• Jeff Matthews

Fed Big Flunks Eco 101


Globalization hasn’t had a significant impact on reducing inflation in the U.S. and may have raised it, Federal Reserve Chairman Ben Bernanke said. —Wall Street Journal During the market swoon early last summer I defended the new Fed Chairman while he was being roundly blamed by frustrated investors for everything wrong with the world, short of global warming (see “Shooting the Messenger,” June 6).

Things settled down shortly thereafter, and until recently Mr. Bernanke was looking pretty good, what with the relentless melt-up in global equity markets and the evaporation of risk premium in the global credit markets.

But a recent speech—quoted above—makes me wonder if Mr. Bernanke has spent too much time reading his press clippings lately and too little time listening to earnings calls from American corporations.

Is there a CEO in America who believes the following?

Mr. Bernanke… said increased trade with China has reduced U.S. inflation, now running at about 2%, by only about 0.1 percentage point. And he noted that while these emerging economies have added to the global supply of manufactured goods, they are also adding to the demand for oil and other commodities.

“There seems to be little basis for concluding that globalization overall has significantly reduced inflation in the U.S. in recent years; indeed, the opposite may be true,” he said. If you quoted those words to my friend who runs a supplier of office products to Wal-Mart and other Big Box retailers, he’d probably spit out his coffee all over his Wa-Mart invoices.

Those invoices, at least on a per-unit basis, did done nothing but go down for the last decade, after Wal-Mart abandoned its “Made in America” campaign and began to enforce a constant price squeeze on its vendors, aided and abetted by the opening up of dirt-cheap manufacturing capacity in China.

That virtuous circle of Big Box retailers pushing down consumer prices and taking greater market share, thereby acquiring even greater pricing clout and greater market share, was the single biggest driver of disinflation ever witnessed in our lifetime. Wal-Mart executives even make presentations to analysts showing how they’ve helped force down prices of everyday, humdrum products such as vacuum-cleaners and microwave ovens by as much as half over time.

How Mr. Bernanke could dismiss it out of hand is beyond me.

In any event, this is all, unfortunately for our own consumer price index, ancient history. The Chinese labor arbitrage began coming to an end two years ago, and most companies are reporting higher, not lower costs out of that country now.

Which means yesterday’s eye-popping 6.6% unit labor cost increase here in the U.S. might not have been simply a fourth quarter investment banking bonus one-off.

Still, if I were an Economics 101 professor I’d give Mr. Bernanke a D- for this thesis on inflation, or the lack thereof.

Jeff Matthews I Am Not Making This Up

© 2007 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

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The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. The content herein is intended solely for the entertainment of the reader, and the author.

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