Here's my Top 10 items from around the Internet over the last week or so. As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.
See all previous Top 10s here.
My must read is #1 on deflation and the response. Food for hawks and doves alike.
1. Here comes the deflation - It is the question of our age: where is the inflation?
The Reserve Bank of New Zealand is confident it will come, mostly because of the recent slump in our currency. Yesterday's QSBO showed it hasn't come yet. In fact, a net 6% of businesses reported cutting their prices in the September quarter, despite a net 19% reporting their costs increasing.
For whatever reason, businesses just can't seem to pass on price increases. Part of the reason may be increasing competition from others via the Internet and lower prices being exported from markets where there's so much capacity that they're having to cut prices just to clear their stock.
This FT piece on the deflation coming out of Emerging Asia is instructive:
Deflation, a prolonged decline in the price of products, is flowing like a draught of cold air from Asia’s powerhouse economies and casting a chill over Japan and Europe, while also endangering US efforts to sustain a recovery.
Evidence of a deepening deflationary spiral in Asia — sparked by manufacturing overcapacity, an evaporation of trade demand and anaemic productivity — is a major cause for concern. That anxiety is amplified because of the structural nature of the problem. That it is taking place just as the EU and Japan are slipping back into deflation while the US is struggling with weak corporate earnings, makes Asia’s falling prices a pivotal issue.
“There is a chance that we are moving towards global deflation,” says Alberto Gallo, head of European macro credit research at RBS, the bank. “We have overleveraged everywhere and, instead of reducing capacity, we are creating a prolonged state of industrial overcapacity that is driving down prices. China is the biggest example.”
2. China at the epicentre - James Kynge and Jonathan Wheatley go on to find China at the epicentre of this deflationary pressure. The chart below is an eye-opener too.
China has notched up 42 straight months of falling producer prices, making it the only large economy other than Japan in the 1990s to show such a persistent deflationary trend, according to Chetan Ahya, chief Asia economist at Morgan Stanley.
Overall, China’s producer prices are down a cumulative 10.8 per cent from their recent peak in 2011. The speed at which prices are dropping is a cause for alarm. As recently as August last year, the producer price index for commodities was showing only a 1.1 per cent drop; this August the decline was 12.8 per cent. Even a country such as India, with an otherwise robust economy, has slipped into producer price deflation over the past year.
Nor is Asia’s deflation solely the result of the global slide in commodity prices. Pernicious effects are also evident from the decline in the price of manufactured products and components, which fell on average by 4.4 per cent year on year in August in the region’s 10 leading economies (excluding Japan).
3. And more QE won't work - Yet the response to this deflationary pressure in the Northern Hemisphere at least has been to cut interest rates to zero (or even below that in Sweden and Switzerland) and then to print money to buy Government bonds through Quantitative Easing.
This could actually be worsening the problem, say some.
Classic theories of deflation, including that espoused in the so-called Bernanke doctrine, state that falling producer prices result from a collapse in aggregate demand. This leads, as Mr Bernanke said in 2002, to “a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers”. This diagnosis led directly to the main US response to the threat of deflation; a reflation of demand by pumping liquidity into the economy via QE.
However, in the case of Asia’s deflation at least, it appears likely that it is an excess of supply rather than insufficient demand that is the prime factor depressing producer prices.
If this is the case, then endless bouts of QE — or “QE infinity” as Mr Gallo describes it — may be exacerbating rather than alleviating the problem of deflation by acting to prolong oversupply through providing cheap credit to companies.
“By itself, ‘QE infinity’ could be deflationary in the long run because it means that the issue of overcapacity is not resolved but dragged forward,” says Mr Gallo. “This could in turn result in both prolonged deflation and asset price bubbles at the same time.”
4. Climate change and lobsters - This Quartz piece on the boom in lobster catches off the coast of Maine is a fascinating look at what climate change might mean. Unintended consequences abound. Climate change may not be the reason, but it's a fascinating read for anyone who thinks about fisheries management and markets.
The charts on lobsters are spectacular too. Note to self. Get out more.
