Yet another economic writer has caved into the illusion that central banks need to raise the inflation target to four percent.
In 2010, Olivier Blanchard, the former chief economist at the International Monetary Fund, offered reasons for a higher inflation target.
Wall Street Journal’s chief economics commentator Greg Ip was against the idea them, but suddenly had a change of tune. “Events have weakened the rationale against the current two percent target”, says Greg Ip.
Please consider The Case for Raising the Fed’s Inflation Target by Greg Ip.
Six years ago, Olivier Blanchard, then chief economist at the International Monetary Fund, floated the idea that central banks should target 4% inflation instead of 2%. I remember giving a colleague countless reasons why he was wrong.
It was I who was wrong. Events since 2010 have led me to conclude those objections no longer apply. The Federal Reserve should give serious consideration to raising its inflation target. Here are my original objections and how they have changed.
Wrong Then, Even Wronger Now
1. Ip Then: Central banks have invested their credibility in a 2% target. If they raise it, the public will assume they’ll raise it again, and expectations will rapidly become unanchored.
1. Ip Now: The fact that inflation has actually drifted lower despite repeated doses of unconventional monetary stimulus shows that inflation is quite inertial and not easily dislodged by questions of credibility. If anything, central banks are too credible: Investors seem to believe 2% is a ceiling, not a midpoint.
1. Mish: Inflation expectations were a joke then. They remain a joke now. Pray tell what consumers give a damn about expectations? Is the average Joe on the street concerned about “expectations” or “reality”. What’s become “unanchored” is Greg Ip’s thought process.
2. Ip Then. As inflation rises, individual prices become more volatile, which makes the economy less efficient and more prone to booms and busts.
2. Ip Now: This is still true, but against that we can see the harm from not being able to lower real (inflation-adjusted) rates further is much larger than anticipated. Meanwhile, the microeconomic harm of higher inflation is elusive. The National Bureau of Economic Research recently published a paper by Emi Nakamura, Jón Steinsson, Patrick Sun and Daniel Villar that found prices did not become more dispersed during the Great Inflation of the late 1970s and early 1980s.
2. Mish: The damage from higher inflation is 100% given if one knows how to measure it. Supposedly there was little inflation in 2007. In reality, inflation was massive. The measured inflation in 2007 ignored asset bubbles. The measured inflation today ignores asset bubbles. Only fools do not see the asset bubbles this Fed has created. They are so obvious that even some Fed presidents see them. History suggests that by the time central bankers see asset bubbles, the damage has already been done.
3. Ip Then: Since inflation is below 2% now and there are no new tools to get it higher, it will undermine central banks’ credibility to raise the target.
3. Ip Now: Japan’s success in getting inflation back above zero, albeit not to 2%, suggests adopting a higher inflation target can bring a shift in expectations, and actions, that help make it happen.
3. Mish: Japan’s “success” if one is foolish enough to label currency destruction as a success, does not have anything to do with expectations. Japan could set an expectation of 20% tomorrow and it would not do a damn thing. Japan’s success stems from actions, not expectations. The market clearly demands more action now. Expectations are meaningless.
4. Ip Then: A higher inflation target makes real interest rates more negative, which would spur reach-for-yield and other speculative excesses.
4. Ip Now: This is true but the alternative may be worse. Rates have been at zero for so long because central banks are erring on the side of monetary ease; they fear that premature tightening will tank the economy and rates will get stuck at zero again. This would be less likely with a higher inflation target, so central banks may not leave rates so low for so long. They would also have less need for quantitative easing and other unconventional tools, which bring their own risks.
4. Mish: Supposedly setting higher inflation targets cause higher inflation. How long has the ECB and Bank of Japan had a 2% target. Meanwhile, damn the asset bubbles. Full speed ahead.
