China Considering Ditching US Treasuries

China Considering Ditching US Treasuries

01/10/2018Tho Bishop

A day after Bill Gross called bonds a bear market, reports are out that the Chinese government is considering slowing our halting US Treasury purchases. While it's easy to connect the dots between this potential change and anti-trade rhetoric from President Trump - which, to date, has thankfully been more bark than bite - the larger issue is central banks are slowly backing away from policies that have inflated bond markets. It's a good time to re-vist an article by Thornton Polleit titled "The Super Bubble Is in Trouble":

First and foremost, the US economy appears to be addicted to cheap money. The latest economic recovery has been orchestrated, in particular, through a hefty dose of easy monetary policy. It is therefore fair to assume that market agents will have a hard time coping with higher interest rates. For instance, corporations, consumers, and mortgage borrowers, in general, will face higher credit costs and a less favorable access to funding if and when interest rates edge higher.

In particular, higher interest rates could send the inflated prices of stocks, bonds, and housing southward. For instance, expected future cash flows would be discounted at a higher interest rate, deflating their present values and thus market prices. The deflation of asset markets would hit borrowers hard: Their asset values would nosedive, while nominal debt would remain unchanged so that equity capital is wiped out — a scenario most investors might assume to be undesirable from the viewpoint of central banks.

Moreover, the yield curve has become flatter and flatter in recent years. This, in turn, suggests that banks' profit opportunities from lending have been shrinking, potentially dampening the inflow of new credit into the economic system. A further decline of the yield spread could bring real trouble: In the past, a flat or even inverted yield curve has been accompanied by a significant economic downturn or even a stock market crash.

That said, investors might expect that central banks find it hard to bring interest rates back up, especially back to a level where real interest rates are positive. This holds true for the Fed as well as for all other central banks, including the ECB. This is because the monetary policy of increasing borrowing rates by a significant margin would most likely prick the “Super-Bubble” which has been inflated and nurtured by central banks’ monetary policies over the last decades.

However, it wouldn’t be surprising if, again, central banks, the monopolist producers of fiat money, turn out to be the major course of trouble. After many years of exceptionally low interest rates, central banks may well underestimate the disruptive consequences an increase in borrowing rates has on growth, employment, and the entire fiat money system. In any case, the artificial boom created by central banks must at some point turn into bust, as the Austrian business cycle theory informs us.

The boom turns into bust either by central banks taking away the punchbowl of low interest rates and generous liquidity generation; or the commercial banks, in view of financially overstretched borrowers, stop extending credit; or ever greater quantities of fiat money need be issued by central banks to keep the boom going, inflating prices so that ultimately people start fleeing out of cash. In such an extreme case, the demand for money collapses, and then a Super-Super-Bubble pops.

As Troy Vincent, a market analyst and Mises Wire contributed, offered an additional note this morning on Facebook:

The fact that Bitcoin didn't get bid up in response to this news, while treasury yields and physical gold did, is pretty interesting.

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BofA: The 10Y Treasury Is No Longer A "Safe Asset", Citing Spending and Fed Policy

10 hours agoTho Bishop

As ZeroHedges notes, a recent report from Bank of America's Barnaby Martin indicates that the banking industry seems to be waking up to the very real risk posed by the Federal government's continued fiscal recklessness.

Martin notes that recently:

Treasury performance has been akin to a risky asset. Our US rates team have highlighted numerous reasons for structural upward pressure on Treasury yields, including the Fed’s balance sheet shrinkage, higher US Libor rates and importantly…the jump in the US budget deficit.

In particular, Martin notes that the US projected deficits look even worse compared to other developed nations:

As the IMF highlight in their latest Fiscal Monitor, the US is the only Advanced Economy where debt-to-GDP is set to increase over the next 5yrs. [The chart below] shows the spectrum of debt-to-GDP changes, per country. In the US, the debt-to-GDP ratio is forecast to rise from 108% (end ’18) to 116.9% (end ’23). Contrast this to Germany, for instance, where the IMF see debt-to-GDP declining by over 17% during this period.


martin bofa ch3.jpg
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Monetary Ease Spawns Euphoria, Reality Awaits

04/26/2018Doug French

“It’s time to stop calling this a recovery, and start calling it a boom,” writes Noah Smith for Bloomberg.The Elliott Wave Financial Forecast (EWFF) reports, The National Federation of Independent Business index of small business owners “Now Is a Good Time Expand” rose to its highest level in the 45-year history of the survey. “Main Street is roaring,” says the NFIB’s president.

