Tag Archives: Inflation

FT: Letter to the editor

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Published letter to the editor in FT.

Expect public-sector deficits and oil prices to go on rising

by Prof Philip Arestis, Dr John McCombie and Mr Warren Mosler.

Sir, Public-sector deficits and crude oil prices will probably both continue rising. Chris Giles’ reports, “Treasury to reform Brown’s fiscal rules” and “Treasury sees storm clouds gathering” (July 18), recognise the inevitability of growing deficits due to economic weakness while also implying public-sector deficits are per se a “bad thing”.

What the articles fail to appreciate are three dimensions to the argument: the first is that public-sector deficits do not present a solvency issue, only an “inflation” issue. Second, public-sector deficits equal total non-government (domestic and foreign) savings of sterling financial assets and are the only source of non-government accumulation of sterling net financial assets. Third, public-sector deficits provide the net financial equity to the non-government sector that supports the private-sector credit structure.

It is the case that the public-sector deficit will increase in one of two ways. The “nice” way would be pro-actively with sufficient tax cuts or spending increases (depending on one’s politics) that support demand at desired levels. The “ugly” way is from a slowing of demand that reduces tax revenues and increases transfer payments. If, instead, the government tries to suppress the current deficit with any combination of tax increases or spending cuts, the resulting accelerated slowdown of the economy will then increase the deficit the “ugly” way.

In any case, the current “inflation” is the result of Saudi Arabia acting as swing producer as it sets the oil price at ever-higher levels and then supplies all the crude demanded at that price. Our institutional structure then passes these prices through the entire economy over time, and there is nothing interest rates or fiscal policy can do to change these dynamics.

The ability to set crude prices can only be broken by a sufficiently large supply response, such as in the early 1980s when net supplies increased by more than 15m barrels per day, helped considerably by the US deregulating natural gas production, which allowed substitution away from crude oil products.

In sum, the deficit will go up either the nice way or the ugly way, as it always does when markets work to grant the private sector the desired net financial assets, which can come only from government deficit spending. “Inflation” will continue higher as long as the Saudis remain price-setter and continue to post ever-higher prices to their refiners.

Philip Arestis,
University Director of Research,
Cambridge Centre for Economic and Public Policy

John McCombie,
Director,
Cambridge Centre for Economic and Public Policy

Warren Mosler,
Senior Associate Fellow,
Cambridge Centre for Economic and Public Policy,
University of Cambridge, UK


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Bloomberg: Inflation weakening some currencies

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Interesting how reports of higher inflation have often meant stronger currencies in the short run due to higher anticipated rates from the CB.

Inflation, however, by definition means the currency buys less of most everything; therefore, inflation and a weakening currency are one and the same.

But it can take a long time for markets to discount this.

Emerging-Market Currency Rally Dies as Inflation Hits

by Lukanyo Mnyanda and Lester Pimentel

(Bloomberg) The five-year rally in emerging- market currencies is coming to an end as central banks from South Korea to Turkey struggle to contain inflation, say DWS Investments and Morgan Stanley.

The 26 developing-country currencies tracked by Bloomberg returned an average 0.86 percent in the past three months, down from 1.63 percent in the first quarter, 8.2 percent for all of 2007, and 30 percent annually since 2003. For the first time in seven years, investors are less bullish on emerging-market stocks than on U.S. equities, a Merrill Lynch & Co. survey showed last week.

Confidence in the Indian rupee is weakening after inflation accelerated at the fastest pace in 13 years, stoked by soaring food and energy prices. South Korea’s won will drop this year by the most since 2000, while Turkey’s lira will reverse its biggest gain since at least 1972, the median estimates of strategists surveyed by Bloomberg show.


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NYT: Too big to fail?

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Too Big to Fail?


by Peter S Goodman

Using public money to spare Fannie and Freddie would increase the public debt, which now exceeds $9.4 trillion. The United States has been financing itself by leaning heavily on foreigners, particularly China, Japan and the oil-rich nations of the Persian Gulf.

This is ridiculous, of course. The US, like any nation with its own non-convertible currency, is best thought of as spending first, and then borrowing and/or collecting taxes.

Were they to become worried that the United States might not be able to pay up, that would force the Treasury to offer higher rates of interest for its next tranche of bonds.

