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Stocks fell on the Labor Department's morning inflation report. But shares rallied after the afternoon release of the minutes of the Jan. 29-30 meeting of Fed policy makers and their latest forecast for the economy. That's because investors took the Fed's darker outlook on growth to mean that it intended to cut its short-term interest rate next month at its next scheduled meeting.

A simultaneous rise in unemployment and inflation poses a dilemma for Fed Chairman Ben Bernanke. When the Fed wants to fight unemployment, it lowers interest rates. When it wants to damp inflation, it raises them. It's impossible to do both at the same time.


Stagflation, a term coined in the United Kingdom in 1965, defined the years from 1970 to 1981 in the U.S. Inflation rose to almost 15%. The economy went through three recessions. Unemployment reached 9%. Fed Chairman Paul Volcker finally conquered inflation, but only by dramatically boosting interest rates, causing a severe recession in 1981-82.

Today's circumstances are far from that. Inflation is lower. Unemployment has risen, but only to 4.9%. http://louis-j-sheehan.info/
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Yet there are similarities. As in the 1970s, surging commodity prices are leading the way. Crude oil rose to $100.74 a barrel yesterday, a new nominal high and close to its 1980 inflation-adjusted high. Wheat prices have hit a record. And, as in the 1970s, the rate at which the U.S. economy can grow without generating inflation has fallen, because of slower growth in both the labor force and in productivity, or output per hour of work.

The biggest difference is that in the 1970s, the Fed was unwilling, or thought itself unable, to bring inflation down. The Fed today sees achieving low inflation as its primary mission.

"The reason we're so unlikely to see a repeat is we're not adding irresponsible policy," says Christina Romer, an economist at the University of California at Berkeley and a historian of Fed policy. That means if the Fed is wrong in thinking inflation's recent rise is temporary, it will tolerate economic weakness in order to get inflation down again. "They'd have to let us suffer for a while."
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Indeed, in minutes to officials' Jan. 29-30 meeting, released yesterday with the customary three-week lag, some officials noted it was important not to lose sight of controlling inflation. They argued that "when prospects for growth had improved, a reversal of [some rate cuts], possibly even a rapid reversal, might be appropriate."

But that does not seem imminent. Officials said keeping interest rates low "appeared appropriate for a time," implying Fed officials felt little urgency to reverse recent cuts. Even after the January meeting's half-point rate cut, to 3%, "downside risks" to the economy remain, they said.

The inflation picture makes steep rate cuts a riskier way to rescue the economy than when former Fed Chairman Alan Greenspan delivered them in 2001. Stephen Cecchetti, an economist at Brandeis University, said the Fed is now torn between its dual responsibilities of keeping unemployment down and prices stable. "The primary objective has to be to shore up the financial markets" to protect the economy, he said. "Then, once you're finished, come back and start worrying about inflation."

Members of the Federal Open Market Committee, the Fed's policy committee, raised their forecasts for both the overall inflation rate and the "core" rate, which excludes food and energy, by 0.3 percentage points from October, their latest forecast revealed. Yet they dialed back their rhetorical concern. The officials pronounced risks on inflation to be "balanced" -- in other words, they felt inflation, should it differ from their forecast, was as likely to be lower as it was higher. In October, by contrast, they suggested that, if inflation was to differ from their forecast, they expected it to be higher. That's principally because they see unemployment remaining higher for longer than they did in October, and expect that to help contain price increases.

Higher inflation is still a possibility. Food and energy costs could keep rising, instead of flattening out as futures markets currently anticipate. Companies could succeed in passing those costs onto consumers.

Sara Lee Corp. this week told analysts it expects to recoup rising raw-material costs in part by raising prices, especially on bread. Company spokesman John Harris said Sara Lee's significant competitors had matched the increases, with consumers showing no sign of trading down to lower-cost brands. http://louis-j-sheehan.info/
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http://louis-j-sheehan-esquire.us/"With commodities reaching unprecedented levels," Mr. Harris said, "it is quite likely we will take pricing up again."