EWFF points out that it feels like the year 2000 all over again.

There are many parallels to the top year of 2000, but two key ones stand out. The Conference Board’s Consumer Confidence Index hit 130.8 last month, its highest level since November 2000. Meanwhile, one of the most widely followed measures of economic performance, the U.S. unemployment rate, fell to 4.1% in January, its lowest level since December 2000.

The housing market is so hot, buyers are bidding up properties, sight unseen. Bloomberg reports,

Thirty-five percent of homebuyers in the U.S. aren’t even visiting the property before they put in a bid, amid torrid competition in a tight market, according to the latest survey by Redfin Corp.

Katia Dmitrieva writes for Bloomberg, “the biggest share of households since 1998 said their finances had improved over the past year and expected continued gains in the year ahead.”


No wonder there is euphoria, “This is the everything bubble generated by seven years of zero interest rates and negative interest rates overseas and massive amounts of money printing. It shows up in the asset price inflation in many different places," Peter Boockvar told CNBC.

However, the easy money chickens are ready to come home to roost. Zero Hedge reports, “legendary trader Paul Tudor Jones (PTJ) argues that US inflation is set to accelerate sharply, making bonds a very poor investment, and that the Fed must act swiftly to tackle financial bubbles created by prolonged monetary easing.”

Jones doesn’t believe the current positive mood is sustainable.

Sitting where we are today, this grand experiment with negative real rates might seem successful: We have the strongest economy in 40 years, at full employment. The mood is euphoric. But it is unsustainable and comes with costs such as bubbles in stocks and credit. Navigating these bubbles will be one of the most difficult jobs any Fed chair has ever faced.

Will Main Street roar with the ten-year rate of 3.75% that PTJ is projecting? Jones doesn’t seem to think so. He doesn’t even want to buy stocks, let alone expand a small business. He says he ready to hunker down owning only commodities, hard assets, and cash, while everyone else believes they can continue to ride the Fed’s bubble.

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Congressman Questions Fed, Treasury About US Gold

04/25/2018Tho Bishop

One of the pieces of legislation Ron Paul pushed while leading the Congressional committee overseeing monetary policy was a bill to audit the US gold reserves. As one may expect when dealing with the Fed, there has long been a general lack of transparency with America's gold holdings. In fact, last year was the first time in over four decades that any member of Congress had been allowed inspect Fort Knox. 

At a hearing on the topic back in 2011, Dr. Paul explained while this matter was so important: 

Because the Government has for so long refused to provide substantive information on its gold holdings, it is not surprising that so much confusion abounds, both within and without the Government.

This gold belongs to the people, especially since much of it was forcibly taken from them in the 1930s, and the Government owes it to the people to provide them with the details of these holdings.

We would greatly benefit from a full, accurate inventory audit and assay with detailed explanations of who owns the gold and who is responsible for ownership, custody, and auditing. 

For the first time since Dr. Paul's retirement from Congress, a member of the House has questioned the Federal Reserve and the Treasury about the Federal government's handling of its gold reserve. 

In a letter yesterday addressed to Treasury Secretary Steve Mnuchin and Fed Chair Jerome Powell, West Virginia Congressman Alex Mooney asked the following questions:

1) Records in the archives of the historian of the U.S. State Department describe U.S. government policy in recent decades as aiming to drive gold out of the world financial system in favor of the Federal Reserve Note or Special Drawing Rights issued by the International Monetary Fund.

Is this still U.S. government policy toward gold? If not, what IS the U.S. government’s current policy toward gold?

2) I have heard complains that the U.S. gold reserve has not been fully audited for many decades, particularly as there seems to have been no acknowledgement of – or account for – “swaps” and leases of gold or arrangements for such to which the U.S. government has been a party.

Does the U.S. government, through the Treasury Department, the Federal Reserve System, or any other agency or entity, transact in gold or gold derivatives either directly or through intermediaries? If so, what are those transactions and what are their objectives?

3) Does the U.S. government undertake any transactions in gold or gold derivatives through the Bank for International Settlements, Bank of England, or other central banks or governments? If so, what are these transactions and their objectives?

