Re: Deflation?
Doug: H, I think it's worth testing the hypothesis that when PEN-L gets a thread going on economic vulnerability, the economy is about to accelerate. This is a good real-time test. Well! It is not just PEN-L. Bill Gross thinks so too. Sabri Fund chief issues global warning By DEBORAH BREWSTER Financial Times,June 17, 2004 Thursday The outlook for the global economy is the most uncertain for 20 or 30 years, according to Bill Gross, the chief investment officer of Pimco, the world's biggest bond fund manager. Too much debt, geopolitical risk and several bubbles have created a very unstable environment which can turn any minute. More than any point in the past 20 or 30 years, there's potential for a reversal, he told the Financial Times. We have become a levered global economy, specifically in Japan and the US. With all this consumer debt, business debt, government debt, smaller movements in interest rates have a magnified effect ...a small movement can tip the boat. Pimco manages Dollars 400bn (Pounds 220bn) in bonds, about a third of which is outside the US. Mr Gross is one of the few bond managers whose views can move the market. He said there were bubbles in commodities, the UK housing market and the US currency. The US dollar is being supported by the kindness of strangers - Japan and China. It should be 20 per cent lower than it is. Japan and China will change their stance, we don't know when, but we know they will. The dollar isn't overvalued against the euro, but it is against Asian currencies. The threat of economic instability, he said, stemmed in part from the advent of financial alchemy - in particular, the growing use of hedge funds. Even banks are employing the 'carry' trade - borrowing short and lending long. They're doing things they haven't done before. There's lots of risk in the economy now compared with even five years ago. Mr Gross supported calls for hedge funds to be regulated, saying they were basically unregulated banks. They are amazingly similar in the leverage they use, and have the same structure, borrowing at 1 per cent and lending or investing longer, and they take it to an extreme because they go into stocks, commodities, real estate. If banks are regulated, hedge funds should be, he said. Pimco's plan was to stay ahead of reflation by keeping money out of the US and in countries such as the UK and Germany. The highest level ever of Pimco's money was invested outside the US, in part because of growth in the fund's non-US fund management business. The proportion would be higher, Mr Gross said, except that many US clients had a ceiling on how much they could invest abroad.
Re: Deflation?
By the looks of it, Roach is on our side too but of course there is nothing new about this. Apparently, we are all waiting for Godot but I am sure of that he will show up one day. If only I knew when and whether I would be around to meet him. Sabri + Heading for the Exits Stephen Roach (New York) Global Economic Forum, June 18, 2004 First, it was the Reserve Bank of Australia. Then, the Bank of England. And now, it's the Swiss National Bank. One by one, central banks around the world are joining the rush to the exit doors. So far, the Big Three - the Federal Reserve, the ECB, and the Bank of Japan - have yet to embark on the road to policy normalization. But that day is coming - and the sooner the better, in my view. Now, more than ever, the global economy and world financial markets need to be weaned from the steroids of extraordinary monetary stimulus. Coming from me, of course, that sounds like a broken record. Earlier this year, I urged the Fed to turn aggressive in normalizing its policy stance by moving the federal funds rate in one step from 1% to 3% (see An Open Letter to Alan Greenspan published in the March 1, 2004, issue of Newsweek International). While my suggestion was not exactly well received at the time, the markets are now rife with talk of the need for a bold policy adjustment. Even the Fed is waffling on this point. One minute, senior Fed officials cling to the incrementalism of a measured tightening. The next minute, they go out of their way to distance themselves from such a mechanistic approach. Little wonder, fixed income markets go back and forth in discounting the outcome of the upcoming FOMC meeting on June 29-30. In the heat of debate, it's easy to fixate on the high-frequency economic statistics that often seem so decisive in shaping the tactical outcome. In doing so, however, we can lose sight of the big-picture issues that matter most. That point was hammered home to me recently by Hans Tietmeyer, former president of the Deutsche Bundesbank and a guest speaker at our mid-June European investment conference. Like America's Paul Volcker, Tietmeyer was a disciplined, tough-minded, and independent central banker. Under his leadership in the 1990s, the Bundesbank became one of the most credible central banks in the world. Tietmeyer was the personification of that credibility. And in listening to him last week, I couldn't help but sense his mounting concern over the current state of central banking. As I stressed in my summary of our Eden Roc conference, Hans Tietmeyer was clearly uncomfortable over the current degree of monetary stimulus that still exists in today's increasingly robust economic climate (see my June 14 essay in the Global Economic Forum, Escape Act). While he concurs that the emergency of last year's deflation scare may well have justified extraordinary monetary accommodation, he was equally quick to suggest that the excess stimulus must be removed promptly once the emergency is over. With world GDP growth having surged at a 5-5.5% annual rate over the past three quarters and core inflation rates having moved up significantly from their lows, the emergency has clearly passed. In Teitmeyer's view, a failure to remove excess monetary stimulus under these conditions underscores the risks of inflation, financial instability, and speculative trading activity in financial markets (i.e., the carry trade). There was one key point that stuck in my mind as I pondered the Tietmeyer message - his emphasis on a much broader concept of inflationary risks than one normally hears. In his view, inflationary pressures in both the real economy and asset markets must be taken into consideration. That's especially true when nominal interest rates converge on the zero-boundary, as they are doing at present. The transmission mechanism of a blunt policy instrument is very different at low interest rates than it is when rates are higher. It may well be that the excess liquidity of extraordinary stimulus doesn't impact inflation in the real economy; limited pricing leverage in the face of serious global competition could keep CPI-based inflation at bay for some time to come. If that's the case, then it seems perfectly reasonable to presume that the impacts of policy stimulus would then spill over into asset markets. And that, of course, is where the carry trade comes into play - the yield-curve arbitrage that creates an artificial bid for long-duration assets such as stocks, bonds, or property. On this key point, Tietmeyer is in strong agreement with Ottmar Issing of the ECB, who has argued that while asset markets should not be targeted by central banks, benign neglect is not the appropriate answer either (see Issing's February 18, 2004, editorial feature in the Wall Street Journal, Money and Credit). Tietmeyer underscored the related point that central banks should not contribute to market euphoria by talking up the fundamentals
Re: Deflation?
And this is what Kenneth Rogoff says. Maybe we should invite him to PEN-L? Sabri ++ The hidden threat of extreme events By SAMUEL BRITTAN Financial Times (London, England) June 18, 2004 Friday We are now in one of those phases where highly favourable economic data clash with an anxious mood among large parts of the business community. Contrast for instance the upbeat remarks of the governor of the Bank of England on a synchronised world recovery with the warning by Bill Gross of Pimco that the global outlook is at its most uncertain for 20 or 30 years. A thoughtful explanation of the discrepancy comes from Kenneth Rogoff, formerly chief economist of the International Monetary Fund, in the May issue of the Central Banker. Mr Rogoff was always an untypical international official - he gave up a career as a chess grand master to concentrate on economics. He now puts his finger on a weakness of official assurances by saying people tend to resist thinking about low probability extreme events. He uses this expression in relation to the risks to consensus economic forecasts of modest US consumer price inflation of some 2 per cent a year stretching ahead. But many low probability events cumulate to a substantial risk. There are other kinds of extreme events outside the range of conventional forecasts. There are those that may not happen quickly, such as a violent regime change in Saudi Arabia, but which would be very disruptive if they did. There are also dangers that are highly likely, but the timing of which is uncertain. Mr Rogoff cites the US current account deficit of 5 per cent of gross domestic product, which he, like many others, regards as unsustainable. Suppose, however, this suddenly reverts to balance. For instance, a steep collapse in US house prices could lead to a sharp rise in private savings. Indeed, he believes there is a high risk of a housing slump in the US even though the boom there has not gone as far there as it has in the UK or Australia. A future correction would need to be accompanied, according to the former IMF economic director, by a drop in the the dollar of over 40 per cent in the short run and in the long run of about 12-14 per cent. But he shares the view that fixed exchange rates would worsen matters. He considers that the US economy has sufficient flexibility to survive the turmoil he foresees. But how would the inflexible economies of Europe and Japan handle a sudden drop in the dollar? Very poorly I would venture. There are weaknesses in the world economy that have a high rather than a low probability of doing damage but to an uncertain extent and over uncertain time horizons. Mr Rogoff cites the low value of official short-term rates, the unusually lax stance of fiscal policy and global imbalances. He believes that we underrate the long-term threat to price stability posed by the steady deterioration in budget positions forecast over the Organisation for Economic Co-operation and Development area in the next 30 years, due mainly to ageing populations. Central banks will thus need to strengthen their independence so that irresistible spendthrift governments meet immovable anti-inflation monetary authorities. Yet he is critical of the obsession with inflation targets over fairly short horizons. He would like central banks to have a longer focus and also take into account output, the exchange rate and asset prices, especially housing, as well as consumer prices. Meanwhile, what is the immediate world conjuncture? Outside the core eurozone countries there is indeed a pretty vigorous world economic expansion. At the same time inflation rates, although still low, are rising faster than expected. Nor is it only oil. Other commodity prices are creeping upwards and so are core consumer inflation rates. The pattern is that of an economic upturn beginning to press on primary producing capacity, and in the UK on the labour market too. The last thing required now are policies designed to stimulate activity further. Yet monetary policies are still highly expansionary. Short-term real interest rates in the Group of Seven countries are still negative. In the US, they are minus 1 per cent. In core euro countries, they are around zero. This compares with a normal historical level of, say, 2 or 3 per cent. There is also a gap of over 2 1/2 percentage points between prevailing international nominal short-term rates and the rates on 10-year government bonds (an upwardly sloping yield curve). Monetary policy is, in the awful US financial jargon, behind the curve. It is difficult to escape the conclusion that central banks still practise the pretence of knowledge. They believe they can estimate phenomena such as the output gap or the rate of inflation to be expected for any specified behaviour of real activity. The sooner they forget these pretensions and move back towards a neutral policy, the better they will be prepared to meet future threats from any direction.
Re: Deflation?
Michael Perelman wrote: Are wage increases outstripping benefit cuts? In the U.S., real wages (ex benefits) are about flat, though they stayed positive through mid-2003 or so. The compensation measures in the productivity series are rising, mainly because health insurance premiums are up 10-12%/yr. But flat direct wages doesn't equal falling wages or a race to the bottom. Doug
Re: Deflation?
I wrote: in which the global downward harmonization of wages and social benefits is dragging down consumption Doug asks: Where are wages falling? And where is consumption falling (even after subtracting debt growth)? real wages are falling at this point in the US, but that's a short-term phenomenon (so far). If Dean Baker is right about the underestimation of CPI inflation, then the fall has been larger and more sustained. But I guess I didn't make it clear that harmonization and the race -- or rather, creep -- to the bottom refer to wages _relative to labor productivity_. It's unit labor costs that matter to business, not wages. Also, wage costs (including benefits) can rise while the value of the wages to the workers fall, as when medical insurance rates go up at the same time that the quality of medical care delivered (hard to measure, natch) falls. I wouldn't simply subtract debt growth from consumption. I'd also subtract the deviation of normal saving from actual saving. Actual saving has been very low compared to the post-WW2 norm, so this gap has been high. This gap, I think, represents consumer borrowing _at the expense of personal retirement savings_. Of course, people are allowed to do this as long as the housing bubble continues. jd
Re: Deflation?
Doug, I don't understand. If health insurance premiums are increasing because of improvements in health care, real benefits might be increasing. Otherwise? On Sat, Jun 19, 2004 at 12:23:35PM -0400, Doug Henwood wrote: Michael Perelman wrote: Are wage increases outstripping benefit cuts? In the U.S., real wages (ex benefits) are about flat, though they stayed positive through mid-2003 or so. The compensation measures in the productivity series are rising, mainly because health insurance premiums are up 10-12%/yr. But flat direct wages doesn't equal falling wages or a race to the bottom. Doug -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail michael at ecst.csuchico.edu
Re: Deflation?
Doug Henwood wrote: H, I think it's worth testing the hypothesis that when PEN-L gets a thread going on economic vulnerability, the economy is about to accelerate. This is a good real-time test. Good point. There's an upswing. Some financials will get fixed and debts will be rolled over. But, as David says, that doesn't make the elements of vulnerability go way. The dollar has been sliding down and the current account deficit is still growing. In the 1990s, that wasn't a problem. But the world is different now. The conditions that fed the boom are not here anymore: the Soviet Union and Eastern European socialism (with or without quotes) cannot collapse again, the sense of stability and triumphant capitalist euphoria is gone. That was a one-shot event in history. A whole new geopolitical game may be starting, with China, India, Russia, and Japan positioning themselves. Still, no match for the U.S., but getting there. (And the war on terrorism has no end.) The relaxed military budgets that allowed for deficit reduction are gone, stable and low oil prices are here no more, technological innovation may or may not be what it once was (there's debate, e.g., Stiglitz points to years of no investment in science and education; Stiroh believes innovation is just beginning, there's a self-reinforcing cycle, and a recovery will create the incentives for another round). The threat of terrorism inside the U.S. and conditions for a needed cycle of class warfare are here. On the other hand, in spite of restrictions to the immigration of skilled workers (and grad school applications), there's plenty of slack in the skilled labor market for now. But let's not get too complicated here. Take the IS equation. Assume all you need to assume. Make the world real simple. In its simplest form, growth in real output is the negative of the autonomous spending multiplier times the i-elasticity of the demand function times the growth in i times investment/output (actually, the portion of demand not autonomous to i). No? Back of the envelope, plug a multiplier of 1.4, an i-elasticity of aggregate demand of -0.025, an (big-item-consumption + investment)/gdp = 0.3. (If you don't like my numbers, use your own.) Armed with this powerful weapons, I solemnly predict a contraction 0.01% for every 1% increase in the interest rate. In an 11 trillion USD economy, it's a decline in 1.5 billion USD, or how many jobs? Wanna bet? Julio _ Latinos en EE.UU: noticias y artículos de interés para ti http://latino.msn.com/noticias/latinoseneeuu
Re: Deflation?
H, I think it's worth testing the hypothesis that when PEN-L gets a thread going on economic vulnerability, the economy is about to accelerate. This is a good real-time test. Doug
Re: Deflation?
the economy will accelerate until early November. jd -Original Message- From: Doug Henwood [mailto:[EMAIL PROTECTED] Sent: Fri 6/18/2004 7:43 AM To: [EMAIL PROTECTED] Cc: Subject: Re: [PEN-L] Deflation? H, I think it's worth testing the hypothesis that when PEN-L gets a thread going on economic vulnerability, the economy is about to accelerate. This is a good real-time test. Doug
Re: Deflation?
Nothing new here. It's just the old contrary contrarian thesis in list form. Besides since when are economic vulnerability and expansion incompatible? Unless somebody is predicting disaster, catastrophe, species-extinction, vulnerability and expansion go hand in hand. -Original Message- From: Doug Henwood [EMAIL PROTECTED] Sent: Jun 18, 2004 10:43 AM To: [EMAIL PROTECTED] Subject: Re: [PEN-L] Deflation? H, I think it's worth testing the hypothesis that when PEN-L gets a thread going on economic vulnerability, the economy is about to accelerate. This is a good real-time test. Doug
Re: Deflation?
the problem is that it's possible for what superficially looks like vigorous growth to hide deep instability. I interpret the US boom of the late 1920s in these terms, just like Bob Pollin's interpretation of the Clinton boom in his recent book. The current boomlet also seems unsteady, based on what looks like excessive consumer indebtedness and a housing bubble. Of course, as with a financial bubble, no one can predict when such a unstable boom will end. The best we can say is that it becomes increasingly unstable -- unless something or someone comes to the rescue. I don't look forward to the next recession (even though I might benefit from royalties on the phrase the second dip of the Dubya recession), since it will hurt a lot of people. It might also deepen reactionary politics. Jim Devine [EMAIL PROTECTED] http://bellarmine.lmu.edu/~jdevine -Original Message- From: s.artesian [mailto:[EMAIL PROTECTED] Sent: Friday, June 18, 2004 10:55 AM To: [EMAIL PROTECTED] Subject: Re: [PEN-L] Deflation? Nothing new here. It's just the old contrary contrarian thesis in list form. Besides since when are economic vulnerability and expansion incompatible? Unless somebody is predicting disaster, catastrophe, species-extinction, vulnerability and expansion go hand in hand. -Original Message- From: Doug Henwood [EMAIL PROTECTED] Sent: Jun 18, 2004 10:43 AM To: [EMAIL PROTECTED] Subject: Re: [PEN-L] Deflation? H, I think it's worth testing the hypothesis that when PEN-L gets a thread going on economic vulnerability, the economy is about to accelerate. This is a good real-time test. Doug
Re: Deflation?
Jim Devine writes: the problem is that it's possible for what superficially looks like vigorous growth to hide deep instability. I interpret the US boom of the late 1920s in these terms, just like Bob Pollin's interpretation of the Clinton boom in his recent book... Agreed but...isn't the transformation from a post-war type society (and class structure) back to sort of a 1920s type a lengthy process that still may have a ways to go? Even more so when one takes the international dimension into account. The world has never really seen this particular sort of transformation backwards. That transformation process gives a lengthy one shot to profit rates and keep the boom running for a while (of course with LOTS of short term fluctuations and fragilities that cause short term crises that could be mismanaged and become big). Plus couldn't there be some technological reasons giving profit rates a long wave type upward buoyancy? Couldn't a boom last long enough to make it seem like we are being Cassandras? If predictions don't become true within a reasonable time frame they can be politically discrediting - unless one is very clear. BTW, I put boom in quotation marks because I think it is really more of a transformation: a large part of the population (not the part that the media reflects) will see little or no benefit and, above all, will see themselves structurally excluded from wealth and power in large and new ways. BTW, Jim surely knows this, but Dumenil Levy's new book (which I haven't yet digested) seems to make a good starting point on some of this (a bit more along Jim's lines than mine). Paul
Re: Deflation?