Also ridiculous. Japan had total debt of 150% of GDP, 7% annual deficits, and were downgraded below Botswana, and they sold their 3 month bills at about 0.0001% and 10 year securities at yields well below 1% while the BOJ voted to keep rates at 0%. (Nor did their currency collapse.)

The CB sets the rate by voice vote.

And that would increase the interest rates that Americans must pay for houses and cars, putting a drag on economic growth.

As above.

For one thing, this argument goes, taxpayers — who now confront plunging house prices, a drop on Wall Street and soaring costs for food and fuel — will ultimately pay the costs. To finance a bailout, the government can either pull more money from citizens directly,

Yes, taxing takes money directly, and it’s contradictionary.

But when the government sells securities they merely provide interest bearing financial assets (treasury securities) for non-interest bearing financial assets (bank deposits at the Fed). Net financial assets and nominal wealth are unchanged.

or the Fed can print more money — a step that encourages further inflation.

This is inapplicable.

There is no distinction between ‘printing money’ and some/any other way government spends.

The term ‘printing money’ refers to convertible currency regimes only, where there is a ratio of bill printed to reserves backing that convertible currency.

Skip to next paragraph “They are going to raise the cost of living for every American,”

True, that’s going up!


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Bernanke testimony on inflation

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The last few Michigan surveys had one-year inflation expectations over 5%.

This is not lost on an FOMC that believes inflation expectations cause inflation.

Chairman Bernanke said this yesterday after outlining the inflation expectations/inflation process:

“A critical responsibility of monetary policy makers is to prevent that process from taking hold.”

‘Prevent’ implies action, not ‘monitoring’.

Might just be a poor choice of words.


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Exports, Inflation, and the USD

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This is what happens when non residents are scrambling to reduce their hoards of USD financial assets.

Exports rising like this along with the still falling dollar indicates the current $60 billion monthly trade gap is still too high – non-residents simply don’t want to accumulate USD financial assets at that rate.

This adjustment process continually aligns the ‘real’ (price adjusted) trade gap to levels that equal foreign $US ‘savings desires’.

For the US this currently means a weak USD and a combo of rising exports and rising traded goods prices.

GDP muddles through as government spending and exports support demand, with continuing weak domestic demand and declining real terms of trade crushing the US standard of living.

US Exports

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US Exports YoY


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Deflation forecast

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This is the deflation argument.
(See below)

Never seen a split quite like this with calls for both accelerating inflation and outright deflation.

Which will it be?

My guess is inflation for the US as our friendly external monopolist continues to squeeze us with ever higher crude prices.

The political process is ensuring they will be passed through as sufficient government ‘check writing’ (net government spending) is sustained to support real growth.

(Bear Stearns, housing agencies, fiscal rebates, fiscal housing package, etc.)

And the dollar continues to adjust to the sudden, politically induced shift in foreign desires to accumulate USD financial and domestic assets.

Various private Q2 GDP estimates are now up to 2% – more than sufficient to support demand and pass through the higher headline prices.

Government is never revenue constrained regarding spending and/or lending.

The limit to government check writing is the political tolerance for inflation, which grows with economic weakness.

This inflation looks to me to be far worse than the 1970s.

Back then, we were able to muster a 15 million bpd positive supply response in crude that broke OPEC by deregulating natural gas.

We don’t have that card to play this time around.

From HFE:

July 14, 2008

WORLDWIDE:

  • Global Disinflation Is Going To Be The Next Big Move For The Bond Markets – Weinberg
  • Commodity And Oil Prices Cannot Rise Forever… There Is No Inflation – Weinberg
  • Bonds To Benefit – Weinberg

UNITED STATES:

  • STOP PRESS: Treasury, Fed To Make Credit Available To GSEs; Treasury To Seek Authority To Buy Their Stocks – Shepherdson
  • This Is A Lifeboat, Not a Bailout; Aim Is To Prevent Uncontained Failure – Shepherdson

CANADA:

  • We Cannot Rule Out A Rate Cut Tomorrow – Weinberg

EURO ZONE:

  • Core CPI Shows No Medium-Term Inflation Risks – Weinberg
  • Production Data Will Be Really Soft – Weinberg

GERMANY:

