1) Thoughts on the Michael Woodford Paper…. by Cullen Roche @ Pragmatic Capitalism
Regarding NGDP Targeting I am definitely skeptical that the Fed’s commitment to a NGDP target will have the stimulative effects that some hope it will. I still fail to see the transmission mechanism whereby balance sheets are meaningfully impacted in a manner that alters current income. Fed policy usually works through altering credit markets by making inside money less expensive and inducing borrowers to borrow. Obviously, at the zero bound with low demand for credit this policy approach has run aground. QE could “work”, but it’s been implemented incorrectly or at least inefficiently in my opinion since monetary policy is about price and not quantity. The portfolio rebalancing effect is interesting, but I have my hesitations about the unintended consequences of targeting nominal wealth as a form of putting the cart before the horse. Ie, the Bernanke Put has its negative side effects. But I am not against trying policies with the understanding that I could definitely be wrong. At this point, the economy is so abysmal and unstable that we should be trying more.
Woj’s Thoughts - Cullen has been a primary source of knowledge/learning about monetary operations so his thoughts on these matters are always worth reading. My position remains similar that the transmission mechanisms (portfolio rebalancing, lower real rates, higher asset prices) are insufficient to meaningfully alter the demand for credit, which continues to restrain growth and inflation. One question I have regarding Woodford’s policy suggestions is, how does the Fed credibly commit to maintaining low interest rates beyond the tenure of Bernanke or voting FOMC members? This is a similar issue faced by Congress or the President in committing to any policy (ex. lower deficits) beyond their term. My hunch is that Bernanke recognizes this dilemma and will refrain from attempting such an action for fear of impairing the Fed’s credibility. Only time will tell if that’s correct. The one issue I have with Cullen’s post is the last sentence in the paragraph above. Saying “that we should be trying more” implies that the expected cost of further actions does not outweigh the expected benefits. I remain skeptical of this argument from the perspective that risks from rising commodity and stock prices, not to mention increasing wealth inequality, are greater than the likely benefits.
2) Why you won’t find hyperinflation in democracies by Felix Salmon @ Reuters.com
The real value of this paper is its exhaustive nature. By looking down the list you can see what isn’t there — and, strikingly, what you don’t see are any instances of central banks gone mad in otherwise-productive economies. As Cullen Roche says, hyperinflation is caused by many things, such as losing a war, or regime collapse, or a massive drop in domestic production. But one thing is clear: it’s not caused by technocrats going mad or bad.
For that matter, there are no hyperinflations at all in North America: the closest we’ve come, geographically speaking, was in Nicaragua, from 1986-91. In fact, if you put to one side the failed states of Zimbabwe and North Korea, there hasn’t been a hyperinflation anywhere in the world since February 1997, more than 15 years ago, despite the enormous number of heterodox central-bank actions in that time.
Woj’s Thoughts - Why are we still even talking about hyperinflation in the US? How many years must pass with ~2% inflation before these concerns are simply ignored? Disinflation remains most characteristic of our economy today and I remain of the view that actual deflation is a more probable outcome in the next 5 years than inflation exceeding 5%.
3) Teaching History of Thought by Jonathan Finegold @ Economic Thought
Maybe it’s my inexperience, but I feel that a one semester undergraduate course — heavily complimented by course readings — could fit in most high profile economists between 1870 and present day, and teach them well. Mises and Hayek, for instance, could be taught in one or two fifty minute lectures (and, no doubt, these themes would recur), with 3–4 readings (call it ~150–200 pages over a weekend). Keynes could be taught in 1–2 lectures, as well. This kind of class would require a lot of reading of “basic” material, with lectures centered on more advanced ideas. Few undergraduate students experience this, but it would be a class where the professor doesn’t regurgitate the reading material.
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What would an “ideal” history of thought class look like to you? We can even talk about undergraduate and graduate courses. Who would you teach? Who would you leave out? Why?
Woj’s Thoughts - I’ve yet to take a true history of economic thought course, but found these questions intriguing since most of my background is based on a random walk through historical readings and economic blogs. My experiences in other economics courses, however, suggests that the specific economists or theories a professor finds worthy of lecturing on is highly correlated to those with whom they agree. Who knows how my future will play out, but the idea of teaching a history of thought course someday is incredibly appealing. Maybe the suggestions here and on Jonathan’s blog will help in structuring that course.
If massive inflation was coming 10-year treasury rates would not be yielding a record low 1.60% and consumers would certainly not be deleveraging!
Might massive inflation be coming down the road?
Certainly, but it will take a change in attitude by consumers and banks or massively reckless policies by Congress.