I wrote: the problem is that it's possible for what superficially looks like vigorous growth to hide deep instability. I interpret the US boom of the late 1920s in these terms, just like Bob Pollin's interpretation of the Clinton boom in his recent book... Paul writes: Agreed but...isn't the transformation from a post-war type society (and class structure) back to sort of a 1920s type a lengthy process that still may have a ways to go? Yeah, the purist neoliberal types probably want more, more, more. Even more so when one takes the international dimension into account. The world has never really seen this particular sort of transformation backwards. how about the collapse of the Roman Empire and the rise of feudalism? That transformation process gives a lengthy one shot to profit rates and keep the boom running for a while (of course with LOTS of short term fluctuations and fragilities that cause short term crises that could be mismanaged and become big). Plus couldn't there be some technological reasons giving profit rates a long wave type upward buoyancy? I think the failure of the various one shot profit-promotion efforts to put neoliberal capitalism on a stable footing is likely connected to an underlying underconsumption undertow (whew!), the way in which the global downward harmonization of wages and social benefits is dragging down consumption (except when helped by increasing consumer indebtedness). Technology helps on the supply side, but in this era the demand side seems to be the source of problems. If wages are stagnant compared to labor productivity, a technical improvement simply raises the latter, encouraging the undercon undertow. Couldn't a boom last long enough to make it seem like we are being Cassandras? Yes, if the boom is global in scope and lasts for a few years, it's possible that world wage rates could be pulled up, ending the undertow. If predictions don't become true within a reasonable time frame they can be politically discrediting - unless one is very clear. I can't predict _when_ the undercon undertow will actually pull down the US and world economies. It's only a possibility. But it's linked to a moral and political critique of the current boom. BTW, I put boom in quotation marks because I think it is really more of a transformation: a large part of the population (not the part that the media reflects) will see little or no benefit and, above all, will see themselves structurally excluded from wealth and power in large and new ways. the legitimation of the new phase of capitalism (neoliberal capitalism) will eventually be a big problem. This can go in a right-wing direction, as it did in the US in the early 1990s (with Timothy McVeigh, et al) or the early 2000s (with George W. Bush, et al). BTW, Jim surely knows this, but Dumenil Levy's new book (which I haven't yet digested) seems to make a good starting point on some of this (a bit more along Jim's lines than mine). I haven't finished the book, but it seems really good. jd
Re: Deflation?
Devine, James wrote: in which the global downward harmonization of wages and social benefits is dragging down consumption Where are wages falling? And where is consumption falling (even after subtracting debt growth)? Doug
Re: Deflation?
Interesting question. Are wage increases outstripping benefit cuts? On Fri, Jun 18, 2004 at 06:13:27PM -0400, Doug Henwood wrote: Where are wages falling? And where is consumption falling (even after subtracting debt growth)? Doug -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail michael at ecst.csuchico.edu
Re: Deflation?
Michael Perelman wrote: Interesting question. Are wage increases outstripping benefit cuts? Shouldn't we be looking at the big picture? I just took Michael Meeropol's Surrender : How The Clinton Administration Completed the Reagan Revolution off my shelf right after the Rosenberg documentary on HBO and started thumbing through it. It just reminded me of how shitty the economy has gotten since I entered the workforce in 1968. Back then you could buy Xerox or IBM stock and be guaranteed that your investment would be safe and profitable. The NY Times had 4 pages of ads for programmers every Sunday. In the 1970s things took a turn for the worse when Carter became President. Maybe it was a coincidence, but I began hearing him say the same thing that the Exxon ads on the op-ed page of the NY Times were saying. The good times were over. Then, Reagan came into office with the understanding that he would bring the good times back. But all I can remember is getting laid off after one consulting job after another. Meanwhile, all the rust belt cities were getting pooer and poorer. I suppose that somebody somewhere is doing better than they were. I can imagine that somebody selling real estate in Scottsdale can afford that cherry-red BMW. But here in NYC, shops are closing down all around me and people I work with have just gotten pink slips. What will reverse this? Certainly not electing John Kerry. In my opinion, we have been in a protracted economic slump for the past 25 years. We are in a period of diminished expectations. Because the impact has been less severe than in the 1930s, the reaction has been less severe. People tend to look for their own solutions. Getting retrained. Moving to another city, like in Roger and Me. But the gravy days of American capitalism are gone for good. -- Marxism list: www.marxmail.org
Re: Deflation?
Loui sProyect wrote: What will reverse this? Certainly not electing John Kerry. Are we really interested in making capitalism work or succeed? Is that the purpose of the election on Novemebr 2? But the gravy days of American capitalism are gone for good. Without a doubt. Joel Wendland http://www.politicalaffairs.net _ FREE pop-up blocking with the new MSN Toolbar get it now! http://toolbar.msn.click-url.com/go/onm00200415ave/direct/01/
Deflation?
Talk has now turned from deflation to inflation. The Fed supposedly agreed to raise interest rates once before the election and then let nature take its course until November. Doug Henwood seems to have been more correct than I was in his belief that the economy would start to recover. Of course, given the low interest rates and the fiscal surplus, the weakness of this recovery is unprecedented. Given the lack of robustness, how much of an interest rate hit, can the economy take without reeling. If interest rates rise here, how much will capital inflows to the United States damage fragile (?) Asian economies? -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail michael at ecst.csuchico.edu
Deflation?
Michael Perelman wrote: how much of an interest rate hit, can the economy take without reeling. I looked at the Flow of Funds. From 2001Q1 to 2004Q1, total outstanding debt in the U.S. grew at 1.8% quarterly. I suppose debt tends to grow faster than the GDP, but isn't this too brisk a pace considering how slow the economy has been? Compare to rates of broken-down sectors for same period (in parenthesis the % of total outstanding debt held by sector): Federal gov't (18.2)1.9% State local gov'ts (7) 2.3% Businesses (32.9) 0.9% Households (41.8) 2.4% Clearly, businesses have been purging their financials since the boom ended. State local gov'ts as well as households have become more vulnerable to shocks, which can reverberate on the financial sector (domestic and foreign) that has the asset side of these liabilities. Julio _ ¿Cuánto vale tu auto? Tips para mantener tu carro. ¡De todo en MSN Latino Autos! http://latino.msn.com/autos/
Re: Deflation?
Where do you think that the hit will show up first? Housing sector. Finance? Vulnerable developing countries? On Thu, Jun 17, 2004 at 06:26:29PM -0400, Julio Huato wrote: Michael Perelman wrote: how much of an interest rate hit, can the economy take without reeling. I looked at the Flow of Funds. From 2001Q1 to 2004Q1, total outstanding debt in the U.S. grew at 1.8% quarterly. I suppose debt tends to grow faster than the GDP, but isn't this too brisk a pace considering how slow the economy has been? Compare to rates of broken-down sectors for same period (in parenthesis the % of total outstanding debt held by sector): Federal gov't (18.2)1.9% State local gov'ts (7) 2.3% Businesses (32.9) 0.9% Households (41.8) 2.4% Clearly, businesses have been purging their financials since the boom ended. State local gov'ts as well as households have become more vulnerable to shocks, which can reverberate on the financial sector (domestic and foreign) that has the asset side of these liabilities. Julio _ ¿Cuánto vale tu auto? Tips para mantener tu carro. ¡De todo en MSN Latino Autos! http://latino.msn.com/autos/ -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail michael at ecst.csuchico.edu
Tom Palley on deflation at the New School
Center for Economic Policy Analysis Wednesday, February 4, 6:00 pm: Tom Palley, Open Society Institute The Economics of Deflation Tom's paper is available for download from the CEPA website at: http://www.newschool.edu/cepa/ The workshop is made possible with funding from the Irene and Bernard Schwartz Project on Markets, Equality and Democracy. The workshop will take place in the Conference Room at 80 Fifth Avenue, Fifth Floor, on the southwest corner of 14th Street and Fifth Avenue. It will begin at 6:00pm and end around 7:30. * * For help with this mailing list go to the CEPA Web site: * http://www.newschool.edu/cepa/
Re: Tom Palley on deflation at the New School
Eubulides wrote: The workshop is made possible with funding from the Irene and Bernard Schwartz Project on Markets, Equality and Democracy. Wow. Bernie made his money as an arms contractor - Loral. Kill with one hand, redistribute with the other? Doug
Re: Tom Palley on deflation at the New School
- Original Message - From: Doug Henwood [EMAIL PROTECTED] Wow. Bernie made his money as an arms contractor - Loral. Kill with one hand, redistribute with the other? Doug === [C]apital comes dripping from head to foot, from every pore, with blood and dirt. --Marx, Capital, Vol. 1, Chapter 31
India: budget politics and deflation
BUDGET 2003 A deflationary Budget PRABHAT PATNAIK [snip] The claim that the Budget is growth-oriented' is based, however, on invoking a myth, namely that doling out concessions to the capitalists (including foreign ones) ipso facto promotes growth. This self-serving proposition, which capitalists always put forward and which has now become officially respectable, is utterly vacuous, both theoretically and empirically. Capitalists invest only when demand is sufficiently buoyant; when this is not the case, no matter how large a transfer is made to them from the public exchequer, they would not invest. They would simply pocket the transfers, which is why this self-serving argument is put forward with particular vehemence precisely in periods of recession when profits are otherwise low. Our own experience bears this out. For several years now, every successive Budget has given concessions to the private corporate sector for stimulating investment and output growth; and yet gross capital formation in the private corporate sector as a proportion of Gross Domestic Product (GDP) has stagnated and, of late, even come down. DEFLATION is the inevitable fate of any economy that gets trapped in the vortex of international speculative financial flows. For the promotion of growth, therefore, it is necessary that the economy gets out of this trap, by arresting and reversing the process of so-called financial liberalisation (which is the mechanism through which economies get trapped). The Budget, however, does the very opposite: it allows foreign direct investment up to 74 per cent in Indian private banks, an increase from the current 49 per cent, even as it removes all restriction on voting rights in banking companies. At the same time it allows the merger of private banking companies with nationalised banks. By these measures, it opens the way for the takeover by foreigners of Indian banks, and the takeover by the private sector, whether Indian or foreign, of nationalised banks, that is, for both the de-Indianisation of private banks and the privatisation of nationalised banks. These measures clearly carry the neo-liberal agenda forward; the deflationary nature of the Budget is a symptom of this. [snip] full at: http://www.flonnet.com/fl2006/stories/20030328004702600.htm
deflation everywhere
Deflationary Virus Spreading Worldwide Abstract: Toshihiko FUKUI (Chairman, Fujitsu Research Institute) argues that deflation is no longer a problem peculiar to Japan and the whole world is starting to see the phenomenon as it spreads across an increasingly integrated global economy. China, which has recently seen consumer prices declining, seems to be affecting other countries like Japan, and the government needs to work harder to deal with deflation, even if the role of monetary policy is of great importance, according to Mr. Fukui. Full article at: http://www.glocom.org/opinions/essays/200303_fukui_deflationary/index.html - Michael Perelman Economics Department CSU Chico, CA 95929
PK on deflation
Title: PK on deflation (It makes me feel good about the fact that I've been telling students about the down-side of deflation literally for decades. Of course, the texts generally tell them the opposite, especially at the intro level.) December 31, 2002/New York TIMES. Crisis in Prices? By PAUL KRUGMAN Some fuzzy math: In the first 30 days of December 2000, according to Nexis, only six articles in major news sources contained both the word deflation and the phrase United States; none of those articles suggested that deflation in this country was a real possibility. In the same period last year there were 292 hits; this past month there were 566. Will deflation be even more on our minds a year from now? About five years ago economists realized that monsters from the 1930's were once again walking the earth: Japan, the world's second-largest economy, was trapped in a cycle of falling prices and rising unemployment. But not many people in the U.S. cared about the woes of a faraway country. Like big-time corporate malfeasance, deflation didn't seem like something America had to worry about. But like corporate malfeasance, deflation has turned out to be something that can happen here. It's by no means a foregone conclusion: Federal Reserve officials assure us that they can and will steer us away from a Japanese-style black hole. But we're close enough to such a black hole that it's already warping our economic space. Here's how it can happen: First, for whatever reason, the economy becomes depressed. The central bank responds by cutting interest rates - but it turns out that even cutting rates all the way to zero isn't enough to restore more or less full employment. At that point the economy crosses the black hole's event horizon: the point of no return, beyond which deflation feeds on itself. Prices fall in the face of excess capacity; businesses and individuals become reluctant to borrow, because falling prices raise the real burden of repayment; with spending sluggish, the economy becomes increasingly depressed, and prices fall all the faster. We know from Japan's experience that the descent into such a black hole is a gradual process. Although most economists now date the beginning of Japan's malaise to 1991, the Japanese economy actually grew, albeit slowly, until 1998 - and it wasn't until 1998 that Japanese officials appreciated the severity of the problem. So we shouldn't take too much comfort from our own sort-of recovery in 2002. Yes, the U.S. economy grew, but too slowly to employ an expanding and increasingly productive labor force. The output gap, the difference between what the economy could produce and what it actually produces, continued to widen. And so the threat of deflation is worse now than it was a year ago. In fact, by some measures deflation is already here. Prices paid by consumers are still rising, but those received by many businesses aren't: the government's index of the prices received by nonfinancial corporations has been falling since the third quarter of 2001. As a result, we've moved closer to the event horizon. The Fed funds rate is only 1.25 percent, yet nothing suggests that the economy is about to close the output gap. The back of my envelope says that G.D.P. would have to grow at least 4.5 percent over the next year to bring an end to deflationary pressure. That's well outside the range of consensus forecasts. And the pull of the black hole is increasing. Consider: A Fed funds rate of 3 percent was low enough to get the economy moving in the early 1990's, so why isn't a rate of 1.25 percent low enough now? In part because back then business prices were rising, while now they are falling, discouraging borrowing even at very low rates. What if a year from now the Fed funds rate is zero, but prices are falling even faster? O.K., let's take a deep breath. Nothing I've said is news to Fed officials - a group that now includes my Princeton colleague Ben Bernanke. Also, the black hole metaphor can be pushed too far; as Mr. Bernanke points out, the Fed has other weapons in its arsenal besides low interest rates. The policies he describes haven't been tested, but in theory they should work. Those policies would be more likely to succeed, of course, if the Bush administration would stop playing politics with fiscal policy and . . . oh, never mind. Anyway, the Fed will do its best. [you think?] But two years ago deflation in America seemed a prospect literally not worth writing about. Will it be all over the newspapers a year from now? [whatever happened to fiscal deficits as a way to stoke the economy's engine?] Jimm
Re: deflation watch
At 29/11/02 09:09 -0800, you wrote: Falling Prices Put Fed on Guard Policymakers Talk About Dangerous Dynamic for Economy By Steven Pearlstein Washington Post Staff Writer Friday, November 29, 2002; Page A01 What worries some economists is that in both of those bad episodes, the deflationary spiral occurred after a huge investment bubble burst, leaving the economy with too much debt and too much capacity across a broad range of industries. This is marxism, but they do not know they are speaking it. In explaining his confident view, Posen noted that the two instances in which deflationary cycles developed in the 20th century -- the Great Depression in the United States and Europe and Japan during the 1990s -- central banks were too timid about using their money-printing powers. But unless the economy really does pick up there is a price for this - including the devaluation of the yield on savings, personal as well as capitalist. In order to keep the consumption of working people going, the burden has to fall on pensioners and there is a crisis of confidence about pensions. Inflation of the currency by central banks, even if choreographed on a global scale, is a vicious circle that may well not solve the fundamental contradiction between the need of capital to accumulate versus the limited purchasing power of the masses in true exchange value terms, whatever happens to nominal prices. In such a global economy, Roach said, the Fed's ability to boost prices by printing unlimited amounts of money is matched against the ability of countries such as China and India to deploy virtually unlimited numbers of workers to burgeoning export industries. That makes deflation a problem not only for Japan or the United States, but also for the rest of the world. In the days of territorial imperialism, this used to be called the yellow peril. Now in the global imperialist economy, the US is having to signal that even its massively hegemonic position is not invulnerable to a real shift of the relative distribution of exchange value across the world, towards a country with vaste supplies of increasingly skilled cheap labour, and with an ability to attract capital. A lot hangs on whether the Keynesian measures snatched at by the central banks of the imperialist countries, will successfully restart their cycle of accumulation. My prediction is that they will not kill off enough uncompetitive capital. A crisis in pensions and housing will bring home to the mass of consumers that they have better cut back on their personal expenditure. When it comes, the actual crisis will lead to even greater destruction of capital than would otherwise be the case. Chris Burford
deflation watch
Falling Prices Put Fed on Guard Policymakers Talk About Dangerous Dynamic for Economy Federal Reserve Chairman Alan Greenspan, right, talks with Rep. Jim Saxton (R-N.J.), center, and Sen. Jack Reed (D-R.I.) (L) before a recent meeting of the congressional Joint Economic Committee, at which Greenspan said the central bank is watching for signs of deflation. (Frank Johnston -- The Washington Post) By Steven Pearlstein Washington Post Staff Writer Friday, November 29, 2002; Page A01 After half a century of trying to prevent prices from rising too fast, economic policymakers have a new concern: Prices aren't rising fast enough. Government statistics show that average prices for products have declined in the past year, including those of cars, clothing, computers, furniture, gasoline and heating oil. So, too, have the prices for services such as telephones, hotel rooms and airplane tickets, even as costs for other services such as health care, housing, education and cable television continued to rise. The broadest measure of prices in the economy shows they rose less than 1 percent during the 12 months that ended in September, the smallest increase in 50 years. Until now, the slowdown in overall inflation has been a boon to the American economy, giving consumers more for their money and allowing living standards to continue to rise even during a period of slow economic growth. But economists warn that if disinflation turns into deflation -- a broad and sustained decline in prices -- it would create a dangerous dynamic that could drag the economy into a nasty recession from which it could be difficult to escape. If you had asked me a year ago, I would have said it was ridiculous to worry about deflation, said Alan S. Blinder, a Princeton University economist and former vice chairman of the Federal Reserve. But the prospect of deflation is now sufficiently probable -- I'd say 15 to 20 percent -- that it's now worth talking about. There has been quite a bit of talk about deflation lately. In recent testimony before the Joint Economic Committee of Congress, Federal Reserve Chairman Alan Greenspan said that while the economy is not yet close to a deflationary cliff, he and his central bank colleagues are watching it closely and taking it very seriously. Last week his fellow Fed governor, Ben S. Bernanke, followed up with a deflation speech titled, Making Sure It Doesn't Happen Here. Corporate executives complain that price competition is so fierce, they are forced to cut prices even as wages and other costs continue to rise. And on Wall Street, declining long-term interest rates in the bond market signal that investors are not much concerned about renewed inflation. Deflation, like cholesterol, comes in good and bad varieties. The good kind, such as many of the price declines over the past few years, happens when companies find ways to produce goods and services more cheaply, usually by making use of new technology or new ways of doing business. In varying degrees, these productivity gains are passed on to consumers as lower prices, to workers as higher wages and to shareholders as higher profits. That makes almost everyone better off. By contrast, the bad kind of deflation occurs because there are too few customers chasing too many goods and services, resulting in repeated rounds of competitive price cutting that leads to layoffs, falling wages, and a decline in business investment and consumer spending. During bad deflation, consumers and businesses -- knowing that prices are likely to be lower tomorrow than they are today -- hoard cash and put off buying things, making the recession worse and driving prices and wages down further. Households and companies with lots of debt suddenly find that they have to make fixed monthly payments out of deflated wages and revenue. Some file for bankruptcy; some are forced to cut other spending to meet their debt service. That was what happened in the early 1930s, triggering the Great Depression. Something similar has taken hold in Japan, where prices are falling about 1 percent a year. What worries some economists is that in both of those bad episodes, the deflationary spiral occurred after a huge investment bubble burst, leaving the economy with too much debt and too much capacity across a broad range of industries. Stephen S. Roach of Morgan Stanley argues that some of those dynamics are now at play in the U.S. economy after the worst stock market losses since 1929. The risk of deflation is higher than at any time in the past half century, Roach said. Americans can already see a few early signs of bad deflation taking hold in a number of industries -- Wall Street, commercial real estate, much of the technology and telecommunications sectors. Perhaps no industry shows it more clearly than the airlines. Take the example of United Airlines, which is cutting expenses in hopes of getting federal loan