Rep. Mooney also made headlines earlier this year for introducing legislation calling for the dollar to be re-pegged to a weight of gold. 

As he wrote in the Wall Street Journal at the time:

The current Federal Reserve system benefits elites. The gold standard is equitable and puts “we the people” in control of the money supply. That’s why it was part of America’s founding and has been a key to the country’s long economic success.

As President Donald Trump continues to disappoint with his central bank nominees, it's nice to see a few voices in the swamp questioning the Fed. 

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Stockman on Fox Business: No, the Pentagon Doesn't Need Its Budget Raised to $700B

04/25/2018David Stockman

David Stockman brought some sanity to Fox Business's Mornings with Maria earlier today. He blasted the hypocrisy of both parties on spending, warned of the dangers of rising bond yields, and called out the absurdity of US foreign policy.

Stockman Battles Fox Business: No, the Pentagon Doesn't Need Its Budget Raised to $700B

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Trickle-Down Economics

04/24/2018Gary North
“It’s kind of hard to sell ‘trickle-down,’” he [David Stockman] explained, “so the supply-side formula was the only way to get a tax policy that was really ‘trickle-down.’ Supply-side is ‘trickle-down’ theory.” [William Greider, "What David Stockman Said," Washington Post (Nov. 22, 1981)

During the Eisenhower administration, critics of the Republican Party’s economic policies called them the policies of “trickle-down economics.” There was even a lyric in a Joe Glazer “folk” song about “trickle-down George” Humphrey, who was the Secretary of the Treasury. Trickle-down economics, the critics said, was based on the theory that tax breaks given to the rich would multiply investment, provide jobs, and eventually create increased income for everyone in the economy. In other words, by “giving” the rich more after-tax income, the government would foster economic growth, because the rich are more likely to invest than the poor, since any additional money in their hands would not have to be spent on necessities.

The critics resented the suggestion that the rich should receive a reduction in their tax rates. They had campaigned long and hard for the “progressive” income tax—the graduated income tax—and they were not happy with any suggestion that the reason why the American economy was not experiencing maximum economic growth was because of the graduated income tax, which in the 1950s extracted a maximum of 91 per cent of “unearned” (investment) income.


It is one of the ironies of history that both the critics and the defenders of reduced tax rates in the highest brackets relied on the same view of income. What we call “welfare economics” was created at the turn of the century by a group of British economists, most notably A. C. Pigou, who misused the crucial economic doctrine-of marginal utility. They argued that since each additional unit of income (ounce of gold, dollar, pound sterling, etc.) is worth less to the recipient than the preceding unit of income, we must conclude that it would increase total social utility within a society to impose graduated income taxes. Why? Because the goods bought by the thousandth dollar received by a poor man are worth so much to him, whereas the goods that the millionth dollar will buy a rich man are valued very low by the recipient. The rich man will have purchased all those goods and services that were high on his value scale long before he receives his millionth dollar. Thus, concluded the welfare economists, the civil government can increase total social utility in a society by taking (say) 75 cents of that final dollar away from the rich man and transferring the money to the poor man.

It took three decades for an economist to come up with a theoretically precise rebuttal to this position. Lionel Robbins, who had been influenced by the writings of Ludwig von Mises early in his career, provided the answer. Robbins argued that while it is legitimate for an individual to compare the value to him of the first, second, or nth dollar of his own income, it is not legitimate for anyone to make interpersonal comparisons of subjective utility. We cannot make scientifically valid statements comparing the subjective value of the second dollar of income (or the millionth) in one person’s income with the subjective value of the second, third, or nth dollar of another person’s income. We cannot even make cardinal (quantitative) comparisons in our own minds—this is worth precisely this much more to me than that but only ordinal comparisons: this is my first choice, that is my next choice, and so forth.

Common sense may not accept Robbins’ conclusion, but such is often the case in matters of economic theory. Science frequently produces conclusions that are in flagrant opposition to common sense. We need to consider an example regarding interpersonal comparisons of subjective value. The millionaire may value his millionth dollar very highly, if he has some investment in mind which requires a high initial payment, or if he regards his income as a kind of measure of his value to society. On the other hand, some mystic or ascetic may not place a high value on his thousandth dollar of income in any given time period.

