Wednesday, October 8, 2014

The Writers versus the Signatories


At Bloomberg:
Signatories of a letter sent to then-Federal Reserve Chairman Ben S. Bernanke in 2010 warning of the risks associated with the bank’s policy of quantitative easing are standing by their claims -- even as the biggest U.S. companies are flourishing, inflation is muted and holding Treasuries has been one of the best trades out there.

In the word "even", you can read the position taken by the writers of that story:

Signatories stand by their prediction of inflation even as the economy improves.

The position taken by the writers is that the economy is doing better, and the improvement is evidence that inflation will not come, so the signatories were obviously wrong.

You see a lot of that lately: the idea that we have not had inflation yet, so we're not gonna get it. And yes, at some point you do have to say "The waiting period is over. A final outcome can now be determined." I'm just not sure we're there yet.

The writers continue:
The Nov. 15, 2010, letter signed by academics, economists and money managers warned that the Federal Reserve’s strategy of buying bonds and other securities to reduce interest rates risked “currency debasement and inflation” and could “distort financial markets.” They also said it wouldn’t achieve the Fed’s objective of promoting employment.

Four years later, members of the group, which includes Seth Klarman of Baupost Group LLC and billionaire Paul Singer of Elliott Management Corp., are facing a different economy. U.S. companies now boast low debt, big cash piles and record profits. They’re creating jobs at the fastest average pace since 2005 and unemployment has dropped to 6.1 percent from 9.8 percent when they wrote the letter. The recovery has underpinned an almost 200 percent gain in the Standard & Poor’s 500 Index since March 9, 2009.

Four years have passed, the writers point out. And, judging by that last paragraph, the economy is doing very well.

So, what do you think?

The economy is not doing well at all. Not the economy I know. But it is doing better than it was. And that is when the threat of inflation can become real -- when things pick up. The writers, laughing at the signatories and thinking we have not had inflation so we will not, those writers are on thin ice. That's what I think.

Inflation is held down by a depressed economy. If inflation picks up, it will happen when the economy picks up. Now, I'm not predicting inflation. But the view that says "the economy is doing better, so inflation is not a threat" is just exactly wrong. I can't see how people who write about the economy can pretend to believe it.


The question of timing remains. The writers point out that four years have passed since that letter was written, and the economy is doing fine. The implication is that if we were going to get inflation, we'd have got it by now.

What do you think? Is four years enough time? How about six years? It's four years since the letter, but it's a full six years since the start of Quantitative Easing. The quantitative easing that troubles the Signatories started in September 2008:

Graph #1: Percent Change, Base Money, Monthly Data: 2004-08-01 to 2014-08-01
August 2008 marks the end of relatively tame money growth. September 2008 marks the start of aggressive money growth. September 2014 marks a full six years of aggressive money growth. And yet two different price indexes both show that inflation since September 2008 has been milder than it was in the period before that date:

Graph #2: CPI (blue) and PCE (red) Inflation Measures, Monthly, 2004-08-01 to 2014-08-01
We've had less inflation since QE began than we had in the years before QE. And we want the threat of inflation to be gone. Doesn't that count for something?

Not much. No.

9 comments:

Auburn Parks said...

Art-

I'm confused, why would shifting already existing bank balances between different types of Govt bank accounts (reserves and securities) lead to inflation aka QE?

Demand driven inflation comes from SPENDING over production. QE does not spend any money. You're aren't any wealthier the day after you sell your T-bond then the day before.

Where would all the spending come from to drive a future inflation anyway?
Private debt bubble? Doubtful any time soon after the last three.

Govt deficits? Small and shrinking

Jazzbumpa said...

So, what do you think?

The economy is doing better than at the trough. Big Whoop. The new jobs are not replacing the purchasing power of the lost jobs, because the new wages are lower as labor's share continues to shrink.

http://research.stlouisfed.org/fred2/graph/?g=IdF

I think Edward Lambert has it right. The business cycle is close to it's end point and profits will decline because there is nowhere for demand to come from. See his recent posts at AB.

If Republicans take over the Senate, nothing good will happen. BHO might be able to prevent the worst they can do via his veto pen, but better than the worst can still be pretty bad.

Inflation is a resultant. [As an aside, I'm pretty much convinced now that NOBODY really understands either inflation or money.] If I have this right, targeting inflation makes no sense. Be that as it may, before we can get to inflation, we have to get out of disinflation. But even with a lot of extraordinary Fed effort, that doesn't seem to be happening.

http://research.stlouisfed.org/fred2/graph/?g=MV2

If the death of the American economy happens any time soon, it will be from deflation, not inflation

About 30 years ago I read a book on the stock market. I had a chapter on "The other environment" e.g. deflation. It seemed a remote possibility at the time, but we had already left the realm of secular inflation and entered the realm of disinflation.

