When the western educated offspring do what they’ve been taught to fight inflation it can all go very wrong.
Their main tool, whether they know it or not, directly or indirectly, is higher interest rates, which only directly makes the inflation worse
through the cost channel and interest income channel, which further weakens the currency/raises costs through the import channel as well.

And at the same time inflation tends to tighten up fiscal balance that can cause a crash.

Also, I received this comment today:

“The Chinese government will take every opportunity to blame foreigners for inflation (and any other problem that crops up) this a well worn strategy.

It is widely believed in China that QE2 has caused the current increase in inflation. The reality is that inflation is being caused by an increase in energy costs. Also because agriculture now uses much more energy than it once did as a result of modernization, food prices are now largely a derivative of energy prices. Taken together, food and energy make up most of the increase in the CPI.

Some more data points: I spoke with a cab driver here in Shanghai yesterday about the rumored across the board fare increase from 12 to 15 yuan and he said if it occurs it will be to offset higher energy costs. There is also news that several major domestic oil producers have been caught selling at prices above the allowed level.”

55 Responses

  1. “Taken together, food and energy make up most of the increase in the CPI.”

    Welcome to the USA. Maybe the PBOC will figure out how to remove that from the official inflation statistics. What matters is wage inflation.

    Could be energy costs, but then it s/b a worldwide phenomenon. So, the current demand from China cannot be met by real resources, or maybe their commodity plays racked up some losses, or perhaps the private lending creating empty cities might have something to do with it?

    Consumer inflation is one way to increase domestic consumption. Nominally, of course.

  2. ” . . higher interest rates, which only directly makes the inflation worse through the cost channel and interest income channel, which further weakens the currency/raises costs through the import channel as well.”

    Warren, you and I have debated this in the past, and somehow I thought I had you convinced, but I guess not. While interest actually is a minuscule cost for the vast majority of businesses, it is a huge demand factor for money, thus which increasing the value of money, thereby fighting inflation.

    It seems to me the Fed has been pretty successful controlling inflation by raising interest rates. Can you point to any historical evidence for your hypothesis?

    Rodger Malcolm Mitchell

    1. Rodger,
      But wouldnt the govt be statisfying (and perhaps exceeding) that demand when the Treasuries roll over they will be issued at now higher coupons? So the govt would be paying out much more in interst to the non-govt sector as the new govt bonds are issued. Depending on how this nets out (In agreement with your observation that interest expense is miniscule for business) this may increase the flow of NFAs to the non-govt sector when to fight so-called ‘inflation’ you would probably want to reduce this flow.

      I guess it comes down to whether your idea of demand for money can be exceeded by supply via govt to>> non-govt ‘interest rate channel’.

      Resp,

    2. RMM,

      Its complicated to be explained in simple ways.

      Higher interest rates raise interest costs for producers and they increase prices. Higher prices lead to lower demand and keeping demand low – throws more people unemployed and reduces upward pressure on prices.

      So one way to say it is that central banks raise prices through interest rates to prevent price rise in the future. Its a dirty way to control prices.

      The Fed has never followed the mantra “dual mandate”

      So don’t see a disagreement between you and Warren.

    3. Rodger,

      The evidence is the interest rates vs deficit graph. To control demand pull inflation you must have to reduce the amount of spending in the economy – ie reduce the flow of money around the system and reduce aggregate demand.

      That means taxation, destroying money. The alternative is to attempt to alter the propensity to save in the non-government sector by putting up interest rates, which puts the money temporarily on ‘hold’. That alters the saving to borrowing ratios and increases the ‘net savings’ of the private sector.

      Now the net-savings of the private sector is the government deficit, so if interest rates did control that variable then surely you would see a correlation between interest rates and the deficit as well as a correlation between interest rates and inflation. I just don’t see that in the graphs – either US or UK.

      So the mechanism is not explained, and that means that the rising and falling of base interest rates may not be the variable controlling inflation.

