Tag Archives: inflation

Schizo-flation

An economy cannot experience both inflation and deflation, and yet that is exactly what seems to be happening. The Fed’s exertions have produced some consumer price inflation – though not enough for diehard Keynesians – and quite a bit of asset price inflation, and yet the economy “feels” deflationary. This would not be the first paradoxical price phenomenon. Inflation had been associated only with rapid growth – until stagflation was discovered in the 1970s.

One possibility is that prices are behaving differently in different segments of the market. Wolf Richter writes here about a bifurcated real estate market, with mortgages off but cash deals booming. We have mentioned Tiffany’s before, and this interview with John Mauldin touches on the market for fine art.

We need to characterize the economy’s condition, but we should not get hung up on price based definitions. For example, David Stockman describes the Great Moderation as an inflationary period, due to loose monetary policy, offset by cheap Asian imports. Frances Coppola says it would have been deflationary – except for the credit bubble. It all depends on your perspective.

Consider what deflation looks like, without reference to prices. Sellers struggle because demand is weak. They cut back on supplies, and they lay off staff. People are out of work. They don’t have much to spend, and debts become unsustainable. Sound familiar? This is the vicious cycle which characterized that earlier depression – and the current one. Wages and prices ratchet downward, but this is only a symptom.

Another way to look at price is not the value of goods, but the relative scarcity of money. The people unable to buy a house, get a mortgage, or put food on the table, are living in a deflationary world – they’re broke. The Fed doesn’t help by driving prices up all around them.

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Chinese Price Hike

Analysts are reading a lot into the PBOC’s recent reduction of its prime lending rate. Gordon Chang, for instance, sees desperation. Chang says lower rates are a reaction to slower growth, and also – in aiding state owned enterprises – a setback for reform.   Jeremiah takes a longer view, looking at growth trends and currency values among China’s trading partners.

Long term, China needs to rebalance its economy more toward domestic consumption. This will stabilize Chinese society by sharing the proceeds of economic success more broadly. It will also give Chinese producers a new market, free of export costs and currency risk.

The obvious way to do this is to allow the Yuan to appreciate, at a measured pace, exactly as China’s trading partners have requested. This will allow America to rebalance more toward production – although we will first have to end our obsession with consumerism. Here is a chart of the Yuan’s ongoing rise versus the dollar.

CNYUSD

In the shorter term, however, the Yuan is in the crossfire of a currency war. Try running that chart for the Euro, or the Yen. You may be sure the Yuan will continue to appreciate, but it may be in the relative sense of “less aggressively debauched.”

So, the PBOC cuts rates to keep up (down) with the neighbors. They are also liberalizing rates, allowing them to rise for ordinary savers. This stands in contrast to Europe’s lunatic policy of charging people to keep money in the bank. Lost in the news over China’s lending rate, is this rise in the deposit rate.

As Shaun Rein writes in The End of Cheap China, the impact of China’s rebalancing will be sharply inflationary for America. Not only will we not have cheap goods coming over here, but we will have to bid against a growing Chinese consumer class.

Jeremiah sees a nice symmetry here. In the 1970s, when America was struggling with inflation, we began importing cheap goods from Asia. Now, we will import inflation, which is just what the Keynesian doctors have ordered. Be careful what you wish for.

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Jobs, Wages, and Uncertainty

Bank of England’s Mark Carney discusses the English labor market here, in FT. Previously at Bank of Canada, Carney is the reason that country did not experience the Great Recession. That’s right – our neighbors to the north had no housing bubble and no crash. Since our bubble was primarily the result of monetary policy (and corruption) it is fair to compare central bankers.

The weakness of pay has, in effect, purchased more job creation. It has not resulted in an unusually high level of profits.

Instead of using inflation to camouflage lower wages – the standard Keynesian method – Carney lays it on the line. Britons have gone back to work for wages they’re not happy with. Once everybody has a job and the labor market is tight, then they will demand higher wages.

We wrote last month about the Federal Reserve’s indecision over slack in America’s labor market. What’s the best way to test that? Ask for a raise! Unions in England plan to strike next month. If they succeed, wage inflation will begin – and Carney can change policy.

So, what’s special about the English labor market? Do they have more patriotic employers, putting people before profits? Well, maybe. They are investing less in automation, hiring the cheap labor instead – tanking their productivity numbers – and they are taking less to the bottom line.

The motivation for such behavior, patriotism aside, is a stable tax and regulatory environment. As in Canada, English companies pay less tax – without having to join a bidding war for concessions and loopholes. They also have their socialist health care sorted out – it’s not efficient, but it is stable. We’ll have that, someday, when the administration stops issuing weekly changes to the law.

About half of [Aetna’s] premium increases … will be attributable to “on the fly” regulatory changes made by the Obama administration.

Finally, there is the regulatory regime we like to call Washington skills – in which well connected companies receive credits and subsidies, while their competitors are harassed by the IRS, EPA, and other agencies.

Employers are reluctant to add staff, in an environment of uncertainty. They cannot possibly plan new projects, creating new jobs, if they face unpredictable new costs. England merely faces the possibility that half the country will split off – nothing like the problems we have here.