deflation in China
A diary contribution from Beijing in the Independent on Sunday (UK) notes that there are now 190 million mobile phones in China. This is tremendously important for a developing country in leaping over one of the steps in technological revolution, the need to lay telephone landlines. Secondly it describes a number of examples of prices falling locally. A Google search reveals the English language version of People's Daily, eager to promote a report by BNP Paribas deflecting mutterings that China may be responsible for global deflation. http://english.peopledaily.com.cn/200210/30/eng20021030_105937.shtml Nevertheless China looks to be in a strategically competitive position in a deflationary world. Hence the interest of other east Asian countries in joining up with it in a free trade area. No wonder the US thought it better bury the humiliation over the dismantled spy plane and resume courtesy naval visits to Chinese ports recently. We may hopefully be moving towards a more interesting multi-polar world. Chris Burford London
RE: deflation? redux
Title: RE: [PEN-L:32528] deflation? redux Larry Elliott says that fears of deflation explain why the Fed cut interest rates this month, and why it would be prepared to back up further cuts in the cost of borrowing with more unconventional means of stimulating the economy - perhaps by printing more cash, buying treasury bills or intervening in the foreign exchange market to lower the value of the dollar. I don't get why the first two are unconventional. The standard open market operations needed to lower market Federal Funds rate to a new target level involve buying treasury bills (or other treasury securities) and thus, implicitly, the printing of more cash. Lowering the exchange rate is somewhat controversial, but all else constant, lowering the target Fed Funds rate has the effect of driving the dollar exchange rate down. Jim Devine [EMAIL PROTECTED] http://bellarmine.lmu.edu/~jdevine
deflation? redux
The great deflate debate Larry Elliott Monday November 25, 2002 The Guardian It's often said that Britain lives in a world of its own, and that assessment looked totally apt at the end of last week. In the UK it was suddenly the1970s redux; firefighters huddled round the brazier, Labour ministers flapping around ineffectually and a chancellor warning of a contagion of inflationary pay demands. Yet while the talk here is of a new winter of discontent, of picket lines and the public sector pay bill, elsewhere different parallels are being drawn - both more recent and more distant. Economists seeking to explain the current state of the world economy are looking at the mid-19th century, the 1930s and the early 1990s. Why? Because Britain's local concern with inflation is at odds with fears that a much bigger threat to the global economy deflation spreading from Japan to the United States and Europe. The Federal Reserve and the Organisation for Economic Cooperation and Development are already talking of what should be done to thwart the onset of falling prices. Focusing on deflation requires a change in thinking for policy makers. Most have spent their careers grappling with inflation, with higher interest rates used to kill off periodic bouts of overheating. They are now faced with a very different global economy to that of the mid-1970s or the late-1980s. The first noticeable difference is that inflation is now much lower than 25 - or even 10 - years ago. Higher interest rates have had something to do with this, but the trend away from protected national markets, strong trade unions and anti-competitive oligopolies and towards global markets, weak unions, and tougher regulation to prevent monopoly pricing has probably been more crucial. Policy potency The boom in the US at the end of the 1990s thus took place in a new environment. Despite the longest post-war expansion, inflation kept on falling because capacity grew at an even faster rate than the economy overall. America's bust was much more like the collapse of a business cycle in the 19th century, when periods of debt-fuelled over-investment led to long periods of stagnation or retrenchment as the boom's excesses were purged. Lower interest rates helped, but were not a complete cure. As a result, the quite substantial easing of economic policy over the past couple of years has not had the potency it had in the past. US interest rates have come down by 5.25 percentage points, those in the eurozone by 1.5 percentage points and those in Britain by 2.0 percentage points. Yet all three economies have been stuttering along this year and, according to the OECD, will not grow much faster in 2003. It would be wrong to conclude from this that macro-economic policies do not work. Had policy not been eased, the position would be now far more serious. The model here is early 1990s Japan. The Fed and OECD view is that the government failed to act quickly and decisively enough after the collapse of the asset bubble of the late 1980s and allowed deflation to take hold. In a paper released this year, the Fed drew two big conclusions: the Japanese authorities had been too slow to see the risk of deflation, and that it is better to be safe than sorry. The message was that if there was a whiff of deflation, the Fed would act and act big. All of which explains why the Fed cut interest rates this month, and why it would be prepared to back up further cuts in the cost of borrowing with more unconventional means of stimulating the economy - perhaps by printing more cash, buying treasury bills or intervening in the foreign exchange market to lower the value of the dollar. Should it do so, it would have the full support of the OECD, which made its views on deflation clear in its half-yearly health check on the global economy released last week. It too drew two lessons from Japan. The first is that the costs associated with possible policy errors are asymmetric: they are far higher when erring on the conservative side than when loosening too much... This asymmetry then justifies a policy posture biased towards expansion, involving decisive cuts early in the downturn and a deferral of rate hikes until a recovery is well under way, as 'insurance' against downside risks. Such a stance is also seen as helping meet the second concern - that of preserving a sound financial system, thereby allowing monetary policy to operate effectively. Hang on, I hear some of you say, the Fed and the OECD are getting het up about nothing. Inflation is still in positive territory and the global economy is growing. Is there really a risk of deflation? And even if there is, would it be so terrible? The answers are yes and yes. The starting point for any analysis is that inflation is already low. In countries such as China and Singapore, prices are already falling, and in the G7 inflation is running at little more than 1%. Inflation falls when economies are operating below trend - when
The risk of deflation/The Economist/Marx
The risk of deflation Comparing symptoms Nov 7th 2002 From The Economist print edition Can lower interest rates prevent the spread of debt-deflation to America and Europe? STOCKMARKETS rose in expectation of the Federal Reserve's half-point cut in interest rates on November 6th to 1.25%, the lowest rate for more than 40 years. The following day, the European Central Bank and the Bank of England decided not to cut their rates, but they are still expected to ease next month. However, investors' exuberance is odd, for interest rates are coming down because the world economy is in worse shape than had been hoped. America's recovery is stalling, as consumers tighten their belts. In the euro area, consumer and business confidence are both on the wane. Although euro-area inflation is above the 2% ceiling set by the ECB, weak demand will push inflation down next year. The case for interest-rate cuts in both America and the euro area was strong, even though the ECB has not yet moved. But will rate cuts work? Most policymakers in America and Europe blame Japan's slump on mistakes--which they can avoid. An alternative view is that much of Japan's economic sickness is the inevitable after-effect of its bubble in the 1980s. Asset-price bubbles tend to be followed by periods of weak growth, as financial excesses are unwound. The table attempts, in unscientific fashion, to assess the risks of America and Germany catching the Japanese disease. America's STOCKMARKET BUBBLE in the late 1990s mirrored Japan's of a decade earlier. Its housing market has also been looking suspiciously like a bubble--though with less froth than Japan's. More surprising, German share prices rose, and then fell, by more than America's. Indeed, at its low point in October, Germany's DAX index was almost 70% below its peak. On the other hand, fewer Germans own shares than do Americans. The other aspect of the bubbles in Japan and America was a surge in CORPORATE INVESTMENT, based on cheap capital and unrealistic expectations about future profits--often inflated by shady accounting practices. By and large, German business escaped such overinvestment. The most serious aspect of Japan's economic sickness is DEFLATION. Falling prices have increased real debt burdens, depressed consumer spending, and made it impossible for the Bank of Japan to deliver the negative real interest rates that the economy needs to revive demand. It is often argued that the central bank was too slow to cut rates after the stockmarket collapsed. Yet in fact Japan's economy initially held up much better than America's. In relation to GDP growth and the size of Japan's output gap--a big influence on inflation--the Bank of Japan cut interest rates as rapidly as the Fed did last year. America does not yet have deflation. Still, its GDP deflator fell to 0.8% in the year to the third quarter; so long as the level of GDP remains below potential, inflation will keep falling. Deflation currently seems unlikely in Britain or the euro area as a whole, but Germany is at risk. German consumer prices have fallen at an annual rate of 0.4% over the past six months. More worryingly, Germany, unlike Japan in the early 1990s or America today, is not free to cut interest rates or run a looser fiscal policy. Interest rates are set by the ECB on the basis of economic conditions in the whole euro area, and budget deficits are limited by the European Union's stability pact. The risk of deflation may therefore be greater in Germany than in America. Deflation is particularly deadly when an economy has lots of DEBT, because falling prices swell the real debt burden. In America and Germany, firms and households have borrowed heavily in recent years, lifting total debts of the non-financial private sector to 150% and 160% of GDP respectively. In the early 1990s Japan's debt burden was equivalent to almost 250% of GDP. Japanese firms are still much more in hock than those in America or Germany. On the other hand, American households look more vulnerable. Even at the peak of Japan's bubble, households remained big savers. Last year German households saved as much as 10% of their income; Americans saved only 1.5%. A cocktail of debt and deflation has left Japanese BANKS crippled by bad loans, forcing them to cut lending. American banks are in better shape; and the economy is less dependent on banks, relying more on capital markets for finance. Even so, concerns are growing about the threat of a credit crunch, as conditions tighten in America's corporate-bond market. German banks look shakier, with poor profitability and shrinking capital as share prices have fallen--as in Japan. Increased competition and the need to lift profits is putting pressure on banks to reduce their traditional relationship lending, resulting in a collapse in new bank lending to small and medium-sized firms. This form of credit crunch has a different cause to the one in Japan, but its effect of exacerbating the downturn
Re: War and deflation
[EMAIL PROTECTED] 10/28/02 04:22PM HCM Market Letter The U.S. economy is being stalked by vampire companies that are effectively dead to their creditors but frighteningly alive to their competitors. on all hollow's eve: capital only lives by sucking living labour, and lives the more, the more labour it sucks... (capital vol 1., international publishers, p. 233) capital obtains this ability only by constantly sucking in living labour as its soul, vampire-like)... (grundrisse, vintage, p. 646) km also compares capital to shape-shifting in writing that it posits the permanence of value by incarnating itself in fleeting commodities and taking on their form... (grundrisse, p. 646) marx references vampires in several other writings as well... michael hoover
Re: War and deflation
At 04:57 PM 10/28/2002 -0500, Lou quoted Yardeni: Deflation is a very unstable and potentially dangerous economic environment. Macroeconomists, particularly monetarists, believe it can be overcome by pumping up the money supply. I am not so sure. I believe that it is a consequence of increasingly competitive markets resulting from peace, free international trade, industrial deregulation, technology, and productivity. .. Peace: bad; war: good! ain't capitalism strnge? But, I thought the Market Watch section had a more interesting tidbit -- relates to Yardeni's zombie angle: HCM Market Letter The U.S. economy is being stalked by vampire companies that are effectively dead to their creditors but frighteningly alive to their competitors. Having declared their insolvency, they are permitted to operate as though they are still solvent, stiffing past creditors while paying new, super-secured ones. Reprieved from paying their creditors, they are able to drop their prices and suck the lifeblood out of their industries' profit margins. WorldCom, Williams Communications, and Global Crossing are feeding upon the bodies of their still-solvent competitors. When Global Crossing boss John Legere boasts that his company will emerge from bankruptcy as a strong and unleveraged competitor, or Williams Communications emerges from bankruptcy with a new investment from Leucadia National, HCM's reaction is to increas it short positions in Qwest and other telecom carriers. Gloabl Crossing and other telecom companies emerging from bankruptcy can lower their prices because they no longer bear the burden of paying their creditors. With enough capacity to satisfy voice and data needs for years (if not decades) to come, the last thing the telecom industry needs is the survival of companies whose business strategies have already failed and cost investors billions. It would be far better for the telecom industry if these failed companies were to have stakes driven through their hearts. Michael E. Lewitt [EMAIL PROTECTED]
War and deflation
Barrons, October 28th, 2002 Deja Vu All Over Again By EDWARD YARDENI The similarities between 2000-02 and 1990-92 are eerie. A president named George Bush was in the White House then and now. Saddam Hussein was Bush enemy No. 1 then, and is again. Both the current and previous decades started with very short and moderate economic downturns. Both were followed by lackluster economic recoveries, with weak employment growth. Indeed, the pattern of initial jobless claims now and then looks remarkably similar. In the early 1990s, the banking industry was a mess. Today, the Tech Wreck is the major structural problem in the economy. In both periods, the Federal Reserve lowered the federal-funds rate dramatically and kept it low for some time. The central bank's key overnight rate plunged from 9.8% during the middle of 1989 to 3% by August 1992, and it remained at this level through the beginning of 1994, when the Fed started to tighten again. At the end of 2000, the fed-funds rate was 6.50%. It dropped to 1.75% by December 2001, and it is likely to remain at this level through most of next year. A combination of easy money and time revived the economy by 1994. Easy money and time should do so again over the next couple of years. Both now and then, Americans were concerned about going to war with Iraq. Tactical weapons of mass destruction were viewed as a potential threat to American soldiers. U.S. troops face the same dangerous scenario today if they attack Iraq. Of course, after 9/11, Americans are more fearful of our vulnerability to terrorists at home. The relatively quick victory in the Persian Gulf War helped to revive consumer confidence, but consumer spending remained lackluster during the first half of the 1990s. This time, consumer spending has been more robust because solid gains in productivity have boosted real pay per worker. Also, record low mortgage rates are supplementing consumers' purchasing power by reducing monthly payments and increasing cash-outs of residential equity. Fannie Mae reports that an estimated $1.4 trillion of mortgages will be refinanced this year, up from $1.1 trillion last year. Furthermore, both this year and last, homeowners took out an estimated $100 billion of equity. The early 1990s marked the end of the Cold War. If the U.S. can deliver a quick and decisive resolution of the Iraq problem, then the so-called clash of civilizations might be aborted quickly. President George W. Bush seems to believe that the most dangerous terrorists are sponsored and supported by states such as Iraq and Iran. If so, then a decisive win in Iraq -- through diplomacy or military means -- could have enormously positive geopolitical consequences for Americans, who might rightly feel less alarmed about the potential for future attacks like 9/11 and more confident about the future. My hunch is that the administration has concluded that a successful outcome in Iraq also might be a good way to revive the global economy. Oil prices are likely to fall significantly, possibly to less than $20 a barrel, if Iraq is free to export more oil. This could provide a substantial cut in the oil tax and stimulate global economic growth. The most significant difference between now and the early 1990s is that deflation is a more significant risk. After the end of the Cold War, I developed a simple War Peace Model for inflation. A glance at the Consumer Price Index in the U.S. since 1800 strongly suggests that wars are inflationary and peace times are deflationary. This makes sense to me. Power is concentrated in the government during wars. Markets tend to be monopolized, protected, subsidized, corrupted, and inflation-prone. Power shifts to business and consumers during peacetime as governments negotiate free-trade agreements to gain access to foreign markets. Markets around the world become more competitive and prone to deflation. Since the end of the Cold War, deflationary forces have been offset by easy monetary policy. However, these forces weren't defeated and were actually reinforced when China joined the World Trade Organization at the end of last year. The Bank of Japan ran out of basis points to fight deflation when the official bank rate was dropped to near zero in the late 1990s. The Fed has only 175 basis points left. Japan's gross domestic product implicit price deflator has been falling modestly for the past several years. During the second quarter of this year, it was 6.1% below its second-quarter 1997 peak. The U.S. inflation rate -- based on the yearly percentage change in the GDP implicit price deflator -- is down from 4.2% at the start of the 1990s to only 1.1% currently. The implicit price deflator for nonfinancial corporations has been deflating, showing a drop of 0.6% during the past four quarters -- the first such negative comparison since the data were first collected in 1958. The weakness in pricing is depressing
Re: To Christian/ Keen on road to debt deflation/ Irrationality andall that