      In other words, although undoubtedly the interest rate and inflation graphs follow in step, you may have a simple correlation not a causation. It could be the endless doom and gloom discussion about interest rates on Fox News that is controlling inflation 🙂

      So I’m not sure that either your explanation or Warren’s is 100% accurate. I think you both have pieces of the puzzle though.

      You are quite right that taxation policy is too slow to react to an economy out of balance – particularly in the US where a moribund legislature seems to happen more often than not. (In the UK we hand out five year dictatorships, so the tax system can be used more quickly here).

      One of the reasons I like the Job Guarantee system is that it is a superb automatic stabiliser and withdraws government spending rapidly and automatically as an economy grows. But that probably isn’t enough to control a spending spike – particularly one where savings are suddenly liquidated.

      So this is my second ‘Unanswered Question of MMT’ – ‘Pragmatically can monetary policy control inflation in an MMT world?’

      1. “The evidence is the interest rates vs deficit graph. To control demand pull inflation you must have to reduce the amount of spending in the economy – i.e. reduce the flow of money around the system and reduce aggregate demand.”

        Not exactly. Inflation is a comparison, not an absolute. It is a comparison between the perceived value of money vs. the perceived value of goods and services.

        So, to control inflation, you must increase the perceived value of money vs. the perceived value of goods and services. Increasing interest rates does that by increasing the perceived value of money vs. goods and services.

        Frankly, I have difficulty with discussions of “savings,” because I don’t know what that word means. Perhaps you can assist me:

        Do you “save” when you:
        1. Bury your currency in a tin can in your back yard?
        2. Deposit your money in your bank savings account or in your money market account?
        3. Purchase Treasury bills or bonds?
        4. Purchase bank CDs?
        5. Purchase guaranteed-interest, whole life insurance?
        6. Purchase corporate stocks and bonds?
        7. Purchase real estate?
        8. Purchase a business?
        8. Purchase your primary residence?
        10. Purchase a secondary residence?
        11. Purchase a car for your business use?
        12. Purchase a car for your personal use?
        13. Purchase a television set?
        14. Purchase food and clothing?

        Re. your 2nd question, pragmatically, interest rate control has done exactly that. Otherwise, our massive debt increase over the past 30 years would have caused massive inflation (the massive inflation debt-hawks say massive debt increases cause.)

        As a businessman, my concern about the Jobs Guarantee idea is in the execution. I have trouble visualizing how the government actually would interview, hire and supervise millions of jobless people, coming in and out of the job market. The more I think about the details, the more unrealistic it seems.

        What was your first unanswered question?

        Rodger Malcolm Mitchell

      2. Rodger,

        MMT is a stock/flow consistent description. I find that it’s most powerful tool

        It’s better in the mathematical notation as ‘savings’ is a bit of a Humpty Dumpty word.

        Again it may appear that interest rates have controlled inflation in the US, but they haven’t in the rest of the world, which suggests that the mechanism isn’t clean and may not be causal. Something else is happening.

        Surely there has to be an alteration in the demand for good and services to control inflation. Inflation, at least as measured by the price index, is prices *quoted*, not prices realised. That surely has to show up somewhere in some alteration in the transaction types.

      3. Neil Wilson righly points out above that attempts to use tax to effect monetary policy are often thwarted by Congress. A recent and disgraceful example of this was a statement by Senate Minority Leader Mitch McConnell, who said if getting rid of Obama “means doing nothing to help 15 million Americans searching for work who can’t find it, too bad.”

        Neil ends by asking “‘Pragmatically can monetary policy control inflation in an MMT world?” I think the answer is that given a logical and widely accepted split of responsibilities as between central bank and legislature, the answer is “yes”.

        E.g. the legislature should control the TOTAL figures for tax and government spending and should assume a balanced budget. In contrast, the cental bank could allow additional government spending (for a given income from tax) if it thinks there is too much slack in the economy. That way, the legislature controls political matters, and the central bank is responsible for trying to attain the optimum inflation/unemployment stance. At the very least, that ought to prevent the likes of McConnell using the unemployed as pawns in a political game.

