So what was the most expensive work of art sold a auction?

From The Economist magazine available here.

An unfair comparison on price changes: "Gas Prices Grow More Under Obama than Carter"

Here is the claim from US News & World Report:

Under the Carter administration, gas prices increased by 103.77 percent. Gas prices since Obama took office have risen by 103.79 percent. No other presidents in recent years have struggled as much with soaring oil prices. Under the Reagan administration, gas prices actually dropped 66 percent. When Bill Clinton was president, gas prices grew by roughly 30 percent, and under both Bush presidencies, gas prices rose by 20 percent. . . .

So what is the problem? Except for the Obama administration, all these numbers are from the beginning to end of these administrations. In Obama's case, it is from the beginning to what is the highest point during the administration. If one would pick the highest points during these other administrations, they would also look much worse.

Inflation over 8 percent?

A lot of people aren't making really big home purchases right now. What happens to inflation when really big purchases are excluded? From CBS News:

Forget the modest 3.1 percent rise in the Consumer Price Index, the government's widely used measure of inflation. Everyday prices are up some 8 percent over the past year, according to the American Institute for Economic Research.

The not-for-profit research group measures inflation without looking at the big, one-time purchases that can skew the numbers. That means they don't look at the price of houses, furniture, appliances, cars, or computers. Instead, AIER focuses on Americans' typical daily purchases, such as food, gasoline, child care, prescription drugs, phone and television service, and other household products.

The institute contends that to get a good read on inflation's "sticker shock" effect, you must look at the cost of goods that the average household buys at least once a month and factor in only the kinds of expenses that are subject to change. That, too, eliminates the cost of housing because when you finance your home with a fixed-rate mortgage, that expense remains constant until you refinance or move. . . .

"Greenspan - US Can Pay Any Debt It Has Because We Can Always Print Money"

"The US can pay any debt it has because we can always print money." This sound like something a third world country would do. Who is going to want to invest in US bonds if they risk the government destroying the value of those bonds through inflation? What does this talk by itself do to the risk of hold US bonds?

Lundberg Survey says that regular unleaded gasoline has hit $4 a gallon

The Lundberg Survey says that regular unleaded gasoline hit the magic $4 a gallon number on Friday, May 6th. Gas Price Watch claimed that regular unleaded had hit the number a few days earlier, though since then prices fell below $4 and now are back up to $4. My piece on the high gas prices from Fox News is available here.

How have gas prices changed over time?

I always get a kick out of people making predictions about what gas prices will be at some point in the future. Drudge had a prediction up that gas prices would reach $5 per gallon by Memorial day. If that were true, the price would already be at that level. If you really thought that gas would be at $5 a gallon at the end of May, it would pay for gas companies to store gas that would have been sold today and keeping putting it aside until the current price were equal to the future expected price. Of course, doing that would lower the future price at the same time it raised the current one. To do anything else would be essentially leave money on the table.

Click on figure to make it bigger.
The source for gas prices is available here.
The source for the CPI is available here from Table B–62.

"More Than Half of Americans Want Fed Reined In or Abolished"

When I first read the headline for this Bloomberg News piece, I thought this is good news. Unfortunately, what is being discussed here, eliminating the Fed's independence, will make it even more political. What would be nice if the government abolished the Fed and let banks issue competing currency. Competition would do more to restrain aberrant money supply behavior than any government can be trusted to behave.

The survey, conducted Dec. 4-7, also shows deep skepticism, especially among Republicans, over the Fed’s Nov. 3 announcement that it would buy bonds in an attempt to bring down unemployment and prevent deflation. More than half say the purchases won’t help the economy.

The policy, known as quantitative easing, was the target of criticism in Washington and overseas. That prompted Fed Chairman Ben S. Bernanke to appear in an interview on CBS television’s “60 Minutes” program on Dec. 5 to defend his actions.

Across the Spectrum

Americans across the political spectrum say the Fed shouldn’t retain its current structure of independence. Asked if the central bank should be more accountable to Congress, left independent or abolished entirely, 39 percent said it should be held more accountable and 16 percent that it should be abolished. Only 37 percent favor the status quo.

In a previous poll, conducted Oct. 7-10, 35 percent of Americans said the Fed should be radically overhauled, while 8 percent said it should be abolished.

