CPI: Deflation Watch

The September Consumer Price Index numbers are out. Inflation is really a sustained general increase in the level of all prices.  Since the price index itself can be rather noisy, varying a lot from month-to-month, many economists use some different techniques to smooth out the trend to see what the “sustained” action really is.  Three of the most popular ways of smoothing out the noise are called core CPI, median CPI, and trimmed-mean CPI.  In all three cases, the signals they are sending are not encouraging for recovery.  We are not yet into true deflation territory where prices are actually falling instead of increasing, but we are very, very close.  Both deflation and high inflation are undesirable.  But the risks are not symmetric.  Even very small amounts of deflation can be difficult to eliminate and can easily push an economy into a very prolonged period of stagnation or decline.  Inflation, on the other hand, can be more easily brought down if it gets too high.  Further, inflation at low levels, such as 2-4% isn’t very harmful at all.  In fact, a case can be made that 2-3% inflation is much more desirable than no inflation.

I like to think of managing inflation/deflation as driving down a desert road at the edge of cliff.  On the deflation side of the road is steep cliff with no guardrail.  On the inflation side of the road is a desert strewn with rocks.  Messing up and getting into inflation will get rocky and messy, but it’s manageable and survivable.  Erring on the side of deflation and things get real bad, real fast.   Best to leave a little margin of 2-3% inflation to make sure there’s no accidental plunge into real deflation.  For more than a year now, we’ve been playing daredevil with our economic futures by getting way too close to deflation.

Calculated Risk explains and offers one of their as-usual outstanding graphs:

…these three measures: core CPI, median CPI and trimmed-mean CPI, were all below 1% in September, and also under 1% for the last 12 months.

Inflation MeasuresClick on graph for larger image in new window.

This graph shows these three measure of inflation on a year-over-year basis.

They all show that inflation has been falling, and that measured inflation is up less than 1% year-over-year. Core CPI and median CPI were flat in September, and the 16% trimmed mean CPI was up 0.1%.

One last note about these numbers.  When The Fed increased it’s balance sheet dramatically two years ago to help bail out the banks and stabilize the financial system, the Austrians, Monetarists, gold bug types, and general austerians all complained that The Fed was leading us into a hyperinflation.  When the federal government budget blossomed into multi-trillion dollar deficit in early 2009, the same people warned us that it would lead to hyperinflation.  Now, 20-24 months later, we can conclude they were wrong. Their models are wrong and therefore the policy advice is wrong.  Deficits do not lead to hyperinflation when you have double-digit unemployment. Period.

Distribution of Wealth: Reality vs. Ignorance

Americans of all persuasions, right and left, progressive and conservative, apparently actually want the same distribution of wealth.  We want to be like Sweden.  Yes, the “socialist” Sweden.  But, we don’t know that and we don’t agree on policies because we don’t accurately perceive what the current distribution of wealth.  A fascinating study by behavioral economist Ariely as reported at tax.com by David Cay Johnston:

…When it comes to wealth and taxes, the vast majority of Americans are modern Know-Nothings. The disconnect between belief and reality is being exploited by those who laugh all the way to the bank with their tax savings and the burdens they have subtly shifted off themselves and onto the rest of us.

The ideal wealth distribution chosen by the 5,522 people who took the online survey has the top fifth of Americans owning between 30 percent and 40 percent of the wealth.

That means Americans believe the ideal distribution of wealth is that of Sweden. Moreover, 90 percent of Republicans share that belief. (Actually, 90.2 percent, as the survey coauthor, Prof. Daniel Ariely of Duke University, noted when we met to discuss his work.)

The survey sample, with more than 10 times the 504 people often used in polls, is robust and credible. (For the report, see Doc 2010-216082010 TNT 196-69: Washington Roundup.)

The genius in the survey was to avoid questions using loaded terms like “estate tax” and “death tax.”

Instead those surveyed were shown pie charts and asked what they thought was the ideal distribution of wealth and what they estimated to be the wealth distribution in America. They were not told that one of the pie charts was Sweden’s actual wealth distribution, but people gravitated to it like moths to a flame.

What did those surveyed think was the actual distribution of wealth in America?

Figure 1

The actual United States wealth distribution plotted against the estimated and ideal distributions across all respondents. In the “Actual” line the bottom two quintiles are not visible because the lowest quintile owns 0.1 percent of all wealth and the second lowest quintile owns 0.2 percent.

: Norton and Ariely Survey.They estimated that the top fifth of Americans owns about 60 percent of the wealth.

The reality? Eighty-five percent.

So what about the bottom 120 million of us? Those surveyed said that ideally, the bottom 40 percent would own 20 to 25 percent of all wealth. When asked to estimate the share of wealth actually owned, the collective guesses were between 8 and 10 percent.

Reality: 0.3 percent.

BTW: Sweden isn’t really “socialist”.  It’s more of a social democracy.


more Bankers: FAIL

Yves Smith at naked Capitalism tells us of a case where Wells Fargo Bank (which acquired Wachovia 2 years ago), foreclosed and evicted a homeowner for failing to make payments.  Then Wells sold the foreclosed house at auction to a new owner.  Then Wells attempted to foreclose on the new owner for alleged failure to payoff the original first mortgage from the previous owner.  How could this happen?  It seems the mortgage Wells used to foreclose the first time was a second mortgage.  Wells took the money from the auction sale and paid off the second mortgage without paying any money to the owner of the first mortgage, which has legal precedence.  In fact, it didn’t even notify the owner of the first mortgage of the sale.  It just took the money and ran.  A gross violation of mortgage law. But it gets even more bizarre.  Turns out Wells Fargo is also the servicer and the party leading the foreclosure effort on the first mortage.