  • Core CPI Still Under 2% And Steady, ZEW At New Record Low – Weinberg
  • … Tighter Money Is Unhelpful Here – Weinberg

UNITED KINGDOM:

  • Starting Point For August QIR Forecasts To Emerge In This Week’s
  • Reports: Most Inputs To The Forecasts Will Be Stronger – Weinberg

FRANCE:

  • Not-Too-Scary Inflation Report Exported: Core Prices Are Steady – Weinberg

JAPAN:

  • Three Soft Report This Week Will Keep Investors Moving Out Of Stocks, Into Bonds – Weinberg

AUSTRALIA:

  • CPI Report For Q2, Due Next Week, May Rekindle Inflation Worries – Weinberg

CHINA:

  • Exploding Foreign Borrowing Diminishes Foreign Currency Reserve Adequacy; Trends Suggest Further Decay – Weinberg
  • GDP Will Be Below Recent Trend In This Week’s Report – Weinberg


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Reuters: Food price supports

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more inflation.

Prices are up due to short supplies due to biofuels and weather.

And the political response is handing out funds to those in need, even though that doesn’t create more to eat.

As previously discussed, governments have no choice but to step on the inflation pedal.

Whether it be for food support payments or financial sector support.

That’s how ‘democracy’ works.

(And democracy is way better than the second choice!)

World Bank’s Zoellick: Food prices high until 2012

by Alexandra Hudson

World Bank President Robert Zoellick said on Saturday he expected food prices to remain above 2004 levels until at least 2012 and energy prices would also remain high and volatile.

He repeated that with food and fuel prices in a “danger zone” there was a need for $10 billion to provide food and cash handouts for the world’s poorest.

Soaring oil and food prices have fueled inflation across the globe at the same time as economies slow, posing a sharp dilemma for lawmakers.


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Bernanke’s July 07 speech and today’s inflation issue

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From Chairman Bernanke’s July 07 speech:

As you know, the control of inflation is central to good monetary policy. Price stability, which is one leg of the Federal Reserve’s dual mandate from the Congress, is a good thing in itself, for reasons that economists understand much better today than they did a few decades ago. Inflation injects noise into the price system, makes long-term financial planning more complex, and interacts in perverse ways with imperfectly indexed tax and accounting rules. In the short-to-medium term, the maintenance of price stability helps avoid the pattern of stop-go monetary policies that were the source of much instability in output and employment in the past. More fundamentally, experience suggests that high and persistent inflation undermines public confidence in the economy and in the management of economic policy generally, with potentially adverse effects on risk-taking, investment, and other productive activities that are sensitive to the public’s assessments of the prospects for future economic stability. In the long term, low inflation promotes growth, efficiency, and stability–which, all else being equal, support maximum sustainable employment, the other leg of the mandate given to the Federal Reserve by the Congress.

Note that the current anti-‘inflation’ argument within the FOMC is that the high prices for imports take discretionary income from consumers that reduces domestic demand and reduces the ability to service domestic debt. There was no thought or mention of that reason for ‘inflation’ being a ‘bad thing’ a year ago.

I suppose one could argue that this problem is due to there not being inflation, as with wages ‘well-anchored’ there is only a relative value story. If we did have ‘real inflation’ with rising wages, we wouldn’t have the problem of insufficient consumer income to support domestic demand, but we would have the traditional negatives from inflation.

But Bernanke’s response to Congress was that exports are replacing domestic consumption and that is a ‘good thing’ as it brings the US trade back to ‘balance’ and restores ‘national savings’ – the old mercantilist, gold standard imperatives. But it does leave weak domestic demand and rising prices. That brings us back to the tail end of Bernanke’s statement:

Admittedly, measuring the long-term relationship between growth or productivity and inflation is difficult. For example, it may be that low inflation has accompanied good economic performance in part because countries that maintain low inflation tend to pursue other sound economic policies as well. Still, I think we can agree that, at a minimum, the opposite proposition–that inflationary policies promote employment growth in the long run–has been entirely discredited and, indeed, that policies based on this proposition have led to very bad outcomes whenever they have been applied.

Seems that either way you look at it, rising prices (whether you call it inflation or not) lead to ‘bad’ outcomes.

