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Italics: Greenspan's speech. Normal text: my comments. Onward.

"The evident strengthening in demand that underlies this improved performance doubtless has been a factor contributing to the rise in inflation this year."

Interesting that the increase in inflation in the U.S. is a function of rising demand as opposed to the massive (record) liquidity that the Fed has created in the economy over the last 2 years.

And what, exactly, does this statement mean?

"But inflation also seems to have been boosted by transitory factors such as the surge in energy prices."

That's like saying that inflation has been created by inflation in energy prices. Huh? What kind of circular logic is that? The real answer? Any inflation we are seeing is the direct and inevitable result of negative real rates and the massive credit creation process that has been underway since 2001.

"Businesses' ability to boost output without adding appreciably to their workforces likely resulted from a backlog of unexploited capabilities for enhancing productivity with minimal capital investment, which was an apparent outgrowth of the capital goods boom of the 1990s.'

This is a long winded way of saying that the overcapacity in the economy created by the asset bubble in 1995-2000 has to be worked off before employment can increase substantially. Of course, the real question remains: what caused the asset bubble in 1995-2000? You know who I blame. Notice how there is no blame for such small employment gains being placed on the fact that ultra-low interest rates favor capital expenditures over labor expenditures (something we have been talking about for the last year).

"The improvement in labor market conditions will doubtless have important follow-on effects for household spending. Expanding employment should provide a lift to personal disposable income, adding to the support stemming from cuts in personal income taxes over the past year."

Doubtless? There are two factors in disposable personal income: jobs and how much they pay. Wages and salary income has stagnated for all of the expansion, coming in less than the inflation rate. So net/net, if people are getting more jobs, that's good, but if those jobs are paying less than inflation, then the net benefit to the household income statement is muted at best.

"In addition, the low interest rates of recent years have allowed many households to lower the burdens of their financial obligations."

This is disingenuous in the extreme. Low rates have lowered the debt service burdens of their financial obligations. The actual debt levels have ballooned, as any perusal of the statistics reveal.

"But the acceleration of core prices has been augmented by a marked rise in profit margins, even excluding domestic energy corporations".

Consumers will be glad to hear that corporate profit margins have risen faster than inflation of goods. This at a time when they have seen their own wage and salary income decline relative to those increasing prices.

"To be sure, the increases in average hourly earnings of nonsupervisory workers have been subdued in recent months and barely budged in June. But other compensation has accelerated this year, reflecting continued sizable increases in health insurance costs, a sharp increase in business contributions to pension funds, and an apparently more robust rate of growth of hourly earnings of supervisory workers."

Again, consumers will be heartened to know that, while they can afford fewer and fewer of the things they need (energy, food, housing), they are shielded from health care insurance increases, they are seeing their pensions funds grow, and their bosses are getting paid more. Sweet.

"But we cannot be certain that this benign [inflation] environment will persist and that there are not more deep-seated forces emerging as a consequence of prolonged monetary accommodation."

Well at least they understand that their monetary accommodation has been prolonged. Even most impartial observers use the adjectives like "record", "substantial", "historic" and the like.

"What does seem clear is that the concerns about the remote possibility of deflation that had been critical in the deliberations of the Federal Open Market Committee (FOMC) last year can now be safely set aside."

Here he's just dead wrong, and is simply parroting the widely-held view (in the media, in the markets, among economists, etc.) that deflation is dead. After record (historic, substantial, etc.) credit creation for 2 + years, inflation has only been able to grow sub 3% y/y. What could possibly be holding back the record forces of inflation that the Fed has unleashed but the even stronger forces of deflation. Deflation is not at all dead. It's my view that it is just getting started.

"Even if economic developments dictate that the stance of policy must be adjusted in a less gradual manner to ensure price stability, our economy appears to have prepared itself for a more dynamic adjustment of interest rates."

Uh, really? The economy is more prepared for a faster increase in rates now? Is that because so much of the carry trade leverage among banks has been taken off? (It hasn't.) Is that because households have pulled back so aggressively from mortgage refis? (They haven't.) Or is it because the banking system has diversified itself away from its massive mortgage credit book? (They haven't.) The economy and its major financial players (consumer, banks, and financial intermediaries) are no less prepared for a rise in interest rates than they were 3 months ago.

"But in the process of returning the stance of policy to a more neutral setting, at least some of the capital gains on debt instruments registered in recent years will inevitably be reversed."

But you should still refinance your home using an adjustable rate mortgage, despite the fact that he thinks rates are going up.

And lastly, this zinger, just to put an exclamation point on how surreal the entire speech is:

"For twenty-five years, the Federal Reserve has worked to reestablish price stability on a sustained basis."

Really? In the last 25 years, the CPI and PPI (both of which massively underreport the actual inflation) have increased 160% and 92% respectively, or 3.9% and 2.7% compounded respectively. That's price stability? No, that's inflation. And worse, it's inflation of the most insidious kind; it slowly eats away at your purchasing power by acting as a "tax" on your disposable income. Allowing you to buy 3% less of what you want each and every year until, 25 years later, voila, your purchasing power has declined by 50%.

Imagine if politicians increased taxes every year by 3% for 25 years. Do you think that they would be anything but voted immediately out of office? But that's precisely what the net effect to you and I is by such a steady, pernicious rise in inflation, engineered by the Fed. When someone at the Fed tells you what their job is, you can bet it's probably the opposite of what they are saying.

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