Posts
1. Toxic assets. No zombie movie would be complete without them.
2. Favorable winds to spread the disease.
October 29, 2002
They're Alive! They're Alive! Not!; Japan Hesitates to Put an End to Its 'Zombie' Businesses
''The government is not going to be hard on the banks,'' said Brian J. Waterhouse, senior Japan analyst for HSBC. ''The zombies are not going to get beaten up.''
Let's turn our attention to the United States.
In order to keep our banking system somewhat stable in appearance, it is my belief that interest rates must continue to fall like they have since 1981.
On the one hand, one might think that we're at the end of the road. Maybe we are. Once the red trend line meets up with the blue trend line then there can be no more can kicking.
On the other hand, what would happen if the inflation rate came down a bit? It really wouldn't take much.
Banks make their money by borrowing short and lending long. Further, they don't exactly complain much if the money they lend long actually manages to keep up with inflation. Go figure. Therefore, if you really want to know what central bankers will do, then perhaps it is best to think like a bank.
1. Borrow at low interest rates.
2. Lend at high interest rates.
3. Keep inflation below the lending rate.
August 27, 2011
Fed’s done all it can on economy, says Bernanke
If the Fed does much more then both #2 and #3 are at risk.
Source Data:
St. Louis Fed: 30-Year Treasury
St. Louis Fed: CPI
11 comments:
From the previous thread, comparing us with Japan is somewhat problematic.
When I lived there in the 1990s the FX rate was always perplexing, with consumer prices seemingly predicated on a return to the Y150 rate.
Having the yen DOUBLE in strength since 1996 has been a favorable wind for consumers, as the retail system slowly yields up its increasing buying power.
The USD doesn't have that much headroom in it, not if we want to have any mfg sector left.
Perhaps we don't.
Troy,
Having the yen DOUBLE in strength since 1996 has been a favorable wind for consumers, as the retail system slowly yields up its increasing buying power.
I think you meant since 1990 and I need to make this distinction in what follows.
On the one hand, your point seems valid to me. You could be right. As you know, I prefer to own treasuries with inflation protection over those without. Our massive trade deficit is a substantial reason for my preference of inflation protected treasuries over those without inflation protection.
On the other hand, the yen was relatively stable compared to the dollar from 1995 to 2007 (as seen in the "1990" link above). The CPI in Japan was still flat though.
Further, some would argue that rising oil prices can still be deflationary. Note that unlike the 1970s, our treasury market seems to enjoy the rise in the price of oil.
THE DEFLATIONARY SHOCK….
For now it still appears as though the US economy is strong enough to generate low single digit inflation, however, if the commodity bubble were to worsen or oil prices were to cause a global recession (this looks increasingly likely as we head into summer) we are likely to find ourselves revisiting our deflationary discussions as opposed to fears over hyperinflation. This is not the 70′s and it is most certainly not Zimbabwe or the Weimar Republic. This is still an environment more akin to Japan and the 30′s.
Here's a bonus thought.
The Fed has been fighting deflation since mid-2007. That's when they first started lowering the fed funds rate. It was 5.25% that summer.
What if they would have done the following instead?
Fed’s done all it can on economy, says Bernanke
I think we would have made the deflationary Great Depression look like a picnic by comparison.
Many of the same mechanisms are still in play. I don't see what was permanently fixed.
As seen in the chart of this post, the government stopped issuing 30 year treasuries for about 4 years (2002 through 2005).
Hindsight shows this was a pretty good plan. Interest rates have fallen since then. In my opinion, something must have really spooked the powers that be. (It certainly wasn't inflation.)
Hindsight shows that this would have been an even better plan if they had stopped selling them entirely starting in the late 1970s. At least so far.
Speaking of spooking the powers that be, check out this amusing article.
June 5, 2007
Bush and Cheney: Cautious to a Fault as Investors?
Why the aversion to risk?
Still, it's puzzling why they aren't more interested in making their money grow. Since 1926, stocks have returned twice as much as bonds -- an annualized 11.5% for stocks to 5.5% for bonds. Meanwhile, inflation has averaged about 3% a year. By investing more in stocks or stock funds, Bush and Cheney could amass larger fortunes to contribute to political causes or charity.
And not only that, but perhaps images of magical unicorns were flying out of my computer screen. Hey, it could have happened. Don't laugh! ;)
>On the other hand, the yen was relatively stable compared to the dollar from 1995 to 2007
I lived that 1995-2000 and it was far from stable, moving from 80 to 150. I had bills to pay in the US so I was intimately familiar with the FX.
Clipping out the pre-Plaza BS:
http://research.stlouisfed.org/fred2/graph/?g=1R4 shows the dynamic range better.
As for the general argument, I don't pretend to understand what's going on now or what's going to happen this decade for that matter.
My thesis is simply the 2002-2007 period was the artificial happiness of ~$2T/yr private credit draws, and the ZIRP we're in now is just keeping the system from going into cross-default.