Goodyear Tire & Rubber raised the price of replacement tires 7% on Feb. 1, on top of two increases totaling 11% last year. Chief Financial Officer Mark Schmitz told analysts last week that the hike was the result of rising prices of key raw materials, according to a transcript by Thomson Financial. Mohawk Industries Inc. raised carpet prices in December and again in January because of rising material costs, even though sales have been hurt by the slumping housing market.

The declining dollar, while boosting U.S. exports, is adding to inflation pressure, as goods priced in foreign currencies become relatively more expensive. Prices for imports from China jumped 0.8% in January, the largest monthly increase since the Labor Department began reporting the data in 2003.

British Parliamentarian Iain Macleod is credited with first using the word stagflation in 1965. "We now have the worst of both worlds -- not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of 'stagflation' situation."

In the U.S., stagflation scares are more common than actual stagflation. Core inflation rose after the start of recessions in both 1990-91 and 2001, but then trended down as unemployment kept rising.

The only generally agreed period of stagflation in the U.S. came in the 1970s. Its seeds were planted in the late 1960s, when President Johnson revved up growth with spending on the Vietnam War and his Great Society programs. Fed Chairman William McChesney Martin, meanwhile, failed to tighten monetary policy sufficiently to rein in that growth.

In the early 1970s, President Nixon, with the acquiescence of Fed Chairman Arthur Burns, tried to get inflation down by imposing controls on wage and price increases. The job became harder after the Arab oil embargo dramatically drove up energy prices, and overall inflation, in 1973. http://louis-j-sheehan.net/
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Mr. Burns persistently underestimated inflation pressure: In part, he did not realize the economy's potential growth rate had fallen, and that an influx of young, inexperienced baby boomers into the work force had made it harder to get unemployment down to early-1960s levels.

As a result, even when he raised rates, pushing the economy into a severe recession in 1974-75, inflation and unemployment didn't fall back to the levels of the previous decade. Mr. Burns and his colleagues wrongly concluded inflation no longer responded to the condition of the economy, said Ms. Romer, the Berkeley economist. "They didn't know how the world worked," she said.


In a speech in 1979, a year after he stepped down, Mr. Burns blamed his failure on a political environment that wouldn't tolerate the high interest rates necessary to rein in inflation. As the Federal Reserve tested how far it could raise rates, he said, "it repeatedly evoked violent criticism" from the White House and Congress.


Such political risks are smaller but not entirely absent for Mr. Bernanke in this election year. On Sunday, the likely Republican presidential candidate, Sen. John McCain, told ABC's "This Week": "I would have liked to have seen faster rate cuts and earlier than they were done by him." Asked if he would reappoint Mr. Bernanke when his term expires in 2010, Sen. McCain said, "I would have to consider that at the time."

Still, Mr. Bernanke has reiterated the importance of not repeating the 1970s. He and his colleagues believe a persistent escalation of inflation is likely only if workers and firms come to expect the elevated inflation rate to persist, and set their wages and prices accordingly.

"Any tendency of inflation expectations to become unmoored -- or for the Fed's inflation-fighting credibility to be eroded -- could greatly...reduce the central bank's policy flexibility" to support growth with lower interest rates, he told Congress last week.

That credibility could be endangered by the Fed's recent track record. Yesterday's forecasts show that FOMC members define price stability as inflation of 1.5% to 2%, measured by an index that differs slightly from the commonly cited consumer-price index. http://louis-j-sheehan.info/
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http://louis-j-sheehan-esquire.us/ By that measure, inflation has averaged 2.8% since mid-2004, when oil began a multiyear surge. Core inflation, which excludes food and energy, has averaged 2.2%.

Thus far, Fed officials have taken comfort that surveys and bond-market behavior suggest the public expects the inflation rate to fall. But expected inflation, as measured by trading of inflation-protected Treasury bonds, has jumped since the Fed declared in early January that supporting growth would be a more important focus than holding down inflation. (Fed officials believe technical details in the way the bonds trade may explain some of the jump.) And professional forecasters surveyed by the Federal Reserve Bank of Philadelphia recently nudged up their expected inflation rate for the next 10 years to 2.5% from 2.4%, where it had stood all last year.