But this does leave those interested in economic modelling--which is indespensible, in one way or another--with a kind of quandry. How do you account for both uncertainty and for the collective effects of uncertainty on behavior in a model? Does it leave you with no predictive/ modelling power? Christian Difficult questions Christian. You know that I am not against the use of mathematical models. How can I be? I love that thing called mathematics. As you may remember, I even invited these Marxian fellows to incorporate mathematical modelling in their analysis. Without such models, how are we going to make predictions of most kinds? Recent academic developments in the area of economics point toward behavioral and experimental studies. Who knows, maybe from these studies some new approach, that incorporates not only mathematical models but also other techniques, will emerge. I am not even questioning the ideology of those who are working on this. But they are discovering what we leftists have been arguing all along: That standard assumptions underlying economic models are often violated and, more importantly, these violations lead to behavior that seriously diverge from conventional economic predictions. That individuals often don't behave as fully rational and self-interested agents. That majority of indiviuals, that is, humans, are loving, caring creatures who worry about fairness. That their expectations about others' behaviour seriously differ from the presumed conjectures that lead us to the paranoid-schizophrenic Nash equilibrium, etc. The focus of these studies is still just the individual but that is fine. I don't expect a radical ideological change at the mainstream US universities overnight. The first challenge of the recent times to the conventional economics was the information economics that questioned its informational assumptions. The current challenge is about the assumptions of rationality, which is the root of this bloody thing. Who knows maybe from these a more serios challenge will emerge. I welcome these challenges. Best, Sabri
RE: To Christian/ Keen on road to debt deflation/ Irrationality and all that
Title: RE: [PEN-L:31498] To Christian/ Keen on road to debt deflation/ Irrationality and all that Christian writes: But this does leave those interested in economic modelling--which is indespensible, in one way or another--with a kind of quandry. How do you account for both uncertainty and for the collective effects of uncertainty on behavior in a model? Does it leave you with no predictive/ modelling power? Sabri had an answer, I have another, which isn't completely different. Marx presented simple mathematical models, using numerical examples. One classic case is the reproduction schemes which appear toward the end of volume II of CAPITAL. It's been stated as a mathematical model many times. But the basic idea -- ignored by many if not most of the modelers -- is that it shouldn't be seen as describing the way the world actually works. Instead, it represents an equilibrium condition that's hardly ever met, i.e., what might be called a harmony condition that describes _what's needed_ for capitalism to attain smooth and steady accumulation (and economic growth). We can add in other conditions, such as a description of the supply of labor-power and the economic processes behind the determination of the profit rate. How do uncertainty and other real-world complications fit in? They help determine the behavior of the actually-existing capitalist economy when it operates when the harmony condition isn't met, as it usually isn't. The longer that the system operates away from meeting the harmony conditions, the worse the imbalances are that can weigh down the system. Then, on occasion, we see forceful equilibration, i.e., crisis, when the system is forced to meet the harmony conditions. This allows the eventual re-establishment of conditions allowing normal accumulation, which then allow new deviations from harmony and new crises... This is very sketchy. But (1) the real world is a non-equilibrium process; but (2) there has to be some balance in the economy for it to grow in the long term (as seen in the harmony conditions). Among economists, this fits well with Hyman Minsky's post-Keynesian analysis of financial fragility. That analysis -- seen in Steve Keen's work posted to pen-l -- has done pretty well. JD
Keen on road to debt deflation
In Australia, a miserabilist is never alone ... http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentarycontent_idx=16477 Steve Keen is the author of Debunking Economics and Professor of Economics Finance, University of Western Sydney, Australia Debunking Economics With books like Dow 36,000, theories like the Capital Assets Pricing Model, and commercial ventures like Long Term Capital Management, academic economists have been both cheerleaders and handmaidens to the economic catastrophe formerly known as the New Economy. So as an academic economist, I must have a hide making a commentary on these pages: why should you bother reading what I've got to say? I'll give you two reasons. Firstly, I belong to a different camp of economists to the ones who for so long hogged the public's attention during the Millenium bubble. I have always been a critic of mainstream economic theory, especially as it relates to finance, and I have also helped developed alternative theories that far more accurately describe how the economy and finance markets operate. Secondly, my calls on the market establish me as a veteran, paid-up member of the Bear clan. The earliest was written in July 1995 and published in an academic journal (Money and Production) in 1996. I was clearly wrong about the immediate behaviour of the market: far from the sudden, sharp correction I expected, it rocketed skywards for another five years under the power of the credit bubble that Doug Noland has so clearly elucidated on the Credit Bubble Bulletin page. But there was no error in calling it a bubble, even seven years ago: As I write this sentence, the Dow Jones Index hovers about 4750its highest level in history. At the same time, the average price-to- earnings ratio is also a record, indicating that a sudden, sharp correction to the Index is imminent. When it occurs, it will be the third time since 1987 that the Index has fallen suddenly by 10 per cent or more. 4750 is a long way below the 11750 peak that the DJIA hit on January 14th 2000, but it's not so far from todays 8,275. To this long-term academic Bear, only a question of time before it is back in the vicinity of its 1996 valuedespite this weeks huge upwards spike. If deja vu to Dow 5000 simply restored the status quo of 1996, then there would be no problem: after the party of the Millenium, America could simply shake off its hangover and return to business as usual. But the post-Bubble economy is likely to be profoundly different to the pre-Bubble economy because of one simple factor: the accumulation of debt. Doug has done a superb job of outlining the distinctive mechanisms by which debt has grown in this particular Bubble, and I wont try to duplicate his analysis here. Instead, Ill explain a non-mainstream theory that predicts the periodic occurrence of financial bubbles, and gives some indication of what can be expected in their aftermath. This theory is the Financial Instability Hypothesis developed by the late American economist Hyman Minsky. Writing as long ago and in such comparatively tranquil times as the 1960s, Minsky argued that capitalism is inherently flawed, being prone to booms, crises and depressions. This instability, in my view, is due to characteristics the financial system must posses if it is to be consistent with full-blown capitalism. Such a financial system will be capable of both generating signals that induce an accelerating desire to invest and of financing that accelerating investment. (Minsky 1969b [1982]: 224) This far-from-Polyannic view of capitalism can be summarised in one simple statement: investors borrow money during booms, and attempt to repay debt during slumps. The cash flows that they expected to have when they entered into debt commitments arent there when repayments are due, so that debts are not fully repaid. Debt can therefore ratchet up over a series of booms and busts to reach levels that are ultimately unsustainable. Japan found itself at the end of this particular hilly road in 1990, and I share Dougs belief that America has reached the edge of the same precipice now. Ahead lies not more of the walking on air of the last six years, nor even a return to pre-Bubble normality, but at best a severe recession and at worst a fall into the uncharted territory of a debt-deflation. Stability is destabilizing Minskys key insight was that a period of stable economic growth leads to rising expectations. This relationship is what makes financial crises an inevitable side-effect of a sophisticated market economy. Since a market economy is always cyclical, and has always experienced periodic financial crises, any period of relative stability will have been preceded
To Christian (was: Keen on road to debt deflation)
A while ago on A-List I said this: It is funny that someone who heads JP Morgan is talking about expected cash flows, by the way. It is mathematically the worst thing to do to look at the expected cash flows. Any valuation or risk assesment based on expected cash flows belongs to a trash can: the realization probability of your expected cash flows is zero. And later tried to answer a question Christian asked me regarding the above. I think this excerpt from the article Rob sent is a better answer than the one I gave on A-List: This far-from-Polyannic view of capitalism can be summarised in one simple statement: investors borrow money during booms, and attempt to repay debt during slumps. The cash flows that they expected to have when they entered into debt commitments arent there when repayments are due, so that debts are not fully repaid. Combining the above two, can we now conclude that the CEO of JP Morgan is a Polyanna? Sabri
Re: To Christian (was: Keen on road to debt deflation)
As Adam Smith wrote: The over-weening conceit which the greater part of men have of their own abilities, is an antient evil remarked by the philosophers and moralists of all ages. Their absurd presumption in their own good fortune, has been less taken notice of. It is, however, if possible, still more universal The chance of gain is by every man more or less over-valued, and the chance of loss is by most men under-valued. [Smith 1776, I.x.b.26, pp. 124-25] On Sat, Oct 19, 2002 at 03:38:16PM -0700, Sabri Oncu wrote: A while ago on A-List I said this: It is funny that someone who heads JP Morgan is talking about expected cash flows, by the way. It is mathematically the worst thing to do to look at the expected cash flows. Any valuation or risk assesment based on expected cash flows belongs to a trash can: the realization probability of your expected cash flows is zero. And later tried to answer a question Christian asked me regarding the above. I think this excerpt from the article Rob sent is a better answer than the one I gave on A-List: This far-from-Polyannic view of capitalism can be summarised in one simple statement: investors borrow money during booms, and attempt to repay debt during slumps. The cash flows that they expected to have when they entered into debt commitments arent there when repayments are due, so that debts are not fully repaid. Combining the above two, can we now conclude that the CEO of JP Morgan is a Polyanna? Sabri -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
To Christian/ Keen on road to debt deflation/ Irrationality and allthat
Michael quotes Adam Smith: The chance of gain is by every man more or less over-valued, and the chance of loss is by most men under-valued. In these days, our behavioral economics friends are discovering that the loss of happiness from loss is larger than the gain of happiness from gain, even when the loss and gain in question are equal in absolute value. This excerpt from the below Economist article is also interesting: Through experiments, they revealed that people look mostly to the information that surrounds them to understand how the world works, rather than having the unlimited knowledge hitherto assumed by ivory-tower economists. They also proved that people have a hard time working out the probability of future events. Another revelation is that answers to survey questions depend greatly on how they are phrased. But I liked this the best: If all this seems obvious, that just means you have not been trained as an economist. Two articles follow. One from the Economist, the other from the Financial Times. By the way, may I invite you for a round of applause for this from our the Economist friends? Known as the father of experimental economics, Mr Smith is hardly a household name. Yet, that may suit him just fine, since his experiments confirm that people entirely ignorant of economic laws (and indeed, of economists) often behave, even when there are few buyers and sellers, just as classical theory would predict. Another Smith (Adam) had a name for it: the Invisible Hand. Best, Sabri + All too human Oct 10th 2002 From The Economist print edition This year's Nobel prizes put man back at centre stage BID farewell to the cold-hearted humans that, since Adam Smith's day, economists have used as their models. He (it is always a he) is particularly unlovable: selfish in the extreme, able to do sums in his head and an insufferable know-all. Now meet the new, sensitive homo economicus: he (she?) is more laid-back, relying on intuition and rules of thumb to make decisions, often without perfect knowledge. This year's Nobel prize celebrates the ideas of Daniel Kahneman of Princeton University, who has built a career by reminding economists that their idealised subjects are all too human. The other winner, Vernon Smith of George Mason University in Virginia, has shown by experiments that, despite people's flaws, the perfect-world theories of university anoraks can work in the real world. The awards, which combine the different work of two researchers at the crossroads of economics and psychology, mark a refreshing change for the Royal Swedish Academy of Sciences, which selects the winners. In recent years it seemed that most of the dismal science's giants had been spoken for, as the battle for most big economic ideas had already been won. Increasingly, the prize has gone to more abstract enthusiasms: game theory, statistics and monetary wizardry. Alfred Nobel's heirs even wanted to strip the economics prize of the family name, since so many winners did not share their anti-globalisation views. How welcome then that Mr Kahneman, along with a colleague, Amos Tversky, who died in 1996, has made such an impact on the profession. Mr Kahneman is not even a traditional economist, but a psychologist. Yet his analysis of how humans make decisions when confronted by uncertainty and risk has created a new branch of economics. As a reward, their early work is cited in nearly every paper now written in the burgeoning fields of behavioural economics and finance. Through experiments, they revealed that people look mostly to the information that surrounds them to understand how the world works, rather than having the unlimited knowledge hitherto assumed by ivory-tower economists. They also proved that people have a hard time working out the probability of future events. Another revelation is that answers to survey questions depend greatly on how they are phrased. If all this seems obvious, that just means you have not been trained as an economist. Knowing that people get risks wrong has broad implications for public policy. For example, people tend to overestimate the probability of a nuclear-power disaster, and to underestimate the risks of being in a car accident. Before Messrs Kahneman and Tversky came along, economists thought of human decisions in terms of expected utility: that is, the sum of the gains or wealth they think they will get from each possible future scenario, multiplied by its probability of occurring. But if people irrationally give greater weight to some scenarios than to others, their decisions will differ from the classical calculation. Observing this led Messrs Kahneman and Tversky to prospect theory, their greatest insight. The best recent example of a failure to calculate risk is the stockmarket bubble. Insights from psychology show how people value the comfort of herds and are far more frightened of losses than inspired by potential gains. These
war deflation
Title: war deflation Deflation is a bigger threat than Saddam Larry Elliott Monday October 14, 2002 The Guardian [UK] Military action by the United States against Iraq seems inevitable. Having won the support of both houses of Congress last week, George W Bush will now step up his pressure for the backing of the United Nations. All the signs are that jaw-jaw will soon be followed by war-war. The Pentagon remains sceptical that weapons inspections will succeed and is already preparing for a fight. Bombing raids on Iraq have been stepped up and movement of heavy equipment to the Gulf is under way. The message coming out of Washington is clear. Bush would like to have the support of the UN, but will go it alone if he has to. Even the tragic events in Bali this weekend, which suggest Washington's obsession with Iraq is blinding it to the real threat from terrorists, are unlikely to deflect the hawks. Economists and financial analysts have begun to take a real interest in the president's intentions, producing weighty pieces of work on when the operation is likely to begin, what form it will take and what the cost will be. It's not hard to see why the number crunchers have turned themselves into armchair generals. The drop in consumer confidence in the US to its lowest level for nine years illustrates that all is not well with the global economy; the wholly realistic fear is that a full scale bust-up in the Middle East has abundant potential to make matters worse. Trouble spot Each of the three previous global recessions in the west - in the mid-1970s, the early 1980s and the early 1990s - have coincided with trouble in the Middle East. In all three, oil prices rose sharply, adding to inflationary pressure and leading to higher interest rates and slower growth. To put it mildly, any tightening of monetary policy with the world economy in its present state would not be helpful at a time when the mood among both policymakers and market players is already dismal. Lehman Brothers says that its discussions with central banks, hedge funds and equity fund managers reveal a litany of worries - that the impact of last year's interest rate cuts has faded, that there is a risk of deflation, that the US and Europe are on course to emulate Japan's lost decade and that shares on Wall Street could fall by another 40% before bottoming out. Add a war into the mix, and it's not hard to see why the markets have been so febrile. The feeling now is that if there is going to be a war, it would be better to get it over with as soon as possible. Under this scenario, we get a reprise of the first Gulf war of 1990-1991 - a short, brutal campaign in which America uses its overwhelming air superiority to destroy Iraq's fighting capability, paving the way for mopping-up operations on the ground. As far as the markets are concerned, this is about as good as it gets (although not for the Iraqis, for whom the consequences would be catastrophic). A lightning war would end the nagging uncertainty, which has been a considerable drag on both confidence and share prices, and would also ensure that any spike in oil prices would be brief. Best of all would be if the toppling of Saddam led to an increase in oil shipments from Iraq, when there would be an even steeper decline in oil prices, reducing business costs and raising the real incomes of consumers. If the comparisons with 1990-1991 hold true, both the global economy and global markets could be witnessing the darkest hour before the dawn. Then, the most bearish phase for the markets was the period between the Iraqi invasion of Kuwait in early August and the beginning of the military build-up by the coalition in October. At that point, share prices stopped falling and oil prices stopped rising. Once the two-week war started in January, the equity market moved into a bull phase and the oil price dropped back down through $30 a barrel. There are, naturally, gloomier scenarios. One would be if the phoney war dragged on well into next year, accompanied by inconclusive negotiations and sabre-rattling. That would leave a cloud hanging over the global economy, bearing down on consumer confidence and making companies even less likely than they are at the moment to boost investment. Worst of all would be a protracted war in which the Iraqis, having learned their lessons from the crushing defeat of 1991, fight an urban war that forces the Americans to break down resistance house by house and street by street. More Stalingrad than Vietnam, in other words. On past form, however, it is possible that the markets are overestimating the military difficulties involved in a war between the world's only superpower and an impoverished nation with equipment even more obsolete than it was 12 years ago. Even if that is so, however, they may still be underestimating the economic risks. Vulnerable First, there is the oil price. The expectation is that there would not be a serious disruption
Re: war deflation
There might some simple method to the madness. Hussein is the ultimate capitulation issue. The US might use trade liberalization to beggar Europe and E. Asia, but its trade--like its military policies--is increasingly go it alone. I suspect the National Security Council has a deflation fighting policy in place, and that includes this war. C. Jannuzi __ Do you Yahoo!? Faith Hill - Exclusive Performances, Videos More http://faith.yahoo.com
bonds may rise further as deflation comes to America - Stephen Roach
from Eric Fry, Daily Reckoning: *** And along comes Stephen Roach to explain why bonds may continue to rise, as deflation comes to America: The American economy now has a record exposure to global competition. In the second quarter of 2000, America imported a third as many goods as it produced. More and more, these goods are coming from highly competitive Asian producers who have much lower cost structures than their American counterparts. Every major Asian economy except South Korea is in the throes of deflation. Courtesy of ever-expanding trade relations with Asia, America is now buying more and more from China, Japan and other countries that are already in deflation. The growing market share of these increasingly cheap foreign goods helps drive down prices of products made at home. The impact of deflation would be most acute for wage earners and debtors. To stay profitable, companies would have to cut jobs or wages, eventually inhibiting consumer purchasing power. Meanwhile, the fixed obligations of indebtedness would have to be paid back in deflated dollars, squeezing over-extended borrowers all the more. America is already at the brink of deflation. The GDP price index recorded only a 1 percent annualized increase in the second quarter of 2002. That is the lowest inflation rate in 48 years. Prices of goods and structures are already contracting at an annual rate of 0.6 percent.