      4. But then spend the additional sums on what? I can’t speak to the Parliament/BOE relationship on your side of the pond, but in our merry Republic, Congress’s power of the purse means that it alone imposes taxes (reserve drain) and appropriates spending (reserve add), nothing happens until Congress gives assent. The trouble with “additional govt spending” is that fiscal policy is not the Fed’s job. Congress could certainly authorize additional spending power (subject to pre-established rules) to the President’s cabinet, that’s the basis of automatic stabilizer programs like food stamps and UI, in fact Congress could expand UI to include a Job Guarantee program. But the funding wouldn’t channel through the Fed.

        As for Congress thwarting the President’s agenda, I should point out that in our apparently dysfunctional political system (especially the US Senate), there’s a bit of Kabucki theater going on. The Democratic senators (and the President) want to appear to their party voters be the tribunes of the people when the party’s financial backers would often rather they do nothing. So their task then is the appearance of furious effort with no forward progress, And I’d say they accomplished that goal in a workmanlike manner. If they wanted to pass laws, there were shortcuts the Democrats could have taken but instead ignored (use of the budget reconciliation rules for starters).

        The Democrats had 59 Senate seats (60 for several months), the Republicans have not had that many Senate seats since 1923. Yet somehow Bush, Reagan and Nixon got laws passed. Its a mystery of the ages, I guess. So no, Mitch McConnell was never the problem.

      5. Beowulf: there’s a bit of Kabucki theater going on

        Exactly. The deals are worked out in private and the politics then proceeds in public, aimed at the various constituencies. Politicians on the other side act as if they are shocked, shocked, shocked. It is all high theatrics, and some these folks are superb actors. Actually, the president’s coolness gives it away. People on the left are angry that he is so detached and above it all. Fact is, he has already done the deal and is just watching the show in Congress like the rest of us, except he knows the outcome in advance.

  3. What is the significance of the oil producers selling at above permitted levels? Does this loss of control show a change in China’s economic evolution? What does this portend for China’s and the world’s economy?

  4. Matt and Ramanan,

    You are correct that interest rate increases have both pro-inflation and anti-inflation effects. Pro inflation: Increase in business costs and increase in the money supply due to increased federal interest payments. Anti-inflation: Increase in the demand for money vs the demand for non-money.

    On balance, I believe the anti-inflation effects are stronger. One hint is this graph: Item #12, that seems to indicate interest rate increases are followed about one year later by inflation decreases. The other hint is the Fed’s ongoing success in controlling inflation despite massive increases in the money supply.

    Interest rate increase can be done quickly and in small increments — just what is needed for inflation control.

    Contrast this with the MMT approach to inflation: Tax increases. Think about the realities. Tax increases are too slow to pass, too slow to take effect, too political, too uncertain in results, too long lasting, and too damaging to the economy. Which taxes should be increased? By how much? Would you have a tax increase during a stagflation? How do you calibrate an incremental tax increase?

    On balance, I suggest that interest rates combine all the necessary attributes of an anti-inflation program, and tax increases combine all the necessary attributes of disaster.

    Rodger Malcolm Mitchell

    1. If wage-price controls are unworkable, and presidential jawboning too easy to defy, and balancing the budget takes too long, and tight money threatens recession, what is left to fight inflation? The answer, Washington officials are reluctantly concluding, just might be to use income taxes as a stick to beat or a carrot to lure workers and companies into holding wages and prices down. 1978 Time magazine piece
      http://www.time.com/time/magazine/article/0,9171,916384,00.html#ixzz17GG4fUgg

      1. “The other hint is the Fed’s ongoing success in controlling inflation despite massive increases in the money supply.”

        LOL! This is hysterical! Yes, both the US Fed and the BOJ have firm control over inflation! Thank goodness for that!!

        Rodger: Most of MMT tax increase during inflation happen automatically. Think about it.

  5. Zanon, yes that tax increase is what is called an automatic stabilizer. It’s not under the control of the government. I was talking about what government actions could prevent/cure inflation.

    In the past 30 years, prices have risen 150%. That’s slightly above 3% a year. The Fed’s target rate is about 2%, which means a price increase of 80% in 30 years. I’m not sure why you’re so hysterical, but considering that the federal debt has risen 1,100% in the same period, that doesn’t seem like inflation is out of “control,” as you imply.