5. Ip Then: What happened in 2008 was unique. Why change the target for something that happens maybe twice per century?
5. Ip Now: Interest rates have been near zero now for more than seven years, and there is every reason to think similar episodes are going to happen again. This was the essence of Mr. Williams’s argument. He isn’t proposing a higher target (or a nominal gross domestic product target, which serves the same purpose) because he’s worried about the economy now. In fact, he is optimistic enough to think the Fed should proceed with another rate increase before long.
5. Mish: Brilliant!
Greg, what mind altering drugs are you taking?
Mike “Mish” Shedlock
What is interesting is knowing that none of these guys even have the requisite skill set to understand what they are pontificating about. They look more and more like a bunch of fools.
As a side note. I think you now need to stop talkin’ smack about Shinzo Abe. Anyone who comes out before the world, standing in the pouring rain, dressed as Super Mario, deserves some serious respect. Hope he grabs himself a pasista and has himself a long night.
Really? They should try sky diving… It’s give you a sense of the importance of getting things right the first time.
Congress should ban all economic curriculum majors in US colleges at all levels w/ doctorates first on the chopping block. It’s killing the nation.
Providing you remove the mathematics, there’s nothing wrong with taking economics classes. However, once you remove the math, there’s not enough coursework for a doctorate. I took lots of econ in college several decades ago. I stunk in the mathy courses and the teacher was dismissive of me because I constantly asked what the math is good for in the real world. He didn’t like me. I got a ‘c’. He eventually said ‘nothing’ but we had to learn it anyway. The best and defining course was intermediate macro where the teacher had us drawing and moving curves in response to questions and courses of events. It taught cause and effect.
What’s most unfortunate is something as simple as economics is almost universally misunderstood, causing ridiculous conclusions to be developed from obvious facts and observations. Then ‘what everybody believes’ gets involved and you end up reading some really stupid sh*t.
Ip is right in there with the people who don’t get it. Not even a little. I don’t know if he’s tool for someone with an agenda or just putting food on the table by writing for people who are as ignorant as he is.
How to cause inflation
1) Currency debasement
2) Price increases because demand exceeds supply
3) Balance of trade by lowering the value of your currency in relation to another belonging to a country you import a lot from … related to point 1 above.
That’s it.
What does inflation do:
1) Erode the value of the currency
2) Erode the real value of long term debt
3) Destroy savings
Nothing else. Nothing mystical. Nothing magical. Nothing complicated.
Economics is easy. People are fools.
Sure, the very basics of economics are simple. The same with weather. Try to predict either accurately. Meanwhile, PhD ivory tower idiots try to run the world economy with overly simplistic theories and the crude models based upon them.
Disagree. Economics is simple. Comparing mathy economics (aka fraud) to a hard science is like comparing medicine to voodoo, except voodoo has more value to society than mathy economics.
Once you have a clear understanding of economic theory … and not the gobbledygook about marginal utility or explaining the micro-economic diamond in the graph as it it really has any value or the mathy bullsh*t … you see it’s a lot like bricks that are intended for a brick wall. Bricks aren’t fancy individually but they can be elegant when put together properly. Today’s ‘economists’ would use those bricks (aka mathy bullsh*t) and try to built a brick warp drive using brick dilythium crystals or glass windows made of brick. Then they’ll lie, group together, and congratulate themselves on their craftsmanship.
As I’ve mentioned lots of times here, most Economists predict the future worse than Astrologers who never bothered to learn Astrology very well.
The main reason is most ‘economists’ don’t have a clue about economic relationships or are just plain lying to keep their jobs. They know the jargon well and sell it masterfully.
“They know the jargon well and sell it masterfully.”
And what they spew is what governments WANT to hear – “No need for budgetary discipline. Just promise everything to get elected or reelected. ‘Deficits don’t matter.’ You can just borrow your way to prosperity.”
One last bit:
A few years ago I bought a used text on International Econ and a used text on International Finance to round out my econ education. Used books were fine because econ and basic financial concepts haven’t changed in a decade or more … much longer for int’l econ. A few hours with both was enough to pick up the concepts.
