A (Bad) Tale Of Two Inflations
The comments below are an edited and abridged synopsis of an article by David Stockman
Stockman’s article details the complexity of providing apples-to-apples pricing trends at the item level over time—to say nothing of proper weighting of all the items that go into the index market basket.
The implication is clear. As per Fed Chair Powell’s belated recant on the ‘transitory’ matter, the Fed doesn’t know where true inflation has been, and it doesn’t have the slightest idea of where it is going.
So the idea of inflation targeting against an arbitrary basket of goods and services embodied in the PCE deflator, much of which consists of imputations and wildly arbitrary hedonic adjustments, is just plain nuts.
The only inflation measure that is in the proper remit of the Fed is monetary inflation—-something at least crudely measured by its own balance sheet.
On that score, the Fed is an infernal inflation machine like no other.
And for want of doubt that the resulting massive asset inflation and rampant financial engineering on Wall Street that flows from Fed policies is wreaking havoc on the main street economy, note this insight from the always perceptive Bill Cohan:
“AT&T bought TimeWarner for a total of $108 billion, including debt assumed, and three years later agreed to spin it off it to Discovery for—what?— $43 billion in stock, cash and assumed debt. By my calculation, that’s a $65 billion destruction of value in three years. That’s not easy to do.”
He got that right. At the end of the day, these massive accounting write-offs are just a proxy for the underlying economic destruction.
As Stockman said, a tale of two inflations. And neither of them imply anything good.