How could this happen?  Well, first off, this is the stuff that happens when mortgages (and transfers of mortgages) are not properly recorded publicly at the county and are instead kept in secret in bankers’-only databases like MERS.  Second, it most likely amounts to attempted fraud and theft.  See, Wells owned the second mortgage.  House gets sold. Wells gets all it’s money back.  But Wells Fargo is most likely only the servicer on the first mortgage. The first mortgage was most likely “securitized” and sold to the MBS trusts where ownership is by a host of bond holders.  If Wells had sold the house and paid off the first mortgage, then the bond holders would have gotten their money back (as legally they should), Wells would only get a small fee, and Wells would be left with no money for the second mortgage.  Wells Fargo most likely defrauded the bondholders.  It’s Bankers FAIL again.

Yves Smith at Naked Capitalism tells the full story:

The Times has a completely different sort of account, with a headline that is remarkably blunt: “Avoid Foreclosure Market Until the Dust Settles.” This is the sort of article that gives industry lobbyists nightmares. And with good reason. It contains a horror story that is enough to scare lots of people who are thinking of buying properties out of foreclosure.

Just as the account of a man who had his house foreclosed upon when he has no mortgage persuade a lot of people that there could be real problems with foreclosures, this one illustrates how title has become a mess.

Todd Phelps and Paul Whitehead bought at a foreclosure auction. It turns out the lender who had seized the house was the second mortgage-holder; unbeknownst to them, the property had a large first mortgage outstanding, which meant it was now their obligation.

The buyers had asked their broker to check the records to make sure the title was clear; he appears not to have done so. The auction company would not refund their payment.

But the really nasty bit here is…both loans on the house were from the same bank, Wachovia, now part of Wells Fargo. The Times story does not draw out the implication: first, that the bank foreclosed on a second, rather than a first (is that a weird way to provide a data point to justify not writing all seconds down to zero? And the fact that the buyers were saddled with the first says, in effect, that Wells defrauded the first mortgage holders, presuming, as is likely, that the first mortgage was part of a securitization, as opposed to on Wells’ books. The proceeds of the foreclosure sale should have gone to the first lien holder, not the second.

The hapless buyers did get out whole; the inquiries of the reporter led Wells to reverse the deal. But anyone in that situation who didn’t get a big media outlet shining a bright light on the transaction would have been stuck. Caveat emptor indeed.

Bankers: FAIL

A quote from Jamie Dimon, the CEO of JP Morgan Chase this week (from the Wall Street Journal via Yves Smith at Naked Capitalism):

“We’re not evicting people who deserve to stay in their house,” James Dimon, J.P. Morgan chief executive, told analysts Wednesday.

Now let’s turn to the Lansing State Journal reporting the day before Jamie Dimon made his comment (emphasis mine):

HOLT – Army National Guard Capt. Bill Krieger was talking to his wife, who’s stationed in Iraq, at the very moment his mail carrier came to his Delhi Township home Saturday with a registered letter requiring Krieger’s signature.

It was a foreclosure notice from Chase Home Finance:


Let me pause here to inject a little background into this story. Capt. Krieger served in Iraq in 2006-07. His wife, Army National Guard Sgt. Kristin Krieger, is there now, as is their 21-year-old son, Pfc. Aaron Krieger, who’s regular Army. They keep in touch via Skype, software that allows voice calls over the Internet.

Let me point out, furthermore, that JPMorgan Chase is one of the banks American taxpayers bailed out in 2008. Chase is currently under investigation for its alleged sloppy approach to foreclosures.

Oh – and one other thing … since they bought their house five years ago, the Kriegers have never missed a payment. Not one.

Mr. Dimon’s assertion that all foreclosures deserve it is demonstrably false.  He is either lying or ignorant.  If ignorant, then we can conclude that the organization he heads, JP Morgan Chase, is our of control and cannot account for it’s own assets properly and report them properly.  Either way, it’s FAIL on the bank.

Unfortunately, Mr. Dimon will not only not suffer consequences for his and his bank’s misbehavior, he will be rewarded with hundreds of millions of dollars in bonuses.

We need a new banking system.



Leadership FAIL

Leadership is not repeating your opposition’s talking points, especially when they are not true and will be destructive to the economy at this time.  It is a false analogy to say government is just like a household or a firm.  It is not. It doesn’t function that way. Further, we cannot reduce unemployment by refusing to fill open job slots.  From the Washington Post, Obama says federal jobs may stay vacant, doesn’t rule out furloughs:

Obama said that just as people and companies have had to be cautious about spending, “government should have to tighten its belt as well. We need to do it in an intelligent way. We need to make sure we do things smarter, rather than just lopping something off arbitrarily without having thought it through.”

He has asked agencies to develop plans for cutting budgets by 5% €ƒpercent. But how that would be accomplished would be decided on a case-by-case basis, he said.

“In some cases, they may say we don’t need to fill vacancies,” he said.