We do not have a quantitative measure of pleasure or utility; thus, we cannot, as scientists, make interpersonal comparisons of subjective utility. Conclusion: it is not scientifically demonstrable that total social utility within a society can be increased by taking 75 per cent of the rich man’s income in the highest tax brackets and transferring this money to a poor man (minus 25 per cent for government handling). There is no such thing, scientifically speaking, as total social utility. We cannot add up subjective utilities as if we were adding up a column of figures.

Admittedly, as policy-makers we have to make judgments concerning the advisability of particular economic programs. But Robbins’ refutation of welfare economics by means of the argument against the scientific validity of interpersonal comparisons of subjective utility cannot be limited to the narrow case of the graduated income tax. It undermines all attempts to “tally up” social utility in the name of economic science. We cannot, as economic scientists, say that any policy will increase total social utility. There is no way to measure “total social utility.” So effective is this argument that it denies to economics the legitimacy of making estimates of the total value of any aggregates. What does Gross National Product mean, anyway, if we cannot assign any value (or meaning) to the columns of figures in a GNP index? If Robbins’ thesis is correct—and since 1932, no economist has shown how it might be incorrect—then most of what we know as modern applied economics, including the formulation of economic policy, is an illusion.

Robbins had this pointed out to him by Roy Harrod, who later became Keynes’ biographer, in 1938. Incredibly, Robbins capitulated to Harrod and abandoned the obvious and inescapable logic of his earlier argument. But he could never explain where he had been incorrect. He simply wanted to maintain the status of economists as scientific advisors, so he abandoned the logic of subjectivist economics. Somehow, he and Harrod agreed, economists as scientists can make assessments of the total social utility of particular economic policies. Somehow, GNP (or other economic statistics) are meaningful They could not say exactly how, but somehow. It was a matter of faith.

Read more.

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Timothy Terrell Named T.B. Stackhouse Professor of Economics at Wofford College

04/24/2018Mises Institute

Congratulations to Mises Scholar Timothy Terrell for being named the T.B. Stackhouse Professor of Economics at Wofford College. 

As Wofford notes, "The T.B. Stackhouse Endowed Professorship of Economics was established in 1949 by the Wofford Board of Trustees in memory of Stackhouse, who graduated from Wofford in 1880 and resided in Columbia, S.C."

Along with his position at Wofford, Dr. Terrell is a member of the Mises University faculty and serves as publishing editor for the Quarterly Journal of Austrian Economics.


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Illinois County Votes to Nullify State Gun Laws

04/24/2018Tho Bishop

Across the country we have seen Democrat-controlled states and cities announcing themselves as "sanctuaries" for immigrants in the opposition to policies handed down from the Trump administration. Last week, a county in Illinois voted to become a "sanctuary county"of its own, but this time the battle is over gun control measures that may be passed by their state government. 

As the USA Today reports:

The Effingham County Board approved the resolution 8-1 on Monday. Board members said they felt it was necessary to "take a stand" against gun control efforts in the Illinois legislature. 

Effingham County State's Attorney Bryan Kibler told Fox News that they decided to "flip the script" and "make this a sanctuary county like they would for undocumented immigrants." 

This is precisely how political self-determination should look like. Instead of leaving it up to legislators in an isolated capital dictate laws on a country as large and diverse as the United States, we are all better off having decisions be left at political units closer to the citizens themselves. Just as states should be able to nullify bad Federal policies, local governments should opt to nullify bad state law.

As Mises wrote in Liberalism:

[T]he right of not the right of self-determination of nations, but rather the right of self-determination of the inhabitants of every territory large enough to form an independent administrative unit. If it were in any way possible to grant this right of self-determination to every individual person, it would have to be done. 

Of course in order to check the political authority of larger entities, those trusted with enforcing the law must be willing to stand with their local community. Unfortunately in the case of Effingham County, it seems their sheriff isn't prepared to do so. Still, the increased willingness of state and local governments to question the wisdom and rules of larger government bodies is one of the more promising trends in American politics. 

Recommend reading: Anarchism and Radical Decentralization Are the Same Thing by Ryan McMaken
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Newman on the Tom Woods Show: The Progressive Era Was a Scam

04/24/2018Patrick Newman

Patrick Newman joined the Tom Woods Show yesterday to talk about the Murray Rothbard book he edited on the Progressive Era.

