This post previously appeared at the author’s blog, Macrofugue.
Ben Bernanke: Not An Idiot After All?
When Ben Bernanke made the comment that he felt the headline inflation was transitory, I do not recall a single blogger, pundit or tweeter who agreed. In fact, I am having a difficult time thinking of any member of those groups who didn’t have some pretty negative things to say about Bernanke.
Of course, long time readers of Macrofugue already know that price-growth converges on wage-growth.
..but I guess that’s our little secret.
Will MSFT, GOOG, AAPL (common) Converge To Safe-haven Behaviour?
Here’s a couple of arguments:
- These companies have mounds of safe-haven assets (largely USTs) already on their balance sheets
- They will be able to generate solid earnings growth even if Real GDP is around 0% if Nominal GDP is 2-3% — which seems like a likely base case
- High growth expectations actually discount these stocks as cash flows to higher growth equities. Lowering growth expectations reverse those flows, and remove the discount put on value stocks
All of these make ultra-high quality equities with low, stable growth & strong balance-sheets act more and more like the long-bond by way of long-term growth & inflation expectations.
Milton Friedman Says Money Supply Leads Growth
Here’s the evidence. What do you think?
“The surest road to a healthy economic recovery is to increase the rate of monetary growth, to shift from tight money to easier money, to a rate of monetary growth closer to that which prevailed in the golden 1980s but without again overdoing it. That would make much-needed financial and economic reforms far easier to achieve.
Defenders of the Bank of Japan will say, “How? The bank has already cut its discount rate to 0.5 per cent. What more can it do to increase the quantity of money?”
The answer is straightforward: The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money. Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand their liabilities by loans and open market purchases. But whether they do so or not, the money supply will increase.
There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately. A return to the conditions of the late 1980s would rejuvenate Japan and help shore up the rest of Asia.” (You can read Friedman’s entire piece here.)
Woops. So Friedman still didn’t understand the demand trap. You can only expect bank reserve increases to also be money supply increases if you can match willing borrowers with willing lenders. This is the crux of the misunderstanding those from the Jean-Baptiste Say school of thought and on make.
Obama thinks high unemployment is due to productivity
Via Naked Capitalism:
Both [Director of the National Economic Council Larry Summers and chair of the Council of Economic Advisers Christina Romer] were, in fact, were concerned by something the president had said in a morning briefing: that he thought the high unemployment was due to productivity gains in the economy. Summers and Romer were startled.
Not entirely untrue, of course, but aren’t you forgetting that demand short-fall?
There are plenty of people who could be providing services, and plenty of services other people need. The capital structure in between has ceased functioning. High productivity is symptomatic of this.
The Composition of Sovereign Debt
Via one of our favourite blogs, Global Macro Monitor:
Greece, Ireland & Portuguese debt seems now to be owed mostly to foreigners, likely speculating on a incomplete default in those countries (lending at now usurious rates). The locals largely have either given up, or don’t have the capacity to absorb more debt. This would be the case in particular if government spending slows or stops: remember that government spending is a deposit in the banking system.
Krugman Explaining Operation Twist
Although Krugman actually didn’t write this article explaining operation twist, it actually makes a great case for it:
What this means is that much of any further decline in expected inflation — which has plunged lately — will translate into a rise in real interest rates. And that will be a drag on the economy, leading to further inflation declines. Basically, we can get into the functional equivalent of a deflationary trap long before we reach actual deflation. And it starts around now.
In short: if inflation begins to decline substantially (seems like this is happening, as per the first note of this missive), even very low rates can be positive real rates. This is obviously a drain on the economy when it is already suffering a tremendous demand short-fall.
Operation Twist, thusly, is perhaps not so much aimed as a fix, but more as a strategy to combat the collapsing inflation expectations so that real rates do not go positive. Will it have a big impact? Probably not. Is it good policy? Probably so.
Some Thoughts On The Euro Crisis
Last Krugman quote — I promise! — he writes that the origin of the crisis is not fiscal, but in fact capital account flows:
The key point here is that countries within the euro zone have no policy tools with which to manage their balance of payments, so that this was hardly a case of policy sin.
Interesting point: countries without policy tools to manage capital flows can’t be completely culpable for fiscal outcomes. Eurozone trade agreements almost certainly actually further impede policy on this front.
To bring it home: is it China’s fault or the American’s fault that the USA runs a trade deficit with China? It would either be possible or happen without China forcing a capital account deficit to be run with the USA.
It is impossible to know what the knock-on effects of a Greek default will be in advance, but not since Russia in 1998 has a default been so widely anticipated. After initially tanking post-default, the S&P 500 went on to new highs that year.
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