War, Deflation, and the Three Bears
At 9:33 PM -0700 9/27/02, Dennis Robert Redmond wrote: Dennis, you're a big fan of both Adorno and East Asian state-led development. Wouldn't Teddy regard them as administered societies of the most conformist and instrumental sort? Yes. But he'd also say that this instrumentalism harbors a tremendous utopian potential. Capital civilizes: an industrial base, modern cities, literacy, healthcare etc. are qualitatively better than preindustrial village society. Administration per se is as neutral as technology -- it can bring good or ill. That's why unions fight like hell for contracts, mobilize to build welfare states, etc. Capital has civilized North America, Western Europe, and East Asia. That's a small patch of the earth, though, within which much of capital circulates. This fact is often held up by proponents of economism as evidence of obsolescence of imperialism. One might as well say, however, that capital's inability to civilize the rest of the world is the sign of its limit: The monopoly of capital becomes a fetter upon the mode of production, which has sprung up and flourished along with, and under it. Centralization of the means of production and socialization of labor at last reach a point where they become incompatible with their capitalist integument (http://www.marxists.org/archive/marx/works/1867-c1/ch32.htm). Overcapacity and worldwide waves of deflation are finally threatening to capsize the USA, the consumer of last resort already laden with debt (Cf. Brad De Long, America's Date with Deflation? _Financial Times_ 21 August 2002, http://www.j-bradford-delong.net/movable_type/archives/000533.html; James Devine on the Three Bears, http://clawww.lmu.edu/faculty/jdevine/talks/Goldilocks.html). We need to analyze the current and future effects of Bush's endless war on the USA and the rest of the world in this context, while trying to build our own capacity to rise up to the challenge. socialism or barbarism, -- Yoshie * Calendar of Events in Columbus: http://www.osu.edu/students/sif/calendar.html * Anti-War Activist Resources: http://www.osu.edu/students/sif/activist.html * Student International Forum: http://www.osu.edu/students/sif/ * Committee for Justice in Palestine: http://www.osu.edu/students/CJP/
deflation watch
The Wall Street Journal today has an article describing how companies are angling to raise prices, often by surreptitious means. In demand were strong, out and out price increases would be relatively easy to engineer. I wonder if anyone has any thoughts on the immediate future of markups. -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
Re: deflation watch
Dial D for deflation Sep 12th 2002 From The Economist print edition Table.pdf Description: Adobe PDF document The biggest risk facing the world economy may be deflation, not a double-dip THE global economy continues to sputter. Yet most economists and policymakers do not expect a double-dip recession in America or elsewhere. This week Horst Köhler, the IMF's managing director, was the latest to play down the risk of recession. Yet this misses a crucial point: even if economies continue to expand over the next year, growth may not be strong enough to prevent the onset of deflationfalling pricesin several countries. America's economy continues to give out mixed signals. Investment remains weak, after dropping for seven consecutive quartersthe longest unbroken fall since the second world war. But optimists pin their hopes on the American consumer, who continues to spend (and borrow) with reckless abandon. For how long? At first sight the fall in America's unemployment rate from 5.9% in July to 5.7% in August seems good news. But the jobless rate, which is based on household surveys, is notoriously volatile. The monthly payroll figures, which are more reliable, show that America's labour market remains weak. Private-sector employment was virtually flat in July and August. This weakness, along with lower share prices, has already dented consumer confidence (see article). After four consecutive quarters of decline, Japan's GDP rose faster than America's in the second quarterby 2.6% at an annual rate. But its economy remains fragile. Retail sales fell by 4.8% in the year to July, and deflation continues unabated. Average wages fell by 5.6% over the same period, as company bonuses slumped. With Japan still sickly and America experiencing a wobbly recovery, one might hope that Europe would ride to the rescue. Dream on. The euro area has also disappointed this year. Not only did GDP grow at an annual rate of only 1.4% in the second quarter, but much of that came from net exports; domestic demand was feeble. The prospects for the third quarter look grimmer. Germany's economy may now be contracting again: its IFO business-sentiment index has fallen for three consecutive months. In the euro area, demand is being squeezed by a stronger currency, as well as by the fall in share prices. Many forecasters have revised their predictions for growth in 2002, to below 1%. A double-dip recession in Americaor indeed in Germanyis certainly possible. But a more likely outcome is that America could suffer a few years of below-trend growth as the economy's imbalances, such as excessive debt and insufficient saving, are put right. A couple of years of modest growth, so long as it remains positive, may not sound so bad. But this misunderstands the relationship between inflation and the output gap (the difference between actual and potential GDP). Letting off air Contrary to popular opinion, inflation does not always rise when the economy expands, nor fall when it shrinks. Instead, the future path of inflation depends largely on the size of the output gap. If the level of GDP is below potential (meaning there is spare capacity), inflation can fall and keep falling, even if the economy is growing briskly, until GDP =if America's growth remains below potential (3-3.5%, according to most economists), the output gap will actually widen, putting even more downward pressure on prices. After the 1990-91 recession, America still had a large negative output gap until 1993; and inflation fell from 5% to 2.5%. Today, America's rate of consumer-price inflation is only 1.5%, and its GDP deflator is rising at a rate of only 1%. A similar decline to that experienced in 1990-91 would take it into deflationary territory. Indeed, according to Dresdner Kleinwort Wasserstein, corporate America is already living with deflation. The implicit price deflator of the non-financial business sector (services as well as manufacturing) fell by 0.6% in the year to the second quarterthe first fall since the second world war (see chart). The risk of deflation in the euro area as a whole remains much slimmer; inflation is still over 2%. But Germany's inflation rate is only 1% and it could well drop over the next year, as weaker growth causes its output gap to widen by more than elsewhere. Even if the European Central Bank's (ECB's) monetary policy is appropriate for the euro area as a whole, it is too tight for Germany alone. As a result, there is a risk that, before the end of 2003, the rich world's three biggest economiesAmerica's, Japan's and Germany'scould all have negative inflation rates. A sharp jump in oil prices as a result of America invading Iraq could, of course, push up headline inflation. But the longer-term impact of higher oil prices would be deflationary, not inflationary. Higher oil prices operate like a tax that depresses growth, so their medium-term impact
RE: deflation watch
Title: RE: [PEN-L:30366] deflation watch Michael Perelman writes: The Wall Street Journal today has an article describing how companies are angling to raise prices, often by surreptitious means. In demand were strong, out and out price increases would be relatively easy to engineer. ... I dunno. It seems to me that (if they hit a large enough part of the economy) price increases, whether surreptitious or not, represent inflation. Both types of price increases are allowed by demand, since people do figure out that quality has decreased or that there are hidden costs. If they don't figure it out for one product, then it cuts into the demand for another. Instead, the existence of surreptitious price increases indicates that the officially-measured rate of inflation is lower than the actual rate. Jim Devine [EMAIL PROTECTED] http://bellarmine.lmu.edu/~jdevine
deflation
Today the Wall Street Journal had a little article on deflation, but they placed it in the section geared to consumers rather than investors. -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
Re: deflation
Michael wrote: Today the Wall Street Journal had a little article on deflation, but they placed it in the section geared to consumers rather than investors. Michael, I don't have access to WSJ so could you please summarize what they say? Best, Sabri
Re: Re: deflation
The article is not theoretical. It merely describes the sectors which are experiencing falling prices. It mentions some with rising prices -- such as ciggies, lawyers, Not much depth, but the fact that the paper even broached the subject was interesting, especially on the day that W. is talking up the economy. On Tue, Aug 13, 2002 at 03:01:19PM -0700, Sabri Oncu wrote: Michael wrote: Today the Wall Street Journal had a little article on deflation, but they placed it in the section geared to consumers rather than investors. Michael, I don't have access to WSJ so could you please summarize what they say? Best, Sabri -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
RE: Re: Re: deflation
Title: RE: [PEN-L:29415] Re: Re: deflation it's not true deflation unless prices _in general_ are falling, though the fall in prices in crucial sectors can indicate that true deflation is in the offing. A really deadly deflation would involve falling money wages and falling housing prices. Jim Devine [EMAIL PROTECTED] http://bellarmine.lmu.edu/~jdevine -Original Message- From: Michael Perelman [mailto:[EMAIL PROTECTED]] Sent: Tuesday, August 13, 2002 3:15 PM To: [EMAIL PROTECTED] Subject: [PEN-L:29415] Re: Re: deflation The article is not theoretical. It merely describes the sectors which are experiencing falling prices. It mentions some with rising prices -- such as ciggies, lawyers, Not much depth, but the fact that the paper even broached the subject was interesting, especially on the day that W. is talking up the economy. On Tue, Aug 13, 2002 at 03:01:19PM -0700, Sabri Oncu wrote: Michael wrote: Today the Wall Street Journal had a little article on deflation, but they placed it in the section geared to consumers rather than investors. Michael, I don't have access to WSJ so could you please summarize what they say? Best, Sabri -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
Re: RE: Re: Re: deflation
Devine, James wrote: it's not true deflation unless prices _in general_ are falling, though the fall in prices in crucial sectors can indicate that true deflation is in the offing. Consumer prices aren't falling, but producer prices are. Year-to-year change in US PPI, all and excluding food and energy (core): all core 12/01-1.7 0.9 1/02 -2.8 0.3 2/02 -2.7 0.7 3/02 -1.7 0.5 4/02 -2.0 0.3 5/02 -2.7 0.1 6/02 -2.0 0.3 7/02 -1.1-0.2 Clearly, weaker energy prices are pulling down the overall index, but the core numbers are very low (annual changes well under 1%) - and most recently negative. CPI comes out in a few days, but it's very low too - .1 for the latest month and 1.1 for the year in June. Doug
RE: deflation
Title: RE: deflation yeah, I know that. In fact, falling producer prices are a sign that consumer prices are likely to fall in the future. A true deflation is like a pure inflation: it has to persist for awhile. It's only when retail wholesale prices -- and money wages -- have been falling for a few months to a year that the economy screams as real debt loads rise relative to incomes. Of course, an asset deflation (such as what hit the stock market and could hit the housing market soon) can have the same effect on the economy, since it would cause people's balance sheets to go to hell (or deeper in that direction). Jim Devine [EMAIL PROTECTED] http://bellarmine.lmu.edu/~jdevine -Original Message- From: Doug Henwood [mailto:[EMAIL PROTECTED]] Sent: Tuesday, August 13, 2002 3:45 PM To: [EMAIL PROTECTED] Subject: [PEN-L:29417] Re: RE: Re: Re: deflation Devine, James wrote: it's not true deflation unless prices _in general_ are falling, though the fall in prices in crucial sectors can indicate that true deflation is in the offing. Consumer prices aren't falling, but producer prices are. Year-to-year change in US PPI, all and excluding food and energy (core): all core 12/01 -1.7 0.9 1/02 -2.8 0.3 2/02 -2.7 0.7 3/02 -1.7 0.5 4/02 -2.0 0.3 5/02 -2.7 0.1 6/02 -2.0 0.3 7/02 -1.1 -0.2 Clearly, weaker energy prices are pulling down the overall index, but the core numbers are very low (annual changes well under 1%) - and most recently negative. CPI comes out in a few days, but it's very low too - .1 for the latest month and 1.1 for the year in June. Doug
Re: Re: Re: Re: Fed on preventing parallels to Japanese deflation
joanna bujes wrote: I'm confused. The Federal Reserve, despite its name, is very much a private concern, right? So, why should it not buy equities? Not very much a private concern. It's a mixed bag. The Board of Governors, based in Washington, are appointed by the pres and confirmed by the Senate. The twelve regional branches are owned by their member banks, and their senior officers are chosen by the bank owners with Washington's approval. The whole system is self-financing, meaning they don't have to worry about getting appropriations from Congress; the Fed turns over a $20-25 billion annual profit to the Treasury every year. Doug
Fed on preventing parallels to Japanese deflation
The New York correspondent of the Swiss journal Neue Zuercher Zeitung (NZZ) today reports on the recently published Fed paper Preventing Deflation: Lessons from Japan's Experience in the 1990s. A couple of days ago the NZZ also reported on a rumour going around that the Fed could have directly intervened on stock markets and could have bought large amounts of stocks: Sie glauben Indizien für eine direkte Intervention der Fed an den Aktienbörsen zu erkennen. In streng geheimen Transaktionen seien dabei zur Stützung des Marktes von Staats wegen Aktien gekauft worden, wird vermutet. Die Fed würde jedoch äusserst unklug handeln, wenn sie in der gegenwärtigen Lage am Aktienmarkt eingriffe. Die Gerüchte dürften daher jeglicher Grundlage entbehren. (NZZ, 27/28.7.2002) Is there any substance to this rumour - or is it part of the usual nervous chat in advance of the Fed meeting? But why does the leading Swiss journal point to this - evidently unsubstantiated - rumour? Neue Zuercher Zeitung, 30. Juli 2002: Das Fed untersucht Parallelen zu Japan Studie der Notenbank weckt Besorgnis bei US-Anlegern kk. New York, 29. Juli Ein Arbeitspapier des Fed, in dem das Beispiel der nunmehr seit zwölf Jahren anhaltenden Flaute des Aktienmarktes sowie des deflationären Umfelds in Japan untersucht wird, macht seit kurzem an der Wall Street die Runde. Viele Anleger interpretieren die Veröffentlichung des Papiers als ein Indiz dafür, dass sich das Fed Sorgen macht, der amerikanischen Volkswirtschaft und den US-Börsen könnte ein ähnliches Schicksal drohen. Ausgangspunkt der Untersuchung ist die gegenwärtig schwierige Situation in den USA, in der die Zielgrösse für die Fed Funds Rate auf den historischen Tiefstand von 1,75% gesenkt worden ist, die auf die Volkswirtschaft einwirkenden externen Schocks aber eigentlich eine weitere Lockerung der Geldpolitik erforderlich machen. Da das Fed durch den extrem niedrigen Stand des nominalen Zinsniveaus aber bezüglich weiterer Zinsschritte stark eingeschränkt ist, wird gefragt, was die Notenbank unternehmen kann, um eine Erholung zu unterstützen. Die Parallelen des Szenarios zur Lage in Japan sind offenkundig: Die Anleger sind gegenwärtig stark verunsichert und stellen sich die Frage, ob nun den USA auch Deflation und eine langjährige Baisse und Rezession drohen. [...] full: http://archiv.nzz.ch/books/nzztag/0/$8B4C6$T.html The above mentioned Fed paper Preventing Deflation: Lessons from Japan's Experience in the 1990s is at http://www.federalreserve.gov/pubs/ifdp/2002/729/default.htm resp. http://www.federalreserve.gov/pubs/ifdp/2002/729/ifdp729.pdf see also: http://asia.news.yahoo.com/020620/5/dtnq.html
Re: Re: Fed on preventing parallels to Japanese deflation
From: Doug Henwood [EMAIL PROTECTED] Hinrich Kuhls wrote: A couple of days ago the NZZ also reported on a rumour going around that the Fed could have directly intervened on stock markets and could have bought large amounts of stocks That one's always floating around. RIght-wing bears are particularly fond of it. Who knows? Anything could happen, and the Fed is certainly authorized to do so. What?! The Federal Reserve is explicitly authorized to take equity stakes in private enterprise? My God, is there anything the sovereign state of the Fed is *not* entitled to do? Carl _ Send and receive Hotmail on your mobile device: http://mobile.msn.com
Re: Re: Re: Fed on preventing parallels to Japanese deflation
At 12:00 AM 07/31/2002 +, you wrote: What?! The Federal Reserve is explicitly authorized to take equity stakes in private enterprise? My God, is there anything the sovereign state of the Fed is *not* entitled to do? I'm confused. The Federal Reserve, despite its name, is very much a private concern, right? So, why should it not buy equities? Joanna
Re: Re: Re: Re: Fed on preventing parallels to Japanese deflation
From: joanna bujes [EMAIL PROTECTED] At 12:00 AM 07/31/2002 +, you wrote: What?! The Federal Reserve is explicitly authorized to take equity stakes in private enterprise? My God, is there anything the sovereign state of the Fed is *not* entitled to do? I'm confused. The Federal Reserve, despite its name, is very much a private concern, right? So, why should it not buy equities? Joanna The Fed is very AC/DC -- sometimes it presents itself as private, other times as public. As I recall, Texas populist Rep. Wright Patman tried for years to levy property taxes on the Fed's headquarters, without luck, since the Fed argued it was part of the government. Confronting the Fed is like grappling with fog. Carl _ Join the worlds largest e-mail service with MSN Hotmail. http://www.hotmail.com
Help on the deflation front
Hope on the horizon for those fearing deflation. Also looks like something the Justice Department might be interested in ;) From EETimes (http://www.eetimes.com/semi/news/OEG20020130S0028) an article about memory chips for, among other things, personal computers: Major DRAM manufacturers are putting their heads together in an effort to coordinate production capacity. . . .Among the participants are Samsung Electronics, Micron and Infineon Technologies. . .There are getting to be fewer and fewer suppliers so we have to work more closely, he said. There is a lot of contact with these guys. Suppliers are comparing notes about production quantities across different product lines, capacity plans and the expected supply of Intel's Pentium 4 chip in an effort to balance supply with demand. We are not talking pricing because that is illegal, but we are talking about how to cooperate how to ensure that the supply side does not get crazy, he said. (NOTE: OPEC generally doesn't talk pricing either.) After nearly a year of dismal memory chip pricing, DRAMs have shot up by more than 250 percent from their November low. . . Eric
GM takes 0 1562396493eals to Jan. 2 ( Deflation ?)
GM takes 0 1562396493eals to Jan. 2 ( Deflation ?) by Ian Murray 13 November 2001 - Original Message - From: Charles Brown [EMAIL PROTECTED] GM takes 0% deals to Jan. 2 ( Deflation ?) Buyers benefit as automaker aims to boost showroom sales; Ford and DaimlerChrysler may follow = Not deflation, Islamic finance! :-) They'd eat a Cadillac if they knew. Ian ___ - CB: Who says there is no merger of finance and industrial capital. GM's ahead of the Fed into the liquidity trap.
GM takes 0% deals to Jan. 2 ( Deflation ?)
