Posts Tagged ‘inflation’
James at Econobrowser always offers insightful views on the economy. This post deals with the prospect for the current hot topic, of inflation or not. My read is that earlier inflation is the more likely prospect, given sectoral imbalances are more likely than not.
My personal view is that real-world unemployment arises from the interaction of sectoral imbalances with frictions in the wage and price structure of the sort documented by Truman Bewley and Alan Blinder. The key empirical test, in my opinion, is at what point inflationary pressures begin to pick up. If Krugman is correct, we could have much bigger monetary and fiscal stimulus without seeing any increase in inflation. If the sectoral imbalances story is correct, it would be possible for inflation to accelerate even while unemployment remains quite high.
Some important messages within Geithners speech in China today that paint a very different next few years compared to the last 10, and as the ‘G2′ move to manage a transition the American economy into one that is very different, yet stable. And all this to be managed against the backdrop of the fear of eventual inflation, which would devalue foreign holdings in US T-Bills, something China is acutely aware of.
These macro factors will play a large role in US banks and credit unions strategy design for the next 5 years.
- no consumer purchase driven economy in US – with the implication of extended higher Government spending for some time to counter
- US consumers save (increasing savings accounts and paying down debt)
- China’s manufacturing supply is sold more and more within China, not Wal-Mart
In the United States, saving rates will have to increase, and the purchases of U.S. consumers cannot be as dominant a driver of growth as they have been in the past.
In China, as your leadership has recognized, growth that is sustainable growth will require a very substantial shift from external to domestic demand, from an investment and export intensive driven growth, to growth led by consumption. Strengthening domestic demand will also strengthen China’s ability to weather fluctuations in global supply and demand.
If we are successful on these respective paths, public and private saving in the United States will increase as recovery strengthens, and as this happens, our current account deficit will come down. And in China, domestic demand will rise at a faster rate than overall GDP, led by a gradual shift to higher rates of consumption.
Globally, recovery will have come more from a shift by high saving economies to stronger domestic demand and less from the American consumer.
Something that has been niggling at me here and here is the law of unintended consequences. The people architecting the financial stimuli today are first politicians and second relatively young living their maturity post the late 70′s early 80′s.
The key statement in this article is at the end, and it was quoted by Geithner today too – that this borrowing is temporary and will be repaid as soon as things are back to normal. Please stand up if you know:
- when normal is expected to resume
- that we will be able to repay the debt at that time? [ would the increase in tax to accomplish debt repayment send us back in a recession? ]
No, we have to accept that we will have high inflation, some equally tough times on the other side of the recession, and financial services must adapt (The Great Unwinding – my take on the future of banks).
The US economy is expected to experience an overall fall in prices this year for the first time since 1955, the world is in the grip of a severe recession and the oil price is 70 per cent below its peaks of last year.
So what are investors currently worrying about? Why, inflation, of course.
xxxThe simple ecpnomic fact is that high borrowing will be followed by inflation. Rationalsing otherwise falls in the same camp as rationalising a bubble housing market that its “different this time” and based on different fundamentals, or alternate economic policies. Well no-one is arguing that house prices will maintain their value now….
I have found myself reading more economics blogs over the last couple of years, trying to understand better what is going on and the impacts of the banking crisis.
This blog, StumblingandMumbling is worth the subscription. It is insightful, and contrary enough to provoke thinking. It also happens to articulate things that I cannot help thinking about.
2. The cost of recession isn’t just unemployment hitting a few hundred thousand, but the fear of unemployment hitting millions.
But this fear exists even in normal times, because the job destruction rate is so high. The 25,000 jobs that’ll be lost when Woolies closes represents just half of one average week of job losses between 1997 and 2005.
And what recession?:
The other day, I tried to do some Christmas shopping. I went into six shops looking for a Wii fit. All were out of stock. When I get home, I get a Barclaycard statement telling me my credit limit has been raised.
What’s more, the welfare benefits of lower inflation – savings on shoe leather costs and on tax distortions – don’t stop at zero inflation. Friedman, remember, thought the optimal inflation rate was negative.
The facts are that few of us understand all this. Its all to easy to insist on bailout packages and economic stimulus. Times of change make everything very personal.
We are in a time of industrial revolution. Many businesses that have prospered through the last 50 years of relative boom times, did so because consumer demand exceeded their need to innovate. Where are the cars that do 150 miles per gallon.Where are the payment systems that seamlessly shift money easily simply and cheaply to merchants, people or internationally. Where are the mobile devices that work on primarily data plans with voice as an extra.
Innovation has come erratically and in small localised pieces. Innovation has resisted peoples requests, preferring to intercept those requests with scripted call centre employees. Yet companies have no idea, institutionally, what is in the content of those conversations.
But things are changing, and that is where the industrial revolution is taking place. Internet has brought together movements in conversations, and the peoples requests are being spoken, heard, and gathering strength.
Here are three industries [auto, banking, telco] that have challenges – what will they look like in 25 years. Do they need a bailout, or temporary money to keep them in a holding pattern while industry disruptors give people what they want.