Rational Exuberance? 20 comments
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Kenneth Rogoff closed his latest column, on the question of whether Lehman's collapse mattered or not, by writing:
Asia may be willing to sponsor the west for now, but not in perpetuity. Eventually Asia will find alternatives in part by deepening its own debt markets. Within a few years, western governments will have to sharply raise taxes, inflate, partially default, or some combination of all three.
That's the conventional wisdom—that piles of debt accumulated over the past decade must eventually be handled somehow, perhaps through the making of difficult choices on taxes and spending, but more likely through inflation and selective default.
The odd thing is that markets don't seem to be playing along. In a June Wall Street Journal column, Arthur Laffer included a chart plotting the recent, massive growth in the monetary base—it essentially doubled over the past two years—and said that current policy is potentially far more inflationary than anything that happened during the 1970s. And yet, we learn that headline inflation in July was unchanged, and core inflation rose by 0.1%. Year-over-year headline prices are off 2.1%, and core prices rose just 1.5%.
Of course, this reflects slack in labor markets and industrial capacity, and declining commodity prices due to weak aggregate demand. But markets are supposed to be forward looking. By all accounts, recovery has arrived or is imminent. Banks should soon begin loaning out their reserves. The velocity of money should be increasing even as we speak. Where is the inflation?
Meanwhile, Brad DeLong notes the curious behaviour of interest rates:
I]t is astonishing. Between last summer and the end of this year the U.S. Treasury will expand its marketable debt liabilities by $2.5 trillion--an amount equal to more than 20% of all equities in America, an amount equal to 8% of all traded dollar-denominated securities. And yet the market has swallowed it all without a burp...
And he's absolutely right. The latest 30-year rates show no sign, no sign at all, that either serious inflation or default is a real possibility.
What does this suggest? Well, it could mean that there's more recession to come. Or it could mean that markets are confused. Or it could mean that the Arthur Laffers of the world have got it wrong. We'll have to see. What does seem clear is that those who warned that deficit-funded stimulus couldn't be effective because debt and inflation concerns would push up interest rates, stifling economic activity, were dead wrong.
This article originally appeared on The Economist.com
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This article has 20 comments:
or it could mean the more meaningless crap we read trying to explain what is going on is making us stupid.
this is a big economy. it does not turn on a dime. i do not drink enough kool-aid to believe you can pump all this debt into the system, and it "burps". just wait till the $hit comes flying out of both ends,
In any case, I am very doubtful the US government will ever recover from its addiction to debt, even long after the recession ends. The US Congress seldom makes difficult choices about anything in the long run. I'd like Obama to present $100 billion in permanent spending cuts to be enacted as soon as we get two consecutive quarters of positive GDP. I doubt it will happen. There will always be an excuse. The economy was "too fragile" to raise interest rates or balance the budget, even long after we had several quarters of positive growth in 2002 and 2003.
"What does this suggest? Well, it could mean that there's more recession to come. Or it could mean that markets are confused. Or it could mean that the Arthur Laffers of the world have got it wrong."
You're right to note that the model we bears are using to relate financial cause and effect is out of sync with current market reality, and to some extent economic reality. (E.g., retail bankruptcies are much lower than they "ought" to be, China's economy is expanding, etc.) There shouldn't be any way that markets could be fooled or manipulated into bullishness so easily. OTOH, our models seem logically watertight.
"We'll have to see."
My feeling is that somehow or other social reality in the form of greenspin and gov't. backups have stabilized the wobbly dominoes for the nonce, but that they will start crashing in the fall.
Correct assumption or not?
That is the $64,000 question!
"An old professor told me that when things do not make sense there is something you do not know."
On Aug 16 04:25 AM TheSnail wrote:
> "By all accounts, recovery has arrived or is imminent."
>
> Correct assumption or not?
>
> That is the $64,000 question!
When they get finished robbing you they'll enjoy sending you the bill for their services in the form of higher taxes, a deflated dollar, and government debt. It's their new form of indentured servitude.
When people say there will be a historic shift in wealth they should not be talking about future tense. They should be talking about present tense.
Clue to the answer: what makes a better story?
Since "all accounts" didn't see the crash coming in the first place, I put NO stock in "general opinion" on anything, ever.