Maybe Volker killed it, or maybe it was a bubble that blew off. But something had to happen to make the underlying inflationary trend change course.

Before inflation can take off again there will have to be some signal event that triggers the change.

I don't think that can happen until deleveraging has run its course.

Cheers!
JzB






The Arthurian said...

Thankfully, Jazz, I don't make predictions.

"About 30 years ago I read a book on the stock market. I had a chapter on "The other environment" e.g. deflation. It seemed a remote possibility at the time..."

We are so lucky, Jazz, to live in interesting times. But seriously, there are many economic concepts that I could not understand until I lived through them.

"Before inflation can take off again there will have to be some signal event that triggers the change. I don't think that can happen until deleveraging has run its course." -- JzB

Agreed, but:

"The period of private sector deleveraging that caused the crisis appears to be over. Debt is now not merely growing, but growing faster than GDP... " -- Steve Keen

//

Auburn, you're right: You *are* confused :)

The topic of my post is not that those who predict inflation may be right. The topic is that those who say "Things are getting better, so the danger of inflation is fading" do not understand the economy at all. As you said: "Demand driven inflation comes from SPENDING over production." If that happens, it happens as the economy gains vigor. It doesn't happen in the tank.

I don't participate in the "shifting already existing bank balances between different types of Govt bank accounts" discussion. I don't reject it, but I don't give it much weight. I look at other things.

jim said...

"The period of private sector deleveraging that caused the crisis appears to be over. Debt is now not merely growing, but growing faster than GDP... " -- Steve Keen

It doesn't look that way from these graphs.

http://research.stlouisfed.org/fred2/graph/?g=MZP

The ratio of Household debt to GDP in particular is declining at about the same pace as it has for the last 4 years. The only debt that is increasing in the private sector is student loans and corporate bonds.

Jazzbumpa said...

Jim -

Thanks for the graph. Makes me wonder what Keene is looking at.

Art -

I think the end of deleveraging is a necessary, but not sufficient condition for inflation to pick up.

As I said, I really don't believe anyone understands inflation. But before it can increase, it has to stop decreasing.

The topic is that those who say "Things are getting better, so the danger of inflation is fading" do not understand the economy at all.

I don't think that is what they are saying. I think they re saying that the inflationistas were wrong in 2010, and "even as the economy improves" there is still no sign that inflation is picking up - so they're still wrong.

They aren't saying inflation will never happen. They're saying that Bernanke's actions did not cause inflation, and the signatories were in error in 2010. But none of them have ever said, "Oops. My bad."

I read it as, since the economy is improving, and we still don't have inflation, those guys weren't just wrong, they were mega-wrong.

Cheers!
JzB

And I have no argument with that observation.

Cheers!
JzB

The Arthurian said...

Jim,
Keen's graph shows change in debt relative to something, GDP I think. I tweaked your graph to change the debt from "billions" to "change, billions" and the result looks more like what Keen showed.

http://research.stlouisfed.org/fred2/graph/?g=N1b

The lines trend upward since 2011.

Keen says "Debt is now not merely growing, but growing faster than GDP" ...
Do you think he should have said "Change in debt is now not merely growing, but growing faster than GDP"
?
Did Keen exaggerate?

Jazz: "I read it as, since the economy is improving, and we still don't have inflation, those guys weren't just wrong, they were mega-wrong."

I think it is still too early to make such a claim. See this morning's post.

jim said...

Art wrote: "Did Keen exaggerate?"

The graph Keen shows doesn't support his claim. The rate of growth is not the same as the quantity of change..

The total amount of Private debt is about 3 times larger than GDP. So if private debt grows at 1% and GDP grows at 2%, GDP will be growing at a faster rate, but the absolute increase in private debt will be around 50% larger than the increase in GDP.

But household debt is smaller than GDP and if you exclude student loans households are still very much in deleverage mode.

http://research.stlouisfed.org/fred2/graph/?g=N29

Auburn Parks said...

Art-

I totally agree with your first paragraph.

But....

"I don't participate in the "shifting already existing bank balances between different types of Govt bank accounts" discussion. I don't reject it, but I don't give it much weight. I look at other things."

How can you not give much weight to the accounting? Economic outcomes are wholly dependent on the accounting and operations.

The Arthurian said...

Auburn,
"Economic outcomes are wholly dependent on the accounting..."

See, no, I don't think that way. Here's what I think:

Economic outcomes are wholly dependent on economic forces.

When the Mars Climate Orbiter crashed, that was like an accounting error. They got the math wrong. But boosting the thing into Earth orbit, and getting from Earth to Mars, that all depended on an adequate understanding of the forces involved.

BTW on the way home from work I was thinking about the "reserves versus securities" thing. For the first time...