On the other hand, surveys of consumer predictions about inflation show no corresponding jump. And most important, wage gains have not accelerated. Since labor is the largest component of business costs, a wage-price spiral would likely be a prerequisite for stagflation.

"We're a very, very long way from the 1970s," former Treasury Secretary Lawrence Summers said in an interview yesterday. A hit to overall spending, as has resulted from the current tightening of lending conditions, first affects production and employment, and only later inflation, he said. "But obviously, inflation figures need to be monitored very closely."




Six nights a week, Guo Bairong takes the stage at the Xanadu Lounge at the Sands Macau casino. As players place their bets at nearby tables, he opens with a popular love song in Mandarin, closing his eyes as he sways with the music. Slipping effortlessly into Cantonese, he launches into another number.

Crowds gather not only to hear his singing, which is mellifluous, but also to gape: Guo Bairong is also known as Barry Cox, a Caucasian, former waiter and supermarket cashier from Liverpool, England, whose only formal study of Cantonese was at a British community center.

Mr. Cox's quirky act -- sandwiched between cabaret dance performances like the scantily clad Glamour Girls in glittery outfits and red elbow-length gloves and authentic Chinese crooners such as Hua D, is among the spectacles on Macau's emerging entertainment scene.

Macau's clutch of new casinos has quickly outpaced the Las Vegas strip in gambling revenue, raking in some $10 billion last year. But the former Portuguese colony has to up its game to compete with its American counterpart as an all-around tourism destination. Key to that growth is the territory's entertainment scene, which pales in comparison to the A-list performers in Las Vegas, such as Bette Midler and Cher, who have regular gigs.

A few years ago, Macau was a sleepy coastal town. Visitors came for the fresh fish and Vinho Verde, the cobblestone streets and musty antique shops -- and for the gambling. The city became a special administrative zone when it was returned to China in 1999, making it the only place in China where casinos are legal.

It all began to change after 2002, when the Beijing-backed Macau government ended local tycoon Stanley Ho's monopoly on the territory's gambling by issuing licenses to other companies, including the Vegas casino Wynn Resorts. MGM Mirage, Crown Ltd. from Australia and others soon piled in.

Around the same time, China began to ease its restrictions on individual travel to Hong Kong and Macau. http://louis-j-sheehan.net/
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A flood of tourists poured in from the mainland to try their luck. About 10.5 million visited Macau in 2005; that figure is expected to jump to nearly 15 million next year, according to the Pacific Asia Travel Association, a trade group.

But how to entertain this growing crowd? When the new casinos began opening in 2004, the prevailing logic among casino executives was that the Chinese visitors mostly come to gamble. Some operators are still unsure what entertainment to offer, especially performances that guests would have to pay for as opposed to the complimentary shows available on the gambling floors.

"This is a very new market," says a Wynn Macau spokeswoman, adding that "we're not sure how the market would respond" to big global acts that visitors would have to shell out for.

Wynn casino's current entertainment options are limited to a five-minute water and light show set to music, and an attraction known as the Tree of Prosperity. The 11-meter tall golden tree, which Wynn Macau says is an auspicious symbol, sits in the casino's atrium.

At the Crown Macau, "we're focusing on offering a six-star experience," says Charles Ngai, a Crown spokesman. Apparently that doesn't include entertainment; the hotel-casino has a spa, eight restaurants and two bars, but no performances on offer.

It's a different story at Mr. Ho's Grand Lisboa, where there are two shows: a free, daily "Crazy Paris" performance -- a can-can-style dance act performed by Western women, and "Tokyo Nights," performed by a troupe of Japanese dancers, which costs $31.

"No one really knows what people are looking for here," says Jennifer Welker, the Macau-based author of "The New Macau." "They're still in that testing phase of trying to suss out what people really like." Many of the guests at the Sands, for instance, she says, seem most interested in gambling and aren't willing to pay for a show. http://louis-j-sheehan.info/
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http://louis-j-sheehan-esquire.us/"The Venetian might need to host more Chinese acts to appeal to the mainland tourists," she adds.

