The deflation case: caught, gutted, poached and eaten

[GRG55]

Re: The deflation case: caught, gutted, poached and eaten

How were the network's wages doing when oil was $20/barrel?.

Or from 1991 to 2001?

That's just the point. I'll repeat. There are parts of the US economy, ignored for the better part of 25-30 years, that are now doing very, very well. Phone any farmer in Nebraska if you think I'm kidding.

Just curious - this would separate the $100/oil price bonus from the inherent oil industry profitability bonus.

Last summer marked my 30th year in the petroleum business. Have ridden the economic, corporate and career cycle up and down. I've watched companies make money when the prices were down and times were hard, and others so bad they destroy shareholder value even today. The primary differentiator between the two? How well they allocate their capital, in a ludicrously capital-intensive industry.

Buffett doesn't like commodities. Sounds like you may not either, for the same reasons? Fine. Nevertheless, Buffett's success, and yours also, will depend a great deal on how well you apply your capital.

How is oil any different from, say, the California defense industry, construction, auto manufacturing, forest products, banking, technology and a myriad of other sectors in a diversified economy? The US has apparently already tried the strategy of exporting every job but hamburger flipper and hair cutters. Doesn't work, does it? Long neglected industries are having their moment in the sun. It won't last forever, but it will last much longer than most Wall St. analysts expect.

As for BMWs - that is a very unreliable statistic. In the Bay Area, it seems every 3rd car is a Merc of BMW; when your house costs $5000/month, a $1000 car payment is only keepng up with the Joneses.

BMWs in my cohort are actually a very reliable statistic. When you work in a deep cyclical industry like petroleum, you tend to develop more conservative spending habits. It is only recently that my circle of friends have started to beleive they can actually afford the entry cost and ongoing opex of a BMW.

[sadsack]

Re: The deflation case: caught, gutted, poached and eaten

Excellent point and observation. Riddle me this.

1) There has been significant inflation over the past few years and the CPI understates it.

2) Inflation cannot increase without wage inflation.

3) Nominal wages are flat and real wages are declining.

All of three of the above assertions listed cannot be true. One or more of them must be wrong.

We are working three hypotheses:

1) CPI-W adjusted wage inflation is higher than reported because inflation measures used to deflate wage rates are higher than reported.

2) Distribution of income gains means high levels of inflation among top wage earners has a disproportionately strong tendency to transmit inflation into the price complex.

3) The inflation cycle does not need rising wage inputs, that rising import prices due to a depreciating currency are sufficient.

Fe! Fi! Fo! Fum!
I smell a whiff of inflation!

The yield on 5 Year TIPs has fallen below zero three days ago and hasn't yet come up for air. I saw this linked on CalculatedRisk:

http://www.bloomberg.com/apps/news?p...IWc&refer=home

March 4 (Bloomberg) -- Yields on five-year Treasury Inflation-Protected Securities fell below zero for a third day on investor speculation that inflation will quicken as the U.S. economy slows.

Yields on the securities, known as TIPS, dropped to minus 0.036 percent on Feb. 29, according to Barclays Capital Inc., the biggest dealer of the securities. It was the first foray below zero since five-year TIPS were first sold in 1997, according to the firm, one of the 20 primary dealers that trade directly with the Federal Reserve.

[c1ue]

Re: The deflation case: caught, gutted, poached and eaten

BMWs in my cohort are actually a very reliable statistic. When you work in a deep cyclical industry like petroleum, you tend to develop more conservative spending habits. It is only recently that my circle of friends have started to beleive they can actually afford the entry cost and ongoing opex of a BMW.

So it is safe to say that oil industry employee raises lagged the average from 1991 to 2001?

I don't know - just was wondering...

I can say that my (former) portion of the tech industry had raises that were great from 1995 to 2005, but the last 2 years have been terrible.

Even discounting a pretty low starting point, I was fortunate enough to experience a quadrupling of salary from 1995 to 1998.

