Month: December 2022

The federal budget passed today. It's cold back East. There's nothing new on the SBF or Twitter fronts. Donald Trump remains guilty of inciting an insurrection to keep himself in power even though he lost the 2020 election. Meh.

So here's a couple of additional charts that show consumer spending through November. First up is services vs. durable goods:

Purchases of durable goods have gone through big swings since the start of the pandemic, and the trendline decline this year is mostly an artifact of huge growth in January. Take that one month away and the trend is actually up. The much larger services sector is less volatile but has been declining a bit all year.

Here is overall personal expenditure growth:

It's been running at about 2.4% since mid-2021, almost identical to the 2.5% growth rate before the pandemic. As you can see, the November figure was very low but appears to be mostly noise. Generally speaking, consumer spending has stayed pretty steady so far even as wages have dropped and savings have been used up.

Here is Charlie walking down our fence using his magnetic boots, which are cleverly made to resemble his natural paws. He's a pretty clever cat.

I've mentioned several times that the Fed's aggressive interest rate hikes haven't yet had an effect on inflation, which has been declining on its own. The reason is that it takes time for the impulse of an interest rate hike to work its way into the economy and produce an impulse in the inflation rate.

But on average, how long does this take? Fifty years ago Milton Friedman popularized the idea of "long and variable lags," which suggests we don't really know for sure. But there's been a ton of research about this since then, which means we can at least hazard a guess or two. This will take a while, so buckle in.

Our first problem is that a great deal of the research looks at how long it takes interest rate changes to have their greatest effect on inflation. The most common guess is 18-36 months. This is suggestive that interest rates have very little impact in their first year, but no more than that. What we really want is research that tells us how long it takes for an interest rate hike to have a noticeable effect on inflation.

Here are a few comments on that:

• Esther George, Kansas City Fed President: "We don't know exactly. I think typically, we've thought about 6 to 12 months of lag in that."
• Nate DiCamillo, Quartz economic reporter: "Part of the reason why the Fed’s rate hikes haven’t had more of an effect is that they take about six to nine months to work their way through the economy."
• Raphael Bostic, President of the Atlanta Fed: "A large body of research tells us it can take 18 months to two years or more for tighter monetary policy to materially affect inflation."
• James Cloyne, then of the Bank of England, and Patrick Hürtgen of Germany’s Bundesbank: "In the U.K., a 1 percentage-point increase in the policy rate reduces output by 0.6% and inflation by up to 1 percentage point after two to three years."

Taken together, these suggest that interest rate hikes start to have an effect on inflation in about a year or so. But I have one more study to add to this, and it's the most interesting of all. It's a meta-study from Tomas Havranek and Marek Rusnak of the Czech central bank and it examines research about monetary policy changes in dozens of countries over the past few decades. It suggests that the maximum impact of rate hikes takes 3-4 years to materialize in the US. But now take a look at something else. First I'm going to show you the whole chart even though it's illegible at this size:

For now, just take a look at the two things I've circled. First, this is a measure of how  long it takes for a rate hike of 1% to produce an inflation response of -0.1%. In other words, how long it takes before you get the first hint of lower inflation.

Second, look at the lower circle. Out of all the things that monetary policy affects, inflation is the very last. Inflation reacts very slowly to rate hikes.

Now let's zoom in on inflation and see what it says:

This is still not the most legible graph in the world, but it does the job. The blue lines represent monetary episodes that produced a positive response—that is, where a rate hike produced the expected reduction in inflation. The earliest response was 8 months and every other episode took at least 12 months to have an effect on inflation.

Bottom line: Except in the most extraordinary circumstances, rate hikes take around nine months to have an effect, and 15 months is probably more likely.

In our current case this doesn't really matter. The earliest date for serious Fed hikes is May 2022 and nine months takes us out to February 2023. It's an almost sure thing that the Fed's actions have had no effect on inflation yet, and probably won't for another three months—maybe longer.

And yet, during that time core inflation has plummeted:

What caused this? My take is here (supply chain problems, stimulus, rents, and savings) but it doesn't matter much if you agree with me. The one thing we can say with high confidence is that it hasn't been the result of interest rate hikes.

However, interest rate hikes generally affect economic growth sooner than they affect inflation. In fact, low economic growth is one of the channels used by rate hikes to influence inflation. So there's a good chance that the Fed has already hurt the economy and will continue to hurt it even worse next year, all the while affecting the inflation rate—which had already come down by itself—only much later, when we no longer care about it.

Worst. Fed. Ever.

Here is PCE inflation for November. It's close to zero:

As usual, this is month-over-month inflation adjusted to an annual rate. The core rate, which the Fed considers the key inflation figure to follow, is down to 2%, which is their official target. The headline rate is even lower at 1.3%.

(If you insist on the year-over-year rates, they were 5.5% for headline inflation and 4.7% for core inflation. They'll catch up to the monthly figures before long.)