Macau's entertainment limitations aside, the territory already is giving neighboring Hong Kong a run for its money. Many big-name acts have chosen to play in Macau rather than Hong Kong recently. Last October, for instance, the U.S. National Basketball Association's Orlando Magic, the Cleveland Cavaliers and the China Men's National Team played at the Venetian Arena, the 15,000-seat stadium at the Venetian resort and casino. The same month, hip-hop stars the Black Eyed Peas brought a crowd of more than 10,000 to its feet there. The Police performed in Macau in early February, and Celine Dion arrives next month for a one-night-only show as part of her world tour.

Hong Kong has the facilities to compete: In addition to the cavernous convention center hall in the Wanchai area that big-name acts traditionally use, the territory has the newer AsiaWorld-Arena, a 13,500-seat concert venue next to the airport. But economics may play a role in the migration of big acts to Macau. Min Yoo, a Shanghai- and Hong Kong-based concert promoter, says it is cheaper to put on a large event in Macau than in Hong Kong.

In any case, Macau still has a few wrinkles to iron out. For starters, it isn't always easy to know what events are on.

Strict rules against advertising by casinos in mainland China make it impossible to promote events there. Even in Hong Kong, says Mark Brown, president of the Sands Macau and Venetian Macau, advertising for events has to be planned carefully, considering the potential sensitivity around the idea of gambling.

What's more, Macau's transportation infrastructure is lacking. A taxi shortage means fans arriving on the ferry from Hong Kong often have to wait in long lines for a shuttle bus to the Venetian Arena.

For now, the Venetian and its sister property, the Sands, are where the serious entertainment action is. This summer, the Venetian plans to bring Cirque du Soleil, the acrobatic show that's a fixture in Las Vegas, to Macau as a permanent show with 10 performances a week. Cirque will perform in a 1,800-seat theater that is still under construction. http://louis-j-sheehan.info/
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http://louis-j-sheehan-esquire.us/That's only the beginning. "Every top U.S. name you can think of, we have an offer out there," says Mr. Brown. "Every top Asian artist, we have an offer out there. Every type of sport you can think of...we have an offer out there."

Meantime, acts like Mr. Cox's are filling the gap.

As a high-school student, Mr. Cox watched Jackie Chan movies and fell in love with the Canto-pop soundtracks. He took a few Cantonese lessons and discovered he had a flair for Asian languages -- he's never studied Mandarin formally, though he considers himself fluent in both.

So he quit his job as a salesman in a Liverpool electrical store and started waiting tables in a Chinese restaurant to hone his language skills. Eventually, he began performing at Chinese gatherings in Liverpool. His renditions of popular Canto-pop classics such "Kiss Under the Moon" and "Love Once More" won over the immigrant crowds there, turning him into a local celebrity.

But all along, his dream was to make it big in Asia. And so in 2002, he moved to Hong Kong, where he sang at corporate events and Christmas parties. He even traveled in mainland China doing a few performances in discos in places like Shenzhen and Guangzhou.

Then, six months ago, Mr. Cox, whose Chinese name was given to him by his Chinese-language headmaster, left Hong Kong for the lights of Macau. http://louis-j-sheehan.info/
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http://louis-j-sheehan-esquire.us/"It's good for what I'm doing," he says, in his Liverpudlian accent. I'm "partly living the dream," he adds.

On a chilly Saturday night, as the Black Eyed Peas warmed up at the Venetian Arena, Mr. Cox, dressed entirely in black down to his pointy-toed shoes, was warming up his audience. Gamblers at nearby slot machines had fallen still, their jaws slack at the spectacle of a foreigner singing Canto-pop. A woman was dancing in her chair.

"This one's for you," he said in Mandarin to a Chinese couple in the crowd, as he launched into a number by Deng Lijun, a Taiwanese singer popular in the 1970s and '80s. The lounge, filled with mainland and Taiwanese tourists, exploded into applause.