    You mention BOJ. I don’t know much about Japan, but you seem to be hysterical about them, too. In the last 30 years, there was one year when inflation reached 4%. In 25 years, Japan’s inflation was below 2%. Often they had deflation. So???

    Anyway, what is your suggested prevention and cure for inflation, that would be better than interest rate control?

    Rodger Malcolm Mitchell

    1. Have you ever considered Abba Lerner and David Colander’s Market Anti-Inflation Plan as an anti-inflation tool?

      See here fore background if you are interested:

      Vickrey, “Fifteen Fatal Fallacies of Financial Fundamentalism:” (fallacy 6)

      http://www.columbia.edu/dlc/wp/econ/vickrey.html

      Colander, “A Real Theory of Inflation and Incentive Anti-Inflation Plans:”

      http://community.middlebury.edu/~colander/articles/real_theory_inflation.pdf

      Colander, “Functional Finance, New Classical Economics and Great Great Grandsons:”

      http://community.middlebury.edu/~colander/articles/Functional%20Finance,%20New%20Classical%20Economics%20and%20Great%20Great%20Grandsons.pdf

      1. A carbon cap and trade market is to a carbon tax as a Market Anti-inflation Plan is to a tax-based incomes policy (TIPs) (mentioned in the Time magazine link above).

        In the City of God (to be Augustinian about it) market-based plans are the most economically efficient path, in the City of Man, tax policy would be easier for Congress to pass and for Tsy to administer.

        Vickrey’s innovation was to put the inflation growth credits (though a tax would work too) not on wages or prices but on a a corporation’s value added margin. A company that increased its margins (more than the targeted inflation rate) would have to go to market for additional credits. What’s interesting is that Vickrey’s system would function (whether structured as a market or a tax) as a de facto anti-monopoly tax. Recall, the Lerner monopoly index– yes, same Lerner.
        http://en.wikipedia.org/wiki/Lerner_index

    2. Rodger:

      My cure for inflation is to set up tax system that automatically increase when price rise, and decrease when ag demand fall. Payroll tax you can turn on and off also good. But this last one means people actually need to understand how system works, so no chance.

      This is basic sort of like what we have no, just more so

      at least this will work, unlike your interest rate channel, and maybe also the interpretive dance channel you’ve been working on in night and weekend

      1. A land levy with a rate than can be adjusted much as interest rates are now and chargeable to registered freeholders would be a good way of doing this.

        If you don’t pay the levy then your title to the land can be reclaimed by the state and sold.

        Then it is up to the freeholders to distribute that cost through the economy under standard market mechanisms.

        Land is a fundamental monopoly and society really should charge people for having it.

      2. Zanon,

        I agree with you. Because employment is linked with aggregate demand, just tie tax rates to unemployment rate. For example (as I’ve mentioned here before): Reduce the 15.3% payroll tax by (U3 rate x 10). So for, say, 9.5 unemployment, 95% reduction, 5.5, 55% reduction, etc. As unemployment drops (or rises) with each monthly DOL U3 report, Tsy would adjust tax rates at the same time. A rule-based system with twelve adjustment a year that the FOMC could

      3. sorry, meant to end with Allowing for twelve fiscal stance adjustments a year would allow the FOMC to focus monetary policy on price stability.

      4. You know Warren, I do like to keep some areas unscripted so you can improvise. :o)
        Just trying to nudge govt fiscal policy towards focusing on price (unemployment rate) instead of the quantity (size of deficit).