This is terrific news and it confirms the low CPI inflation rates we saw a couple of weeks ago. And keep in mind that this happened all on its own. The Fed most likely had nothing to do with it. Unless I get really lazy, I'll have a post about that later in the morning.

This was at the bottom of the first story the New York Times printed about Donald Trump's tax returns:

The new tax data showed that while in the White House, Mr. Trump made charitable contributions in cash, something the House committee said warrants further investigation. “We would have inquired as to whether the large cash contributions were supported by required substantiation,” the report said.

Cash! You betcha. Isn't that how everyone makes five and six figure charitable contributions?

Trump has a long record of aversion to making contributions to charity. His foundation was funded almost entirely by other people and was eventually dissolved after a judge ruled that it engaged in “a shocking pattern of illegality.” A long investigation by the Washington Post showed that Trump had given away only about $200,000 per year during his adult life, a paltry sum for a multi-billionaire and far, far less than he implied he gave away. The New York Times reported that of his more recent giving, virtually all of it was only technically charitable: he agreed not to develop land, usually after already deciding he didn't want to develop it anyway.

So should we believe that the undocumented "cash" contributions he allegedly gave to charity during his presidency are real? I don't know how anyone other than the IRS could investigate this, but why bother? I think we all know the answer.

After the Omicron outbreak of early 2022 subsided, death rates from COVID-19 have been steady and relatively low for the rest of the year:

I've included Germany just to provide a comparison with a typical peer country. This still comes out to more than 13,000 deaths per month in the US, so it's a lot of deaths. But so far we haven't seen a winter surge.

This is Monet's cottage in Giverny. I didn't go inside because I'd already seen it and it was jammed with busloads of tourists (like me). However, I did carefully scout out a spot that made it look nice and peaceful, as it should.

The LA Times reports that Los Angeles posted a record-high high school graduation rate last year:

For the high school class that graduated in 2022, the percentage of students who earned a diploma in four years in Los Angeles Unified — the nation’s second-largest school system — was 86%....There was about a 4.5 percentage point increase from 81.6%, a continuation of an ongoing trend of annual graduation-rate increases.

An increase of 4.5% in a single year hardly seems plausible. And yet, here's a look at the past decade:

As it happens, the Times apparently got things wrong. The graduation rate in 2021 was 83.8%, not 81.6%, so the increase was actually 2.2%. This is fairly normal for LA Unified, which has averaged a 2% annual increase since 2010.

Of course, I wouldn't be surprised if there are two or three different measures of graduation rates. On the other hand, the LAUSD dashboard has the 2022 graduation rate right, so I suppose it has the 2021 rate correct as well.

In any case, this seems pretty remarkable. What on earth has LAUSD done to increase its graduation rate by 24 points in a mere 13 years?

From the LA Times:

The right of billionaires to travel in secrecy is a niche concern, to say the least.

True enough. However, when your paper employs a "wealth reporter" you gotta write about something, don't you?

I have to admit that, zillionaires or not, I sort of sympathize with them on this issue. Sometimes you just want to go somewhere and not have the whole world know about it. Still, as the story points out, you can always travel by charter jet, which allows all the privacy you want and almost all of the luxury of a private jet. So there's no reason to feel too sorry for all these hotly pursued celebrities.

Until its implosion last month, Alameda Research was the sister company of FTX. Both were founded by Sam Bankman-Fried, and Alameda was the company that borrowed customer deposits from FTX using inflated crypto tokens as "collateral." The money was used partly to fund risky investments and partly to make loans to SBF and his CTO, Gary Wang.

A couple of weeks ago the former CEO of Alameda Research, Caroline Ellison, was spotted in New York City:

PLEASE CONFIRM: A user claims that they spotted Caroline Ellison at Ground Support Coffee on West Broad in SoHo Manhattan at 8:15 AM. This would mean she is not in Hong Kong and is in NY not in custody. pic.twitter.com/QUduYO9GfZ

— Autism Capital ???? (@AutismCapital) December 4, 2022

Sure enough, it turns out she's been spilling the beans on Sam Bankman-Fried the whole time. So has Wang. The Wall Street Journal has the story:

Ms. Ellison, 28 years old, pleaded guilty to seven counts, including wire fraud and conspiracy to commit securities fraud, according to her plea agreement, which was signed Monday. Mr. Wang, 29, pleaded guilty to four counts, including wire fraud.

....According to their plea agreements, Ms. Ellison and Mr. Wang are expected to truthfully disclose information to investigators, provide requested evidence and appear in front of a grand jury or court proceeding if asked. In exchange, the government will inform the judge of the defendants’ assistance and request lesser sentences.

This might explain why SBF agreed to be extradited and is now in custody in New York. He knew the jig was up and there was little point in fighting any longer.