I would not be surprised to see something similar with the oil industry at the likely beginning of a good decade.

[jk]

Re: The deflation case: caught, gutted, poached and eaten

Excellent point and observation. Riddle me this.

1) There has been significant inflation over the past few years and the CPI understates it.

2) Inflation cannot increase without wage inflation.

3) Nominal wages are flat and real wages are declining.

All of three of the above assertions listed cannot be true. One or more of them must be wrong.

We are working three hypotheses:

1) CPI-W adjusted wage inflation is higher than reported because inflation measures used to deflate wage rates are higher than reported.

2) Distribution of income gains means high levels of inflation among top wage earners has a disproportionately strong tendency to transmit inflation into the price complex.

3) The inflation cycle does not need rising wage inputs, that rising import prices due to a depreciating currency are sufficient.

the statement that is wrong is that inflation requires rising wages. rising wages aren't necessary if there is another source of funds to support consumption.
you forgot to include the effect of the housing atm and foreign financial flows as a form of vendor financing. who needs increased wages when you can just charge something against your heloc? the key question is whether wages will pick up now to allow more inflation, now that the housing atm is closed.

[zoog]

Re: The deflation case: caught, gutted, poached and eaten

the statement that is wrong is that inflation requires rising wages. rising wages aren't necessary if there is another source of funds to support consumption.

you forgot to include the effect of the housing atm and foreign financial flows as a form of vendor financing. who needs increased wages when you can just charge something against your heloc? the key question is whether wages will pick up now to allow more inflation, now that the housing atm is closed.

Ah, well now that's a good point. More interesting than my thoughts but here's my two cents anyway.

We are working three hypotheses:

1) CPI-W adjusted wage inflation is higher than reported because inflation measures used to deflate wage rates are higher than reported.

If it's politically advantageous to under-report price inflation so people don't feel like their living costs are skyrocketing out of control, then why would the government under-report wage inflation which purports to show how much money people are making? Wouldn't they want to over-report that? Seems like they'd want to make the case that even though there is a "mild" amount of price inflation, wages are rising faster so the inflation is quite manageable for Joe Sixpack.

2) Distribution of income gains means high levels of inflation among top wage earners has a disproportionately strong tendency to transmit inflation into the price complex.

I like this one just because I'm not a top wage earner, so naturally I feel like they're making too much money. But it seems unlikely to me that there are enough of them and they are spending enough money to inflate prices on everything from basic commodities on up.

3) The inflation cycle does not need rising wage inputs, that rising import prices due to a depreciating currency are sufficient.

This seems like the blindingly obvious answer... which doesn't mean it's the correct answer but it would be my pick. Of course, it could be more complex than just currency depreciation. Perhaps there is wage inflation in other parts of the world, and they are buying more stuff, and that is contributing to higher prices as well (both as consumers with more money and as a factor in rising production costs passed on). Maybe (likely, really) production of various commodities and finished goods is not keeping up with worldwide demand, regardless of how much demand or how much buying power people have here in the US.

[GRG55]

Re: The deflation case: caught, gutted, poached and eaten

So it is safe to say that oil industry employee raises lagged the average from 1991 to 2001?

I don't know - just was wondering...

I can say that my (former) portion of the tech industry had raises that were great from 1995 to 2005, but the last 2 years have been terrible.

Even discounting a pretty low starting point, I was fortunate enough to experience a quadrupling of salary from 1995 to 1998.

I would not be surprised to see something similar with the oil industry at the likely beginning of a good decade.

Don't have any data for individual wages, but total employment/payrolls in the upstream black-oil sector of the industry continued to decline significantly as oil prices ended the decade of the 1990's near mulit-year lows (setting the stage for the talent shortages today). Those working in the upstream (exploration and production) natural gas sector in North America fared somewhat better as nat gas prices were in the toilet about 1993 and bounced back nicely over most of the remainder of the decade.