        While driving through an enormous military base today, I had two thoughts about govt policy:
        1. The Pentagon takes a LOT of land off local property tax rolls (federal exemption from taxation). Congress already requires the TVA to make annual Tax Equivalent payments to state govts, wouldn’t hurt if the Pentagon did the same.
        http://www.tva.gov/news/releases/octdec10/2010_tax_equivalent.html

        2. Congestion pricing (yet another innovation by Willaim Vickrey) on roadways would reduce the deadweight cost of traffic congestion (and instantly expand effective road capacity) and the Air Force already has us halfway to a credit-based system. “Drivers receive credits they can spend to drive on crowded roads during peak times. Or they can spend the credits more judiciously by traveling at off-peak hours”).
        http://www.utexas.edu/research/ctr/research/articles/on_road_again.html
        There’s no need for toll booths, HOV lanes or raising the gas tax state by state, just a Congress ready to send money to oil companies (so we have that covered too!). The critical element is the GPS network, which the Air Force has already built and continues to maintain, GPS direction finders are sold at Walmart for $90 (and could be given away by oil companies). Every time you get gas, the gas station could download your GPS “breadcrumb trail” since your last refueling to determine where you’d driven at what time (driving at 5pm costing more than 3am) to calculate how large a congestion credit to immediately apply against your fuel bill. It’d be voluntary for the sake of the privacy-obsessed (if The Man wants to know where you are, he’ll just track your cell phone), you’d just forfeit any credits if you didn’t use it, but why wouldn’t you? Oil companies could give away GPS trackers on condition they’d only download to their affiliated gas stations. Congress just needs to appropriate the money as needed to bribe– err credit the oil companies. What’s the show on the road, Congress cold likewise subsidize providers of natural gas, hydrogen or electricity for cars.

        That’s all I got. Happy sailing Warren. :o)

  6. Wage inflation is happening in China.

    The wages my company pays to keep good Chinese workers is up 3X in the last 5 years.

  7. What aspect of which type of inflation causes what problem to which segment of society?

    What perecntage increase on which type of inflation cause what degree of problem over which period of time?

    As I thought …….. nobody can answer.

    1. Andrew, I am not an economist but I am given to understand the “inflation” is defined by economists as a general upward price movement as measured by an index, such as CPI and PPI.

      What different types of inflation are you thinking of? Informally, price appreciation sometimes called “inflation,” e.g., “asset inflation,” but I don’t think that is technically correct as far as economists are concerned. Moreover, I have never heard the wealthy complaining that their wealth was being eroded by “asset inflation,” and it is supposedly the wealthy that are most affected by inflation, since they hold the majority of savings.

      Although it is true that price appreciation in some sectors may be quite different from others, unless prices rise across the board, economists would not call it “inflation” in the technical sense. Assets are not included in inflation measures, and volatile prices are eliminated in the computation of core inflation, which is what the Fed chiefly uses to determine its policy, as I understand. The people in the street complain about gas and food prices increasing, but these prices are excluded from CPI as volatile.

      I am not sure what you are driving at. Perhaps you could elaborate.

      1. I think I’m just feeling frustrated at the general mantra inflation is bad. It depends on the perspective.

        There is wage inflation. Wages could increase by 15% per anum and CPI could increase at 10% pa. That might be a problem for corporate profits and the stock market, I hardly see it being a problem for the average worker. Obviously, savers would squeal if banks were only paying 5% on fixed deposit at the same time.

        CPI can be low and housing increasing by 20% per anum. Great for some not so great for others.

        As many of the blogs are inhabited by retirees with time on their hands and a fixed income. It’s a fair bet high CPI will be a hot button. Just feeling the conversations get a bit skewed. Fed up that 4% CPI get’s people hot under the collar every time.

      2. Totally agree Andrew

        Inflation is mostly in the eye of the beholder. The ones who have the most power over the narrative are not concerned by asset price inflation (they own the assets) are not concerned too much by CPI inflation ( they can afford stuff at any price) but absolutely abhor wage inflation (they are paying the wages). So here we are. We get policies which blow bubbles in different asset classes, drive wages down and increase the use of borrowing by the general population.

      3. The problem with measuring inflation nominally is that, first, the choice of index components is selective and data is estimated, and, secondly, there are real components of inflation that are not included, such true cost based on inclusion of externality, and reduction of amount or quality will leaving the price of an item the same. Moreover, with technology there is constant deflation in technology that offset other price rises. “Inflation” becomes what those measuring it want it to be, e.g., by using “substitution.”

