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Marshall Auerback: Fiscal Policy Setting Stage for a New Bubble
As far as government deficits go, what we argue is that there are no financial constraints-there is a real resource constraint. In other words, inflation is the ultimate constraint. We shouldn't be constructing fiscal policy with some sort of vague, undefined notion that it's fiscally sustainable. Nor should we define "fiscal sustainability" via some arbitrary number as Kenneth Rogoff and Carmen Reinhart have done in their recent book, This Time Is Different: Eight Centuries of Financial Folly, wherein they say if a debt-to-GDP ratio gets above 90%, then bad things start to happen. That's not an accurate way to look at it because you have to consider the economic context and the institutional arrangements governing the economy. A pure fiat currency regime, as we have in the U.S. or Canada, for example, is vastly different than a country which operates a currency peg system, such as Latvia or Argentina in the 1990s.
I would tend to agree or I would not want to own TIPS.
MA: I don't think inflation per se is a problem. Food and energy price increases have been significant and they are real. I'm not trying to diminish their importance; but in the absence of income and job growth, people have to heat their homes, fuel their cars and feed their families. That just means more discretionary income is tied up in those areas, which means less discretionary income for retail, restaurants, etc. I think the ultimate impact is deflationary rather than inflationary.
Also, the high rates of unemployment are not going anywhere. Labor has no pricing power. There's no generalized increase of consumer price inflation. As that perception grows, the marginal bid could be taken out of the gold market for a while, which is why I am cautious on the gold price short term.
Once again, I would tend to agree. I'm just not seeing the increases in consumer price inflation that many seem to see.
Real Estate Newsletter Articles this Week: Existing-Home Sales Increased to
4.15 million SAAR in November
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At the Calculated Risk Real Estate Newsletter this week:
[image: Existing Home Sales]*Click on graph for larger image.*
• NAR: Existing-Home Sales Increase...
12 hours ago
8 comments:
I'm sorry but this part of the quote makes no sense to me:
That just means more discretionary income is tied up in those areas, which means less discretionary income for retail, restaurants, etc. I think the ultimate impact is deflationary rather than inflationary.
If food and energy prices are going up, and other prices are holding steady, then why isn't that inflationary? Maybe Mr. Auerbach thinks that all other prices are deflating fast enough to compensate for the increases in food and energy? Just because demand has flagged for some products because people are spending more on food and energy doesn't mean that the price of those products can drop below their production costs.
If higher energy and food prices put companies out of business is that deflationary?
Glenn,
Thanks for your comments.
If higher energy and food prices put companies out of business is that deflationary?
It could very well be. The "ultimate impact" of rising oil prices in 2008 was just that.
If food and energy prices are going up, and other prices are holding steady, then why isn't that inflationary?
It would be but that's not his argument. He's arguing that other prices will fall to compensate (like housing prices did).
Just because demand has flagged for some products because people are spending more on food and energy doesn't mean that the price of those products can drop below their production costs.
We're a service economy. If there is only so much money to go around and the price of food and energy rise then we would expect to see the price of services to fall in order to compensate.
Here's a link as an example of just how low some service economy "production costs" could become.
I should also add that I don't think he's trying to claim that what we have right now is deflationary.
He's claiming what the "ultimate impact" would be.
Thank you.
Just because demand has flagged for some products because people are spending more on food and energy doesn't mean that the price of those products can drop below their production costs.
Food can get hit with substitute goods -- chicken for beef.
Energy can get hit with self-rationing, which is immensely deflationary as people leave the house less.
As our host mentioned above, as a Georgist I like to take this zero-sum argument one step further, that with in a no wage-inflation regime, people can in fact find more discretionary income -- by negotiating their HOUSING cost lower (housing comes out of "disposable" income not "discretionary").
So my thesis is that rents and home values can in fact come down, a lot.
The "production cost" of existing rental housing stock is $100 a month or so (the management cost and the normal wear & tear of a tenant).
Troy,
Being a landlord is not without its risks. Nothing eats capital like a vacant home in a falling market (property taxes + maintenance + insurance + falling prices).
As you imply, better to bring in some monthly income than just let it sit there if times turn really tough.
"Nothing eats capital like a vacant home in a falling market..."
You ain't kiddin'
In my neck of the woods, we had a large group of people (55+ retirees) who saw the building boom as a grand time to become flippers. Their target investments were houses within their very own communities. The ones who got caught out when the pool of greater fools dried up tried to use the bust as a grand time to become landlords. When the pool of potential tenants didn't materialize we now have, well, you know, holes for capital destruction.
So far, this is not news. But here's the twist in my area: these folks are, in a sense, well equipped to handle this drain on their capital positions. It's called pensions and SSA.
The environment around here is warped when compared to other parts of the country. These people aren't "walking away" and "jingle mail" is not all the rage. But I shudder to think what would happen, or might still happen, if this situation does not improve for many years. It's been a great shock absorber for these people to have had GM and AT&T et. al. funding their folly.
I hope their children are learning from this because they're not going to have similar shock absorbers. I know I'm not. That's in large part why I'm naturally bearish.
G.H.,
"But I shudder to think what would happen, or might still happen, if this situation does not improve for many years."
You and me both!
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