The constant corporate restructurings and layoffs, starting with the oil price collapse in 1986, created a generation of employees in the upstream industry that became wary of job loss, and in many cases talent left the sector permanently because the job uncertainty proved too much, even though wages generally held up (it's rare to have actual wage cuts, more usually wage and benefit freezes in the tough times, for those that keep their jobs). That's why most of my friends haven't owned BMWs, and it seems most who are buying them now are paying cash.

The area that tons of money was made in the decade of the 1990s was the emergence of the merchant energy trading companies - Enron et al. Although the rise and fall of these companies was overshadowed by the near concurrent rise and bust of TMT, these companies found and exploited a real market inefficiency and minted a lot of money for their owners and employees, but unfortunately greed and stupidity caused their leaders to corrupt the business model...and the rest is history.

[World Traveler]

Re: Oil Industry Wages

I worked in oil idustry from 70's to my recent retirement. I remember the 70's oil boom in Houston well. It was a great time, jobs aplenty, rising wages, and a booming local economy.

And a lot of oil industry equipment manufacture was done in Houston at that time, so lots of those type jobs too.

The easiest way to describe the current Houston economy is probably better than the most of the U.S., but far from booming, nothing remotely like the 1970's.

Reason, I believe, is what I saw firsthand and have heard from many friends. Many of the bigger oil companies have off-shored big chunks of their non-Upstream activities in the last 10 years. And by that I mean, Information Technology, Accounting, Financial analysis, Procurement, Payables, Receivables, etc. I've even heard of an oil company that now processes and supports its U.S. payroll and benefits activities from South America, etc., etc.

So jobs for back office and Downstream activities are not booming and wages consequently are not going up in any significant way.

Upstream (Exploration and Production), though, is another story. Salaries in Upstream are going up as oil companies compete for engineers and others who can find oil or help get it out of the ground or deepwater.

Also, there is no boom in oil equipment manufacturing here. There doesn't seem to be much of that left in Houston.

[BiscayneSunrise]

Re: The deflation case: caught, gutted, poached and eaten

Fred,

I believe # 3 is the answer.

Isn't the dictionary definition of inflation simply an increase in the money supply resulting in the loss of value of the currency?

Throw in the traditional definition of too many dollars (from around the world) chasing too few goods and you get inflation here at home despite the average wage earner in the US not getting raises.

Greenspan used to say that increasing productivity held down inflation but that model only works with things like technology especially when that industry was nascent. It's harder to squeeze productivity out of commodities when you are faced with peak production problems. The law of diminishing returns forces inflation, especially when aggravated by soaring worldwide demand

[BiscayneSunrise]

Re: The deflation case: caught, gutted, poached and eaten

Long neglected industries are having their moment in the sun. It won't last forever, but it will last much longer than most Wall St. analysts expect.


Agreed. It's fun to watch the incredulous talking heads on CNBC rail against the rising gold price. They just want to close their eyes to reality and wish the FIRE economy back to its glory days.

[GRG55]

Re: The deflation case: caught, gutted, poached and eaten

The deflation case: caught, gutted, poached and eaten

Oh, no! Not the Inflation vs Deflation debate again!

by Eric Janszen

The Fed’s greatest challenge is that the need to create an inflationary firebreak between crashing asset prices and the real economy has become so obvious that Wall Street money managers are starting to pile into the inflation bet en masse...

What happens if the ECB doesn't play ball?

Trichet's press conference today left me with the impression, from his tone not so much his words, that the ECB intends to hold the line on interest rate cuts. He made it very, very clear, answering several similar questions from different reporters, that the ECB does NOT have a dual mandate and that it's only mandate is price stability. At one point he made a pointed and deliberate contrast between his situation and the Federal Reserve Board dual mandate ("The ECB has a single needle compass...").

Emphasis mine...

Trichet Says Anchoring Inflation Is Highest Priority

By Brian Swint

March 6 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said policy makers are focused on keeping expectations about future price increases in check.