The bank money was done printed last decade, so all that's left is keeping the balls in the air until something else happens.
I do not understand what caused the good times of 1995-1999 full-employment though. That's an important part of what's missing from my thesis, 'cause, who knows, maybe that will return again.
Troy,
I lived that 1995-2000 and it was far from stable, moving from 80 to 150. I had bills to pay in the US so I was intimately familiar with the FX.
My point was that the yen was not growing stronger vs. the dollar from 1995 to 2007 and yet Japan still had deflation.
As for the general argument, I don't pretend to understand what's going on now or what's going to happen this decade for that matter.
I hear that. If I knew for sure what was going to happen then I wouldn't be sitting in TIPS. There would be far braver opportunities in deflation (I could drop the inflation protection) and inflation (I could leverage a bet directly on commodities). Or perhaps I am dead wrong (I should therefore be betting on the stock market).
I do not understand what caused the good times of 1995-1999 full-employment though. That's an important part of what's missing from my thesis, 'cause, who knows, maybe that will return again.
The Internet is a wonderful tool to see what people were saying back then.
July 1999
Full Employment Has Not Been Achieved
To make matters worse, unemployment is underestimated if one applies the concept of “disguised” unemployment, that is, growing employment in services, whose productivity is low compared with productivity in manufacturing.
When we thought we were more prosperous, we were more willing to allow others to do work for us? Pay others to mow our yards and clean our homes?
There were a few exponential trends that were absolutely guaranteed to fail at some point. Once they failed, the "disguise" fell apart?
BLS: OOH: Grounds Maintenance Workers
Employment change. Employment of grounds maintenance workers is expected to increase by 18 percent during the 2008—18 decade, which is faster than the average for all occupations. In addition, grounds maintenance workers will be among the occupations with largest numbers of new jobs, with around 269,200. More workers will be needed to keep up with increasing demand for lawn care and landscaping services both from large institutions and from individual homeowners.
Perhaps I am too pessimistic, but I find that a bit hard to believe.
BLS: OOH: Building Cleaning Workers
Employment change. The number of building cleaning workers is expected to grow by 5 percent from 2008 and 2018, more slowly than the average for all occupations.
One wonders if the same person wrote both outlooks.
My point was that the yen was not growing stronger vs. the dollar from 1995 to 2007 and yet Japan still had deflation.
This is because the retail sector was in fact yielding out the currency gains parsimoniously.
The yen was at 240 for the first half of the 1980s and that's where the price level was for everything. As Japan settled into the new regime of 120 prices drifted downward, but the retail sector gave up these concessions to an increasingly bargain-conscious public very grudgingly.
But how this compares to the very real "hollowing out" of production to China is a good question.
That is, growing employment in services, whose productivity is low compared with productivity in manufacturing.
Interesting. Services are very good for spreading the wealth around per dollar of input. You can get a lot of GDP -- the masseuse paying the cat sitter paying the gardener paying the bookkeeper etc etc.
My general thesis WRT China is not that the trade is killing us, it's the trade deficit, where $4 leaves the paycheck economy and only $1 returns -- every $4 we buy leaves us $3 poorer since trade is nearly a one-way street with China.
Excellent post, Mark - really, one of the best I've seen here.
Creditors - like the people at the fed - dislike inflation. They do all they can to fight it.
Unemployment? . . . . Sorry, despite their dual charter, they're really not that concerned.
WASF,
JzB
Troy,
Interesting. Services are very good for spreading the wealth around per dollar of input. You can get a lot of GDP -- the masseuse paying the cat sitter paying the gardener paying the bookkeeper etc etc.
Unfortunately, massages are not a need and can therefore be cut back first if the economy falls apart. Then the masseuse can't pay the cat sitter and the cat sitter can't pay the gardener and then the gardener has no need for a bookkeeper. It's like a trickle down economics nightmare.
And if real wages don't rise long-term then the masseuse is in trouble long-term.
Jazzbumpa,
The banks certainly don't want to see the debts inflated away. The masters don't want to ruin that debt slavery thing.
Unfortunately, the oil speculators do want to see us attempt to inflate our debts away. Even a hint of it and oil prices rise.
We were in a win-win situation from about 1980 to 2000. Now we're in a lose-lose situation.
The Fed cannot get inflation adjusted wages to rise no matter what it seems to do, and yet that's what we really need.
Troy,
My general thesis WRT China is not that the trade is killing us, it's the trade deficit, where $4 leaves the paycheck economy and only $1 returns -- every $4 we buy leaves us $3 poorer since trade is nearly a one-way street with China.
If I could go back in time and change just one thing, it would be the trade deficit. We should have forced it to stay at ZERO when we had the chance. It would have been painless to enforce when it was already zero. The world would not have complained too much if we had just kept it there. We'd be so much better off now. But the free lunches of sending paper money overseas in exchange for hard goods was just too tempting apparently.
Cumulative Trade Deficit Nightmares
Post a Comment