Republicans and independents are more likely to support ending the Fed, with 19 percent of independents, 16 percent of Republicans, and 12 percent of Democrats wanting to do away with the central bank. Among those who identify themselves as supporters of the Tea Party movement, which wants to rein in government, 21 percent want to abolish the Fed. . . .

Investors seem to be convinced that commodity prices are heading up

This is the type of activity that you see when investors' believe that inflation is going to increase.

Investors are holding their biggest positions on record in the commodities markets as prices surge and debate intensifies among U.S. regulators about whether to limit the amount that any one trader can bet in markets for energy, metals and agricultural products.

Hedge funds, pension funds and mutual funds dramatically ramped up their holdings in everything from oil and natural gas to silver, corn and wheat this year. In many cases, the number of contracts held for individual commodities now far exceeds the amount outstanding in mid-2008, the last time commodity markets were soaring to records and debate raged about whether excessive speculation was driving up prices.

Contracts held by investors have risen 12% this year through October and are 17% higher than June 2008, according to data from the Commodity Futures Trading Commission, the market regulator. . . .

Data on China's Foreign Currency Reserve Holdings and how that has changed with increases in the US Money Supply

Click on the chart to enlarge.

The Chinese data are available here for 2008, 2009, and 2010. The M1 data are available here.
A 2008 China Securities Journal article reported that over time "The current dollar reserve assets ratio of the total reserve assets has long been stable at 65%..." On October 14, 2010, The Economist noted: "China holds by far the world’s biggest stockpile of foreign-exchange reserves, worth $2.6 trillion at the end of the third quarter. About 65% of these holdings are in dollars, according to the China Securities Journal, an official newspaper."

UPDATE (11/25): During the period from January 2006 to January 2008, PBoC went from $549 billion in US Dollar Foreign Reserves to $1.03 trillion, an 88 percent increase. The level of PBoC Treasury and Agencies as a percent of Chinese GDP growth appears to have experienced a much smaller percentage change increase in those holdings. Assuming that ALL the PBoC US Dollar Foreign Reserves were invested in Treasury and Agencies in January 2006, the second graph here implies that most of the increase in Dollar reserves isn't invested in Treasury and Agencies.

US Treasury Bond holdings by country are available here. Click on the figure to make it larger. Historical data are available here. I don't have the information on "Agencies" held by the PBoC, but I would guess that they are probably positively correlated with the US Treasury Bonds.


A related discussion with slightly different numbers is here. In August, China's holdings of US Treasuries was less than half of the $1.74 trillion in US Dollar Foreign Reserves held in August.

The cash-rich Chinese government reduced its US Treasury bond holdings to 843.7 billion dollars in June, the lowest level since at least the same month last year, the Treasury said in a report on international capital flows.
The June data was lower than the 867.7 billion dollars in Treasury bonds held by the Chinese in May and 900.2 billion dollars in April. . . .

It is very interesting how the gap between BPoC's US $ Reserves and the BPoC's US Treasury holdings have increased substantially over time. If this difference in holdings is made up by the BPoC holding US dollars, it could help explain some of the drop in velocity that offset the increases in the money supply.

New Fox News piece: We Don't Need More Inflation, We Need to Put An End to Obama's Job Killing Policies

The new piece starts this way:

The current inflation rate of 2 percent is "too low." That is at least if you believe Federal Reserve Chairman Ben Bernanke. With the economy growing "too slowly to bring down unemployment," Mr. Bernanke's solution is to increase inflation.

The Federal Reserve last week started printing up $600 billion to buy U.S. Treasury Bonds and another almost $300 billion to buy mortgages. The printing more dollars will reduce the value of the dollar just as doubling the number of apples will reduce the price of apples.

A falling value of the dollar is what is called “inflation.” The problem is that this "stimulus" will only temporarily reduce unemployment and get the economy growing by tricking people into making mistakes that they will later regret, mistakes that will cost the country much more in the long run than will be gained by these temporary improvements. With unemployment stuck at least at 9.5 percent for a record 15 months, the desire "to do something" is understandable, but the only people who this policy will help are the politicians currently in office.

You would think that all economists would have learned the lessons of the 1960s and 1970s: higher inflation rates only temporarily reduce unemployment. . . . .

Treasury Secretary Tim Geithner is attacking Governor Palin for agreeing with the points that I made in this piece. China's reasons for making the same argument is undoubtedly quite different from Palin's for the reason that I describe in the piece, but that doesn't make the argument any less true.

