E.Indicators

On this date of July 26, 2004, we only have five days left to influence the Trade Balance statistic to

be released on September 10th. I did not notice this before because we have over a month to influence the other statistics to be released on this same date, Core PPI and PPI. The history of these since June of 2003 are below copied-and-pasted from the msnbc Economic Calendar. Let's try to push the Trade Balance down to -$25 billion. In simpler terms, if countries such as China want our business, they have to first meet our human rights standards. And buy American will

be our theme. As for Core PPI and PPI, according to my economist-father, the optimal statistic for these is 0.2%. Initial Unemployment Claims, although not listed below, will be released on September 09th and must be at 250,000.

The following is another e-mail from my father. I finally learned how to save it such that I can reproduce it on this website. I e-mailed him a Q&A pursuant to our telephone conversation, and these are his answers and my questions.

Do their fluctuations correspond?

No, the whole point of omitting some indices is that the average of the remaining indices usually acts (over time) like the trend of the overall index, i.e., ithe core PPI has the same average change, over the decades, but eliminates much of the "noise" that befogs the overall index.*

*That is, both indices have their up-and-down cycles. But PPI has much sharper and more frequent fluctuations. The node--center of each up-and-down--is identical for both. So if it is trend you want to watch, not detail, Core PPI is the index for you.

What is optimal indices for each? Is it 0.2%?

I believe so since very rapid inflation is undesirable but deflation (e.g., like the 1930's) is even worse. This is like a road with a precipice on one side (without a fence) and some mud on the other. You don't want to get off the road on either side but it is better to leave a larger safety margin on the side with the precipice.

Why is it good for investors for these to rise?

The thing that determines the real burden of any debt you incur is the difference between the nominal interest rate and the rate of inflation. The Federal Reserve can control the structure of nominal rates except that it cannot charge a negative rate. Usually if it wants to induce people to spend more it can cut the real interest rate by reducing the nominal rate. However, if the inflation rate becomes negative, i.e., if there is deflation then this can cause big trouble. For example, consider the early 1930's in the United States; prices were falling by about 8% per year, i.e., the minimum real rate was 8%. This very high rate of real interest deterred spending and, since the nominal rate had already been reduced to nearly 0%, there was nothing more the Fed could do to stimulate the economy and so, as the economy hurtled downward, unemployment peaked out at about 25%. The same thing happened, to a lesser degree, in Japan more recently-indeed it is not quite clear that it is over in Japan.

Why do we not want people to wait to buy goods?

This is what happened in this country, and indeed in most of the world in the 1930"s (see the preceding answer). With prices falling rapidly everything (e.g., vacations, pork chops) was behaving like the price of computers has done recently so that one almost always thinks you could have done better by waiting and so you are inclined to wait t make future purchases. The resulting decline in overall demand causes people to be laid off and also causes you to be laid off because others have not yet bought. Now many don't have the income to enable them to buy and unemployment becomes intractable.

What is real interest rate? What is nominal interest rate?

For the real interest rate see to answers above. The nominal rate is just the quoted rate. For example, if the quoted rate on a mortgage is 6% and you expect about 2% general inflation then the real interest rate on your mortgage is 4%.

What interest rate should the Federal Reserve Board charge?

A varying one that is low when business is poor and higher when unemployment falls for too long below the natural rate (see above) and so the Fed wants to stimulate business firms and consumers to buy more.