        Greg is correct. In a capitalistic society, inflation boils down to wages, which are the largest cost. No one in power gets all that excited unless wages threaten to rise. Then the conclusion is that unemployment has to increase. That is the bottom line realistically.

      4. while you are correct that the issue of inflation is in the eye of the beholder, inflation is still a problem because even the “beneficiaries” don’t look on it kindly. let’s take what i feel is the most accurate inflation pressures measurement (one minsky talked ad nauseum about), that is, the ratio of consumption good-producing workers to non consumption good-producing consumers (it is a good measurement of inflation pressures because a rise in the ratio signals that each consumer good-producer must produce more to sustain the same level of consumption or the price must rise to ration the goods between all people with effective demand for goods). I’m going to create a painfully simple model to illustrate my point.assume 200 people with effective demand, 1 dollar of money income per day for all 200 people, 20 tidbits made per worker per day and constant productivity. if the ratio rises from 50:150 to 40:160 because 10 people were hired into the FIRE sector , the amount of tidbits per person would fall from 5 to 4. notice that even though the rise in price came about to support those 10 worker’s consumption, they still feel like a fall in income has come about. obviously my little absurd model isn’t supposed to mirror reality but i think it does paint my point about the “winners” of inflation still often feel like losers. even if in reality the “unproductive” worker’s real income rose, they would probably still feel injured by the rise in prices.

  8. As a follow up to my earlier comment:

    “China’s oil majors, China National Petroleum Corporation (CNPC) and China Petroleum & Chemical Corporation (Sinopec), have been put on notice by the government for violating rules in rising diesel prices.”
    http://english.caing.com/2010-11-24/100201478.html

    China has begun for the first time to import its major source of energy: coal. http://www.nytimes.com/2010/11/22/science/earth/22fossil.html?_r=1&scp=1&sq=coal%20trade&st=cse

    “November 24, a netizen published a post stating that a school cafeteria/canteen riot occurred at the Number 2 Middle School in Liupanshui city of Guizhou province, with over a thousand participants. The reason the students vandalized the cafeteria was because the school cafeteria that evening announced a price increase.”: http://www.chinasmack.com/2010/stories/guizhou-students-protest-inflation-attack-school-cafeteria.html

    Also I agree with Warren that increases in interest rates will only worsen inflation. Once rates are increased, the large group of savers in China will have that much more money to spend on items requiring energy inputs.

  9. Increasing the interest rates is not a direct policy to counter inflation, but it can theoretically function as such. It’s true that increasing rates also increases the money supply. It does so over time however, so that interest rates can be used as a time management tool for the availability of money. Higher rates attract more money which is then absorbed into government bonds to be released periodically back into the money supply.

    This doesn’t really make sense in China though, considering their high savings rate. Instead I recommend that the government sells short futures on the Shanghai markets in key commodities and puts on delivery by confiscating the goods from the buyers’ own warehouses. I don’t think there is a more effective way to discourage the stockpiling and commodity speculation that’s happening in China right now.

    1. “Instead I recommend that the government sells short futures on the Shanghai markets in key commodities and puts on delivery by confiscating the goods from the buyers’ own warehouses. I don’t think there is a more effective way to discourage the stockpiling and commodity speculation that’s happening in China right now.”

      Now that is an effective solution. 🙂

  10. Zanon @11:09

    I agree with you re inflation caused by excessive demand, although I might add some tightening of regulation for mortgage financing.

    Any thoughts on supply-induced inflation?

    1. Lots of things can trigger increase in CPI.

      Certainly a sufficient big negative real supply side shock could do it. Or you could have big increase in price of non-substitutable commodity (like oil).

      Inflation caused by too many dollars chasing too few goods. Every claus is important:
      – too many dollars
      – chasing
      – too few goods

      1. Zanon: OK, but how would you bring a major supply price increase under control.

        I know Bill Mitchell has said (my version, apologies to Bill), regarding the 1970s oil price shock, that the inflation spiral was due to capital and labour not being able to agree on who would bear the brunt of the price increase.