As I mentioned in earlier posts, learning the Balance of Trade theory explains much of international economics in general. It’s rather simple. Once you learn it you see that most people who talk and write about international economics are goofballs who don’t understand much of anything.
I’ve lost a lot of respect for certain WSJ columnists like Greg Ip and the editorial board that has been sabotaging Trump’s candidacy.
IMF self-interest at work?
Since rigging interest rates and printing money are to Central Banks (CBs) what vehicle sales are to General Motors, perhaps this is “sales talk” designed to motivate the CB/IMF workforces to inflate faster. The more money created or printed per employee, the higher the employee productivity metric; which makes hyperinflation a logical end goal. Stratospheric, never-repayable levels of government debt are manna for the money-printing business; and hyperinflation and currency debasement are the only way to nominally repay the government debt without a technical default or bankruptcy. Inflate or die, as Richard Russell always used to say.
Measures like negative interest rates and excessive regulation (e.g. war on cash) that retard the general economy provide expanded money-printing rationale; so are in CB self interest. I am surprised that the IMF and CBs have not openly set the goal as achieving Weimar Republic hyperinflation, which helped Germany shed their ridiculous Treaty of Versailles debt. The money printing business needs to keep expanding or the IMF and CBs become less important and shrink. The IMF has to urge ever increasing levels of government debt monetization in order to boost its Special Drawing Rights (SDRs) money-printing franchise, which is scheduled to ramp up in response to the next multi-trillion financial crisis bailouts of the expanded too-big-to-fail bank balance sheets. Business is business, at General Motors or the Central Banks.
The CBs job is to keep the banking system fat and happy. They honestly believe: As goes banking so goes the economy. Their version of: As goes GM so goes the economy voiced by GM chairman when we were an industrial economy. Today we are a financial economy. Followed by health care. Followed by military. Finance takes 25% of total private profits (down from 40% in 2008) health care is 20% of GDP and military; don’t get me started. People ask why are we in trouble? Look at the sectors that dominate our economy.
Private debt to GDP is ~200%. If we were to get 4% inflation, nominal GDP would increase but nominal debt would not. Get private debt to GDP ratio down to 40% and the economy will boom.
Of course, inflating the currency by a factor of 5 would destroy savings and raise the cost of living through the roof, but it is the only way to restart growth. The alternative is Japan style stagnation forever.
Honestly, inflating our way out of this mess is our best, politically viable option. If anybody has a better idea, I’d love to hear it.
Write down the debt, take the lumps and let the bondholders take a hit. Curiously that is exactly what we told Japan to do! When our chance came, we did what Japan did – bail out the banks.
That’s a better idea in absolute terms, but is it politically doable?
Why would Congress ever agree to a plan of action that would cause them to lose their seats? Remember also that the current economy is working out very well for the political and economic elites, they would be against any meaningful reform and would fight it to the death. Your plan of action would require outright revolution.
Easier to just inflate our way out of this mess.
MIsh is EXACTLY correct.
“easier to just inflate our way out of this mess”
Easy? Really? What per chance do you think Japan, Europe, and US have been trying to do for YEARS?
Current monetary policy is disinflationary … deflationary when asset bubbles burst.
China is/will export deflation globally.
Until the debt overhang dealt with there will be no sustained inflationary pressure.
“Why would Congress ever agree to a plan of action that would cause them to lose their seats?”
How do you know they won’t lose them anyway? The Iraq plan of action caused the Republicans to lose congress in 2006. The 2009 plan of action caused Democrats to lose the House in 2010.
If it is easier to just inflate our way out of this mess, people should be thrilled at the medical premium increases this fall.
Mish is correct here.
“Easier to just inflate our way out of this mess.”
Easier? Really?
What do you think US, Europe, and Japan (for decades) have been trying to do?
Current monetary policy is disinflationary … deflationary when asset bubbles burst.
