Resolving Shirakawa’s conundrum
The governor of the Bank of Japan, Masaaki Shirakawa, says he is confounded by the still very low level of Japanese government bond yields given the country’s elevated debt to GDP ratio of over 200 percent. Speaking on an IMF panel over the weekend, he offered a rather unintuitive explanation for the phenomenon:
It seems difficult to explain the case of Japan in light of conventional wisdom. One frequently offered explanation is that the ample domestic savings in Japan have absorbed the issuance of JGBs and the share of JGBs held by foreign investors is very small. But a more fundamental explanation is that the stability in the current bond yields reflects market participants’ expectations that fiscal soundness will be restored through structural reforms imposed in the economic and fiscal areas.
Most economists think Japanese yields are low because of continued expectations for deflation and weak economic growth. But for Shirakawa, it seems, it is public confidence in future fiscal restraint that is keeping bond yields low. Except he then contradicts this point by saying weak confidence in future fiscal reforms is also simultaneously undermining consumer spending:
At the moment, such expectations are not firmly backed by concrete reform plans. The public therefore restrains spending on concerns over future fiscal developments. This constitutes one factor behind sluggish economic growth and mild deflation. If this is indeed the case, the experience of Japan indicates a possibility that a cumulative increase in government debt combined with weak economic growth expectations might generate deflationary pressures.
Not so, argues Ugo Panizza, head of debt and finance analysis at the United Nations Conference on Trade and Development. He and co-author Andrea Presbitero find no causal link between high debt levels and weak economic growth.
Christopher Sims, a Nobel-winning economist and Princeton professor also on the panel with Shirakawa, had a much simpler explanation for why Japanese yields are low while Europe’s face steady upward pressure even though both economies are struggling with soft growth:
Did France cause The Great Depression?
Economist Douglas Irwin of Dartmouth College has stirred up a bit of a fuss by concluding in some academic research that it was France, not the United States, that was most to blame for The Great Depression.
Irwin’s theory, in a paper posted here by the National Bureau of Economic Research, is that France created an artificial shortage of gold reserves when it increased its share from 7 percent to 27 percent between 1927 and 1932. Because major currencies at the time were backed by gold under the Gold Standard, this put other countries under enormous deflationary pressure.
To prove his point, Irwin ran a model looking at what would have happened without the French move. The results:
Counterfactual simulations indicate that world prices would have increased slightly between 1929 and 1933, instead of declining calamitously.
All this runs counter to the traditional finger-pointing for The Great Depression, which has it that the U.S Federal Reserve tipped the world into the economic abyss by tightening monetary policy.
Irwin does not let the Fed totally off the hook, however. He concludes that France was “somewhat more” to blame than the United States for the worldwide deflation of 1929-33 and that the deflation could have been avoided if central banks had simply maintained things as they were in 1928.
Economy signs: Housing a painful recovery
A look at the macroeconomic news and its impact on the mood of investors and the direction of the economy. Are we heading for a double-dip recession?
The housing market is more closely related to the price of luxury items than staple goods such as food and clothing, reports David Leonhardt in the NYT. This being the case, don’t treat your home like an investment because the forecast is underwhelming.
But all is not doom and gloom in the housing sector. In is blog Jeff Matthews Is Not Making This Up, Mathhews espouses the “Cover Story Syndrome” method of investing. The seeds of a housing market recovery have been planted by this week’s Time magazine cover story on just how bad things are, according to Matthews.
“When investment themes get so popular they appear on the cover of a major news magazine—a dying breed, but the basic idea is still there—then that investment theme is, by definition, too popular to succeed, and maybe popular enough to start betting against,” says Matthews.
Also in the down but not out category is Mark Hulbert’s article in MarketWatch. He takes a look at how to make money amidst deflationary concerns. Look to the consumer staples and health care sectors as a way of staying in the stock market.
Investors have their head in the sand when it comes to the outlook for the economy, reports Izabella Kaminska in the FT. The blog also contains a great video of Spock’s Vulcan nerve pinch.
Rip-off Britain in effect
While most of the developed world frets about deflation, in Britain, inflation just won’t quit.
The Bank of England has been forecasting a sharp fall in consumer price inflation for about as long as Britons have hoped for a summer of uninterrupted sunshine. But at least Britons are still betting on a fair amount of rain.
UK inflation was 3.2 percent in June, a slight fall from the month before, but still 1.2 percentage points above the central bank’s target rate.
“Another big shocker,” said one economist. “Yet another depressing month,” said another.
No wonder Londoners roll their eyes when on the one hand policymakers say inflation’s set to fall and on the other, they’re told that tube, bus and transport fares are set to rise sharply again next year – as they do every year.
In 2003, when I moved to London, a cash bus fare was 70p. Now it’s £2. We’ve just been through the worst post-War recession on record but inflation lingers on.