He looks at what to do about the zero lower bound (ZLB) problem where a central bank can't stimulate the economy if interest rates are already near 0%. He looks at the prospect of helicopter money, higher inflation targets, negative interest rates and abolishing cash. Yes. You heard right. Abolishing conventional paper cash.
A more radical proposal still would be to remove the ZLB constraint entirely by abolishing paper currency. This, too, has recently had its supporters (for example, Rogoff (2014)). As well as solving the ZLB problem, it has the added advantage of taxing illicit activities undertaken using paper currency, such as drug-dealing, at source.
6. So what about bitcoin? - Haldane has a soft spot for bitcoin as one way to abolish cash. And the Bank of England is seriously working on something like it.
In its short life, Bitcoin has emerged as a monetary enigma. It divides opinion like nothing else (for example, Yermack (2013), Shin (2015)). Some countries have banned its use. Others have encouraged it. Some economists have denounced it as monetary snake oil. Others have proclaimed it a monetary cure-all for the sins of the state.
What I think is now reasonably clear is that the distributed payment technology embodied in Bitcoin has real potential. On the face of it, it solves a deep problem in monetary economics: how to establish trust – the essence of money – in a distributed network.
Bitcoin’s “blockchain” technology appears to offer an imaginative solution to that distributed trust problem (Ali, Barrdear, Clews and Southgate (2014)). Whether a variant of this technology could support central bank-issued digital currency is very much an open question. So too is whether the public would accept it as a substitute for paper currency. Central bank-issued digital currency raises big logistical and behavioural questions too.
How practically would it work? What security and privacy risks would it raise? And how would public and privately-issued monies interact? These questions do not have easy answers. That is why work on central bank–issued digital currencies forms a core part of the Bank’s current research agenda
7. Become a beef farmer - This FT piece on China's need for the land equivalent of Great Britain to produce enough meat to feed China's growing middle classes is a cheering one for New Zealand sheep and beef farmers.
It certainly explains Shanghai Maling's keenness to lock in New Zealand supplies through its deal with Silver Fern Farms.
The average Chinese eats about 57kg of meat a year, up by almost a quarter from 2003, when consumption totalled 46kg. This is expected to rise to 74kg in the next decade, pushing up grains and soyabean demand by 94m tonnes for livestock from the current overall usage of 650m tonnes.
This increase, in turn, will mean that an additional 15-20m hectares of agricultural land will be needed, according to the corporate finance arm of auditors PwC. The shift in diets “will place enormous burdens on an already challenged domestic food system and have significant ramifications on international trade in agriculture”, said Richard Ferguson, PwC adviser and author of the report “China’s agricultural challenges”.
Constraints of land and water availability will mean that the country will increasingly rely on imports or look to secure land overseas for agricultural production — a phenomenon that is already happening.
8. Another point of view - This piece written on October 2 by Joe Stiglitz and Adam Hersh on the TPP is an antidote to the boosterism around at the moment.
It should surprise no one that America’s international agreements produce managed rather than free trade. That is what happens when the policymaking process is closed to non-business stakeholders – not to mention the people’s elected representatives in Congress.
9. Totally a mash-up of some great movie scenes. This is just a bit of fun.
10. Totally Clarke and Dawe on the differences between Labor and the Liberal/National coalition. And some chat about broadband.
21 Comments
Inflation will come when the USA runs a bigger deficit. Currently it's something stupid like 3% of GDP. It's simple really. You want inflation for the world? Then you need growth for the world. You want growth for the world? Then you need America (government) to SPEND.
deflation is looking more and more being the fault of the money printing. it temporarily created demand to produce when real growth was not around.
now some printing has stopped the demand for goods is smaller than production so until that corrects we wont have inflation.
ala oil it has taken a lot longer than normal for the inefficient producers to fall over due to the cheap credit
No it was European austerity that created deflation. Its pretty simple, when you make savage cuts to public spending and hike takes, this reduces people's incomes and spending power.
QE was intended to increase the value of the banks' reserve capital to allow them to lend more money without having to raise more capital. It also allowed the banks to offload their toxic assets to the public sector balance sheet so they wouldn't have to be marked to market values.