Interestingly, Congressional policies are indeed "massively reckless" just not reckless enough yet. The emphasis is on "yet". I will not be a deflationista forever, but I remain one for now.
Read it at Mish’s Global Economic Trend Analysis
Monopoly Money vs. Bernanke Money, is there a Difference?
By Mike ‘Mish’ Shedlock
Mish argues that the Fed’s ability to generate inflation in practice is quite different from their theoretical ability. I couldn’t agree more.
One of the champions, for a rather long time, of the deflationary outlook has been my friend David Rosenberg (formerly chief economist at Merrill and now with Gluskin Sheff in Toronto). He has been talking for years about a target of 1.5% for the ten-year US bond. Today we got down to 1.5% and did not even pause, ending the day at 1.47%. I noted that in a phone conversation to Rich Yamarone, the chief economist at Bloomberg, and he said he believes we will scare 50 basis points before we are through. To which Rosie replied in a later text, “He’s nuts.” We will all be at a special evening for the University of Texas McCombs School of Business next Thursday. I will offer to hold their coats while they have a lively discussion.
Since I was thinking about bond yields, I called Dr. Lacy Hunt (one of the more brilliant economists in the country, and not just in my opinion). He has been forecasting interest rates for a long time and been the guiding light at Hoisington Asset Management, which has established perhaps the best track record I know of for bond returns, if a tad volatile. They have been long bonds for a very long time, which has been the correct position, if a difficult and lonely one. Most bond managers think rates are set to rise.
Not Lacy. He thinks we will get close to 2% on the 30-year bond and has said so for decades. (Interestingly, he will be in the audience on Thursday, along with Van Hoisington. I think I will refrain from saying anything about bonds that night and talk about something more predictable, like politics or Europe.)
Dr. Gary Shilling wrote his first book, called simply Deflation, in 1998 and followed it up recently with another great work, titled The Age of Deleveraging
. He first went long bonds in 1982, which has been one of the great trades of the last 30 years. He lists a whole host of reasons for a deflationary period over the next few years.
The argument for deflation is rather straightforward. The boom in the US and much of the world from 1982 until 2008 was partially the result of financial innovations and massive leveraging. That process has come to its end, and the private sector is deleveraging and will do so even further as the economy softens and we slip into the next recession.
Read it at The Big Picture
First Deflation, Then Inflation. But the Timing…?
By John Mauldin
As Maudlin correctly notes, Rosenberg, Hunt and Shilling have been on top of the deflationary outlook for at least several years. The latter two have been recommending positions in long-duration Treasury bonds for nearly three decades, a period that saw bonds actually outperform stocks (which was never supposed to happen)! Anyone thinking about shorting Treasuries should give strong consideration to these views and why, after thirty years of being both correct and the minority, the near future will prove them wrong.
Separately, a look at history will show that severe deflation is often a precursor to hyperinflation. Part of the reasoning is that the economic environment only becomes ripe for truly massive money printing after economic conditions become so bleak that all other hope is lost. As a currency issuer, the US does not risk losing the “ability to borrow money at reasonable rates” (as suggested by Mauldin) since the US does not, in fact, need to borrow money in order to spend. Hyperinflation, however, is a potential outcome for sovereign currency issuers but remains highly improbable for the US unless significant deflation is witnessed first. A word of caution for those betting on hyperinflation, be prepared for massive pain/losses before those bets pay off. As for my money, the deflationary environment is likely to persist for at least a couple more years but the end result will be a leaner private sector ready to power the next great growth cycle.
Related posts:
Talk of Deflation Begins
David Rosenberg - The 3-D's Deflation, Deleveraging and Demographics
Inflation Fears Are Misplaced
- Restraining unit labor costs is a right-wing conspiracy - Steve Randy Waldman discusses how the Federal Reserve’s explicit actions are helping reduce labor’s share of output over time.
- The rule of more - A former professor of mine, Susan Dudley, is quoted on the subject of inconsistent cost-benefit analysis that allows the regulatory system to be gamed. (h/t Cafe Hayek)
- Keeping an Eye on Wealth Creation - Renowned investor Hugh Hendry continues to expect a Chinese hard landing and, most importantly, expresses his view that “ the road to hyperinflation is via hyperdeflation.”
- Hayek, Equilibrium and Complexity - Paul Omerod succinctly explains the importance of Hayek’s thinking to the study of complex systems.
- The Longest Quarterly Letter Ever - Legendary investor Jeremy Grantham offers his updated investment outlook and continues to recommend patience. (h/t Zero Hedge)