``The firm anchoring of medium- to long-term inflation expectations is of the highest priority to the Governing Council,'' Trichet said at a press conference in Frankfurt today after the ECB kept its key rate at 4 percent. ``The current monetary policy stance will contribute to achieving'' this goal.

Record oil prices, higher credit costs and the euro's 17 percent gain against the dollar in the past year are slowing economic growth in the 15-nation euro region. At the same time, inflation is running at 3.2 percent, the fastest pace since the euro's debut in 1999.

``Uncertainty resulting from financial turmoil remains high,'' Trichet said. ``The economic fundamentals are sound. We emphasize that maintaining price stability over the medium term is our prime objective.''

The 21-member rate-setting council was unanimous in leaving interest rates unchanged today, Trichet told reporters. When asked if investors' expectations for lower interest rates were misplaced, he said: ``We're not underwriting the present future- market interest rates.''

The ECB today revised up its inflation forecasts to 2.9 percent from 2.5 percent for 2008 and said inflation will stay above the 2 percent ceiling in 2009, Trichet said.

The bank also cut its predictions for growth to 1.7 percent for this year and 1.8 percent for 2009, compared with a December forecast of 2 percent and 2.1 percent.

http://www.bloomberg.com/apps/news?p...Crc&refer=home

[FRED]

Re: The deflation case: caught, gutted, poached and eaten

What happens if the ECB doesn't play ball?

Trichet's press conference today left me with the impression, from his tone not so much his words, that the ECB intends to hold the line on interest rate cuts. He made it very, very clear, answering several similar questions from different reporters, that the ECB does NOT have a dual mandate and that it's only mandate is price stability. At one point he made a pointed and deliberate contrast between his situation and the Federal Reserve Board dual mandate ("The ECB has a single needle compass...").

Emphasis mine...

Trichet Says Anchoring Inflation Is Highest Priority

By Brian Swint
March 6 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said policy makers are focused on keeping expectations about future price increases in check.

``The firm anchoring of medium- to long-term inflation expectations is of the highest priority to the Governing Council,'' Trichet said at a press conference in Frankfurt today after the ECB kept its key rate at 4 percent. ``The current monetary policy stance will contribute to achieving'' this goal.

Record oil prices, higher credit costs and the euro's 17 percent gain against the dollar in the past year are slowing economic growth in the 15-nation euro region. At the same time, inflation is running at 3.2 percent, the fastest pace since the euro's debut in 1999.

``Uncertainty resulting from financial turmoil remains high,'' Trichet said. ``The economic fundamentals are sound. We emphasize that maintaining price stability over the medium term is our prime objective.''

The 21-member rate-setting council was unanimous in leaving interest rates unchanged today, Trichet told reporters. When asked if investors' expectations for lower interest rates were misplaced, he said: ``We're not underwriting the present future- market interest rates.''

The ECB today revised up its inflation forecasts to 2.9 percent from 2.5 percent for 2008 and said inflation will stay above the 2 percent ceiling in 2009, Trichet said.

The bank also cut its predictions for growth to 1.7 percent for this year and 1.8 percent for 2009, compared with a December forecast of 2 percent and 2.1 percent.
http://www.bloomberg.com/apps/news?p...Crc&refer=home

The Wall Street Journal put it well yesterday saying the Fed's policy has been as a man showning up at the black tie dinner in a Halloween costume.

[GRG55]

Re: The deflation case: caught, gutted, poached and eaten

The Wall Street Journal put it well yesterday saying the Fed's policy has been as a man showning up at the black tie dinner in a Halloween costume.

No kidding. Look at this...

N.Z. Dollar Rises After Bollard Says Rate to Remain at Record

By Emma O'Brien and Ron Harui

March 6 (Bloomberg) -- New Zealand's dollar advanced after the central bank said the nation's benchmark interest rate will remain at a record high.

