Edward Harrison sees both inflationary and deflationary forces at work over the next several years, and he concludes:
This will present policy makers with a problem as the reflation trade comes good, and the resulting policy responses will have serious implications on the medium term outlook for the economy and asset markets.
Deflation:
He sees the current crisis as a continuation of an asset bubble begun in 1997 under Greenspan. The collapse of this bubble has resulted in deflation and, in his view, depression. What results is 'the D process,' deleveraging, deflation and depression. Companies go from being concerned with profits to being concerned with reducing debt. This limits the effectiveness of monetary policy.
In sum, the psychology after a major bubble is very different than the psychology before its collapse. The post-bubble emphasis becomes debt reduction and savings, making monetary policy ineffective, not because financial institutions are unwilling lenders but because companies and individuals are unwilling borrowers. These are forces to be reckoned with for some (time) to come.
Inflationary factors:
Edward Harrison sees two major inflationary factors: commodity prices and money supply.
The Federal Reserve and other central banks have been pumping a lot of money into the financial system in an attempt to add reserves to the system and to take on the intermediation role the wider banking system normally serves. Nevertheless, this money is not being lent out and excess reserves are piling up at the Federal Reserve. Last April, there were only $1.8 billion in excess reserves i.e. reserves against which loans were not being made. According to figures just released by the Fed on May 28th, this April that figure has soared to $824.4 billion, a surge of 447 times in one year. If you want to know what is wrong with the American economy, you should start here. -Skip- But, what happens when the economy returns to an environment in which those excess reserves start to be lent out? Inflation. And this is an inflation that will not be so easy to control because the Federal Reserve has embarked on a policy of `qualitative easing' by buying up non-treasury assets, transforming its balance sheet from one dominated by treasury assets to one in which Treasury assets are in the minority. So, as the Fed has intervened and bloated its balance sheet, an increasing amount of the assets it has with which to withdraw the excess liquidity in the system is hard to sell. So, you have a huge amount of excess reserves, hard to sell assets on the Fed's balance sheet. Add in the fact that the Federal Reserve is going to be loathe to choke off an incipient recovery and you have the makings of inflation when recovery takes hold. Moreover, there is a rise in commodity prices which is adding inflation to the pipeline. Much of the recent decrease in headline inflation numbers is due to the collapse in commodity prices. But, Copper is near a seven-month high. Oil is near a seven-month high. And all of the agricultural and industrial commodities are taking off again. As China ramps up its economic stimulus, the recent increases in the ISM manufacturing data in the U.S. and elsewhere point to an increasing demand for industrial commodities, and this is inflationary. In sum, any pickup in the economy is going to be met by a host of inflationary forces. This is one reason that bond yields have been increasing and the spread between the two-year and 10-year U.S. government bond is near a record.
-Skip-
But, what happens when the economy returns to an environment in which those excess reserves start to be lent out? Inflation. And this is an inflation that will not be so easy to control because the Federal Reserve has embarked on a policy of `qualitative easing' by buying up non-treasury assets, transforming its balance sheet from one dominated by treasury assets to one in which Treasury assets are in the minority. So, as the Fed has intervened and bloated its balance sheet, an increasing amount of the assets it has with which to withdraw the excess liquidity in the system is hard to sell.
So, you have a huge amount of excess reserves, hard to sell assets on the Fed's balance sheet. Add in the fact that the Federal Reserve is going to be loathe to choke off an incipient recovery and you have the makings of inflation when recovery takes hold.
Moreover, there is a rise in commodity prices which is adding inflation to the pipeline. Much of the recent decrease in headline inflation numbers is due to the collapse in commodity prices. But, Copper is near a seven-month high. Oil is near a seven-month high. And all of the agricultural and industrial commodities are taking off again. As China ramps up its economic stimulus, the recent increases in the ISM manufacturing data in the U.S. and elsewhere point to an increasing demand for industrial commodities, and this is inflationary.
In sum, any pickup in the economy is going to be met by a host of inflationary forces. This is one reason that bond yields have been increasing and the spread between the two-year and 10-year U.S. government bond is near a record.
Hmmmmm.... In the long run, we're all dead. John Maynard Keynes
I have mixed feelings on it. As I'm most concerned with how prices impact the working class and the poor, I want a reliable measure of what it takes to get by, and with that in mind the rent measure makes sense to me, since owning a house is not necessary.
On the other hand, it's helpful to have a measure of what the typical family buys, and as a bit over 65% of people own their homes here, the rent figure is not really an accurate reflection of the last few years. Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
I suspect it's somewhat negative, or at least very close to zero, at the moment.
I suppose there was still a middle class in 2005. The most recent numbers would be interesting too.
That has to be taken in the context of a housing bubble, of course, in which case rents should've been abnormally low. Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
but I'm certain it would not include housing.
I would think that much would be clear after the Great Housing Crash. Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
Prices are crashing here (finally), but it isn't really doing too much damage to the local economy. Unemployment was at about 3.6% when the labor market peaked, and now it's up to about 4%. Obviously having the relative stability of federal jobs, especially at a time when the government is expanding at a fast pace and with a lot more to come, helps with that, so it's not really fair to compare it with other places.
But I have a hard time imagining, based purely on the price and income numbers, that the remaining bubbletowns -- and we're basically down to Boston, New York and DC now -- will see anything like what happened to South Florida, where it was, literally, street after street of seeing every third or fourth house either on the market, as the owners tried to bail, or already foreclosed. My parents' bought their house in 2001 a little before things took off, and it nearly quadrupled in value by the 2005 peak. It's nearly back down to where it was when they bought it.
And that was in an area that was apparently not hit too hard compared with others. Miami was much worse. Prices peaked around $400k (about 10-15x income). That's in the third-poorest of the major American cities (trailing only Detroit and New Orleans). Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
OTOH, I agree strongly that the stimulus was and remains insufficient and I have no qualms about spending much more, especially on alternative energy or on anything that will improve our national accounts balance. My concern is that all of the money spent or pledged on the financial sector is and will be shown to be totally wasted. The Fed has loaded up on toxic assets paid for with the cleanest US currency available. When they need to withdraw liquidity to prevent inflation, when the economy starts heating up and commodities start increasing in price, they will be unable to sell those assets at anything like the price they paid for them and will only be able to withdraw liquidity at the rate of dimes for dollars. That, at least, is the sense I have gotten from some of the more cautious "inflation hawks." As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
Greenspan: Just a greedy clown, gathering money and influence (power).
I won't have anything said against Greenspan. The man's a genius.
He must have brought forward the inevitable collapse of the system by at least ten years, and deserves a Nobel prize IMHO. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Isn't that what "allocative efficiency" means?
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