Until the debt overhang addressed … there will be no sustained inflationary pressure.
Unfortunately you are right. Powerful interests don’t even want inflation as a path out of this. We are trapped in permanent stagnation at private debt to GDP near 175%. A macroeconomic boot on the face of humanity forever. I blame Krugman and his academic ilk for still insisting debt doesn’t matter.
Ip is a jackass, and should be strung up with the est of them when the day of reckoning comes.
In a “real economy”, prices on goods and services would always decrease as efficiency increased,
Cash would always earn a real positive market interest rate.
Thus one could only earn a living by bringing actual value to the table — financialization of assets would be dead.
The end result would be a rock solid economy. Not exciting mind you, but rock solid.
Ugh. Many bankers and economists have become horrible beyond all reason. What we really need is some good deflation so that ordinary people can buy additional goods.
Inflation is a bank loan bailout. Inflation enriches already wealthy financial sector players by confiscating goods from the people, for redistribution to the financial sector. Inflation slowly produces an inefficient banana republic by removing accurate supply/demand information from prices. Above all inflation oppresses the majority, moving them slowly backward.
Outstanding post, Mike. I might put emphasis on your use of the word “slowly” as that is a word politicians like. If the trainwrrck happens slowly enough, then there might be fewer casualties or so goes the political reasoning.
+10
What difference does it make? If they set the target 100% will their failure to achieve even 1% make these morons any funnier?
There are those who create wealth and those who destroy it. It’s all about the tools used to direct the power to the group currently in control. Wealth creators have tools of initiative, wit and talent. Wealth destroyers now have as their tools; military, government, central banks, wall street, media, and academia. Very unbalanced now and likely to cause much less wealth for the future.
Likely to cause war for the future, each wants it all.
Yes lack of balance each side wanting all = war. Creation and destruction are both needed but things are much better when they are operating equally in opposition.
..for every day for the next 19 (now 13) years, 10,000 baby boomers will reach age 65. (http://www.pewresearch.org/daily-number/baby-boomers-retire/)
Keeping interest rates at the abysmal place they are today will force retired boomers and near-retirement age boomers to keep their money in the stock markets, meaning companies have to look attractive to risk-adverse investors. This leads to the situation we’re in now: no innovative companies are going to get funded unless they can be absorbed by a large established player. And no company in the startup phase that doesn’t look interesting to a big company will ever move much beyond the garage phase. Also because no one can risk their retirement accounts, the demand for greater regulation and associated costs means new startups will be crippled by increased cost of doing business that is much easier absorbed by established players.
Old well established companies generally don’t hire new graduates, because they can afford to pay up for experience. And for the most part they don’t want to train anyone either. So now not only can’t millennials get work, in 5 years they still won’t have much experience either. You think the economy is limping along now, just wait. If the FED shenanigans continue we’ll not only have a massive number of people who should be aged out of the system continue to work, knowing that they won’t be able to live off the interest of their savings, we’ll also have a very large number of people who’s most productive years will be spent just trying to get up to speed. The old timers will resist change, the young workers won’t have any way to move out of the entry level, and innovation will be an iPhone that’s 1/4 millimeter thiner than last year’s model.
If a college dropout cable guy can figure this out, why the hell can’t Janet Yellen? Raise interest rates, get CDs paying what they should and draw down the stock market in a controlled manner. Let the boomers retire, bring in the new blood and the stock market will boom on innovation, not manipulation.
If a college dropout cable guy can figure this out, why the hell can’t Janet Yellen?
Pardon my cynicism, but I assume she is smart enough to see this. Therefore, she must report to different masters, and not the public at large and the general good as you and I define it.
Since she has been supporting low rates and foreign deficit monetizing governments abroad for so many years, and offering no more than lip service here for years, it’s reasonable to assume she is doing exactly what she intends to do and we are the ones who mistakenly assume we are all on the same team.