The local dollar gained after Reserve Bank of New Zealand Governor Alan Bollard kept borrowing costs unchanged at 8.25 percent, saying that inflation will ensure rates stay at ``current levels for a significant time.'' New Zealand's debt has attracted investors because the rate is the highest after Iceland's among economies rated Aaa.

``Inflation is the dominant problem so cuts are a very, very long way off,'' said Brendan O'Donovan, chief economist at Westpac Banking Corp. in Wellington. ``The interest-rate differential is going to stay wide so that's supportive of the currency.''

http://www.bloomberg.com/apps/news?p...d=a7N7Wu9zS29M

And this...

Australian Dollar Gains as Prices of Commodity Exports Increase

By Chris Young and Ron Harui

March 6 (Bloomberg) -- The Australian dollar gained as prices of commodities the nation exports such as gold increased, boosting the outlook for the nation's economic growth...

...The Australian dollar's status as a favorite of so-called carry trades was enhanced yesterday when the central bank raised its benchmark interest rate to a 12-year high of 7.25 percent...

http://www.bloomberg.com/apps/news?p...d=aHmLwzjpWsEQ

And this...

BOE Keeps Benchmark Interest Rate Unchanged at 5.25%

By Jennifer Ryan

March 6 (Bloomberg) -- The Bank of England kept its benchmark interest rate unchanged as accelerating inflation prevented policy makers from cutting borrowing costs to shore up economic growth.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, kept the bank rate at 5.25 percent, as predicted by 59 of 60 economists in a Bloomberg News survey. One forecast a quarter-point reduction. The central bank reduced the benchmark in December and February.

Surveys this week showed factories and service companies raised prices at the fastest pace on record last month, and the central bank predicts inflation may accelerate above 3 percent this year. That makes it harder for policy makers to cut interest rates to protect the economy as house prices fall. Home values slipped 0.3 percent in February, HBOS Plc said today...

http://www.bloomberg.com/apps/news?p...d=a2ciYddEps1w

And this...

China Has Room to Raise Rates, Governor Zhou Says

By Li Yanping

March 6 (Bloomberg) -- China's central bank Governor Zhou Xiaochuan said he'll consider raising interest rates to tame the fastest inflation in 11 years.

``There is still room for further interest-rate increases,'' Zhou said today at the annual meeting of China's legislature in Beijing. Any decision is complicated by the U.S. Federal Reserve cuts to borrowing costs and the government's goal of increasing consumer spending, he said.

China's Premier Wen Jiabao said yesterday curbing inflation is his top priority. Zhou, who's raised the benchmark one-year lending rate to a nine-year high of 7.47 percent, needs to cool prices without triggering a sharp slowing of the world's fourth- largest economy.

http://www.bloomberg.com/apps/news?p...d=a0_RYdn_7hVE

So the question is still...Does the Fed decide to draw a line in the sand and arrest, at least temporarily, the fall in the US$ and knock the economy and commodities on the head?

[FRED]

Re: The deflation case: caught, gutted, poached and eaten

No kidding. Look at this...

N.Z. Dollar Rises After Bollard Says Rate to Remain at Record

By Emma O'Brien and Ron Harui

March 6 (Bloomberg) -- New Zealand's dollar advanced after the central bank said the nation's benchmark interest rate will remain at a record high.

The local dollar gained after Reserve Bank of New Zealand Governor Alan Bollard kept borrowing costs unchanged at 8.25 percent, saying that inflation will ensure rates stay at ``current levels for a significant time.'' New Zealand's debt has attracted investors because the rate is the highest after Iceland's among economies rated Aaa.

``Inflation is the dominant problem so cuts are a very, very long way off,'' said Brendan O'Donovan, chief economist at Westpac Banking Corp. in Wellington. ``The interest-rate differential is going to stay wide so that's supportive of the currency.''

http://www.bloomberg.com/apps/news?p...d=a7N7Wu9zS29M

And this...