        Of course in today’s world that would no longer be the case as it would be resolved through a zero burden to capital and 100% to labour. But if we were to be fair about it, then what?

      2. see my comment above. one thing that minsky was very focused on was the ratio of consumption good-producing workers to non consumption good-producing consumers. notice that a rise(fall) in this ratio can be a positive(negative) demand shock and a negative(positive) supply shock caused by almost purely monetary factors.

  11. “Their main tool, whether they know it or not, directly or indirectly, is higher interest rates, which only directly makes the inflation worse through the cost channel and interest income channel…”

    Warren, IMHO you may still be underestimating the macro effects of significantly negative real interest rates paid on bank deposits (since the Chinese government actually mandates the maximum interest rate on deposits). My impression is that this is a strong factor helping drive expansion in real estate and to a lesser extent commodity hording. So raising rates would result in a less negative real interest rate for savers, likely reducing incentives to save via “hard assets”, thus lessening the inflationary effects occurring via the construction sector and commodity prices. Of course I agree with you that more interest income also adds to demand, but as always it is a question of relative magnitudes, with some amount of guesswork clearly involved.

    Also is there any significance to the various recent announcements of the reserve ratio being increased in China? I know that has no effect on lending magnitude in the US, but is there anything different in China that would cause this to matter (such as differences in how the central bank sets short term rates and the amount of bank reserves in the system), or is it being done just for show?

  12. Fundamental Analysis:

    Supply up (Iraq), demand constant = prices down

    Techinical Analysis:

    Price Ceiling is set at $90 / barrel (Double Top)

    Federal Reserve: Monetary Manipulation: USD Strenthening

    When the FRB raises interest rates or defuses money from the economy, the supply of money decreases relative to demand for money (demand remains constant) and the value of the dollar increases*

    *If anyone wants to argue with me on that one just yourself… where can I put my money that interest rates are high? Right now Aussie dollars are seeing a large influx of foriegn investors

    Each dollar is worth more, making our exports less cometitive is forign markets and imports more competitive in our domestic market (ie light sweet crude oil). The short term effect is bearish on most commodities – but bullish on the dollar

      1. Forward contracts get more expensive if interest rates rise as the yield curve changes. But if short term rates stay low then near month futures prices should stay the same. This reinforces that interest rates are an important component in financal management, especially when you consider that futures are sold not just by the exchanges but by actual physical hedgers such as producers and service centers as far out as 9 years. If the guys with tanks full of oil or oil fields for that matter know what they are doing it effectivly does what the ivory tower or academia teaches.

  13. Ambrose Evans-Pritchard, China’s credit bubble on borrowed time as inflation bites

    The Royal Bank of Scotland has advised clients to take out protection against the risk of a sovereign default by China as one of its top trade trades for 2011….

    RBS recommends credit default swaps on China’s five-year debt. This is not a forecast that China will default. It is insurance against the “fat tail risk” of a hard landing, with ramifications across Asia.

  14. Hi Warren,

    On previous occasions, you’ve mentioned that Saudi Aramco exercises monopolistic powers by setting the price of oil and letting the quantity float. However, this article describes the mechanism by which prices are currently set, and it’s not entirely in Saudi hands:

    http://www.bloomberg.com/news/2010-12-05/saudi-aramco-increases-january-crude-oil-prices-to-asia-the-mediterranean.html

    Explanation: Saudi sets the price of the premium against a crude oil benchmark according to some formula. The levels of the crude oil benchmarks are determined by traders in New York, Dubai, etc. The Saudis target a premium above these benchmarks and not an absolute price figure.

    So any cost-push inflation due to increase in crude oil prices is not really a conscious effort by the Saudi authorities to increase prices. It’s not entirely in their control.

      1. Makes sense! They have the power to set the absolute price, but they choose to follow futures market benchmarks for whatever reason. And that leaves the price of oil, and by extension any consequent net USD financial assets in the rest of the world, to be determined by speculative activity in futures markets. It’s a case of the tail wagging the dog out of sheer ignorance. Much like the Fed having all the levers to set the rates across the yield curve, being the money monopolist, but they choose not to exercise that power.

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