See also: Rewriting health reform on the fly

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Stock Market Manipulation

A new study by the OMFIF discloses that the world’s central banks are buying stocks. So, there you have it. The well known correlation between Federal Reserve easing and stock market highs is now proved to be cause and effect. The references on their home page are illustrative:

  • FT finds irony in central banks’ yield hunt
  • Central banks fueling equity bubble
  • Central banks switch to equities for diversification

One weakness of the OMFIF report is that it lumps sovereign wealth funds in with central banks. The former may buy what they like – they don’t have the authority to print money. Central banks playing in the stock market are quite another thing.

A central bank, like the Fed, is the ultimate deep-pocket manipulator. They have an infinite capacity to bid prices up, and they have insider knowledge when easing will end. It is simply unbelievable that this activity is legal.

The justification, of course, is the good of (some) national economy. We are reminded of Lenin in this connection. Indeed:

Asset managers may face efforts to influence their investments in areas like infrastructure or social security systems. Public investors of all categories may be called upon to take part in global and regional safety nets.

Not content with the stock market bubble, central banks are now encouraged to funnel newly printed funds directly into government programs. That’s moar better.

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Do You Believe in Magic?

coldIt is bitter cold in New York this morning, 2 degrees, plus the wind chill.  Across the border into Canada, it’s minus 14 – a little warmer.  How is it possible that minus 14 is warmer than 2 degrees?  Obviously, the Canadians use a different thermometer.

You cannot make yourself warmer by switching thermometers, and the government cannot make you richer by printing more money – or by mandating a raise in the minimum wage.  Jeremiah believes that everything, including your labor, has a “real” price.  The government can raise your “nominal” wage with the stroke of a pen, but it will take concerted effort to raise your real wage.

Let’s say that you have to work all day at the grocery store in order to buy a bag of groceries.  Maybe that’s a six hour shift at nine dollars and you keep $40 after taxes.  You could be paid in pesos, and it wouldn’t make any difference.  Your day’s labor is worth one bag of groceries.

Now, along comes the government and hikes your wage to $15.  Cool, huh?  You will feel richer for about six months, while the dollar depreciates.  You see, everyone else got a wage hike, too.  So, the price of McDonalds went up, and the price of gas went up, and groceries went up.

You still have to work all day to buy a bag of groceries.  Your nominal wage went up, but your real wage is unchanged.

Raising your real wage will take real work.  It takes a growing economy, and a tight labor market.  You may have to join a union, or find a new job, or go back to school.  Government can help, with the right policies, but there is no magic.

If you believe that the government can change the real wage structure by fiat, then you believe in magic.  As Thomas Sowell said, if you can’t handle the truth, you’ll keep voting for liars.

See also:  Socialist Brain Drain

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El Niño Grande

waterworld23Continuing our series on economics and meteorology, we find an interesting parallel involving large quantities of inflation and heat energy that have lately gone missing.

Climate skeptics have been enjoying the sixteen-year pause in global warming while, despite this contrary evidence, IPCC scientists are sticking by their models.

Simulations …  suggest that warming should have continued at an average rate of 0.21 °C per decade from 1998 to 2012.

This case of models versus evidence has an exact parallel in monetary policy.  Purists say that $4 trillion in quantitative easing must inevitably result in raging inflation, never mind that CPI is still quiescent.  They even use thermodynamic metaphors, like “pumping” and “hot money.”

Austrian [economists] made some very strong predictions about inflation — and rightly, given their model of how the world works.

For fun, we can add political labels.  Paul Krugman identifies monetary hawks as “the right.”  On climate change, the roles are reversed.  The left believes in IPCC modeling, and the right believe their thermometers.

So, where are the missing quantities?  The excess heat, as everyone knows, has gone into the Pacific Ocean, while the inflation has gone into assets like stocks, T-bills, and Ferraris.

Jeremiah expects both will come roaring back simultaneously, raising the sea level along with the price of milk.

See also:  Partly Bullish, Chance of Recession

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Connecting the Dots

Ever since Cyprus, Jeremiah is skittish about his bank account.  Here is a Harvard professor reminding us that bank deposits do not compensate for even a slight risk of default.

If the chance that Bank of America will not return my money is, say, a mere 1 percent, then the expected cost to me is 1 percent of my [savings]. That far exceeds the interest I receive, which, I hardly need remind depositors, is a cool $0.

We covered this calculation during the Cyprus event.  Banks pay a risk premium to big investors – you are just a hind-tit unsecured creditor.  Before switching to money market funds, be aware that the Fed’s proposed minimum balance at risk rules may bite you there, too.

It seems like your money is a problem that the government wants to solve.  In Europe, they’re drawing up plans for forced investment in small business, infrastructure, and “other projects.”

The savings of the European Union’s 500 million citizens could be used to fund long-term investments to boost the economy

If these are such swell investments, why isn’t Warren Buffett already in them?  The definition of a good investment is one that you’re willing to make without the government forcing you.

Jeremiah is suspicious of any government “help” with retirement, including this new myRA plan.  We already have Social Security, which takes from your paycheck today, in exchange for a hazy promise in the future.  This sounds like the same deal, only dressed up like a Roth IRA.

One concern with myRA is that while the principal is guaranteed, the interest rate is not, and the rate of G Fund bonds could fall below the rate of inflation.

It sounds like myRA is less about your retirement, and more about making a market for U.S. bonds.  We’d be believers if the plan let us invest in, say, inflation protected bonds – or Apple.

See also:  Bonds and Discipline

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