I’m assuming she will perform in a linear fashion and use Jackson Hole to introduce and/or call for new theories she can hide behind that completely institutionalizes low rates, financial market manipulation, and government spending deficit monitization forever. With GDP targeting on the discussion agenda, this can only pre-suppose new versions of ‘helicopter money’ coming out of the creative woodwork and being sold as new genius.
If higher level is actually a serious objective, we have to assume they will use whatever invention they pull to get to 2%, an invention that does not need 4% target, with the higher target simply being what suits whatever accounting and management they feel will be most ‘apt’ into the future. In other words they are sounding out a new set of parameters for us. The alternative is that they recognise a high inflation is baked in somehow, and they would like to appear to have managed it.
‘ Sir, the people are starving, they are killing each other, there is talk of revolution, of wa…’
-‘ Raise the targets! ‘
‘Nooo…’
– ‘ Yes! Raise the targets to…. ‘
‘No, no sir… ‘
– ‘ FOUR! ‘
I believe in KISS more than ever as I get older. My food & healthcare have become more expensive. Measurably more expensive.
I do not buy computers or TVs–mine are fine. But I saw an article about best buy the other day where its sales are in decline because TVs prices are dropping like a rock.
I have an 8 year old car with 33ks mile on it–I see no reason to replace that, however I see zero interest, no money down loans for cars and rebates.
It would appear supply outstrips demand.perhaps the mfgs should cut production? But then jobs would disappear and unions would be upset. In 3 months they will be able to cut production
.
Phones: the wireless companies have unbundled their packages and clean up the subsidies. I guess they want to continue to make money. The problem-my smartphone is 3 years old and technology wise fine–damn battery is failing. S I find out I have to raise my monthly charge by some 30 bucks to get a new phone–screw it–I’ll wait til the battery is nearly gone.
The printing of money manifests in price inflation and the biggest price inflation is on healthcare of course, probably rents, and of course the stock and bond markets.
Its classic. The money printed is chasing stocks and bonds-the cheap money as we all know made buybacks possible, LBOs enhanced by cheap money. Hedge funds can lever up and buy stocks I believe pension funds are doing that too.
The combination of higher rates and lower markets will do us in.
The fed has no control over interest rates or inflation in a deflationary world. Inflation is a function of wages growing faster than productive capacity. How can the Fed positively impact wages? It can’t. Interest rates are driven by the demand for money. How can the Fed increase that demand? It can’t.
Central banks can provide liquidity during banking panics. They can also drive up interest rates in an inflationary world. the converse is not true however. I believe that they know this. So their must be some other reason for all of this talk.
The Fed and all central banks are effectively managing interest rates by buying ginormously massive amounts of government debt at rates that are far lower than if the central banks were not involved. This affects the level of rates everywhere because the amounts are massive and the pricing they pay is aggressive. The discount rate matters a little, too.
The Fed keeps rates low here by buying new debt to replace debt on the balance sheet that matures. The ECB does it through monetization programs ultimately intended to keep the Eurozone in existence. The BOJ does it because Japan is a stagnant society that apparently knows no other way to live other than debt monetization and direct stock market manipulation.
It takes all three working together to keep the scheme going. If the US raises rates, it might blow it for the ECB and BOJ not matter how hard they work at it. That’s the big risk on the table.
continued: Rates on non government debt are managed out of a search for yield. Corporate rates are normally higher but supply and demand for yield bids corporate interest rates lower. Thus all rates are managed lower as a result of massive central bank intervention in the government debt markets.
Quantitative easing has been over for almost 2 years now and rates are lower than ever. Though I guess I could see that the ECB and BOJ are driving investors into US treasuries, driving down rates.
I don’t believe the Fed drove down rates by paying high prices for treasuries. They just pay the market rate necessary. I believe they just did it by buying so much that it reduced the quantity well below demand.