Check out the episode here. 


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Was Mises a Neoliberal?

04/23/2018Jeff Deist

Does neoliberalism, the tired slogan of our time, have a precise definition? 

The short answer is no, it doesn't. At least not readily one readily at hand, if this New Republic article is any guide:

For the left, neoliberalism often connotes a form of liberal politics that has embraced market-based solutions to social problems: the exchanges of the Affordable Care Act, for instance, rather than a single-payer, universal program like Medicare. {Jonathan} Chait argues that leftists use the word to “bracket the center-left together with the right” and so present socialism as the only real alternative. But the term has its critics on the left, too: Political economist Bill Dunn finds it too insular, rarely adopted by the people it is said to describe. The historian Daniel Rodgers, meanwhile, argues that neoliberal means too many different things, and therefore not enough.

But is neoliberal a slur, as some contend, used to attack Democrats who are overly cozy with Wall Street and global corporations? Does it describe left-liberals who have given up the fight for full democratic socialism, and sold out their principles to enjoy the fruits of unjust capitalism?

English anthropologist and geographer David Harvey implies as much, though he does assign reasonably cohesive elements to the term:

An economy built on just-in-time production, the internationalization of capital, the deregulation of industry, insecure labor, and the entrepreneurial self. In the years since, these trends have only accelerated due to improvements in, and the spread of, information technologies. But few call this “post-Fordism” any longer. They mostly call it “neoliberalism.”

Harvey references Henry Ford, not Gerald Ford, in his identification of neoliberalism as the political devolution of western societies from democratic nation states into subdivisions of borderless mass production and mass consumption. And this materialism is at the core of why left-progressives view neoliberalism as a pejorative term; and perhaps not surprisingly label the New Republic itself a neoliberal outlet (notwithstanding protestations by Chait and others). To progressives, the Clintons, the Democratic National Committee, and traditional old guard liberal media outlets are merely center-right leaning mouthpieces for big business.  

As with most political (and politicized) terms, definitions vary wildly depending on who uses them. Murray Rothbard and Elizabeth Warren hardly mean the same thing when they say "capitalism," and we all suffer from the tendency to imbue words with meanings that suit our purposes. Interestingly, use of the term "neoconservative" similarly has been attacked as a slur, one designed as code for undue Zionism or overeagerness to unleash military forces. Helpfully, however, neoconservative Godfather Irving Kristol himself provided us with the broad parameters, and the expression has lost much of its bite in the post Bush 43/Cheny/Rumsfeld era.

Within the current zeitgeist we can offer a less inflammatory yet still loose definition of neoliberalism than Harvey: the basic program of late 20th century liberalism (social democracy, public education, civil rights, entitlements, welfare, feminism, and a degree of global governance), coupled with at least grudging if not open respect for the role of markets in improving human life. In other words, neoliberals are left-liberals who accept the role of markets and the need for economic development as part of the larger liberal program. Think Bono, who considers himself a progressive "citizen of the world" yet admires markets and globalism.

With this definition in mind, the New Republic article goes badly astray when it asserts that neoliberalism "emerged from the ruins of the Austro-Hungarian Empire in the early twentieth century." First and foremost, it's hard to consider any century-old framework of thought as neo anything. And it's difficult to trace meaningful connection between first and second generation Austrian economists, writing before World War II, before truly global trade, and before the triumphant ascension of central banks, with today's neoliberal political program of social democracy and political globalism. Menger, Mises, and Hayek, with their deep regard for specialization, comparative advantage, and global trade, all wrote within a basic framework of nation states.  

As is often the case, critics of markets and private property mistake means with ends, and assume a lack of concern for "human" considerations is necessarily bound up with rigorous concern for material considerations. Hence author Patrick Iber travels a winding path of cherry-picking Misesian and Hayekian thought, the effect of which is deeply misguided though not malevolent. Not much is new here; Iber simply repeats the standard progressive arguments: they favored capital over labor. They supported democracy only as a means of reducing violent people's uprisings. They supported government, but only in service to wealth and property. And so forth. Yet by New Republic standards he treats both men somewhat fairly, far better than, say, The New York Times or Washington Post would and have. There is only one out-of-context cheap shot directed at Mises ("he was pleased when an anti-fascist uprising was violently suppressed in 1927"); meanwhile the article at least recognizes Hayek's moral concerns over apartheid in South Africa and Pinochet's dictatorship in Chile.

