Inflation!!!! Coming to Save JOBS!!!!!!

[Angrycat]

Quote from circadian:

Ahhhh, the good old Phillips Curve illustration. There are definitely some stimulating topics of ET from time to time.

There's only one little problem with the Phillips Curve - it hasn't been proven empirically. In fact, the protracted period of low inflation and full (and increasing to boot) employment and the period of high inflation and high unemployment in the 70's sort of disproved it.

Now if only policy makers will let it RIP.

 

[Angrycat]

Quote from hayman:

High inflation, leads to higher interest rates, which has a negative effect on business (and hence, employment). Good for holders of long-term debt.

you mean good for borrowers. Lenders get screwed in inflationary periods because they are repaid in devalued currency - particularly lenders at the long end of the curve.

 

[circadian]

Quote from Angrycat:

In fact, the protracted period of low inflation and full (and increasing to boot) employment and the period of high inflation and high unemployment in the 70's sort of disproved it.

Now if only policy makers will let it RIP.

I agree that high inflation isn't synonymous with high natural employment rate, as we know how detrimental 70's style inflation can be on the economy. Phillips curve seeks to prove a relationship between rising prices and rising employment rate in short run. The relationship does exist, even in periods of high inflation, especially when this high inflation abates along with employment level for a period, and subsequently returns to natural inflation/employment relationship in S-Run. The employment level doesn't always return to natural rate, but it does rise in tandem with inflation rate.

Early 90's was kind of an abberration

Check out the graphic. Unemployment rate is inverse, so it's actually employment rate.

 

[Misthos]

In order to have inflation, the money has to somehow make its way to the average person. How will that happen when you have debt destruction (deflation) and wage reductions/layoffs (deflation)?

Wouldn't demand drop, thus furthering the drop in prices?

If the government really wanted inflation, it would have massively cut taxes so the money would go to the populace, not for the banking system to hoard.

Instead, the government merely did a giant balance sheet cost shifting exercise with the banking industry. Money was not really created, just shifted around balance sheets to be paid off another day by the gov't thru taxes. Bad assets (Toxic Debts) exchanged for good assets (US Treasuries). No net gain to the economy, just the end of the black hole on banks' balance sheets (so they think), and a ballooning national debt. The bailout funds have not exactly added to the cost of say, concrete or timber because nothing was purchased - it was an exhcange of "Assets" the real economy was not impacted in a demand/supply of material goods sense. So demand is still dropping.

I just don't see inflation anytime soon. This is deflation that will get worse. First you have credit destruction thru defaults, and PART II will be when the FIRE Economy implodes. I see it already with people I know in Real Estate, Finance, Insurance, Law....

I just don't see how the implosion of a giant sector of our economy can create inflation. What am I missing here?

And if you're going to tell me that foreigners will stop buying treasuries, well, what about their currencies? Aren't all major currencies equally shabby? Thus cancelling out any diminution of value?

Honestly, I don't know what we're in for.

 

[kashirin]

Quote from Misthos:

In order to have inflation, the money has to somehow make its way to the average person. How will that happen when you have debt destruction (deflation) and wage reductions/layoffs (deflation)?

Dollar is the world reserve currency. Remember what we experienced last summer?
Wages were stagnant but prices went up because of foreigners

If Fed continues monetizing debt - dollar will go down so prices of import will go up - and oil will be first

And wages won't matter here

 

[drsteph]

Quote from lemeeeplay:

Not if you can get the Chinese to buy your debt and keep rates artificially low. The US government has found the goose that lays the golden egg in globalization. This can't go on forever though, but I think it will continue much longer than most people would expect.

Its almost as if TPTB in trying to slow the FIRE economy down brought themselves to the edge of the abyss and peered in. When confronted with the terror of deflation in Q4/Q1 they said forget it - let's start up the engines again, damn the costs. Currency destruction with full employment is something we can deal with - deflation with upheval is not.

The best thing about the FIRE economy is that you can insert yourself in multiple points along the way for 'added value' and as long as asset prices are rising, nobody cares. Doesn't require real education, real research, or real effort. Just show up to work, sell some instruments, and head out with your flock for some drinks after work.

We'll see if it works. Doubtful.

 

[Misthos]

Quote from kashirin:

Dollar is the world reserve currency. Remember what we experienced last summer?
Wages were stagnant but prices went up because of foreigners

If Fed continues monetizing debt - dollar will go down so prices of import will go up - and oil will be first

And wages won't matter here

Last summer was very unique. I think the global markets punished the US Dollar prematurely thinking that other currencies would not fare as bad... the currency markets were wrong. The entire global financial system is subprime now. Just look to the export countries' markets, and look to consumerist/financial countries' markets - notwithstanding this recent short squeeze/engineered rally for elites to sell into - the fundamentals are all crap. yeah, I'm a tinfoil kinda guy.

Energy was also inflationary (and I know many will disagree with me here) because of speculation - not inflation. And thus, caused a spike on commodities as well.

Read this: Catsimatidis thinks others hurt SemGroup
The idea is that they helped drive up oil prices, causing big losses for the company. http://www.tulsaworld.com/news/article.aspx?subjectid=11&articleid=20090327_351_A1_JohnCa682978

It wasn't until the manipulators fell down that oil too, dropped. The major banks got pummeled and hedge funds faced significant redemptions... then oil dropped. It wasn't inflation as much as everyone making the same trade. It was artificial.

Many here refer to the 1970s. That is wrong. the 1970s were different because of three factors:

1. The end of gold and the beginning of an untested monetary paradigm - Bretton Woods II

2. The reaction to the above by OPEC receiving paper instead of something gold backed, as well as the crisis in the middle east - Oil Embargo = Inflation. A result of politics AND monetary policy.

3. The de-industrialization of the US that began in the late 60s. The rest of the world caught up from the destruction caused by WWII. The US fought inflation not just via Volcker, but by global wage arbitrage/relocating production. This was anti inflationary. In the place of production the souped up FIRE economy grew amidst the new fiat money regime and created "wealth" and jobs... Ever wonder how consumer goods and commodities dropped the last 30 years, yet somehow asset classes (equities, real estate, etc..) grew parabolic? Inflation was targeted to focus on things we can borrow against.

Well, that new fiat regime can only grow so long as incomes (personal, gov't and corp) can keep up with growing debt. Once that tops off - oops... debt defaults and DEFLATION. Incomes cannot keep rising in a global free trade system because of the effects of global wage arbitrage. The FIRE economy, too suffers.

My conclusion is that you cannot have stable currencies in a fiat model world when global trade is lopsided. All major nations need a balanced mix of production and finance/consumption. Otherwise, the system topples and all nations suffer a depression/deflation.

 

[jueco2005]

Quote from lemeeeplay:

Not if you can get the Chinese to buy your debt and keep rates artificially low. The US government has found the goose that lays the golden egg in globalization. This can't go on forever though, but I think it will continue much longer than most people would expect.

It will obviously go on for many more years, I wonder how it would end.