GM takes 0% deals to Jan. 2 ( Deflation ?) Buyers benefit as automaker aims to boost showroom sales; Ford and DaimlerChrysler may follow By Joe Miller / The Detroit News DETROIT -- General Motors Corp., bidding to grab more U.S. market share and keep the squeeze on rivals, is extending zero-percent financing on most of its car and truck lineup through Jan. 2. The offers -- no-interest, three-year loans on most 2001 and 2002 Buick, Chevrolet, GMC, Oldsmobile, Pontiac and Saturn cars and light trucks -- were scheduled to expire Saturday. The latest deal excludes Cadillac, Chevrolet Corvette and new Saturn Vue sport-utility vehicle. Ford Motor Co. and DaimlerChrysler AG's Chrysler Group may extend similar offers although no final decisions have been made. Ford's current program ends Nov. 20 while Chrysler's ends Monday. We will remain competitive in the marketplace, said Jeff Bell, Chrysler vice-president, marketing communications. We certainly have an obligation to keep Ford dealers competitive, said Ford sales analyst George Pipas. Zero-percent financing offers from GM, Ford, Chrysler and Toyota Motor Corp. -- launched after Sept. 11 to jump-start sluggish vehicle sales -- drew consumers in record numbers to dealerships in October, resulting in the best sales month in automotive history. But analysts say the deals encouraged consumers to buy sooner rather than later, setting the stage for a sales slump in coming months. Even if Ford and Chrysler follow GM's lead with another round of zero-percent financing, analysts say it will be difficult for automakers to match October's sales pace. A lot of the fence sitters jumped off the fence to buy in October, said Jeff Schuster, an analyst with J.D. Power and Associates. But the consumer hasn't failed to amaze us yet. U.S. auto sales are down 2.6 percent from record 2000 levels, and the industry remains on pace to post one of its strongest years ever. GM and Ford were the biggest winners for the month -- sales for both automakers rose more than 30 percent in October -- but analysts say the expensive incentives are cutting into profits. The rebate spree has proved difficult for financially troubled Ford and Chrysler. They don't have the funds set aside for this kind of incentive race, Schuster said. At the same time, however, the deals have nearly cleared out automakers' inventories of 2001 vehicles and left them with abnormally low inventories of 2002 vehicles going into the traditionally slow winter sales season. Analysts believe the low inventories will help Detroit's automakers avoid the costly production cuts that hurt profits a year ago. It's good for sales and production. It's going to put pressure on their profits, but ultimately it's a better environment for the automakers and suppliers, said Michael Bruynesteyn, an analyst with Prudential Securities. GM has kept the pressure on Ford and Chrysler from the start, introducing its Keep America Rolling zero-interest financing program Sept. 19 and later extending it through Nov. 18. Ford, Chrysler, Toyota and others quickly followed with similar programs and similar extensions. GM says it has offset most of the cost of the zero-interest financing program by eliminating other marketing initiatives. The results have been beyond anyone's expectations, said Bill Lovejoy, GM group vice-president of vehicle sales, service and marketing. We have clearly achieved our objectives in a cost efficient manner. GM's share of the U.S. market rose to 31.6 percent in October from 30.1 percent in October 2000. The automaker's share of the lucrative truck market rose to 33.7 percent from 30.1 percent in the same period. For the year, GM's slice of the U.S. market stands at 28.3 percent, down from 28.4 percent in 2000. GM, which has seen its market share fall from nearly 50 percent over the last couple of decades, is betting it can hold onto its latest gains. It's a pretty good chess game they've got going on now primarily with Chrysler and Ford, Schuster said.
Re: GM takes 0 1562396493eals to Jan. 2 ( Deflation ?)
- Original Message - From: Charles Brown [EMAIL PROTECTED] GM takes 0% deals to Jan. 2 ( Deflation ?) Buyers benefit as automaker aims to boost showroom sales; Ford and DaimlerChrysler may follow = Not deflation, Islamic finance! :-) They'd eat a Cadillac if they knew. Ian
deflation?
Record fall in US prices prompts deflation fears Heather Stewart Saturday November 10, 2001 The Guardian A record fall in American factory gate prices prompted fears yesterday that September 11 has sent the US into a deflationary spiral. At the same time, the Japanese government blamed the knock-on effects of the attacks for what is expected to be the fastest contraction in that country's economy for 20 years. The 1.6% fall in the US producer price index last month was the sharpest since records began in 1947, as firms passed on falling energy costs and offered cut-price financing deals on cars to tempt consumers to keep spending. Analysts said falling prices left the Federal Reserve with room to make further interest cuts without sparking inflation. Anthony Karydakis, of Bank One, said: There is no doubt that inflation is not an issue right now, and is not likely to be an issue for the foreseeable future. The fall in prices followed rises of 0.4% in both August and September, and even after stripping out volatile energy and food prices, there was a monthly decline of 0.5%. Fears that the economic downturn hitting the US will be reflected in other countries were confirmed, as the Japan ese economics minister, Heizo Takenaka, admitted that his government expects the country's economy to shrink by 0.9% in the year to March. The forecast contraction would be the largest for 20 years, and marked a sharp downward revision from Tokyo's previous prediction of 1.7% growth. Economic conditions are very severe. External shocks hit Japan when the economy was weak, said Mr Takenaka. With interest rates already virtually at zero, economists said the Japanese government will be hoping the Fed's 10 interest rate cuts this year are enough to kick-start the US economy. The Japanese economy is so dependent on US demand, said Graham Turner, of GFC Economics. The best hope for Japan is that the global economy recovers. Some hope that American consumers may be shrugging off the gathering economic gloom came in news that consumer confidence, as measured by the University of Michigan survey, has unexpectedly risen this month, to 83.5, from 82.7 in October. Oscar Gonzalez, from John Hancock Financial Services, said: In combination with the producer prices report earlier this morning, it's good news for consumers.
IT-led deflation: Moore's Law ... or Murphy's?
*The Industry Standard* is doing it tough just now, but consoles itself with the thought they won't be alone in this. The following rings pretty convincing, I reckon. Cheers, Rob. OPINION: ERIC J. SAVITZ Price Choppers http://www.thestandard.com/article/0,1902,28832,00.html In case the tech sector doesnt have enough problems, here's another one: The recovery, when it comes, could be undone by deflation. Aug 29 2001 06:01 AM PDT OPINION One of the most shocking pieces of technology news in recent weeks was the word that Intel plans to slash prices on its Pentium IV microprocessors by 50 percent or more dropping what Lehman chip analyst Dan Niles described as a price bomb. Now, theres nothing new about declining chip prices. The steady ratcheting down of computing costs over time is at the heart of Moores Law over time, the cost of a given amount of computing power becomes increasingly small. More precisely, chip processing speed doubles about every 18 months. But Intels move, apparently designed to knock the wind out of rival Advanced Micro Devices and to stimulate PC demand, smacks of something more insidious. In short, while Moores Law continues to operate, in some very important ways it may not matter as much as it used to. And deflationary forces like those in the processor business could go a long way toward muffling the tech recovery - whenever it finally shows up. At least, thats the thinking at the Precursor Group, a Washington-based investment boutique. Analysts Scott Cleland and Bill Whyman assert in a recent report that investors have failed to realize that serious deflationary pressures could undercut the ability of the technology and telecom sectors to grow rapidly when the recovery arrives. Writes Precursor: The sectors fundamental potential for growth is eroding. Certainly, a reduced impact from Moores Law would have a chilling effect. As Precursor points out, Moores Law may have been the single biggest driver of the tech boom over the last two decades. But Cleland and Whyman contend that the importance of Moores Law to hardware companies and to investors has been reduced by the failure of the software business to create the kind of applications that require the power state-of-the-art processors can offer. In the last year, hardware performance for the first time has dramatically outpaced softwares ability to use it, they write. The result? The faster-growth PC replacement cycle of the past is over. The combination of excess processing power and the commoditization of memory and data storage, Precursor says, means longer replacement cycles, reduced demand and deflationary price traction for the PC business. In short, the analysts conclude that Moores law may have lost much of its investment traction. Alas, thats not the end of Precursors deflation thesis. The firm sees further pressure coming from the glut of fiber capacity, asserting that new demand is way overestimated given that no killer app requires fiber to the home. As they point out, DSL and cable modems certainly dont require it. Deflationary forces in telecom, Cleland says, have been exacerbated by both telecom legislation and FCC policy, which have encouraged competition, added costs and constricted the industrys ability to raise prices. Cleland and Whyman believe that conditions in microprocessors and communications services share the same issue: The market simply cant absorb the existing capabilities of either technology. Fiber and silicon technology is now flooding the market with bandwidth and processing speed in market segments that cant put it to full use, which deflates prices and slow growth. Precursors analysts advise tech investors to weight their portfolios toward companies that stand to benefit from declining hardware and equipment prices. The firm remains bullish on the access business, in particular the Baby Bells and the cable systems companies. The analysts are also favorably inclined toward enterprise software companies, as well as on computer services and consulting firms. But they recommend avoiding the deflation-vulnerable hardware companies. Those stocks, Precursor warns, could prove to be a particularly thin base for a growth portfolio. Consider yourself warned.
Re: Hong Kong expands despite deflation
Hong Kong has a wide range of policies to encourage domestic investment. It uses large projects (like its huge new airport) to stimulate the economy. Following the Asian financial crisis it bought $36 billion worth of shares on the Hong Kong sharemarket to prop up the Hong Kong dollar. It still retains $30 billion of those, and will keep half of them as a long-term investment. It also has venture capital funds, financial and technical support, export credit insurance, government-funded industrial estates and a Science Park, aimed at supporting and incubating businesses in areas considered growth areas (such as technology). I have a current interest in Hong Kong because the New Zealand government is currently negotiating a wide-ranging free trade and investment agreement with it. (Advt) See my report (published just beforer negotiations were officially announced) at http://canterbury.cyberplace.org.nz/community/CAFCA Bill Rosenberg Chris Burford wrote: Perhaps a few populist headlines carrying forward the interesting story of Hong Kong: (source from the BBC2 Newsnight programme) In 1997-8 HK fought off currency speculators and devaluation through massive state intervention in the stock exchange, and suffered a mere 5% contraction. In 1999 it expanded. In 2000 the expansion increased and was of the order of 10%. In the four years since 1997 the burden has been taken by property prices which fell by 65%. Deflation stands at 4%. This helps exports by reducing the costs of manufacturers. One factor in the expansion is the ability of the government to intervene in a countercyclical way with its unusual massive surpluses (derived from state ownership of land). It is now pouring money into reclaiming land to build the site of a regional Disneyland centre. Questionable taste in use values, but still some interesting lessons about how much state intervention and control is possible in an economy that has to remain competitive with the global capitalist market. Has anyone got any further details or clarifications? Chris Burford London
Hong Kong expands despite deflation
Perhaps a few populist headlines carrying forward the interesting story of Hong Kong: (source from the BBC2 Newsnight programme) In 1997-8 HK fought off currency speculators and devaluation through massive state intervention in the stock exchange, and suffered a mere 5% contraction. In 1999 it expanded. In 2000 the expansion increased and was of the order of 10%. In the four years since 1997 the burden has been taken by property prices which fell by 65%. Deflation stands at 4%. This helps exports by reducing the costs of manufacturers. One factor in the expansion is the ability of the government to intervene in a countercyclical way with its unusual massive surpluses (derived from state ownership of land). It is now pouring money into reclaiming land to build the site of a regional Disneyland centre. Questionable taste in use values, but still some interesting lessons about how much state intervention and control is possible in an economy that has to remain competitive with the global capitalist market. Has anyone got any further details or clarifications? Chris Burford London
Monetary inflation/deflation
In reply to Jim Devine: -- I don't know what deflating the currency means. Usually its _prices_ that fall, which is summarized as deflation. Under these conditions, the currency gains value in terms of its commodity-purchasing power. --- Let's get real simplistic. If an economy consists of $100 and 100 apples, an apple costs $1. If somebody adds $100 into the economy, the price of apples would increase to $2.00. This, in my view, is inflating the currency. The real economy -- the world of goods and services -- has not changed -- only the quantity of the unit of account. Conversely, if 50 apples were destroyed in a fire, the price would also increase to $2.00, but that would not be, in my view, an example of monetary inflation, because the price change reflects a change in the quantity of the actual goods and services. David Shemano
RE: Re: Monetary inflation/deflation
In reply to Michael Perelman: David we were talking about something else -- not the inflation, but the relative value of currencies. Yes, standard theory suggests that pumping up the money supply is the cause of inflation, which then makes a currency eventually fall. Other forces can also explain inflation, eg market power, but the monetarists usually ignore that possibility. - To the extent a monopolist withholds supply to increase the price of the goods and services, I would not call that a monetary inflation. Analytically, why do you want to conflate the two (increases and decreases in the quantity of the unit of account as compared to increases and decreases in the quantity of goods and services). David Shemano
Gray on global deflation
[Clearly someone worth engaging, no?] Another Wall Street slide could set off worldwide deflation. And Japan shows where that leads Special report: Japan Guardian Unlimited Money John Gray Tuesday March 27, 2001 The Guardian "We need to tame deflation and make it benign. To do so we need not just different policies but a different economic philosophy." The Japanese banker who told me this a week ago in Kyoto was not speaking only of Japan. Unlike most western observers, he understood that the world is returning to a condition it has not known since the late 19th century, when globalisation first got under way. Deflation is built into the global economy that has emerged in the wake of the cold war. The question is whether we can prevent it from spiralling out of control. While the stock market continued to defy gravity few people took seriously the idea that we may be returning to a world of steadily falling prices. Deflation might be entrenched in Japan, but there was no reason to think that it could spread. The vast destruction of wealth we have seen in stock markets over the past few weeks has shattered that complacent consensus. As in Japan, the risk is that a further collapse in the stock market will rebound on the real economy and reinforce the deflationary forces that go with globalisation. Until only a few months ago, the suggestion that the long boom on Wall Street would end in a Japanese-style crash was treated with derision. With few exceptions, western commentators insisted that it rested on sound economic fundamentals. A surprisingly large number gave credence to the idea that the US had entered a "new era" of crisis-free growth. This was, of course, sheer tosh. No doubt it owed something to gains in productivity from restructuring and new technologies, but America's millennial boom was essentially a classic speculative bubble, fuelled by loose credit and stoked up by vast inflows of foreign capital. As in the bubbles of the past, investors were assured that "This time it is different". The investment bankers who proclaimed an American economic miracle were fond of quoting Joseph Schumpeter's description of capitalism as an economic system driven by creative destruction. But in the euphoria produced by rocketing stock prices the destructive side of capitalism identified by the great Austrian economist (the decimation of obsolete industries and the recurrent booms and busts in financial markets) was rarely mentioned. Many Americans came to believe that crashes happen only in history books. As in the 1920s, the belief that the US had arrived on a plateau of permanent prosperity became the basis on which they planned their economic future. Placing their faith in the capital gains they had made in the stock market, they stopped putting money aside for retirement and borrowed as if there were no tomorrow. As could have been predicted, the sunlit upland proved to be a narrow and dangerous crevasse. Many of the capital gains on which Americans were relying for their security in retirement have now gone up in smoke. Any figure is bound to be imprecise, but the worldwide loss of wealth resulting from the decline in stock markets is estimated to be already five or six times as large as that suffered in the mini-crash of 1987. The danger to the global economy posed by this loss of wealth is significant. In order to avoid poverty in old age, millions of Americans will have to start saving again - and saving hard. If history is any guide, they cannot rely on being baled out by the markets. In 1949, the Dow Jones Index stood at less than half its top in 1929. In 1982, when the last great bull market in American stocks began, the index was still more than 20% lower than its peak in 1966 - 16 years earlier. Contrary to the claims of brokers and financial advisers, equities are risky even when they are held long-term. After a meltdown of the sort we are seeing, it can take decades for investors to recoup their losses. Many will find their standard of living reduced permanently. The danger that economic activity will contract throughout the world as Americans curtail their spending is well understood among bankers and policy makers. The deflationary impact of globalisation is less widely comprehended. But the fact is that virtually every aspect of that complex process works to drive prices down. The internet has brought about a huge transfer of value from producers to consumers. By comparison with the past, information is now virtually cost-free. An enormous variety of services can now be accessed directly, without the need for expensive intermediaries. With new technologies, production can be sliced into segments and sited in places all over the world. At the same time, the collapse of communism and the emerging economies of Asia and Latin America have injected billions of new workers into world markets. Taken together, these developments have catapulted us b
Re: Re: Re: Monetary deflation
Of course, the Fed could have tried to slow the bubble by raising margin requirements. It's not clear this would have worked, but then again, the Fed never tried it. Jim wrote: I didn't finish my thought here. The Fed had a hard job in this situation, which involved a private-sector-led speculative bubble which included not just financial and other asset markets but also "high tech" industries, all financed with inflows of foreign funds (corresponding to the current account deficit and increasing US indebtedness to the rest of the world). If it had kept interest rates low, it might have encouraged the bubble economy to keep on growing. It instead raised rates, encouraged the popping of the bubble, with possible Japan-type effects (a decade of stagnation) or worse. Ironically, raising US rates encouraged the inflow of funds (along with the safe-haven effect), fueling the bubble. In these terms, Greenspan's job is really difficult.