Credit is imploding, print as much as you like, we are going down BIG, in a combination that will "rhyme" (as Mark Twain put it) with both 1929 (where the drop after the initial relief rally was MANY times as deep as the original drop, and 1938 with its sharp rally (does "3 weeks almost straight up" sound familiar?) off of a retest of support followed by about 3 weeks of mostly sideways action (again, sound familiar?) that put in a top that was to last for the next 7 years, the next four of which were successively lower. The top should be put in by next Monday. (There are too many expiring puts for it to start going down much this week.)
1. I disagree with the critics who feel Ryan Avent is indecisive in this article. Just read the last sentence: "What does seem clear is that those who warned that deficit-funded stimulus couldn't be effective because debt and inflation concerns would push up interest rates, stifling economic activity, were dead wrong."
That is taking a pretty strong position in my book. I just don't think that the statement is complete. The sentence ended too soon: the words "for 2009" should be added. See my discussion and metaphor below for elaboration of how I'm thinking.
2. Consider that models being used are kept in a box. To use them, you open the cover, pour in some observations, and then wait for the model outputs to come out a hole in the side of the box. Sometimes you will never get a useful answer until you get "outside the box". I guess I am really agreeing with Roger Knights here, and also with Steven Hansen's professor quote that Roger cites in another comment.
3. In some respects, my thinking is more aligned with alajac than with markfl and Steve Hansen comments, but I am trying to visualize potential future timelines, and down the road I believe things will change and I'll change sides. I am thinking one way for the next 6-12 months, but events will guide my thinking as they unfold. Again I will conclude with a metaphor (below) to try to get my thought process clarified.
The Volcano Metaphor
I am vizualizing the current situation as an (assumed) extinct volcano with a vast caldera. Since there is a danger that the massive walls of the caldera could collapse, creating deadly landslides downslope, the caretakers are pouring a mixture of fill and adhesive cement into the caldera to support it and create bonds toward the interior.
If they pour material in too rapidly, the caldera wall may be pushed out, creating the feared landslides, which would actually be made worse by the extra material. If they pour the material too slowly, the extended time gives the caldera walls more time to collapse on their own.
Now, there is a risk as the caldera nears the full point. If the material is not stopped in time, an overflow will occur and the downslope vicrims may still be unindated, now with excess fill rather than collapsed caldera material.
The final risk is that the volcano may not be extinct after all. If it erupts unexpectedly (think market panic), not only will ash and lava be emitted, but all the fill and part of the mountainside will also be available to create lehars and slides far more damaging than would have occurred had no modifications to the volcano been made. In fact, a geologist might say that the weight of the added fill suppressed an eruption that would have occurred less violently if it had happened earlier.
Now, if everything is done right, and the volcano really is extinct, all the fill (money) poured into the caldera (financial system) can be stopped without overflow and the entire structure is reinforced and stabilized without negative after effects.
Would you start this volcano reinforcement project based on theory or would you want a good engineering study, including borings and mechanical structural analysis? My trepidation about the current efforts is that it is mostly based on theory and not enough on thorough analysis.
"What does seem clear is that those who warned that deficit-funded stimulus couldn't be effective because debt and inflation concerns would push up interest rates, stifling economic activity, were dead wrong."
This is akin to Noah noting a lull in the rain on day five of the Flood and declaring authoritively, "The rain is over". Of course the next 35 days kinda put a damper on that bad call.
As for the Market looking forward: "Dot com bubble burst". The market is confused . . . maybe even just plain stupid.
One is simple the other sounds like something dreamed up by a congrssional committee. Sadly I think both make valid points about how poorly people see into the future and the bad times we are headed for due to those decisions.
Only Moon Kil Woong sees it for what it is. Outright thieft by politicians, Wal Street and the politically connected to rip off the last vestigaes of wealth from the bottom 95% of America and the world.
The Fed have pulled back for now, they think that the job is largely done, but if it came to it there is a long list of options that they could progressively step through to tackle deflation. This could include such items as a money financed tax cut i.e. print money and hand it out to workers. If you do enough of that you pretty soon create demand. Look back at Bernanke's publications to see where he has discussed doing exactly that.
And if your argument is that this would destroy the dollar, then just understand that you can't agrue that the Fed can't tackle defaltion AND argue that the Fed would destroy the dollar. That would be logically inconsistent.
On Aug 16 04:18 PM Money Talk wrote:
> What inflation? It is going to be the mother of all deflations for
> the history books to write for a thousand years! etc.
On Aug 16 09:34 PM DJS wrote:
> The inflation is is stock prices. The biggest recipients of new FED
> money are the banks. They are NOT lending the money. They are investing
> it in the stock markets.
Nicola(LordMovie.com)