If the market believed inflation was going to pick up because the central bank is printing money to buy up Treasury bonds, long term interest rates would explode. The central bank can only control the rates of the assets they choose to target, they cannot control all rates at once.
The decline in interest rates therefore is not caused by the central bank.
Yes. CBs are reacting to low rates not causing them. Cause is private debt saturation. Economies can service total debt proportional to rates. As debt climbs rates fall else debts default. CBs cannot eradicate private debt. They can buy debt taking it onto their balance sheets but forgiving debt will force realized losses which immediately hit treasury as massive deficit and issuance of equivalent public debt. I expect this to continue.
“The decline in interest rates therefore is not caused by the central bank.”
Federal Reserve has a $4.5 trillion balance sheet. If FOMC announced today it was liquidating its balance sheet back to pre -recession level ($800 billion). Rates would move higher. How high? One way to find out.
“They can buy debt taking it onto their balance sheets but forgiving debt will force realized losses which immediately hit treasury as massive deficit and issuance of equivalent public debt. ”
Say the US Treasury debt is $8T but the DB owns half of that, $4T. If tomorrow the fed declared they were ‘forgiving’ the entire Treasury debt then the US Treasury debt becomes $4T. The interest payments due get cut in half but the deficit remains the same. Why? Well before the Treasury was paying interest on $8T but half of that interest went to the CB (which presumably pays it back to the Treasury). Now none goes to the CB but at the same time the Treasury has only half the debt to make payments on.
“Federal Reserve has a $4.5 trillion balance sheet. If FOMC announced today it was liquidating its balance sheet back to pre -recession level ($800 billion). Rates would move higher.”
I suspect not. By pulling the cash out of the economy the Fed would trigger a huge recession pulling inflation into negative territory. Rates in the assets they are trying to sell off may rise but overall rates would probably fall IMO. Real rates might rise, however (i.e. inflation may become -5% but rates would be -1%)
Wouldn’t they just swap treasury bonds for excess reserves? How would that cause rates to increase?
“Rates in the assets they are trying to sell off may rise but overall rates would probably fall IMO”
Subprime auto loan interest rates would fall?
Not a chance.
Lead to big reprice in risk (too much dodgy covenant lite debt out there already)
FR scarfing up high quality backed by full faith of US taxpayer debt has led to reach for yield by investors. As investors purchase the treasury debt held by FR (at higher rate) they would dump debt backed by the full faith of Bubba … and how much debt (such as mortgages) tied to treasury rate?
I do agree with your point that it would lead to a severe recession … but one at which yields are not necessarily a lot higher, but higher than current.
Tony
Existing subprime auto loans or new ones? If the Fed forced deflation then I’m thinking about what would it mean if someone got an auto loan for, say, $10,000 if the car’s price is expected to fall by 10% per month. Let’s say real interest rates are 0%, so the investor is willing to loan $10,000 for the car provided that the end of the loan he has enough money paid back so he could buy an equal car for himself. Work it out for a 1 yr loan with deflation of -10% per year.
I think the interest rate would indeed be negative 10%. You’d take out a loan today and buy a car for $10,000. On day 365 you will have paid back $9000 and your loan would be declared paid in full, the investor could then go down to the car dealership and buy the same type of car for $9000.
Brian – you are not factoring in credit risk.
Many investors (imo) are thinking that when TSHTF the Federal Reserve will buy their junk lest risk having the economy “staring into the abyss” (low yields across the board attest to this) Article 14 of Federal Reserve Act states SPECIFICALLY what the FR can purchase … and junk not allowed. Any amendment would require explicit / implicit support by Congress. And Congress would authorize Federal Reserve to purchase junk and have the taxpayer on the hook for $hundreds of billions in losses?
Federal Reserve can’t “buy it all” (otherwise, zimbabwe, here we come) … and once investors learn that hard lesson the reset will occur.