And it sure looks to the dissenters in the FOMC that this is exactly what is happening. Only time will tell, but all Fed speakers now agree the risk of inflation is elevated substantially, and we will soon see if they still agree the cost of letting the inflation cat out of the bag is far higher than letting a near-term recession run its course and (hopefully) contain prices and keep a relative value story from turning into an inflation story.

Also, not how the Fed continues to use ‘other tools’ for market functioning as Bernanke just now indicates they will keep lending directly to their primary dealers.


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AP: Crippling effect of inflation in poor countries

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Impossible – as long as wages are well anchored it’s not inflation…???!!!

Or at least not here?

Inflation surges to double-digit levels in 1 in 4 countries worldwide

by Rachel Beck

There is nowhere to hide from inflation.

Prices in one in four countries, many of them in emerging markets, are accelerating at a double-digit pace, which puts them at least two and a half times the 4 percent annual U.S. headline inflation rate, according to new research from Morgan Stanley.

That should be a wake up call for anyone counting on investments abroad to prop up their portfolios as U.S. stocks teeter on the edge of a bear market.

Sure, the “decoupling” strategy worked for investors in the recent past. Foreign holdings fared better because international economies were outperforming U.S. growth.

The U.S. economy has slowed to nearly a standstill in the last year because of the mounting inflation and the collapse in the housing and mortgage markets. Other industrialized countries have seen about a 2 percent average rate of growth while emerging economies have topped 7 percent.

That growth is now being threatened by inflation. And remember: In the developing world, a larger portion of household expenditures tends to go to the most inflationary items — food and fuel.

Food prices have jumped 39 percent from February 2007 to 2008, led by wheat, soybeans, corn and edible oils, according to the International Monetary Fund.

That hits residents of emerging markets much harder than those living in more advanced economies. People in countries like Vietnam, Russia, Egypt and India put at least 30 percent of their total spending toward food, well above the 6 percent allotment for U.S. households, according to U.S. Department of Agriculture.

That’s why Morgan Stanley economists Joachim Fels and Manoj Pradhan said they were “flabbergasted” by their findings that 50 countries had double-digit inflation rates. On that list were six of the 10 most populous countries in the world, including India, Indonesia, Pakistan, Bangladesh, Nigeria and Russia.

In total, those facing such pricing pressures accounted for 42 percent of the world population.

“In other words, close to three billion consumers are currently experiencing double-digit rates of price increases,” they wrote in a note to clients.

Soaring inflation is not easy to tame. Some countries, such as India where inflation is running at around 11 percent, may have no choice but to boost interest rates.

The Reserve Bank of India earlier this month announced an inter-meeting rate hike. It said in a statement accompanying the move that the “overriding priority for monetary policy is to eschew any further intensification of inflationary pressures and to firmly anchor inflation expectations.”

Others, however, will balk at tightening monetary policy because they don’t want their currencies to surge, which would then raise the price of their exports.

Many emerging-market economies also link their currencies to the dollar, and because of the U.S. Federal Reserve’s loose monetary policy stance right now — the central bank has aggressively cut interest rates in response to the credit crisis — that has helped feed inflationary pressures.

The longer inflation remains elevated, the more damage it will do to long-term economic growth.

“There is plenty of reason to worry about the continuation of the bull story for emerging markets, especially in those countries that have seen a sharp acceleration in inflation, are unable or unwilling to tighten policy sufficiently, and are commodity consumers rather than producers,” the Morgan Stanley economists wrote in their report.

But even as prices surge, earnings forecasts aren’t coming down in many global markets. That may give investors false hope that many countries will bypass the inflation storm.

For instance, in Asian countries outside Japan, earnings forecasts are still for 11.6 percent growth over the next 12 months and 15.1 percent growth in calendar year 2009, according to Barclays Capital.

Those estimates “are implicitly assuming that inflation will either miraculously disappear on its own accord or that central banks are not going to bother doing anything about it neither is particularly believable,” wrote Tim Bond, head of global asset allocation at Barclays.

Barclays is recommending that investors either avoid owning stocks in that region or that they short shares, meaning bet they will decline.

“Although the area is currently outperforming in terms of economic growth, the inflationary environment is not far short of disastrous,” Bond said.

Clearly, the inflation bogeyman is haunting all corners of the world.

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