". The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn't getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash...Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the U.S. central bank's bond purchases had been an absolute coup for Wall Street. The banks hadn't just benefited from the lower cost of making loans. They'd also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed's QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way."
http://www.wsj.com/articles/SB10001424052702303763804579183680751473884
btw what's the alternative? In case you didn't know the Chinese don't have a comprehensive safety net which we have become accustomed to. Like Japan, China's social security system is intimately tied to its enterprises. Its often the companies that provide healthcare, retirement benefits, and accommodation. If you lose your job you also lose your social security entitlements. This is why Asians are such high savers. The economic climate is so insecure and penury is just a job loss away.
"State enterprises maintain hospitals, clinics, and schools and build houses for their workers. They employ one-third of the nation's medical staff and 600,000 teachers and administrators. Workers view these benefits as entitlements. But as subsidies to enterprises have been reduced from 6 percent of GDP in 1990 to 4 percent in 1994, many enterprises have been forced to meet these expectations without government assistance."
https://www.foreignaffairs.com/articles/asia/1998-07-01/smashing-iron-r…
No it was European austerity that created deflation. Its pretty simple, when you make savage cuts to public spending and hike takes, this reduces people's incomes and spending power
ironically due to cheap credit house prices all over the world have increased at the fastest rate ever with an increase in debt owned to banks matching, meaning any increase in interest rates will suck up peoples spending power and could push countries into recession.
so we now have central banks cutting interest rates to try to stimulate spending and instead it is being used to take on more debt as people all over see low interest rates as the norm?
how do they get out of this without pain
for capitalism to flourish weak companies and industries must be allowed to fail so strong ones and new industries can grow
Oil is a classic of this. because of the cheap credit inefficient drilling popped up increasing supply, as the price fell supply was increased to service the debt until the price got to low for to long and has forced some drillers to go under and others to stop drilling new wells.
now supply is dropping again and the price is recovering.
and what about the lenders who have lost money on this, they have moved onto the next bubble investment as they have a lot of money to lend and they need to find something that will give a decent return
"ironically due to cheap credit house prices all over the world have increased at the fastest rate ever with an increase in debt owned to banks matching, meaning any increase in interest rates will suck up peoples spending power and could push countries into recession."
No, not all over the world. Only in those countries with the fortune to avoid the worst consequences of the GFC (New Zealand, Canada, China, Sweden, Australia, Sweden, and Norway) or those whose economies are not under management by Calvinistic, parsimonious Germans who through deficit financed public spending managed to forestall the deleveraging of their financial systems and restore their bank balance sheets. In those countries that did manage the latter, such as Great Britain, the United States, Iceland, Latvia, and even Spain, there is a significant foreign investor component to the demand for property or in the case of the United States investment banks and equity funds are buying up huge tranches of property and packaging up financial instruments underpinned by the rents paid by tenants of those houses who were formerly homeowners until the GFC.
No, deflation and the GFC occurred before QE. Then you say "it temporarily created demand to produce when real growth was not around." which is the definition of inflation and was meant to be a temporary situation that when it was withdrawn saw us head back to dis-inflation.
oil, yes I agree, but this is due to investment in junk bonds and not fed printing / QE.
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...but this is due to investment in junk bonds and not fed printing / QE.
One follows the other according to Bernanke and others.
Thus, Federal Reserve purchases of mortgage-backed securities (MBS), for example, should raise the prices and lower the yields of those securities; moreover, as investors rebalance their portfolios by replacing the MBS sold to the Federal Reserve with other assets, the prices of the assets they buy should rise and their yields decline as well. Declining yields and rising asset prices ease overall financial conditions and stimulate economic activity through channels similar to those for conventional monetary policy. Following this logic, Tobin suggested that purchases of longer-term securities by the Federal Reserve during the Great Depression could have helped the U.S. economy recover despite the fact that short-term rates were close to zero, and Friedman argued for large-scale purchases of long-term bonds by the Bank of Japan to help overcome Japan's deflationary trap. Read more
When I think back to the seventies and eighties there was inflation caused by scarcity, you just couldn't buy stuff, pre jap import car, car less days because of fuel shortages, there wasn't the choice of goods you could buy. You would buy today to avoid price rises tommorrow. Compare with today, how many brands of cars can you get? You don't buy anything from an appliance store unless it's on sale. There is no expectation that prices of many goods will increase. Even the massive property inflation we have seen carries with it the expectation by many that it might crash or at least fall in a correction.