Treasury Secretary Tim Geithner on Tuesday called it "a remarkable thing" that former Alaska Gov. Sarah Palin was voicing the same criticism of U.S. monetary policy as China was. . . .

The Fed also responds:

Charles Evans, president of the Federal Reserve Bank of Chicago and a strong supporter of the Fed's easing policy, noted in an interview with The Wall Street Journal that the weak economy and low inflation warranted the Fed's action and that more such purchases might be needed in months ahead if the economic outlook doesn't turn. "I would continue to want to apply accommodative monetary policy until I had some confidence that that situation was changing," Mr. Evans said, noting that $600 billion is a "good place to start" the easing program.

Eric Rosengren, president of the Federal Reserve Bank of Boston and another strong supporter of the easy-money policy, echoed those comments: "As long as the economic outlook doesn't improve dramatically I would expect that we will purchase the entire amount," he said, adding, "if the economy were to weaken and we were to get further disinflation and a higher unemployment rate, then we would have to reflect on whether we should take additional action." Disinflation is a decline in inflation.

Their comments came after top Fed officials, including Vice Chairwoman Janet Yellen and New York Fed President Bill Dudley, in earlier interviews with The Wall Street Journal, New York Times and CNBC, defended the Fed's policy as a needed step for the U.S. economy.

After months of fractious internal debate, the Fed is now in a highly uncomfortable spot. Several officials, including Fed governor Kevin Warsh, Richmond Fed President Jeffrey Lacker and Kansas City Fed President Thomas Hoenig, have in recent days expressed wariness about the program and a willingness to cut it short if there are signsthat inflation is picking up too much. . . .

Evans and Rosengren were appointed during the last two years of the Bush administration. Yellen and Dudley are strong Democrats.

Walmart prices up at 3.6 percent annual rate

It isn't too surprising that different surveys of prices give different estimates, but this one indicates that prices might be going up a little faster than the Fed thinks.

A new pricing survey of products sold at the world’s largest retailer. ] showed a 0.6 percent price increase in just the last two months, according to MKM Partners. At that rate, prices would be close to four percent higher a year from now, double the Fed’s mandate. .
The “inaugural price survey shows a small, but meaningful increase on an 86-item grocery basket,” said Patrick McKeever, MKM Partners analyst, in a note. Most of the items McKeever chose to track were every day items like food and detergent and made by national brands. . .

Hasn't Bernanke learned anything about the false trade-off between inflation and unemployment

Inflation only lowers unemployment by temporarily tricking people into think that they are getting better wage offers than they actually are. When people learn that they have made a mistake, they go back to being unemployed again. In the mean time they are doing work that they regret taking.

Inflation the last two months has been going at a 2.8 percent annual rate over the last three months. That seems like a fairly normal inflation rate for the last couple of decades.

Here is what Bernanke said (see also here):

The longer-run inflation projections in the SEP indicate that FOMC participants generally judge the mandate-consistent inflation rate to be about 2 percent or a bit below. In contrast, as I noted earlier, recent readings on underlying inflation have been approximately 1 percent. Thus, in effect, inflation is running at rates that are too low relative to the levels that the Committee judges to be most consistent with the Federal Reserve's dual mandate in the longer run. In particular, at current rates of inflation, the constraint imposed by the zero lower bound on nominal interest rates is too tight (the short-term real interest rate is too high, given the state of the economy), and the risk of deflation is higher than desirable. . . .

As of June, the longer-run unemployment projections in the SEP had a central tendency of about 5 to 5-1/4 percent--about 1/4 percentage point higher than a year earlier--and a couple of participants' projections were even higher at around 6 to 6-1/4 percent. The evolution of these projections and the diversity of views reflect the characteristics that I noted earlier: The sustainable rate of unemployment may vary over time, and estimates of its value are subject to considerable uncertainty. Nonetheless, with an actual unemployment rate of nearly 10 percent, unemployment is clearly too high relative to estimates of its sustainable rate. Moreover, with output growth over the next year expected to be only modestly above its longer-term trend, high unemployment is currently forecast to persist for some time. . . ..

Bernanke is right that the economy is growing "too slowly to bring down unemployment." The objection is how Bernanke and Obama is trying to fix the problem. Bernanke may need that he feels that he needs to do more extreme measures because the Obama administration is creating so many disincentives, but that doesn't justify Bernanke doing things wrong also.

The fall in the value of the dollar likely signifies two things: that few want to invest in the US and that inflation is going to increase.