First, credit risk complicates the hypothetical but not much. In the case where deflation is running -10% per year then a $10,000 car loan with no risk would mean your payment would be only $9000 for a one year loan. If there is credit risk then you’d pay a bit more than that, depending upon how much it is. Maybe you’d pay back only $9500 or maybe you’d even have positive interest and pay back $11,000.
“Federal Reserve can’t “buy it all” (otherwise, zimbabwe, here we come) … and once investors learn that hard lesson the reset will occur.”
Actually the Fed could buy anything the Treasury issued and if inflation refuses to pick up then the Treasury could issue as much debt as the gov’t can spend. Not sure why you think there’s a limit there.
Zimbabwe is what happens after you hit full employment and the CB keeps printing money for other reasons. See above with my simple program:
1. Print money.
2. Is inflation picking up? Yes go to 3, no go to 1.
3. Stop printing money
Massive confusion here with talking about ‘asset bubbles’ as an element of inflation. The confusion here is between the real and paper economy.
Take Wal-Mart. Wal-Mart has real assets. Those would be its stores, its trucks, the inventory sitting on shelves and in their distribution center. Less tangible might be their computer networks, the supplier networks they’ve built up, customized programs they created to figure out what to put on sale and when etc.
Wal-Mart also is the basis of paper assets. It has shares of stock, bonds, options etc. There’s only one connection between the real economy and the paper assets. If you own the paper assets you can collect on whatever the real assets are doing. If you own bonds, for example, you collect interest payments, generated by the real assets. If you own shares you can control profits generated by those real assets (after the interest payments are made of course).
Paper assets are not constrained by the real economy. Tomorrow Wal-Mart could double the number of shares being sold on the market. To double their real assets would require mobilizing a huge amount of construction and purchasing.
Counting the price of paper assets into measures of inflation misses this insight. The ultimate purpose of the economy is to produce stuff, goods and services. Paper assets is not ‘stuff’ hence you do not include it in inflation measures.
Now a bubble in paper assets can cause inflation. If the stock price of Wal-Mart went into a bubble and Wal-Mart as a result sold more shares and decided to use the money to double its real assets it would start spending billions on constructing new stores, distribution hubs etc. Construction equipment, building materials, workers would be tied up in building Wal-Mart’s ‘bubble stores’ raising the price of everything else in the economy. You would see an inflationary bubble so there is no need to try to figure out what stock prices should be an count that as ‘inflation’.
But bubbles can form in real assets too. Lately our banking system got the notion housing could never fall in price. Banks threw out the old rule that house price is 100 times monthly rent and replaced that with value equals recent sales price per assessment by professional assessor. This is crux of Minsky instability. Asset price justifies asset price not asset income justifies asset price. Possible to run away because banks create money by lending. Money supply expands this way exponentially creating bubble in real underlying collateral. We are at the end of such a cycle. There is no where to hide now. All collateral is overburdened by debt, real and paper. What’s the value of your home compared to rental income potential ? Bet it’s over 100X.
IMO a better example of ‘real asset’ bubble would be the dot com bubble. What happened? Well lots of fiber optic cable was laid, plenty of office buildings got overpriced chairs. When the collapse came these assets could be brought at low prices. Over time the we enjoyed phone bills dropping and long distance charges (remember those?) becoming dirt cheap since there was such a surplus of telecom capacity.
The mortgage boom not as a clear an example IMO. While there were some examples of poorly thought out housing developments going up, I suspect most of the price increase came from already existing homes. In other words, paper assets, the deeds of homes that already exist. When you look at the # of people per house in the US you don’t see much evidence of a nationwide boom.
Even if you did, though, it wouldn’t look like this in the real economy. There is no ‘debt overhang’ in the real economy. Every person who owes $1 is offset by someone else who is owed $1. If Sam struggles to pay off his $1 debt, Sue gets paid back the $1 she loaned a decade ago (or if Sam decides to stiff Sue, then Sam doesn’t have to struggle today to pay off the $1).