Australian Dollar Gains as Prices of Commodity Exports Increase

By Chris Young and Ron Harui

March 6 (Bloomberg) -- The Australian dollar gained as prices of commodities the nation exports such as gold increased, boosting the outlook for the nation's economic growth...

...The Australian dollar's status as a favorite of so-called carry trades was enhanced yesterday when the central bank raised its benchmark interest rate to a 12-year high of 7.25 percent...

http://www.bloomberg.com/apps/news?p...d=aHmLwzjpWsEQ

And this...

BOE Keeps Benchmark Interest Rate Unchanged at 5.25%

By Jennifer Ryan

March 6 (Bloomberg) -- The Bank of England kept its benchmark interest rate unchanged as accelerating inflation prevented policy makers from cutting borrowing costs to shore up economic growth.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, kept the bank rate at 5.25 percent, as predicted by 59 of 60 economists in a Bloomberg News survey. One forecast a quarter-point reduction. The central bank reduced the benchmark in December and February.

Surveys this week showed factories and service companies raised prices at the fastest pace on record last month, and the central bank predicts inflation may accelerate above 3 percent this year. That makes it harder for policy makers to cut interest rates to protect the economy as house prices fall. Home values slipped 0.3 percent in February, HBOS Plc said today...

http://www.bloomberg.com/apps/news?p...d=a2ciYddEps1w

And this...

China Has Room to Raise Rates, Governor Zhou Says

By Li Yanping

March 6 (Bloomberg) -- China's central bank Governor Zhou Xiaochuan said he'll consider raising interest rates to tame the fastest inflation in 11 years.

``There is still room for further interest-rate increases,'' Zhou said today at the annual meeting of China's legislature in Beijing. Any decision is complicated by the U.S. Federal Reserve cuts to borrowing costs and the government's goal of increasing consumer spending, he said.

China's Premier Wen Jiabao said yesterday curbing inflation is his top priority. Zhou, who's raised the benchmark one-year lending rate to a nine-year high of 7.47 percent, needs to cool prices without triggering a sharp slowing of the world's fourth- largest economy.

http://www.bloomberg.com/apps/news?p...d=a0_RYdn_7hVE

So the question is still...Does the Fed decide to draw a line in the sand and arrest, at least temporarily, the fall in the US$ and knock the economy and commodities on the head?

That's what keeps us up at night. On the other hand, from the front page of today's Wall Street Journal:

Liquidation Fears Squeeze Stocks
Stocks fell as missed margin calls compounded fears of securities liquidation and the dollar hit fresh lows against the euro. Oil prices eased after climbing close to $106 a barrel. 10:16 a.m.

Carlyle Adds to Fears of Forced Sales
Carlyle Capital added to worries about forced liquidations of residential mortgage-backed securities after failing to meet margin calls on its $21.7 billion portfolio. 7:33 a.m.

New Spasm Jolts Credit Markets
Despite repeated doses of medicine from central banks, short-term lending markets around the world are struggling again. The renewed turmoil marks the latest fallout from the deflation of U.S. housing values and the subprime-mortgage crisis.

The Bank of Japan in 1990 and the Fed in the early 1930s tried to raise interest rates during credit contractions to protect the currency. Didn't work out well.

We need to see signs that the credit crisis is not spreading and deepening before worrying too much about the Fed changing direction.

Fed will maintain course and speed toward zero until the credit crisis clears.

[Jim Nickerson]

Re: The deflation case: caught, gutted, poached and eaten

No kidding. Look at this...

N.Z. Dollar Rises After Bollard Says Rate to Remain at Record

By Emma O'Brien and Ron Harui

March 6 (Bloomberg) -- New Zealand's dollar advanced after the central bank said the nation's benchmark interest rate will remain at a record high.

The local dollar gained after Reserve Bank of New Zealand Governor Alan Bollard kept borrowing costs unchanged at 8.25 percent, saying that inflation will ensure rates stay at ``current levels for a significant time.'' New Zealand's debt has attracted investors because the rate is the highest after Iceland's among economies rated Aaa.