The dollar tumbled against most major currencies on Thursday, prompting warnings that the weakness of the world’s reserve currency could destabilise the global economy and push other countries into retaliatory devaluations to underwrite their exports.

Increasing expectations the Federal Reserve will pump more money into the US economy next month under a policy known as quantitative easing sent the dollar to new lows against the Chinese renminbi, Swiss franc and Australian dollar. It dropped to a 15-year low against the yen and an eight-month low against the euro. . . . .

As the WSJ notes, Bernanke is only concentrating on unemployment, and he should be honest, rather than the bizarre comment that a 2 percent inflation rate is "too low."

Mr. Bernanke broke no new ground in explaining why he believes inflation at less than 2% is too low and why the Fed must encourage greater inflation to reduce the 9.6% jobless rate. "Inflation is running at rates that are too low [his emphasis] relative to the levels that the [Fed Open Market] Committee judges to be most consistent with the Federal Reserve's dual mandate in the longer run," he said. That dual mandate is to maintain stable prices and low unemployment, and Mr. Bernanke's message couldn't be clearer that cutting the U.S. jobless rate is now Job One at the Fed.

We were more struck by what Mr. Bernanke didn't say. In a nearly 4,000-word speech about inflation, the Fed chief never once mentioned the value of the dollar. He never mentioned exchange rates, despite the turmoil in world currency markets as the dollar has fallen in anticipation of further Fed easing. . . . .

Another piece is here.

Wow, do you really think that there is any connection here?

Take these two stories. First that virtually everyone thinks that the Fed is going to increase the money supply.

Following Friday’s disappointing jobs report, market participants are now virtually certain that the Federal Reserve will announce that it will resume buying assets at the conclusion of its November meeting and do so in a sizeable way, according to an exclusive CNBC Fed Survey.

Nearly 93 percent of the 70 respondents, including economists, fund managers and traders, believe the Fed will boost the size of its portfolio, up from 69 percent in the survey two weeks ago. . . .

The second that the dollar's value is plunging:

The dollar fell against the euro and yen on Monday after the world's top finance officials failed to reach a consensus on measures to head off what some see as a looming "currency war", analysts said.
The euro reached 1.40 dollars, while the US unit hit a fresh 15-year low against the yen amid growing expectation that the Federal Reserve will pump more money to bolster the struggling US economy, they added. . . . .

Printing up more dollars and the value of the dollar plunging? It seems like a pretty obvious relationship to me. Someone thinks that there is going to be increased inflation in the future.

What does a 2.7% 10-year bond yield tell us?

To have the 10-year bonds at this low of an interest rate is pretty amazing. It tells you something about inflation and/or growth. Over the last year, the inflation rate has been 1.2 percent. If that holds, it implies a real return on bonds of only 1.5 percent. What it does mean is that people's expectations of inflation and growth are both very low.

The 10-year Treasury yield sliding to a 16-month low of 2.68% shouldn't be ignored or explained away. . . . Clearly, at minimum, the 10-year yield at these levels reflects the general reduction in U.S. growth assumptions, both about last quarter and the second half of the year. Yet there is probably more going on here than bonds reliably pricing in another economic contraction that would upend stocks. There's even a chance that neither stocks nor bonds have the outlook wrong. The argument between the two asset classes might instead be a subdued and agreeable discussion.

At the most basic level, both markets seem to have internalized the idea that the Federal Reserve's zero-rate policy is the law of the land for the investable future, and policy makers stand ready to throw money at the economy's problems, be they evident or hypothetical. With overnight lending rates at zero and the two-year note yield barely above half a percent in yield, the incentives for banks and other leveraged investors to simply coast along the yield curve remain strong, even at 2.68% on the 10-year. . . .

41 percent of Economists think inflation will increase

The WSJ has this:

Half of 266 members of the National Association for Business Economics surveyed in August said the Fed's decisions to increase the money supply won't lead to inflation in the next few years, the NABE said Monday. Some 41% disagreed, though, citing "lagged effects of policies now in effect," "monetization of the debt" and "ineffective exit strategy" as their primary concerns.

The economists overall said they expect inflation excluding food and energy to average 3% from 2014 to 2018. "This may reflect their view that an excessively stimulative fiscal policy and a complicated exit from its quantitative easing policies over the medium term will result in the Fed tolerating a higher level of inflation than it desires," the NABE report said. The Fed aims to keep inflation between 1.5% and 2%. . . .