What would it look like if you had a real bubble causing misallocation in the real economy? It would be a supply side shock. The economy today would not be able to supply as many goods and services as it should because we spend the 2007 era building houses rather than factories (or server farms, or auto plants, or whatnot). You would see inflation in prices since the economy could not produce enough goods and services as are demanded by those with money. You would see interest rates going up as the demand for loans to invest in creating real assets would compete with demand for real goods and services in the economy. In other words, you’d see symptoms that look NOTHING like today’s world.
Using NGDP targeting solves the problems of trying to pick the right inflation or interest rate target. There are still measurement challenges, but policy is automatic and predicable, which is business friendly.
There is no need to pick anything. Actually, it’s counterproductive to try.
And the federal reserve has no more ability to hit a nominal GDP target than it has to hit an inflation target in a deflationary world.
The world has the capacity to produce far more than can be consumed by existing wages. And there is no mechanism for increasing wages. So no more growth. We are Japan.
“The world has the capacity to produce far more than can be consumed by existing wages. And there is no mechanism for increasing wages. So no more growth.”
Why would you have to increase wages? Say the median wage is $51,000 a year but the world could produce $55,000 worth of goods and services. Errr if you gave everyone a Visa gift card of $4,000 why wouldn’t you easily cause demand to equal supply.
This has nothing to do with growth. Next year the world might be able to produce $60,000 worth of goods per person or only $55,000.
Growth requires investment in new production. That only happens when an organization believes it can sell said new production. Which means, net for the world, the producer must believe that there exists new, greater levels of wages.
So the $4,000 dr card doesn’t work. $5k might. But it cannot happen purely for political reasons. Ergo, Game Over Dude.
Let me give you hypothetical, tapes versus CD’s for music…if you remember music stores and older formats you could buy music on. CD’s were clearly better, even in 0% growth, music stores would invest in adding inventory of CD’s, producers would invest in creating CD making factories. Where would that growth come from? Spending would shift away from tapes, if CD’s were really so much greater spending on other things (eating out, long drives, clothes) would also shift away as consumers would start discovering how great digital music.
Individual investors do not act as macro-economists but as micro ones. Knowing the overall economy will grow 2% this year tells you nothing about your investments or businesses.
As for the $4K debit card, doesn’t happen that cleanly but it does happen. In the US I’d say maybe 40%-60% of the defense budget is demand driving. It isn’t meant to be, it’s the result of politics keeping bases open because they are in the right districts, keeping weapons systems funded because contractors contribute to campaigns and so on. You also have government entitlement spending and regular spending (roads, bridges, national parks, the FBI etc.) I suspect that would come out to more than a simple $4K debit card per person.
I prefer to see the glass as half full.
Although, being a pessimist, I assume the worst and so far haven’t been disappointed.
But I draw the line at the US being Japan. That’s too squalid to comprehend.
Japan’s been at this for thirty years. We are only in 9. We’ll go full retard soon enough.
If you want to create inflation it’s very easy. There are many examples in different countries, but all have the same print money and give to people. Increase all pensions 5%, 10%, 15%…
Increase all wages from budget 5 or 10%, you will see inflation roaring in 2-3 months time…. then you start increasing interest rates.
This would indeed be an interesting thing to try except in the US the Fed Reserve cannot just ‘print money’. It has to buy things and it has to buy safe things at market price. The thing it usually buys is Treasury bills and bonds. So your proposal would work except you would add the gov’t running a big deficit but the Fed buying up most of the bonds issued by that deficit.
The reason you would want that is because if the Fed ever needs to get rid of cash it should be able to reverse the process. To do that it has to have something to sell. Bonds work quite nicely because you can either sell them very fast or if you just hold onto them you will slowly get cash from the interest payments and eventual principal payment.. That’s the pro, the con is that since the gov’t is issuing debt eventually taxpayers will have to pay the debt if the central bank lets the bonds out ‘into the wild’ by selling them.