Don't you need to see evidence of wage inflation to be really worried about inflation overall? It seems to me that there is little evidence that wages are going to rise quickly given the slack in labor demand.
Inflation is driven by monetary policy, not by wages. Moreover, wages usually lag inflation. I discovered this first-hand while living in Argentina in the late 1970s.
Terrific wrap-up and blogging. Just because I often disagree with Scott Grannis, does not mean I don't appreciate the insights and work that goes into his blog. Unit labor costs are flat to down--it is true, there will not be a cost-push inflation, despite weak demand, also called stagflation. The TIPS market says inflation under 2 percent for as far as the eye can see. One odd thing about the charts shown--capacity utilization seems to be topping out at lower and lower levels throughout the chart, after each recession. A measurement bias worsening in time? Truly, we are using so much less of our capacity? I sense we are into a new era, in which the adversary is deflation, not inflation.Some are speculating whether the low interest rates of today, and the huge amount of debt being issued, will create a huge bond-owning class that prefers zero growth and zero inflation to robust growth and moderate inflation. I agree with Grannis is one sense---the Fed must anticipate and never let inflation get too low, and must always avoid deflation. If you get deflation, you get the rentier class hooked on bond appreciation and then saddled with low yields. They are powerful and averse to growth and inflation. See Japan.
Agree with Scott and inflation is money printing. Print enough of it and it will surely find its way to your doorstep. The Feds history is littered with mistakes and commentary suggesting their job is reactionary by design. Ben someday you will figure out deflation is the opposite of inflation. Inflation is money printing. Therefore, deflation is simply the result of the printing presses prior excesses. There is nothing to fear about deflation. It’s called economic progress and lettign the market allocate resources most efficiently.
Scott, what are your thoughts on shorting Treasuries
Your comment about the Fed not being proactive has a strong history. A plot of weekly T-Bill Rate vs. Fed Funds Rate shows that the Fed lags on the upside till the economy is well on its way and then under Bernanke it moved FF rate 20-40bps higher. It simply lags as the economy slows and is always behind T-Bill rates on the downside.
Re: shorting Treasuries. It sure looks like an obvious trade to me, but the enemy is time. A steep yield curve means there is a cost to shorting Treasuries. The "long and variable lags" between monetary policy and its impact on the economy and inflation mean that the trade could take a long time to work, and it could be very expensive. However, I will note that I see what could be the beginnings of an uptrend in T-bond yields, especially at the long end.
Just buy TBT.
excellent post
Scott, what should be done in either monetary or fiscal policy to address the issues of: a) the long-term downward trend in the employment to population ratio; b) the long-term declines in real worker wages; and c) the long-term declines in home values. I am interested in your views on these Main Street indicators. Is it your view that these indicators are irrelevant to monetary and/or fiscal policy? Thank you for the opportunity to comment on your excellent blog space.
We could see years of near-zero inflation and deflation. Treasuries may only offer refuge, not returns. The bad news out of Japan is that stocks and property have sunk for 20 years into a deflationary era, and property is still sinking.Ergo, forget those categories, if the Fed remains fixated on nominal rates of inflation. Okay, that leaves bonds--and interest rates may set some more, but there is not much room. We are hitting zero bound. Just as Japan did in 1992. Anyone who wishes for a deflationary environment is not considering the Japan story. Even very low rates of inflation seems to mean the Fed can only spin its wheels, while fiscal policy is ineffective.Ergo, the best place to be is in the moderate inflation rage, perhaps 3 percent to four percent. This allows the Fed to tighten when necessary and loosen when necessary with conventional tools.When you get down to zero bound, and deflationary recessions, the only tool left is QE. That's why Milton Friedman told Japan to print lost of money. They did not listen, and have been easily eclipsed by China.BTW, you hear a lot of braying about he ned for US leadership in the world, and prestige etc. I can assure you, if China keeps growing, and we do a Japan, this century will belong to China.And we are on the Japan path.
