The Mess That Greenspan Made - Part 416

The Federal Reserve Has a Plan

After much debate following last week’s market swoon that was induced, to some degree at least, by the central bank’s dim outlook for the U.S. economy, a new plan has emerged.

From the Lee Judge archive at the Kansas City Star.

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The Chained CPI is Inevitable

Everything you ever wanted to know about the inevitable switchover from the government’s current official measure of inflation to what is commonly referred to as the “chained CPI” is contained in this article by Alan D. Viard at the American Enterprise Institute.

And the reason why you’ve read the word “inevitable” twice already above is that this change is about as close as anything will come to a slam dunk as part of the nation’s budget debate. While decried by many as being part of the government’s intention to “mask” inflation, the broader substitution of items in the official shopping basket that the chained CPI represents does make a good deal of sense when looked at closely. But, much more importantly, its impact on the government’s bottom line is significant as detailed below.

By indexing tax brackets more slowly, a switch to the chained CPI would increase revenue. By reducing the COLA for federal benefit programs, the switch would also reduce benefit outlays. Both the revenue increase and benefit reduction would lower the deficit. In its most recent survey of deficit reduction options, the Congressional Budget Office presented budgetary estimates for a switch to the chained CPI and summarized the policy arguments for and against that change. Based on its expectation that the chained CPI will increase 0.25 percent per year more slowly than the CPI-U and the CPI-W in upcoming years, the CBO estimated that a switch would increase income tax revenue by $72 billion, reduce Social Security benefits by $112 billion, and reduce federal pensions and veterans’ benefits by $24 billion from fiscal 2012 through 2021.

The broader questions about measuring inflation (none of which you’re likely to hear during what little debate there will be on this subject) have much more to do with, for example, whether or not it’s a fair gauge to be used for social security recipients who have a shopping basket very different than the one  that either today’s CPI or the chained CPI represent.

Another subject you don’t hear anything about is how the decades-long trend of cheap imported goods offsetting the rising cost of domestic services to produce benign inflation have temporarily distorted any measure of inflation, a development that future policy makers will ultimately have to deal with as the great equalization of wages in a globalized economy causes U.S. living standards to fall for the foreseeable future.

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Still Far From a Sustained Recovery in Housing

Standard & Poor’s reported that U.S. home prices rose 0.9 percent in July for their fourth straight big monthly gain, but, after seasonal factors are taken into account, home prices were about flat for the fourth straight month, a reminder of both the weak fundamentals for the U.S. housing market and seasonal summer strength for home sales as shown below.

Index Committee Chairman David Blitzer noted, “While we have now seen four consecutive months of generally increasing prices, we do know that we are still far from a sustained recovery” and this likely understates the problems ahead for housing as the U.S. and much of the world appear ready to enter (or is already in) a recession.

Sadly, home prices rose again in Washington D.C. and it was one of only two regions indicating year-over-year gains (along with the housing basket-case known as Detroit).

Perhaps a good indication that the national economy is on a sustained path to recovery will be when home price in the nation’s capital begin to fall sharply, rather than continue their recent rise, driven in large part by the virtual gusher of newly borrowed and printed money.

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Nightly Business Report on Gold

I was taken aback by the bullishness in the lead story on the Nightly Business Report last night as, apparently, the network hadn’t gotten the memo from central banks and economists that the barbarous relic was a barbarous relic once again, that is, after the price had tumbled almost $400 an ounce as of yesterday morning from its early-September high.

Watch the full episode. See more Nightly Business Report.

Admittedly, Joe Foster of Van Eck Global is just talking the firm’s book, but it seems odd to hear anyone say on network television in the U.S. that, with the gold price at $1,600 an ounce, you should be a buyer.

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