should be in a fair international monetary system, BTW, i.e. one in which the dollar was not accorded “privileged” status – then there are way, way too many dollars (and US-issued dollar-denominated debt) outside the US. So many that their holders would be able to pay for US exports for a very, very long time without needing to sell anything to the US. And why wouldn’t they?

    Clearly, if the US becomes the only country accepting dollars as payment for its exports, US imports would drop brutally – conceivably to zero. Taking into account that the US imports 59 % of its consumption of oil + petroleum products, the impact on US life would be brutal too. Welcome to Peak Oil now, US-only version.

    It follows that, if the US wants the dollar to retain, at least in part, its role as international trade and reserve currency, they can no longer follow a monetary policy focused only (or even mainly) on avoiding internal recessions, and must adopt one geared to preserving the purchasing power of the USD for international transactions by checking money supply growth. Unpleasant recessions may come as a result, but the alternative is much, much worse.

    This issue is extensively developed at

  40. robster commented on Nov 8


    LOL – You got me. I can’t remember what they hosted in 1980s, but I know they did have some big event there (’86 summer games??). I also seem to recall hearing about a bit of a slump post games.

    Hope 2010 works out better for you.


  41. Colin commented on Nov 9

    We also raised rates during an election. Fuck the politicians, our economy needs us!

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