Dollars and Jens
Sunday, October 30, 2005
Ben Bernanke on Too Little Inflation
A speech by then-Fed-governor Bernanke on the dangers of insufficient inflation. Also potentially interesting because he talks about inflation forecasting, and gives a view as to what he's likely to be watching to forecast trouble.

economic data
I have to admit I had forgotten the GDP number was to come out, so I was not only surprised by the contents of the release, but by the release itself. The headline number of 3.8% was a bit of a surprise, and even more so was that it includes another large inventory drawdown, which bodes quite well for the fourth quarter number — Goldman Sachs raised its 4Q estimate from 2.5% to 3.5% just because of this.

One of my favorite numbers comes out on Thursday. While everyone else looks to the next week for the Fed statement Tuesday afternoon and the payroll data Friday, I'm looking forward to the productivity report, which tends to be given little attention because so much of what it tells us comes out in that GDP report, and it tends to be volatile anyway. Still, I like to look at unit labor cost trends.

Tuesday, October 25, 2005
Ben Bernanke on Inflation Targeting
A somewhat seminal speech by Bernanke on inflation targeting, from 2003, when he was on the board of governors.

Monday, October 24, 2005
Gas Prices
Gasoline prices, at least in Massachusetts, have returned to pre-Katrina levels.

If I have time later, I may visit the EIA web site and see if I can find what quantities have done.

Greenspan's Successor
According to the Journal:
President Bush plans to name Ben Bernanke, the current chairman of his Council of Economic Advisers, to succeed Alan Greenspan as chairman of the Federal Reserve.

Tuesday, October 18, 2005
price indices
How expensive is life in Manhattan?
The study considered what a typical family of four earning $60,000 annually spends and compared the costs of maintaining that lifestyle in more than 300 U.S. locations.

In Manhattan, that family would need to spend $146,060, 137.9 percent more than in the average American town. It topped runner-up San Francisco by more than $24,000 to earn the dubious distinction of being the nation's priciest town.

In the top five locations, which also included Los Angeles, San Jose, and Washington D.C., housing costs make up the lion's share of total living costs. The survey factored in local and state income taxes, costs associated with owning two cars (except in Manhattan), public transportation costs, goods and services, sales taxes, and costs to own a 2,500 square foot house (mortgage payment, insurance, real estate taxes, utilities and maintenance).

In Manhattan the survey figured those housing costs amounted to a whopping $100,532 annually and accounted for nearly 69 percent of all living costs.
Of course, no family of four with $146,060 to spend in Manhattan would live in a space with 2,500 square feet; if they did, it would cost, like, 69% of its budget.

The family would live in a smaller space, devoting more of its budget to other things. Those things would probably cost more dollars in Manhattan than they would in Iowa, but they would cost fewer square feet of living space. If you took all the stuff for which the $146,060 was spent in Manhattan, and tried to replicate that lifestyle in a more typical U.S. location, the cost would be lower than $146,060, but would be much more than $60,000 — it might be something like $80,000. The changes in lifestyle are tailored to mitigate the differences in price levels.

If everything in New York cost exactly 137% more than it did in Peoria, the "cost of living" ratio could be exactly stated, but because people who live in each location make their tradeoffs by buying what is relatively cheaper where they live, the actual cost of the Peoria lifestyle will go up much more when it's transplanted to New York than the New York lifestyle would. Because of these differences, there's no clear way of saying which costs should make up the cost of living; the best you can say is the ratio is sort of in the 146/60 to 146/80 range.

This is a standard problem associated with constructing, for example, the consumer price index. As costs of some things rise more quickly than others, other things being equal, people tend to move their purchases to other things, so that increases in prices don't hurt quite as much as you would think if you just measure how much it would cost for them to keep buying the same thing.

This is cross-posted, in part in case someone wants to comment.

Saturday, October 08, 2005
Greenspan's successor
I'm inexplicably thrilled to see Bob McTeer mentioned as a possible chairman of the Federal Reserve; I typically haven't seen his name on these lists. I think he'd be a lot like Greenspan, though probably a bit more market-driven, and slightly less — well, central-banker-like.

John Taylor, who was an Undersecretary of the Treasury but I believe no longer is, is another dark-horse possibility that would give me an inexplicable warm, fuzzy feeling.

I keep using the word "inexplicable" to leave derelict any responsibility for arguing in favor of these choices.

Update:Tradesports has both McTeer and Taylor as options, but offered at 3 and 2 respectively. The traders are pretty much looking at Bernanke as being twice as likely as Lindsay, Feldstein, or Hubbard, and nobody else above 10.

The next guy, though, is a fellow I hadn't heard of named Manuel Johnson. He was vice chairman at the Federal Reserve — and would become the first person ever to have that on his resume and get the job of chairman — after working in Treasury under Reagan. More recently he was chairman of the Financial Accounting Foundation.

Tuesday, October 04, 2005
interest rate policy
"The markets, if left to their own devices, would produce higher interest rates to ration money and balance the demand and supply of capital," [Dallas Federal Reserve Bank President Richard Fisher] said. "If the Federal Reserve were to resist the upward pressure on interest rates, it would in effect monetize the burgeoning fiscal deficits."
This is basically how I think about what Fed policy should be; I think it's a fairly Austrian way of thinking about it. Speaking colloquially, I sometimes say something is "inflationary" if I mean it would tend to raise interest rates — so that it would be inflationary for the Fed to hold interest rates where the neutral rate would otherwise be — if I don't feel like trying to change someone's whole monetaristic paradigm. This is the primary sense, incidentally, in which I understand both economic growth and large government deficits to be "inflationary" — they increase the product of capital and/or decrease savings, so as to raise the natural rate of interest.

Incidentally, how should the fed respond to high oil prices, which are largely exogenous to the U.S. economy? As a reduction in supply, it seems to me they would reduce returns on marginal capital investment, so I would tend to respond as though I were, in a classical sense, more concerned with the drag on the economy than with the inflationary effects. (I'm not certain that it will reduce returns on capital, and welcome with alacrity any thoughts on this.) On the other hand, Katrina, by destroying a lot more capital infrastructure than anything else (from an economic standpoint) (and creating, thereby, a lot of high marginal-value opportunities for new capital investment — and don't let sunk costs throw you here) should cause interest rates to rise. Not merely was it not a good enough reason for the Fed not to raise rates, it was a reason for them to do so. (Cataclysms, especially surprises, can cause a large increase in propensity to save, as people try to protect themselves for a rainy day; I think 9/11 did for a while, and lower interest rates — "liquidity", if you like — are then appropriate. Anecdotally, I don't see much of that from Katrina.)

In the cases where I'm arguing for higher interest rates, I'm not necessarily sure that the alternative is inflation; in fact, in the case of higher oil prices, I may well be accepting inflation, and my first impression is not that Katrina is literally inflationary. What these policies do, though, is reduce and mitigate the disruptions to the economy caused by these shocks — in Katrina's case, for example, by keeping too many resources from suddenly being driven to capital formation all at once, while inducing increased savings to go to the increase that does take place. (From that standpoint, maybe Katrina would be inflationary with fixed interest rates. I'm kind of thinking out loud here.) In the long-term, I suppose I expect these kinds of policies to lead to dollar-stability, but I'm thinking more about general economic stability.

Monday, October 03, 2005
Goldman Sachs
From the Financial Times:
When things are going well at Goldman Sachs (NYSE:GS), its president, Lloyd Blankfein, likes to remind everyone he hasn't felt this good since July 1998, the month before the bond market meltdown.
A bit of humility is always called for.

(I inserted a comma before the trailing appositive in the quotation — is this an American rule?)

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