September 11, 2004


Inflation Tames -- So Should the Fed (Larry Kudlow, September 10, 2004, Townhall)

Hawkish inflationism on Wall Street took a bath with the release of an anemic producer price report late this week. The producer price index (PPI) -- a measure of what businesses are paying for goods and materials -- shows that inflation is in fact falling.

Prices of finished goods have declined in two of the past three months, amounting to a 1.1 percent decline-rate over the period. More, the core PPI registered a marginal 0.5 percent at an annual rate over the past three months, including a one-tenth of a percent price drop in August. After an early-year inflation flare-up, price indexes are settling in around zero.

Noteworthy is the 2.1 percent annualized decline-rate in the price of consumer goods over the past three months, and a 13.6 percent deflation-rate for computers. Overall, capital-goods prices are rising less than 1 percent, while the price index for durable goods (in the July report for consumer spending and income) plunged 1.9 percent over the past twelve months.

Can an imaginary beast be tamed?

Posted by Orrin Judd at September 11, 2004 8:14 AM

Food costs were inflated by transportation costs which apparently are temporary. This is why these month-to-month comparisons make no sense except as part of a yearly picture in order to find trends.

Kudlow is of course correct that we have no need to raise rates, but then Greenspan has made a career of being deathly afraid that Americans might actually ever be happy.

Posted by: Bart at September 11, 2004 9:19 AM

Debtors always want to let 'er rip.

Those with capital prefer a go-slow approach.

In any case, those people buying or selling homes have seemed pretty happy over the past three years, due in part to Greenspan.

Posted by: Michael Herdegen at September 11, 2004 10:32 AM


There is no good reason why we can't have 5-6% economic growth with negligible inflation and continued low interest rates. Then maybe we can all be happy for the next few years too.

Posted by: Bart at September 11, 2004 10:52 AM

Uncle Bill:

What does being naked have to do with whether or not the woman is pure ?
Clothing screens "purity vibes" ?
I suspect that this was a Medieval version of "Come up and see my etchings".
("Come up and check out my plasma HDTV", for those of you who don't dig Nineteenth century pickup lines).


Yes, I've heard that argument before, and although I'm willing to try it, the fact that it's never been done causes me to be skeptical.
Also, if we do have 6% growth, we're going to have to have open borders with Mexico if you want no inflation, as well.

Posted by: Michael Herdegen at September 11, 2004 11:48 AM


Actually, we had that kind of growth if not more for much of the 19th century. It is even more likely today because of the exponential effect that technology has on increasing productivity.

It just seems to me that if we do raise interest rates, we'd better have a damn good reason. A one percent rise adds $70 billion to debt service, and since we have changed the basket of Treasury securities, dispensing with longer terms and using more short term financing, that rate hike will have an even greater negative impact.

As for opening borders with Mexico, would that be so terrible if they came here to work? It would improve the cuisine, the general level of female pulchritude and charm in the US would increase, bringing with it a general improvement in the prevailing level of American male happiness. It would increase our connection with Latin America, to the benefit of our economy and culture.

Posted by: Bart at September 11, 2004 11:58 AM

Not raising interest rates will put pressure on the dollar. Why invest in the US when rates are higher elsewhere? A lower dollar will mean more expensive imports, which will mean inflation. Lunch will be paid for, one way or another.

Posted by: Robert Duquette at September 11, 2004 12:06 PM

Rates are higher where folks have to prop up an inherently weak currency. Our is strong at any price because backed by us. You can't raise the franc enough to make French bonds worth owning in the long term.

Posted by: oj at September 11, 2004 12:14 PM


You don't need to convince me about Mexico: I believe that the USA and el EUM (Mexico) should merge.
They can become the 51st - 60th states.
Benefits abound for everyone.

(Nor do you need to convince me of Chicana pulchritude, but that's another post).

Posted by: Michael "Aztlan" Herdegen at September 11, 2004 1:40 PM

If the Fed does not raise rates in the next meeting as expected, expect the dollar to resume its downward slide.

Posted by: Robert Duquette at September 11, 2004 10:53 PM

So what?

Posted by: oj at September 12, 2004 12:26 AM

So my gold goes up and your index funds go down. And imports get more expensive (inflation). And rates rise, as foreign bondholders start dumping (you see, the Fed ultimately can't control rates; the Market will make the corrections that the Fed refuses to).

Posted by: Robert Duquette at September 12, 2004 3:05 AM

And the US sells more exports, and buys fewer imports, and the American domestic economy strengthens, and the European economy sputters, and the Japanese gnash their teeth, and the Chinese burst their spleens trying to keep the yuan from appreciating...

Posted by: Michael Herdegen at September 12, 2004 4:07 AM


It is only a matter of time, given the pushmi-pullyu economic policy of the EU because of the vast differences in wealth among its members, that the Euro goes the way of the Argentine austral and the Turkish lira.

If you want to keep buying gold, knock yourself out but I must remind you that in the mid 70s it was $800/oz. If you're going to buy an asset that just sits there looking pretty, might I suggest real estate?

Posted by: Bart at September 12, 2004 7:36 AM

Yes, in 1980 gold hit $800 an ounce. Today it is $400. Buy low, sell high.

Yes, you are describing the realignment that the economy has to go through to get back to a sustainable balance of fundamentals. The dollar is overvalued and must go down, in the long run it will be a good thing. But the realignment won't be pretty, and you better be invested in the right markets in the meantime.

Posted by: Robert Duquette at September 12, 2004 10:51 AM