Re: Re: Re: Monetary deflation
Of course, the Fed could have tried to slow the bubble by raising margin requirements. It's not clear this would have worked, but then again, the Fed never tried it. right, but the officially-"independent" Fed isn't independent of pressure from the financial interests, who hate that kind of thing. It's only independent from democratic control. - This message was sent using Panda Mail. Check your regular email account away from home free! http://bstar.net/panda/
Re: Monetary deflation
1. Is there an ongoing monetary deflation? Again, I am asking about a world-wide monetary illiquidity phenomena, not an economic contraction. I'm not sure about the phrase "monetary deflation," but "deflation" refers to a steady decline of prices. A world-wide illiquidity problem -- a shortage of money or loanable funds, if you will -- might cause deflation and might be doing so now. What I object to is the "deflation is always and everywhere a monetary phenomenon," which is either tautological true or (if interpreted in any specific and well-defined sense) false. After all, there are other important causes of deflation. Deflation is also encouraged, for example, by the worldwide "race to the bottom," in which all sorts countries try to attract the good wishes and funds of multinational capital by cutting wages, state-provided benefits to workers, environmental restrictions, etc. This is typically combined with competitive austerity programs and export-promotion drives. BTW, in my screed on how business-oriented policies helped create the Great Depression, I skipped over one element. In the 1920s, it was standard pro-business operating procedure to raise tariffs. Joseph Schumpeter, for example, pointed out that it was the US Republican Party's main solution to domestic problems. This medicine worked in the early 1920s, but then was a disaster with the Smoot-Hawley act, because it encouraged retaliation. In recent years, protectionism has become anathema (partly because the US started running the world after 1945 and so business leaders decided that they no longer needed it; this attitude was then pushed on the rest of the world). Instead, the neoliberal movement has been pushing faster and faster globalization, causing the deflationary trends discussed in my second paragraph, above. So the race to the bottom, etc., has replaced tariff wars, the gold standard, etc. as a source of world deflation. And if not, why is the price of gold so low, relatively speaking, notwithstanding recent interest rate cuts? My impression is that gold prices are mostly connected with expected inflation rates (though interest rates may affect short-term fluctuations). (When fiat bank money is losing its purchasing power (inflation), people decide to hold more gold. After all, unlike bonds or stocks, gold doesn't pay interest or dividends.) So a move toward deflation would lead people to want to hold fiat bank money instead of gold, depressing gold prices. 2. If there is an ongoing monetary deflation, what are (will be) its consequences? Since a big part of society has excessive debt, and since debts are typically in nominal terms (and hard to renegotiate when times are turning hard), a fall in prices -- and thus money incomes -- means that debts rise relative to incomes, encouraging falls in spending, decreases in new loans, and waves of bankruptcy, which encourage the hard times to turn even harder. (Irving Fisher, the great neoclassical and eugenics fan, gets credit for the "debt deflation theory of great depressions." My version is less abstract.) 3. If there is an ongoing monetary deflation, what is causing it? The Fed or something else? What would cure it? Should it be cured? The Fed has clearly contributed, though the factors discussed above (the race to the bottom, competitive austerity and export promotion) encourage it too. I think it's a mistake to put too much blame on the Fed, because the world economy has been facing a situation that is increasingly untenable: the US has been the "consumer of last resort," filling the demand gap created by the race to the bottom, etc. But this has led to increasing US debts to the rest of the world, increasing US interest payments to the rest of the world, and the greater possibility that the "safe haven" status of the US dollar would go away, perhaps with the status of the US dollar as the main reserve currency. Jim Devine [EMAIL PROTECTED] http://bellarmine.lmu.edu/~jdevine
Re: Re: Monetary deflation
I wrote: The Fed has clearly contributed, though the factors discussed above (the race to the bottom, competitive austerity and export promotion) encourage it too. I think it's a mistake to put too much blame on the Fed, because the world economy has been facing a situation that is increasingly untenable: the US has been the "consumer of last resort," filling the demand gap created by the race to the bottom, etc. But this has led to increasing US debts to the rest of the world, increasing US interest payments to the rest of the world, and the greater possibility that the "safe haven" status of the US dollar would go away, perhaps with the status of the US dollar as the main reserve currency. I didn't finish my thought here. The Fed had a hard job in this situation, which involved a private-sector-led speculative bubble which included not just financial and other asset markets but also "high tech" industries, all financed with inflows of foreign funds (corresponding to the current account deficit and increasing US indebtedness to the rest of the world). If it had kept interest rates low, it might have encouraged the bubble economy to keep on growing. It instead raised rates, encouraged the popping of the bubble, with possible Japan-type effects (a decade of stagnation) or worse. Ironically, raising US rates encouraged the inflow of funds (along with the safe-haven effect), fueling the bubble. In these terms, Greenspan's job is really difficult. I'm reminded of a statement that Uncle Miltie and Anna K.S. made about monetary policy in the late 1920s: Federal Reserve policy was "too easy to break the speculative boom, yet too tight to promote healthy economic growth" [quoted in Temin, 1976: 23]. I should mention that just like in the late 1920s, the 1990s boom wasn't simply a product of monetary policy: rising profit rates (until 1998 or so) also fueled the speculation. Jim Devine [EMAIL PROTECTED] http://bellarmine.lmu.edu/~jdevine
Monetary deflation
For those interested, my supply-side gurus are taking the position that the world economy is suffering a severe monetary deflation, mainly caused by errors at the Fed. If true, Lefties especially should be concerned, because monetary deflation has directly negative consequences for the ability of debtors to repay debt. http://www.polyconomics.com/searchbase/03-14-01.html http://www.nationalreview.com/comment/comment-darda031901.shtml David Shemano
Re: Monetary deflation
David Shemano wrote: For those interested, my supply-side gurus are taking the position that the world economy is suffering a severe monetary deflation, mainly caused by errors at the Fed. ...because, as every supply-sider knows (and every monetarist too - this is one point they agree on), problems in capitalism only emerge from bad state policy, never from within private market relations. Doug
RE: Re: Monetary deflation
Doug Henwood wrote: -- For those interested, my supply-side gurus are taking the position that the world economy is suffering a severe monetary deflation, mainly caused by errors at the Fed. ...because, as every supply-sider knows (and every monetarist too - this is one point they agree on), problems in capitalism only emerge from bad state policy, never from within private market relations. - If you could explain to me how monetary deflation can arise from private market relations and not the actions of a central bank(s), I would be very interested. David Shemano
RE: RE: Re: Monetary deflation
If you could explain to me how monetary deflation can arise from private market relations and not the actions of a central bank(s), I would be very interested. David Shemano *** http://www.csu.edu.au/ci/vol06/keen/keen.html Ian
Re: RE: Re: Monetary deflation
David Shemano wrote: Doug Henwood wrote: -- For those interested, my supply-side gurus are taking the position that the world economy is suffering a severe monetary deflation, mainly caused by errors at the Fed. ...because, as every supply-sider knows (and every monetarist too - this is one point they agree on), problems in capitalism only emerge from bad state policy, never from within private market relations. - If you could explain to me how monetary deflation can arise from private market relations and not the actions of a central bank(s), I would be very interested. Well, just to take one convenient example, in recent years the U.S. enjoyed one of the great speculative manias in human history, with wild stock valuations leading to the squandering of billions on ludicrous IPOs, innocent civilians trusting their retirement portfolios to utterly inappropriate mutual funds, corps and households borrowing recklessly (partly emboldened by the vigorous stock market and the ludicrous New Economy discourse), etc. You could argue that the "Greenspan put" laid a public sector foundation under the bubble, but generally, blaming the central bankers conveniently gets the private actors off the hook. Doug
Re: RE: Re: Monetary deflation
David, I tried to give an explanation in a book, The Natural Instability of Markets. David Shemano wrote: If you could explain to me how monetary deflation can arise from private market relations and not the actions of a central bank(s), I would be very interested. David Shemano -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
Re: Monetary deflation
At 11:08 AM 3/19/01 -0800, you wrote: For those interested, my supply-side gurus are taking the position that the world economy is suffering a severe monetary deflation, mainly caused by errors at the Fed. ... Jamie Galbraith, a Keynesian, has also blamed international stagnation on the Fed's high rates. Jim Devine [EMAIL PROTECTED] http://bellarmine.lmu.edu/~jdevine
Re: Re: Monetary deflation
At 02:53 PM 3/19/01 -0500, you wrote: David Shemano wrote: For those interested, my supply-side gurus are taking the position that the world economy is suffering a severe monetary deflation, mainly caused by errors at the Fed. ...because, as every supply-sider knows (and every monetarist too - this is one point they agree on), problems in capitalism only emerge from bad state policy, never from within private market relations. isn't it self-evident and thus axiomatic that all evil comes from the government? The only reason why we associate human disasters with capitalism is that it hasn't been perfected yet. Capitalism is, after all, the "unknown ideal," to quote Ayn Rand. Jim Devine [EMAIL PROTECTED] http://bellarmine.lmu.edu/~jdevine
Re: RE: Re: Monetary deflation
At 11:56 AM 3/19/01 -0800, you wrote: If you could explain to me how monetary deflation can arise from private market relations and not the actions of a central bank(s), I would be very interested. There is no such thing as "private market relations." Without the Fed and other government agencies, private market relations -- which encourage opportunistic greed of the worst kind -- would degenerate into a Hobbesian war of each against all. Further, though the Fed and similar government agencies clearly make mistakes, they do so under the profound influence of those engaged in "private market relations," since the latter have the most political power on issues economic unless there is a movement of labor, etc., to counteract that influence. An historical illustration: In the early 1930s, for example, the Fed allowed the U.S. money supply to fall drastically. Milton Friedman and similar MFs lambaste the Fed for this, basically saying that "if I, Milton Friedman, had been running the show, the 'great contraction' of the money supply would never have happened, so there wouldn't have been a great depression and the resultant rise in statism." But this is nonsense. At the time, those in "private market relations," i.e., business, had tremendous amounts of political power. It was a very conservative _pro-business_ position to tie the dollar to gold. In fact, many laissez-faire-oriented "supply-siders" think that the gold standard should be re-established -- even though the clinging to the gold standard was a major reason for the Fed's deflationary policies. Further, it was a _pro-business_ position to "liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate" (Treasury Secretary Andrew Mellon), i.e., to encourage recession. It was also the _pro-business_ position to push the income distribution toward greater and greater degrees of inequality during the 1920s, including big "supply-side" tax cuts which reinforced the trend toward inequality and high profits. It was also the _pro-business_ position to push the government to raise taxes in the early 1930s, since it was the pro-business position that the government should never, ever, run deficits. Those in "private market relations" were running the show, suffered from _hubris_, and blew it. Of course, they then struggled to make sure that the working people paid the cost of their blunders. Finally, the money supply and the cost of credit do not simply respond to Fed policy. When the pro-business policies led to the collapse of the US banking system, that led to a shrinkage of the money supply (and a rise in the cost of financial services) beyond what the Fed was trying to do. Jim Devine [EMAIL PROTECTED] http://bellarmine.lmu.edu/~jdevine
Re: Re: RE: Re: Monetary deflation
[EMAIL PROTECTED] writes: At 11:56 AM 3/19/01 -0800, you wrote: If you could explain to me how monetary deflation can arise from private market relations and not the actions of a central bank(s), I would be very interested. How could a monetary deflation not arise from "private market relations" in the absence of a central bank? What exactly would a monetary system founded on "private market relations" look like? Presumably, without a central bank or other issuer of fiat money, private bank notes would circulate as money. A few nasty bankruptcies and, bam, debt-deflation. This happened all the time in the US in the 1800s. A fundamental fallacy of neo-classical economics and its poltical corollary, libertarianism, is that in a state of nature, markets and property relations would spring up, but governments would not. In fact, any reading of history suggests the opposite. Governments of all types precede markets. Further, the expansion of markets since the 1800s has been accompanied every step of the way by the expansion of government activity. Why do you think central banks were created anyway? Ellen Frank
Monetary deflation
I hate to be crabby but I am working late and not enjoying it. Please give me your take on my original intended question, as now reformulated, without the capitalism bad, socialism good stuff: 1. Is there an ongoing monetary deflation? Again, I am asking about a world-wide monetary illiquidity phenomena, not an economic contraction. And if not, why is the price of gold so low, relatively speaking, notwithstanding recent interest rate cuts? 2. If there is an ongoing monetary deflation, what are (will be) its consequences? 3. If there is an ongoing monetary deflation, what is causing it? The Fed or something else? What would cure it? Should it be cured? Thanks. Now I feel better. David Shemano
Re: Monetary deflation
A number of people on the list have been referring to the worldwide overcapacity crisis. Why do you think that it is necessarily monetary? On Mon, Mar 19, 2001 at 09:27:56PM -0800, David Shemano wrote: I hate to be crabby but I am working late and not enjoying it. Please give me your take on my original intended question, as now reformulated, without the capitalism bad, socialism good stuff: 1. Is there an ongoing monetary deflation? Again, I am asking about a world-wide monetary illiquidity phenomena, not an economic contraction. And if not, why is the price of gold so low, relatively speaking, notwithstanding recent interest rate cuts? 2. If there is an ongoing monetary deflation, what are (will be) its consequences? 3. If there is an ongoing monetary deflation, what is causing it? The Fed or something else? What would cure it? Should it be cured? Thanks. Now I feel better. David Shemano -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
RE: Re: Monetary deflation
I don't think anything necessarily. I am simply asking questions. The two articles I linked discuss a worldwide monetary deflation. In other words, the Fed has not created enough dollars to satisfy the world demand for dollars. As a result, commodity prices, as best evidenced by gold, have been sinking. And as a result, debtors, whether individuals or countries, now find themselves having to repay debts in dollars that are worth much more than they were when they incurred their debts, which is painful and will cause defaults and bankruptcies. The supply-siders think this is going on because the Fed has been looking for inflation that simply does not exist and not paying enough attention to the price of commodities such as gold. Now, this may be true or it may not be true. I don't know, although it makes sense to me. That is why I am asking for your general take on it. David Shemano -Original Message- From: [EMAIL PROTECTED] [mailto:[EMAIL PROTECTED]]On Behalf Of Michael Perelman Sent: Monday, March 19, 2001 9:47 PM To: [EMAIL PROTECTED] Subject: [PEN-L:9171] Re: Monetary deflation A number of people on the list have been referring to the worldwide overcapacity crisis. Why do you think that it is necessarily monetary? On Mon, Mar 19, 2001 at 09:27:56PM -0800, David Shemano wrote: I hate to be crabby but I am working late and not enjoying it. Please give me your take on my original intended question, as now reformulated, without the capitalism bad, socialism good stuff: 1. Is there an ongoing monetary deflation? Again, I am asking about a world-wide monetary illiquidity phenomena, not an economic contraction. And if not, why is the price of gold so low, relatively speaking, notwithstanding recent interest rate cuts? 2. If there is an ongoing monetary deflation, what are (will be) its consequences? 3. If there is an ongoing monetary deflation, what is causing it? The Fed or something else? What would cure it? Should it be cured? Thanks. Now I feel better. David Shemano -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
Re: Monetary deflation
David, Japan has not been able to get out of its slump with a very expansionary monetary policy. Even if Greenspan, who was a god only a few months ago, pumped up the money supply and got the stock market rolling again, sooner or later the contradictions of overcapacity would bite him in the butt. On Mon, Mar 19, 2001 at 10:03:18PM -0800, David Shemano wrote: I don't think anything necessarily. I am simply asking questions. The two articles I linked discuss a worldwide monetary deflation. In other words, the Fed has not created enough dollars to satisfy the world demand for dollars. As a result, commodity prices, as best evidenced by gold, have been sinking. And as a result, debtors, whether individuals or countries, now find themselves having to repay debts in dollars that are worth much more than they were when they incurred their debts, which is painful and will cause defaults and bankruptcies. The supply-siders think this is going on because the Fed has been looking for inflation that simply does not exist and not paying enough attention to the price of commodities such as gold. Now, this may be true or it may not be true. I don't know, although it makes sense to me. That is why I am asking for your general take on it. David Shemano -Original Message- From: [EMAIL PROTECTED] [mailto:[EMAIL PROTECTED]]On Behalf Of Michael Perelman Sent: Monday, March 19, 2001 9:47 PM To: [EMAIL PROTECTED] Subject: [PEN-L:9171] Re: Monetary deflation A number of people on the list have been referring to the worldwide overcapacity crisis. Why do you think that it is necessarily monetary? On Mon, Mar 19, 2001 at 09:27:56PM -0800, David Shemano wrote: I hate to be crabby but I am working late and not enjoying it. Please give me your take on my original intended question, as now reformulated, without the capitalism bad, socialism good stuff: 1. Is there an ongoing monetary deflation? Again, I am asking about a world-wide monetary illiquidity phenomena, not an economic contraction. And if not, why is the price of gold so low, relatively speaking, notwithstanding recent interest rate cuts? 2. If there is an ongoing monetary deflation, what are (will be) its consequences? 3. If there is an ongoing monetary deflation, what is causing it? The Fed or something else? What would cure it? Should it be cured? Thanks. Now I feel better. David Shemano -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED] -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
Re: severe world monetary deflation
I had in any case wanted to go back to the original question posed At 11:08 19/03/01 -0800, David Shemano wrote: For those interested, my supply-side gurus are taking the position that the world economy is suffering a severe monetary deflation, How is deflation conceptualised in this usage, since actual falls in prices are so rare? I had intended to raise this query when at the weekend I saw the report that Japan has just slid into deflation. The figures at face value look most undramatic. "Japan's consumer price index fell 0.4% in 2000 after a 0.3% fall the previous year - meeting the international definition of deflation, which is two consecutive annual declines in prices." What struck me is how even with markedly reduced inflation in the world an annual price rise of under a few percent would be considered common. So why the dread if prices dip for a couple of years in one, admittedly major economy, very slightly below the 0 line? My query is that this must imply that there is an underlying assumption in conventional economics that does not in fact regard prices as the ultimate standard of the total worth in an economy. Rather there is an assumption that year on year the amount of goods and services in an economy in price terms will rise and that in practical terms inflation is when the supply of money expands disturbingly faster than this expansion. This implies that conventional economics, without acknowledging Marx in any way, accepts that there is some fundamental limiting factor like the total exchange value in an economy, and that in modern economies year on year as production rises, the price of each individual unit represents a proprotionately smaller fraction of the total exchange value of the economy. Perhaps there are holes in this reasoning so far, or not everyone is with me. Let me go back to the stark contrast posed by David Shemano's question. How can any gurus be arguing there is severe monetary deflation in the world where according to the international definition of inflation only one economy has slipped by less than 0.5% into price falls for two consecutive years? What is the definition of deflation for such gurus? What are they actually talking about? (at their most coherent? - don't lets spend time on the idiocies) Chris Burford London
Deflation Persists in Japan (was Japan's Debt)