The economy is still at least 7 percent below 'normal' capacity utilization levels. And this after about 4 years of little new investment to expand that capacity. There are no signs of excess demand in any major sector except (arguably) oil; and other energy components (natural gas & coal) probably offset oil.And as already pointed out unit labor costs continue to decline. (Scott probably likes this).Summary: no significant inflation in the foreseeable future. Just check out the TIPs markets.
Scott, would love to hear your thoughts on this pro-Argentine piece in today's Guardian !http://www.guardian.co.uk/commentisfree/cifamerica/2012/apr/18/argentina-critics-oil-nationalise
Bill-Ask yourself, "If the cost of everything I buy has gone up significantly, but wages in the aggregate have not gone up, am I experiencing inflation?"I have three kids, I buy alot of milk and alot of cereal. Both items have gone up in price about 15% in just the last few months, and are up over 25% in 2 years. Should I give one second's thought to whether diary workers and cereal makers are earning more or less?
To me, inflation of ‘3 to four percent’ (Benjamin) is extremely high. In six years a savings account without considering the yield on the account will be reduced to a compounded 80% of what it was. Risk will be forced on all that don’t have cost of living increases build into their income. Speculation will become rampant and it will end in another bust. And that is with just 3.5% inflation. That is why the FED won’t raise their inflation target.
Rob: reading that piece on Argentina was like entering a true reality distortion field. The author must be one of those who still believe that socialism works and Cuba is doing great. We are headed off to Argentina in a few hours so I will have more to say on this later.
Squire-Yes, six straight years of 3.5 percent inflation will reduce an uninvested paper dollar to 80 cents or real value. If you keep cash around, you will be sorry. If you are a drug lord, or living on exclusively US bond income, you want zero inflation or even deflation. However, cash is intended as a medium of exchange, not a store of value.If cash becomes a store of value, then it makes sense to bury cash (or gold) in your backyard. Read David Hume.The result of many people burying cash or gold is a shrinking economy, and chronic deflationary recessions. It makes sense to keep the gold doubloon buried. Hide the cash in the safety deposit box and spent it later. Why hurry to invest? See also Japan.From 1982 through 2007 the USA had moderate and varying inflation, usually between 2 percent and 6 percent. The stock market boomed. Property markets did very well. Industrial production soared. Per capita incomes rose.I will take that 25 years again, happily.In the same time, Japan nominal GDP shrank, wages fell by 15 percent, industrial production shrank, property values fell by 80 percent and are still falling, and the stock market fell 75 percent. They had 15 percent deflation--only a minor deflation of less than one percent a year, yet it was deeply corrosive to real output. That is how insidious deflation is. There are many reasons that moderate inflation works to promote real economic growth. The economy is not a Swiss clock. It is not so perfectly crafted---the gears need a lot of lubricant. That lubricant is inflation.By fixating on one aspect of monetary policy---inflation---you are losing sight of the larger and long-run picture. I do not see how the USA can recover form a deep recession and real estate bust, while holding inflation at 1.5 percent (where it is now). Banks will take a long time to work through bad loans, consumers will own underwater houses, and small business guys, owners of warehouses, stores etc will not be able to borrow for expansion (small business guys usually borrow against their real estate).Maybe in a perfect world, we can have zero inflation, But nirvana is for the f=afterlife. here on earth, we need a robust and growing GDP.BTW, China prints a lot of money, and they are beating our ass all over Asia. They have become the largest trading partner of Thailand and most other Asian nations. Leadership is shifting to Peking. We are asphyxiating ourselves with tight money and sailing aircraft carriers around.Not hard to predict whose century this will be.
I'm no economist, but I think these technical issues surrounding the Fed are overblown. The U.S. economy, in my view, is hampered by two major cost items: oil and health care. The bloated costs of both of these are essentially no differet than skyrocketing taxes.
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