``Inflation is the dominant problem so cuts are a very, very long way off,'' said Brendan O'Donovan, chief economist at Westpac Banking Corp. in Wellington. ``The interest-rate differential is going to stay wide so that's supportive of the currency.''

http://www.bloomberg.com/apps/news?p...d=a7N7Wu9zS29M

And this...

Australian Dollar Gains as Prices of Commodity Exports Increase

By Chris Young and Ron Harui

March 6 (Bloomberg) -- The Australian dollar gained as prices of commodities the nation exports such as gold increased, boosting the outlook for the nation's economic growth...

...The Australian dollar's status as a favorite of so-called carry trades was enhanced yesterday when the central bank raised its benchmark interest rate to a 12-year high of 7.25 percent...

http://www.bloomberg.com/apps/news?p...d=aHmLwzjpWsEQ

And this...

BOE Keeps Benchmark Interest Rate Unchanged at 5.25%

By Jennifer Ryan

March 6 (Bloomberg) -- The Bank of England kept its benchmark interest rate unchanged as accelerating inflation prevented policy makers from cutting borrowing costs to shore up economic growth.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, kept the bank rate at 5.25 percent, as predicted by 59 of 60 economists in a Bloomberg News survey. One forecast a quarter-point reduction. The central bank reduced the benchmark in December and February.

Surveys this week showed factories and service companies raised prices at the fastest pace on record last month, and the central bank predicts inflation may accelerate above 3 percent this year. That makes it harder for policy makers to cut interest rates to protect the economy as house prices fall. Home values slipped 0.3 percent in February, HBOS Plc said today...

http://www.bloomberg.com/apps/news?p...d=a2ciYddEps1w

And this...

China Has Room to Raise Rates, Governor Zhou Says

By Li Yanping

March 6 (Bloomberg) -- China's central bank Governor Zhou Xiaochuan said he'll consider raising interest rates to tame the fastest inflation in 11 years.

``There is still room for further interest-rate increases,'' Zhou said today at the annual meeting of China's legislature in Beijing. Any decision is complicated by the U.S. Federal Reserve cuts to borrowing costs and the government's goal of increasing consumer spending, he said.

China's Premier Wen Jiabao said yesterday curbing inflation is his top priority. Zhou, who's raised the benchmark one-year lending rate to a nine-year high of 7.47 percent, needs to cool prices without triggering a sharp slowing of the world's fourth- largest economy.

http://www.bloomberg.com/apps/news?p...d=a0_RYdn_7hVE

So the question is still...Does the Fed decide to draw a line in the sand and arrest, at least temporarily, the fall in the US$ and knock the economy and commodities on the head?

Nice substantive post, GRG, I think if the equity markets were to be much lower--say have taken out the November lows--in 12 days, then the Fed will cut probably 0.5% as that is the last number I read somewhere the Fed futures were indicating. The FOMC is spineless in my opinion and is unwilling to allow the needed medicine to be taken by the economy. If the market were to substantially rally from here, who knows, they might not do anything.

[FRED]

Re: The deflation case: caught, gutted, poached and eaten

Nice substantive post, GRG, I think if the equity markets were to be much lower--say have taken out the November lows--in 12 days, then the Fed will cut probably 0.5% as that is the last number I read somewhere the Fed futures were indicating. The FOMC is spineless in my opinion and is unwilling to allow the needed medicine to be taken by the economy. If the market were to substantially rally from here, who knows, they might not do anything.

Application of the same medicine that caused two major recessions and repaired the economy in the early 1980s will lead to a depression today. The most significant difference between today versus 1980 is that the majority of US households have negative net worth vs sufficient savings to weather a lengthy recession.

The median US household has enough savings net of liabilities at current rates to support 18 weeks of cash flow vs 30 just eight years ago.

Such fragile balance sheets mean US households are in no state to experience the medicine that is needed to manage inflation fueled by a declining currency.

It is a dire conundrum.