But the author errs badly in assuring the reader that Mises (the democrat) preferred capital to labor in service of the bourgeoisie, and that Hayek thought markets took priority over "human rights and social justice." This is especially interesting given Hayek's own perspective on the latter term, and the typically vague manner in which the author employs both.

For our purposes we can neatly distinguish "real" liberalism, or classical liberalism for lack of a better historical term, from neoliberalism. Liberalism in Mises's conception is fundamentally concerned with private property. In this view the means of production — capital — are in private hands. They are not owned by the state, by society, by "the people," or collectively. Full stop. No amount of regulated semi-capitalism or semi-socialism can evade this foundation, because both individual and economic freedom hinge on the free use and control of private property. Control over one's property, meaning the ability to use, alter, alienate, encumber, or sell it, is the essence of true property ownership—albeit always subject to tort liability for harms caused to others. Any amount of taxation, regulation, or outright confiscation necessarily erodes this control, which Mises acknowledged even within his framework of utilitarian democracy as a protector of property rights.

This insistence on property rights at the core of any liberal program is scarcely to be found in today's neoliberalism, yet again it remains at the heart of left-progressive antipathy to the term. They are suspicious of any introduction, or re-introduction, of markets and property into what ought to be a worldview of economic planning by the state.

We should note that Mises also appended his program of liberalism with two important corollaries that were "neo" for the time, specifically the interwar years: freedom and peace. In contrast with what he saw as the "old" 19th century perspective, a "present-day" liberalism had "outgrown" the old version through "deeper and better insights into interrelationships." Meaningful liberalism required political freedom for the individual, especially freedom from involuntary servitude. And peace was the foundation for all true economic activity, inescapably tied to civilization. Undoubtedly New Republic readers would benefit from understanding just how progressive Mises really was when Liberalism first appeared in 1927!

Meaningful argumentation, as opposed to politics and outright war, requires words and precise definitions. This is why, unfortunately, almost all political talk devolves into what Orwell accurately described as "meaningless words." Meaningless words attempt to impugn or attack the "other," rather than convey specific information or create understanding and consensus. Politics is not a science, but we would all benefit from insisting on rigor in definitions from political pundits just as we once did from social scientists. Imprecise meanings and shifting semantics generate more heat than light, and leave us all talking past one another.

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Fed: "Underlying Inflation" near a 12-Year High

04/23/2018Ryan McMaken

According to the Federal Reserve's Underlying Inflation Gauge, the 12-month inflation growth in March was at 3.13 percent. That's the highest rate recorded in 140 months, or nearly 12 years. The last time the UIG measure was as high was in July 2006, when it was at 3.2 percent. 

The Fed began publicly reporting on new measure in December of last year, and takes into account a broader measure of inflation than the more-often used CPI measure.


Not shockingly, the UIG has shown a higher rate of inflation than the CPI, most of the time in recent years. Moreover, this gap between UIG and CPI appears to be growing.1 


In March, while the UIG was 3.13 percent, the CPI growth rate was 2.4 percent. This was a 13-month high for the CPI. 

The use of consumer prices only in the CPI has long been a problem, in that the cost of living and planning for the future does not involve only the basket of goods used in the CPI calculations. A wide variety of assets affect the American economy as well. 

As explained by the New York Fed's summary of the UIG measure:

We use data from the following two broad categories: (1) consumer, producer, and import prices for goods and services and (2) nonprice variables such as labor market measures, money aggregates, producer surveys, and financial variables (short- and long-term government interest rates, corporate and high-yield bonds, consumer credit volumes and real estate loans, stocks, and commodity prices).

But don't expect the Fed to abandon its fondness for the CPI and the arbitrary "2-percent inflation" goal any time soon. The fact that the broader measure of inflation is climbing to the highest level seen in more than a decade is apparently not a matter of concern. 

Today, the president of the Federal Reserve Bank of Chicago, Charles Evans, reiterated that the Fed is holding to its 2-percent inflation goal - and they're not talking about using the UIG measure. 

  • 1. The gap is simply calculated by substracting the CPI YOY growth rate from UIG YOY growth rate. A negative value means the CPI was higher than the UIG in that period. 
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