Core UK inflation, which some say is a better underlying measure of price trends even though the BoE targets the headline rate, rose back to 3.1 percent, the same as in April, and the highest since current records began in 1997.
from Global Investing:
Deflation to jump the shark?
The recent spate of shark attacks on Australian beaches could mark a turning point in global deflation and signal a change in fortunes for some beleaguered emerging economies, if Nomura strategist Sean Darby is to be believed.
Speaking at a Nomura investors forum, Darby said a chance sighting of a shark on Sydney's famed Bondi Beach three weeks ago made him realise that prices of grain and other soft commodities -- punished of late by global recession fears -- could be due for a rebound.
"I actually saw a shark on Bondi Beach and that made me wonder about the impact of La Nina and how there's a severe drought around the world at a time when many farmers are finding it hard to access credit," said the Hong Kong-based analyst.
The La Nina meteorological phenomenon has been blamed for bringing deep ocean creatures -- such as sharks -- closer to shore and also for a long-running drought that has hit farmers in Australia, China and North America.
Persistent drought could push food prices higher, potentially benefitting soft commodity-producing economies from Vietnam to Ukraine, Darby said.
"This is one area that could disrupt the picture of global deflation that bond markets have," he said.
Hey Europe, stop acting so happy
Merrill Lynch economist David Rosenberg’s views are well-known for bearing no resemblance to his firm’s trademark bull, so when he says European clients seem too upbeat, what he really means is they weren’t thoroughly depressed. The New York-based economist just got back from a marketing trip across the Atlantic and didn’t find much common ground.
In particular, he said European clients seemed more concerned about inflation than the deflation that he sees coming, and they may have unrealistically high expectations for President Barack Obama.
“Unbelievably … portfolio managers seem to think they are taking a bigger risk with their careers by missing the rallies than by missing the sell-offs,” he wrote in a note to clients. “I can tell you that this is not a condition from a sentiment standpoint that terminates bear markets.”
For the record, Rosenberg thinks the Standard & Poor’s 500 index may have another 20 percent to fall, and U.S. house prices could drop an additional 15 percent. That would take the cumulative loss in U.S. household net worth to $20 trillion. Yes, trillion.
He said European clients had a “very high degree of confidence” that Obama would be forceful in addressing reflation, credit and the recession, and he heard frequent comparisons to Franklin Roosevelt.
“But the dirty little secret from the New Deal is that even by the end of the 1930s, the unemployment rate was still north of 15 percent compared to 2 percent when the Great Depression began, and the CPI was deflating at a 2 percent annual rate,” Rosenberg points out.
And on inflation? He doesn’t see that happening when unemployment is high and the manufacturing sector is saddled with 30 percent idle capacity. “Spare capacity in the economy is now so big that it would take six years of 4 percent real GDP growth or alternatively three years of 5 percent real growth just to get the economy back to full employment.”
from Global Investing:
Not going back to platform days
Deflation seems to have replaced inflation as the public enemy No.1 these days.
This might give relief to quite a number of people, including those who thought the resurgence of inflation could take us back to the 1970s.
"We thought we would be wearing platform shoes again, like in the 1970s," says Philip Saunders, head of investment strategy at Investec Asset Management.
"A potential return of inflation is not something people are worried about but maybe that’s what people should be worried about," he told participants at an investment outlook briefing in London.
Perhaps we should go and buy a pair of platform shoes as well?
Worried about deflation? Don’t be so stupid
Highly regarded Federal Reserve historian Allan Meltzer has some sharp words for journalists calling for his views on whether the United States is heading for a Japan-style bout of deflation.
“The last time somebody asked me that question it must have been the fifteenth time that I’d heard it, and I said that it must be the most stupid question I’ve heard in 40 years of dealing with the press,” he told the Cato Institute during its annual monetary policy conference this week.
“It is time that the people talking about deflation go back to school and learned about the difference between maintained rates of change and one-time changes in level,” he lectured the high-powered audience of economists, which included Fed Vice Chairman Donald Kohn and Richmond Fed President Jeffrey Lacker.
Kohn had earlier said that he didn’t see a big deflation risk. Lacker made similar remarks on Friday.
Why all the deflation talk all of a sudden? It didn’t help that U.S. consumer prices tumbled in October. Or that the newest Nobel prize-winning economist, Paul Krugman, used the “D” word in Friday’s New York Times.
Meltzer says forget about it.
Allan Meltzer is ignorent.
The history of the FED is falsified like most of the rest of American history.
The FED (a unconstitutional organization) likes to fool the people and tell them lies. Ofcourse their will be deflation before hyper inflation sets in.
The FED, the FED notes should be abolished and all processes brought back under the Treasury (like JFK tried to do with executive order 11110).
The dollar should be connected again to gold or silver.
And rates should go up to 5% to 10% to compensate the comming hyper inflation.
feel enlightened now?
