interest rates

Bernanke Jackson Hole Speech Kicks the Can Over to Obama and Congress

bernake say whatFederal Reserve Chair Ben Bernanke gave his long awaited Jackson Hole speech this morning. Now all are reading between the lines on whether more quantitative easing will be done and picking apart every single word as if Bernanke speaks in cryptography.


First, here is the speech paragraph that will generate quantitative easing, or QE3 buzz:

In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.

Clearly QE3 is still on the table from this speech.

Bernanke, the Dollar and Commodities

Ben Bernanke has come out with a now, now, there, there on the falling dollar:

The Federal Reserve is monitoring currency markets “closely” and will conduct policy in a way that will “help ensure that the dollar is strong”, Ben Bernanke said on Monday in rare comments on the US currency.

The Fed chairman also indicated that the US central bank would not ignore the impact of rising commodity prices when evaluating the outlook for inflation. He said he would not rule out using interest rates to combat new asset price bubbles, even though he did not see obvious mispricing in the US at this stage.

Hmmmm, no obvious mispricing. Does that include the oil speculative bubble of 2008?

Meanwhile Gold is through the roof, in part due to the dollar decoupling.


kitco gold

No Long-term Recovery without real Wage Growth

In my recent series, Economic Indicators during the Roaring Twenties and Great Depression, I concluded that the indicators that were studied from the Deflationary period of 1920-1950 suggested that this recession might bottom out in about Q3 2009. But with anemic wage growth to say the least, such a weakly based recovery might be doomed at birth to be short-lived.

All the deflationary recessions from 1920 - 1950 followed a pattern. The CPI declined from the beginning of the recession and its YoY rate of decline bottomed immediately before the recession's end. M1 money supply followed a similar pattern, sometimes coincidentally, sometimes leading slightly. In all 6 of the deflationary recessions during the period of 1920-50, once M1 and CPI both declined at a decreasing rate, the recession was about to end.

That 70's Show Revisited

Sometime in the next couple of years we are going to see the virtual death of the dollar and its death is going to be perpetuated by the very recovery the administration is now engineering.

The death I speak of may not necessarily come in the form of terrible exchange rates, but it will definitely manifest itself in the form of very high interest rates and likely inflation as well (through commodities again).

Economic Indicators during the Roaring Twenties and Great Depression (V).

This is the concluding installment in my series examining how the most reliable economic indicators during the Inflationary Era, perform during periods of deflation. I have done this by examining the Roaring Twenties, Great Depression, New Deal, and the Post WW 2 deflationary recession. The reason for doing so is that we are now in the midst of the first deflationary recession in 60 years. Most indicators used by economists and pundits do not exist or have never been tested that far back in time. Indicators which may work during inflations may not work during deflations. Having set forth the data for you, today we show exactly how two such indicators -- monetary and interest rates -- panned out, and the implications of those conclusions to our present situation.

Economic Indicators during the Roaring Twenties and Great Depression (IV).

Previously in Part I of this series, I explained the need to re-examine economic indicators to determine how they performed in previous periods of deflation. In Part II, I looked at the year-over-year M1 vs. CPI indicator during the Roaring Twenties. In Part III, I looked at the same indicator during the 1930s and the post-World War 2 deflationary recession of 1948-49. That examination showed that, in the 1920-1950 period, the M1 vs. CPI indicator generally worked well, but missed the 1927 recession and most importantly of all completely failed to appropriately signal the beginning, duration, or end of the 1929-32 Great Contraction.

IV. Interest rates and the yield curve

In this installment, I will look at NY Fed interest rates, short term rates, and long term rates as they apply to the entire 1920-1950 period.

Economic Indicators during the Roaring Twenties and Great Depression (III).

Previously in Part I of this series, I explained the need to re-examine economic indicators to determine how they performed in previous periods of deflation. In Part II, I looked at the year-over-year M1 vs. CPI indicator during the Roaring Twenties. That examination showed that, in the 1920s, the M1 vs. CPI indicator generally worked well, with two differences from the Inflationary Era: (1) if anything, the indicator slightly lagged signaling the start of recessions, and led signaling expansions; and (2) when M1 was not growing -- when it was stagnant or declining -- it did not signal expansion even though its YoY change was less negative than a CPI deflation.

III. Great Depression, post WW 2 deflation -- monetary indicators

In this installment I will look at the same M1 vs. CPI indicator during the Great Contraction and New Deal portions of the Great Depression, and the brief post World War 2 deflation of 1948-49 (the last significant period of deflation before now).

Before we examine the Great 1929-1932 Contraction, let's look at the Recesion of 1937-38 (as previously, YoY M1 is in blue, CPI is in red):

As with the Roaring Twenties, our monetary indicator works flawlessly here, with M1 declining below CPI in June 1937, only one month after the onset of the recession in May 1937, and exceeding CPI in August 1938, two months after its end in June 1938.

Economic Indicators during the Roaring Twenties and Great Depression (II).

Yesterday I discussed the need, given our deflationary recession, to examine the reliability of economic indicators during past periods of deflation, specifically to the period from 1920 to 1950. Today I begin that examination with the 1920s.

II. The Roaring Twenties: monetary indicators

The Roaring Twenties was an era of productivity- and debt- fueled urban prosperity that contemporaries called "The New Era" in which supposedly all of humanity's economic problems had been solved. Little did people at the time know of the severe hardships that awaited them when the bubble burst. Monetarily the decade was begun with the bursting of World War 1's high inflation (much like Paul Volker was to burst 1970s' inflation 60 years later), that settled into disinflation (declining inflation) and finally into deflation.

Today I will examine the monetary component of Paul Kasriel's "infallible recession indicator" as applied to the 1920s.

Economic Indicators during the Roaring Twenties and Great Depression (I).

I. Introduction

The supporting data normally cited in the welter of economic commentary suffers from an important limitation. Almost all of those indicators date from the 1950s and 1960s onward. That is to say, they cover a period where there was not even one single deflationary event. All of their reliability comes from a period of waxing and waning inflation -- but always inflation. As we are experiencing the most significant deflationary recession since the Great Contraction of 1929-32 and the Post World War 1 deflation of 1920-21, the applicability of these indicators is very suspect.

This point was driven home to me when I saw a graph of one such very reliable post-war indicator -- the yield curve -- dating from 1929. The graph re-posted below, shows a relentlessly positive yield curve (short term rates are in green, long term rates in red).

If one were ignorant of history, one would have expected that with the exception of a couple of brief bumps, the economy would have been expanding nicely throughout the entire period from 1929-1950! Even during most of the "great contraction" of 1929-32, the yield curve was positive.

He was shocked, I tell you, shocked!

Man oh man, if there ever was a prime example of a revelation of the greatest flaw in libertarian economic theory, it had to be Alan Greenspan's speech.  For those not in the know, the former Federal Reserve Chairman spoke before a Congressional committee yesterday.  Long one of the grand proponents of laissez fair capitalism, his decisions, ironically, probably has lead to the complete discrediting of such economics. 


"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief," said Greenspan, who stepped down from the Fed in 2006.

- excerpt from Greenspan: I was Partially Wrong on Credit Crisis,, 2008.