Harder Than Thought

One of the standard economic understandings of the post 70's experience is that a Central Bank could create inflation if it wanted to. The reality is the endeavor may be much harder than previously thought. The capacity, production and abundance associated with the technological revolution is overwhelming the monetary - and more importantly, demand side  of the equation.

The data and recent CBO ACA information show the difficulty. After several months of finding a pulse in C&I data to end 2013, the demand for credit has stalled/waned again. The supply had been absorbed by foreigners but January has highlighted the fragility of outsourcing dollar credit. Turkey, India, Russia and the Middle East have quickly felt the pain of potential US monetary fine tuning. The CBO ACA report shows a deflationary headwind in the roll out of a huge social program.

Greenspan used to teach his students, in Rand influenced fashion, that "Excess government spending creates inflation." The world bought into the "Inflation is always and everywhere a monetary phenomenon" meme. Scarcity - real and perceived - and DEMAND seem necessary characteristics yet under appreciated. Even at 12% and 2 matched sales at Fed time, Volcker opined at the difficulty in cracking credit demand. The ZLB is the problem at the other end of the spectrum.

In the mid-90s credit crunch, Greenspan made his famous "Eventually, bankers will act like bankers" quote. But post credit crisis in an era of abundance and little capacity reduction, consumers may not return to former behavior. Boomer demographics and low growth reality are combining to limit sales transactions. Wal-Marts and Targets have become warehouses of the unwanted and unneeded. Martha Stewart and the credit super cycle did more for household formation and consumption than most care to admit. (There's a great scene near the end of The Hurt Locker where Jeremy Renner is completely in awe and out of touch in the cereal aisle..I feel that way in every aisle.)

In the meantime, a host of bond hating, metal hugging, crisis hoping nabobs will keep telling us that the inflation genie is out of the bottle. The Keyser Soze of monetary policy, inflation is rumored to be seen and feared by the Usual Suspects. Janet Yellen has more work to do.

3 thoughts on “Harder Than Thought

  1. Lawrence Martin

    Re inflation; have always liked this one: ‘In the end, inflation is about the value of money’ (I will search for the proper attribution) : Read a piece over the weekend about the effect of the baby-boom demographics (aging of USA) on our economy. Based on the baby-boom rippling through, the high point in US econ was predicted to be 2007. Pretty close, eh ? Its all downhill until around 2019 when the 1980’s birth boom (baby-boomer’s kids having kids) start looking to purchase housing. But the essence of the current US econ situation had its origins in the 1960’s when the boomers had other priorities than starting families. Automation: Had interesting convo with plant manager recently reassigned here. Their company purchased a very expensive gizmo from Switzerland that works 24-7, does 3 times the output (and more accurately) as 30 workers, with less recurring costs and HR issues. One person can operate on a shift. Result: 30 fewer workers at their facility. Productivity ? At least we have a ton of cheaper widgets …

  2. Shrek

    The markets and the intelligentsia believe that inflation is the result of lack of slack and expectations, but the worst inflations are caused by questions of national solvency. People begin to believe that they will be repaid in in increasingly debased dollars. Institutions still believe we are going to grow our way out of of our debt problem, but if it becomes obvious that we can’t then inflation will begin to skyrocket

  3. Sean Hennessey

    Great read as always. Heard your comments on the belly of the curve. Would you be long the long end the short end?


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