“Pipeline inflationary pressures are greater and the economy is stronger today than they were ten years ago when the FOMC began raising the fed funds rate. Why is the FOMC reluctant to raise the funds rate now?” Another good read from Paul Kasriel at Northern Trust.

Today, Federal Reserve Chairman Alan Greenspan on Wednesday played down the risk to U.S. bond markets if heavy official foreign buying dried up.

Paul Kasriel (Northern Trust Company) has a thought about what would really happen if foreign demand were to fall:

“In effect, the Fed would monetize the U.S. government securities being sold by foreign central banks. Although this would prevent short-maturity interest rates from rising, it might actually lead to higher longer-maturity interest rates. Why? Because the Fed’s monetizing of debt has future inflationary implications. Rising inflation expectations would drive up the nominal interest rates on longer-maturity debt. So, Greenspan is only partially correct about the effect of foreign central bank sales of U.S. government securities. These sales would not necessarily drive up short-term interest rates, but would probably drive up long-term interest rates.”

There have been rumors in the last few days that China plans to let the yuan rise against the dollar. This IHT/NYT article thinks that is fairly unlikely:

“But representatives of American unions and manufacturers, along with many economists, said on Tuesday that the yuan would have to rise 20 percent or more to make much of a difference in trade flows – a currency move that no one has forecast.”

Join Bill Fleckenstein this week on a trip to the government department responsible for fun with numbers. Maybe you are already familiar with the use of hedonic indexing of information technology and how it affects GDP. Well, now they are thinking about taking it further:

“the BEA is considering the use of hedonics to lower the impact of rising medical costs on the CPI by subtracting the imagined value of quality improvements in medical care from the price we’re really paying. The government recognizes it has a problem with exploding health costs and is studying the use of that same quick fix which has “worked” when unwelcome rising prices have been an issue in other areas, i.e., to define the problem away.”

Eric Englund has some thoughts on Potential Inflation.

“As has happened with all previous fiat currency experiments, government debt is repaid by simply printing the money to pay back the government’s debt obligations (i.e., bonds). Of course, as more money is printed, its value falls just like the gun safe plunging from ten stories above the ground.”

I stumbled across two interesting graphs today.

The first is from Brad DeLong’s Blog which he refers to as a graph that is “currently freaking me out.” It’s an index that shows how, since 2000, “Total nonfarm business compensation has fallen 10% relative to GDP–an extraordinarily large amount. It’s as if 10% of the wages, salaries, and benefits that we would expect in the normal course of things to see flowing to workers has vanished in the past three years. Real GDP per capita today is 3% above its year-2000 value. But real worker compensation per capita is 7% below its year-2000 value.” Like him, I wonder if this could possibly be true.

Next, Clive Maund hears “gold echoes from the 1970′s” that “present a most interesting chart that shows the current bull market overlaid on the 70′s bull market”. Indeed. The two track each other in an strikingly similar fashion.

“JAPAN’S Ministry of Finance has lost more than £40 billion in the past financial year trying to bet against currency speculators, The Times has learnt. Cabinet Office insiders admitted yesterday that the currency losses have spiralled out of control, after a renewed attempt by the Finance Ministry to prop up the dollar and talk down the value of the yen…. In trading in Tokyo yesterday it was clear that Japanese exporters were also preventing the massive currency intervention programme from succeeding. As the yen fell to Y107.50, a number of carmakers were understood to be dumping large amounts of their foreign-earned dollars on the market.”

I wonder how much longer they can pursue this failing strategy.