Again to Jim D.: Here pen-l faces a disagreement: Peter says that Japanese private corporations and banks face stuff like low profitability, excessive debts, pessimistic expectations, and unused capacity, while Dennis (always an optimist concerning Japan) sees profitability recovering. It would great to see some evidence. This is old news, but * Financial Times (London) October 20, 2000, Friday London Edition 1 SECTION: ASIA-PACIFIC; Pg. 13 HEADLINE: ASIA-PACIFIC: Japan puts up growth forecast to 1.5 per cent BYLINE: By GILLIAN TETT DATELINE: TOKYO The Japanese government yesterday raised its forecast for growth, claiming its new stimulus package would boost the rate of expansion. The revision came as the government confirmed the package would total Y3,900bn (Pounds 25bn) in terms of real spending, or Y11,000bn if all the additional measures are included that do not involve new spending. This is the 10th package the government has announced in a decade. These packages have brought its stimulus spending to more than Y120,000bn, and helped raise Japan's debt to gross domestic product towards 130 per cent, the highest ratio in the industrialised world. The Economic Planning Agency yesterday said that the latest round of spending would raise the overall rate of growth by 1.2 percentage points. Consequently, it raised its forecast for growth in fiscal 2000 to 1.5 per cent from 1 per cent, slightly below most private sector forecasts. However, in a move that indicates the problems still dogging the Japanese economy, the EPA also revised down its price forecast. It now expects consumer prices to fall by 0.3 per cent over the next year, instead of rising by 0.3 per cent, as earlier projected. This price projection is in line with recent CPI data, though many economists suspect that this is understating the level of price decline: recent GDP deflator figures, for example, have suggested that prices are falling by almost 2 per cent a year. However, the EPA price projection is embarrassing for the Bank of Japan, since the central bank has recently been suggesting that deflationary pressures are disappearing in the economy. Partly as a result of this, it raised overnight interest rates from around zero to 25 basis points in August. And further falls in prices will make it even harder for Japan to tackle its debt problems, as nominal GDP is now growing at a much slower pace than real GDP. The EPA yesterday suggested that nominal GDP would be only 0.4 per cent this fiscal year, compared with an earlier projection of 0.8 per cent. "It is now official - deflation persists," said Jesper Koll, economist at Merrill Lynch. In spite of this, Kiichi Miyazawa, the finance minister, yesterday pledged that the government would try to make this year's stimulus package the last. The government yesterday said the budget would be an "IT budget", since most funds are going to IT programmes, urban infrastructure, environment and services for the elderly. Of the Y3,900bn spending, Y2,500bn will be spent on so called "social infrastructure", Y100bn on promoting IT education, Y400bn on natural disaster measures, Y800bn to help small companies and Y100bn to combat unemployment. * Yoshie
RE: Regarding deflation/inflation
Michael Perelman wrote, Dave's report today had two indications that deflationary pressures are weakening. Is that true? Other reports suggest that the economy might be slowing down. What is happening??? Richardson_D wrote: A survey of business economists showed that more companies are raising prices than at any time during the past 5 years, while a separate report Well, there was this big solar flare last Friday . . . Temps Walker Sandwichman and Deconsultant
Regarding deflation/inflation
Dave's report today had two indications that deflationary pressures are weakening. Is that true? Other reports suggest that the economy might be slowing down. What is happening??? Richardson_D wrote: A survey of business economists showed that more companies are raising prices than at any time during the past 5 years, while a separate report shows import costs continue to rise on spiking petroleum prices. The National Association for Business Economics said one-third of the businesses it surveyed had increased prices in the second quarter, and half expected to do so later this year. The National Association of Business Economics said one-third of the businesses it surveyed had increased prices in the second quarter and half expected to do so later this year. __A new survey by the National Association for Business Economics shows that businesses increasingly can make price increases stick in the marketplace as global demand strengthens and deflationary forces subside. In the second quarter of 2000, about one-third of NABE members surveyed said their firms were able to pass along price hikes, the highest percentage in 5 years, according to the organization's president. Almost 50 percent of the firms represented in the second quarter survey said they expected their companies to raise prices this year. Some 27 percent said they expected increases to be more than 2 percent, while another 21 percent expected hikes of less than 2 percent (Daily Labor Report -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
[PEN-L:12562] Re: deflation (by pen-l's Brad)
Brad de Long is too modest. He should have told us about this. I think this article looks really interesting. I can't really judge an article by an editors' summary, but it seems to minimize the effects of international deflation on global spending. Maybe. It's U.S. centered (although there was a part of it about how the U.S. could become very vulnerable should foreigners begin asking that their U.S. bank accounts be denominated in euros please, that I think was cut for lack of space from the published version...) If you want a slightly longer (2000 word) summary, it's at: http://econ161.berkeley.edu/Econ_Articles/brookings_crisis_speech.html
[PEN-L:12546] deflation (by pen-l's Brad)
Brad de Long is too modest. He should have told us about this. I think this article looks really interesting. I can't really judge an article by an editors' summary, but it seems to minimize the effects of international deflation on global spending. "Should We Fear Deflation?" by J. Bradford DeLong (BROOKINGS PAPERS ON ECONOMIC ACTIVITY, 1 1999) Summary by William C. Brainard and George L. Perry of the Brookings Institution THE BOOMING U.S. economy is today virtually the only bright spot in a world economy beset by subpar growth or outright recession. Although the emerging economies of the Pacific Basin appear to have bottomed out of their crisis, much of Western Europe is moving ahead only slowly, and many Latin American economies appear vulnerable to renewed decline. In Japan, where the general price level has actually dropped in recent years and where producer prices fell by 5 percent during 1998, recovery is still uncertain, and monetary policy cannot lower real interest rates significantly with nominal rates already near zero. Some observers see excess global manufacturing capacity, and global slack in general, leading to a worldwide deflation that could derail even the U.S. economy. In the last report of this issue, Bradford DeLong examines whether there is reason to fear deflation in the United States and whether policymakers are equipped to deal with the problems created by deflation should it appear. Public awareness of the possibility of deflation has increased dramatically in the past year: DeLong reports that the number of articles about deflation in major U.S. newspapers increased more than tenfold in the six months before the Brookings conference. Yet for most of the postwar period inflation, not deflation, has been the main concern. By the mid-1970s many observers had concluded that the U.S. economy had an inflationary bias. DeLong observes that some economists had already come to this view by the late 1930s: shortly after publication of Keynes's General Theory, Jacob Viner warned of such a bias in Keynesian policies aimed at full employment. In Viner's view, Keynesian policies were likely to result in a "constant race between the printing press and the business agents of the trade unions..." in order to maintain employment at its potential. DeLong goes on to describe how Finn Kydland and Edward Prescott developed and sharpened this idea of inflationary bias in the 1970s. In their simple model, central banks concerned with unemployment are tempted to take advantage of a short-run Phillips curve to boost employment, but in the end they are unsuccessful, as workers and managers with rational expectations come to anticipate such actions from the central bank. The result is that equilibrium production and unemployment are unaffected, but inflation is higher than desirable. Whether because of such insights or because of the actual experience with inflation following the two oil price explosions of the 1970s, a common culture of central banking has emerged in many countries in which control of inflation is the paramount if not sole objective. Ironically, however, more or less simultaneously with this heightening of concern about inflationary bias in monetary policy, inflation was actually vanishing. DeLong raises the possibility that the apparent bias toward inflation in the 1960s and 1970s resulted not from any game-theoretic interaction between central bankers and the economy but rather from "painful misjudgments about the structure of the economy that were corrected after the 1970s." The only living Americans who have actually experienced a significant deflation are those old enough to remember the Great Depression. The decline in prices during that period was indeed dramatic. From 1929 to 1933 the consumer price index fell 25 percent, and prices received by farmers fell by more than half. Neither consumer nor agricultural producer prices regained their 1929 levels until 1943. DeLong briefly reviews how economists' views of inflation and deflation changed during this period as well as the lessons about deflation they have drawn from that experience. He reports that most economists in the 1920s treated inflation and deflation as roughly symmetric "evils to be shunned." But he sees the Depression as shifting the balance of fears to deflation, with "a near consensus...that deflation was deeply dangerous and to be avoided at all costs." Although economists have differed about the root causes of the Depression, according to DeLong almost every analyst during and since the 1930s has "placed general deflation-and the chain of financial and real bankruptcies that it caused-at or near the heart of the worst macroeconomic disaster the world has ever seen." Before and during the Depression, Irving Fisher stressed the damage to leveraged companies and financial institutions f
[PEN-L:1138] Deflation?
AFTER GIVING DUE AND CAREFUL STUDY TO THE fallout from Ailing Asia, Reeling Russia and Listing Latin America, weighing the possible impact of the personalities filling our tiny screen from Monica Lewinsky (former First Intern now embittered extern) and Osuna bin Laden (may his tribe decrease) to Ken Starr (will somebody please tell him to stop smiling when he spots a camera pointed his way) and Bill Clinton (who thinks that being President means you never have to say you're sorry), weighing the effects of the anti-terrorist missile strikes in Afghanistan and Sudan against the potential terrorist retaliatory attacks on Americans abroad and at home, our considered reaction to Friday's stock market action is...??? How can a market be so ugly all day long and so beautiful in the final hour? Did the real market sneak away late Friday to get a head start on the weekend and a rogue market take over? If so, won't the real market be boiling mad, and what does that bode for Monday? Did Alan Greenspan decide to switch his portfolio from bills to equities or at least grab a few calls on the SP index? Did every partner at Goldman Sachs (enough to fill 100 elevators if the fat ones call in sick) chip in a week's pay and buy stocks in a gallant move to save the nation, the economy, the bull market and their pending IPO (not necessarily in order of importance)? Did the humble but honest Japanese investor, who after eight years of a bear market in Tokyo still has a yen for stocks, decide to try his luck in the US. and proceed to quietly pour into our market some of the dough he has been squirreling away in postal savings at a 0.0005% yield (compounded)? Did the trillions the Russians don't pay in taxes hop a freighter, land on these shores and rush helter-skelter into the stock market? Did the Colombian drug lords, nervous about devaluation in Venezuela, Brazil, Argentina, Mexico, etc., etc., take their loot out of South American banks (scrupulously paying penalities for early withdrawal, of course) and send it, disguised as bananas, tacos and coffees, into this country, whence it found its way into the pharmaceutical sector? Did the early selling represent heavy shorting by the aforementioned Osama bin Laden and the last-minute buying represent even heavier buying by his estranged Saudi relatives? Did the Chinese, famously canny investors, having suckered the Americans into shoring up the yen while they were dumping $10 billion worth of that shaky currency, put their winnings from that transaction into U.S. stocks? Did participants in the global sex industry, which, a U.N. agency revealed this week, hundreds of billions a year, fearful that exposure will subject it to local taxes, choose 3:30 p.m. on Friday to sequester their ill-gotten gains in IBM, Microsoft, GE and other impeccable issues? That the stock market buckled so sharply Friday morning was hardly surprising. In fact, the surprise would have been if it hadn't. We don't think the selling was occasioned by the news that some smart missiles had been fired at some dumb terrorists. Nor, for that matter, are we persuaded that Mr. Clinton 'fessing up to doing naughty things in the Oral Office sent stocks into a tizzy. The strikes against the terrorists, if anything might be viewed as a positive and purposeful action. And gosh, is there anyone of legal competence (or even most folks might not qualify for that designation) who thought Mr. Clinton wasn't capable of fibbing. We remember in the initial months of the President's first term, Barrons ran a cover showing Mr. Clinton fitted with a fine Pinocchio nose We weren't prescient, merely observant. More likely the excuse for the big dive was the evidence, which suddenly became too imposing for even the most optimistic bull to ignore, that the world was inexorably dissolving all around us. Beyond East Asia and Japan, the likes of Russia and Venezuela were teetering on the precipice, with Brazil and Mexico, to name only two, closer to the precarious edge. And the currency plague is threatening to spill over from the emerging economies and infect Canada and Norway, as well. Especially unsettling was the official denial China that it planned to devalue the yuan or unpeg the Hong Kong dollar. Denial of intent to devalue is invariably a precursor to devaluation. Mr. Yeltsin, you may recall, firmly offered just such a vow the day before the Russian ruble, with Moscow's. blessing went down the tubes. The Chinese economy, from all indications and despite the numbers concocted by Beijing, is stagnating or worse. It's hard to imagine the powers-that-be hesitating to do what they must to stay competitive In foreign markets. All of which strikes us -- and, obviously, an increasing number of investors as well -- as auguring further deflationary pressure around the globe. We think the stock market reacted on Friday to the dreary prospect of a beggar-thy-neighbor world. Nothing we're afraid, changed in the final hour
Greenspan on Deflation
The Wall Street Journal Interactive Edition -- January 3, 1998 Speech by Alan Greenspan Remarks by Federal Reserve Chairman Alan Greenspan at the Annual Meeting of the American Economic Association and the American Finance Association, Chicago, January 3, 1998 'Problems of Price Measurement' For most of the past twenty years, the challenges confronting monetary policy makers centered on addressing the question of how inflation could be brought down with as little economic disruption as possible. Given the progress that has been made in reducing inflation, and the very solid economic performance that this low-inflation environment has helped to promote, a new set of issues is now emerging on the policy agenda. Of mounting importance is a deeper understanding of the economic characteristics of sustained price stability. We central bankers need also to better judge how to assess our performance in achieving and maintaining that objective in light of the uncertainties surrounding the accuracy of our measured price indexes. In today's advanced economies, allocative decisions are primarily made by markets. Prices of goods and services set in those markets are central guides to the efficient allocation of resources in a market economy, along with interest rates and equity values. Prices are the signals through which tastes and technology affect the decisions of consumers and producers, directing resources toward their highest valued use. Of course, this signaling process, which involves individual prices, would work with or without government statistical agencies that measure aggregate price levels, and in this sense, price measurement probably is not fundamental for the overall efficiency of the market economy. Indeed, vibrant market economies existed long before government agencies were established to measure prices. Nonetheless, in a modern monetary economy, accurate measurement of aggregate price levels is of considerable importance, increasingly so for central banks whose mandate is to maintain financial stability. Accurate price measures are necessary for understanding economic developments, not only involving inflation, but also involving real output and productivity. If the general price level is estimated to be rising more rapidly than is in fact the case, then we are simultaneously understating growth in real GDP and productivity, and real incomes and living standards are rising faster than our published data suggest. Under these circumstances, policy makers must be cognizant of the shortcomings of our published price indexes to avoid actions based on inaccurate premises that will provoke undesired consequences. Clearly, central bankers need to be conscious of the problems of price measurement as we gauge policies designed to promote price stability and maximum sustainable economic growth. Moreover, many economic transactions, both private and public, are explicitly tied to movements in some published price index, most commonly a consumer price index; and some transactions that are not explicitly tied to a published price index may, nevertheless, take such an index into account less formally. If the price index is not accurately measuring what the participants in such transactions believe it is measuring, then economic transactions will lead to suboptimal outcomes. The remarkable progress that has been made by virtually all of the major industrial countries in achieving low rates of inflation in recent years has brought the issue of price measurement into especially sharp focus. For most purposes, biases of a few tenths in annual inflation rates do not matter when inflation is high. They do matter when, as now, inflation has become so low that policy makers need to consider at what point effective price stability has been reached. Indeed, some observers have begun to question whether deflation is now a possibility, and to assess the potential difficulties such a development might pose for the economy. Even if deflation is not considered a significant near-term risk for the economy, the increasing discussion of it could be clearer in defining the circumstance. Regrettably, the term deflation is being used to describe several different states that are not necessarily depicting similar economic conditions. One use of the term refers to an ongoing fall in the prices of existing assets. Asset prices are inherently volatile, in part because expected returns from real assets can vary for a wide variety of reasons, some of which may be only tangentially related to the state of the economy and monetary policy. Nonetheless, a drop in the prices of existing assets can feed back onto real economic activity, not only by changing incentives to consume and invest, but also by impairing the health of financial intermediaries--as we experienced in the early 1990s and many Asian countries are learning now. But historically, it has been
Re: The IMF and deflation
Michael Perelman wrote: Does anybody have any thoughts on the critique of the IMF by Stiglitz and Sachs -- that the IMF is creating a deflationary economy to save the banks? This is speculation based on no solid information, but the World Bank funds lots of infrastructure projects that provide contracts for lots of First World companies, and the loss of the Asian market must be pretty painful for the likes of Bechtel and GE. The IMF's mandate is purely financial. It may be that this is one of those moments where the interests of finance and industry diverge, and the WB-IMF tiff reflects that. Doug
Re: The IMF and deflation
Michael Perelman wrote:Does anybody have any thoughts on the critique of the IMF by Stiglitz and Sachs -- that the IMF is creating a deflationary economy to save the banks? Rakesh asks: There is still faith in the Keynesian panacea? Though I don't know the content of the SS critique, my guess is that they hope that the IMF could become the world's central bank, to apply Keynesian-style monetary policy for the world as a whole, overcoming the barriers that internationalization put in the way of purely national monetary policies. If so, that's pretty utopian to say the least. The IMF has been a collection agency/enforcer for the banks and an international proselytizer for the free-market gospel for so long that it's hard to imagine it switching gears and becoming a world balance-wheel until after a world debt-deflation depression and political crisis hits. (Sorry about the mixed metaphors.) The US Fed didn't see itself as stabilizing the domestic economy until after 1933 or so and even then its commitment was pretty superficial. It's hard to see the IMF combining its current role with a central bank role. As Minsky points out, it often happens that the Fed finds itself where its "function" as the "lender of the last resort" (a central aspect of its role as organizer and leader of the banking cartel) conflicts with its role as monetary stabilizer of the economy (a result of its political charter). This conflict even applies when the Fed sees its entire macrostabilization job as that of avoiding accelerating inflation. One thing the Fed has that gives it a little backbone to lean toward macrostabilization rather than being simply a shill for the banks is the existence of a US state (and government), which can pressure it. Lacking a world state, it's hard to see where the IMF's backbone would come from. Is the IMF to be an agency of the US government? the OECD? the UN? what? In addition, I should mention that monetary policy isn't as strong as in the textbooks, but you knew that. Coming back from seeing a large number of young economists tarting themselves up in business suits in an effort to sell their asses to employers (at the ASSA/AEA convention in Chicago), I see that pen-l is discussing prostitution at extreme length and with much heat. I agree with Michael that the topic has been mined, except for the gender dimension (i.e., why it is usually women rather than men who are prostitutes). Is it possible for someone to summarize the points of agreement and disagreement? I know I couldn't do it. Good luck. in pen-l solidarity, Jim Devine [EMAIL PROTECTED] http://clawww.lmu.edu/1997F/ECON/jdevine.html "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- K. Marx, paraphrasing Dante A.
Re: The IMF and deflation
On Thu, 8 Jan 1998, Michael Perelman wrote: Does anybody have any thoughts on the critique of the IMF by Stiglitz and Sachs -- that the IMF is creating a deflationary economy to save the banks? There is still faith in the Keynesian panacea? Rakesh
The IMF and deflation
Does anybody have any thoughts on the critique of the IMF by Stiglitz and Sachs -- that the IMF is creating a deflationary economy to save the banks? -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 916-898-5321 E-Mail [EMAIL PROTECTED]