Just take it back one more stage. ie not so much just scarcity but that inflation is caused by too much money chasing too few products. Today we have no more money in our wallets (wage growth is stagnant) in fact probably less so there is excess capacity in many things and hence no inflation and in fact deflation.
"There is no expectation that prices of many goods will increase" yes, and in fact I'd argue there is an expectation building that goods are/will decrease.
With property the massive property increases are only in some suburbs. Around the rest of NZ prices are virtually flat or even declining.
The relationship between prices, growth, and money supply isn't as simple as the economists would have you believe. It even depend upon such basic factors as which measure of money supply aggregates, you are talking about. M1, M2, and M3, can diverge substantially depending upon whats happening in the broader economy.
" After all, these quantities often go in dramatically different directions. Since the internet Austrians seem to blame the Fed, let’s assume they are talking about the sort of money created by the Fed, the monetary base. In January 1920 the base was $6.909 billion, and in December 1929 it was $6.978 billion. Thus it was basically flat, and this was during a period where the US population and GDP rose dramatically. The broader monetary aggregates rose significantly, but the government didn’t even keep data on M1 and M2 until fairly recently. No one in the 1920s thought the Fed should be targeting aggregates that didn’t even exist."
http://www.themoneyillusion.com/?p=12111
Throughout the 1920s, the United States experienced steady deflation in the price level, while both its population and economy were growing steadily. Even today a national economy can grow significantly without significant money supply growth
"In a few cases though, I saw something interesting. In the countries that are colored deep green (like Indonesia), economic growth was much faster than the growth in labor and the money supply. Conversely, with ruby red countries like Azerbaijan, economic growth was much slower."
https://blogs.cfainstitute.org/investor/2015/02/25/global-labor-force-a…
There appears to be a complex interrelationship between money supply, labour supply, and economic growth, which is in my view underpinning by the unique structural peculiarities of the national economy in question.
https://blogs.cfainstitute.org/investor/2015/02/25/global-labor-force-a…
Not sure why you have posted this, and I mostly do not agree.
Some even simple economic models / relationships seem to hold up rather well. However some so called economists seem unable to even get basics right "oh god the Fed is printing here comes hyper-inflation" So not even "simple" but simply downright wrong.
My view for the last few years is a simple model = no more money in ppls pockets = no inflation. Which is why QE is such a failure.
In terms of "a complex interrelationship between money supply, labour supply, and economic growth" again it is even simpler, no more cheap [transport] energy = no more sustained growth.
Last nail in the coffin to us staggering along would probably be Donald Trump winning the Whitehouse (or indeed any other Republican candidate) then we'd lurch into Rand fantasy and bye bye US/world economy. At the rate the other candidates seem to be going I think he could win.
#4 - yes, a very enjoyable read - even if it didn't have the graphs/pictures. I'll bet we don't have even one tenth that understanding about our crayfish stocks. For an island nation, the amount of research we do in relation to our oceans is a total embarrassment.
I am all in favour of the free market mechanism , but it looks like its seized up ..........I want to know why we export fresh fish at $1,45/kg , yet fresh fish at Pak n Save is from $20 to $34/kg ?
Then we have people saying that low-income Kiwi families are not able to eat properly ?
Its my WTF for the day ...........its a national disgrace that corporates are profiteering to this extent
The BOE's Haldane's paper is interesting, and generally well argued, as you would expect. On solutions, though, he seems shy of reaching the more obvious path.
Given that interest rates are close to zero in most economies, he lists three solutions over a cycle:
Raising the inflation target to say 4%.
More QE
Getting rid of printed cash.
On inflation targets, he seems to think 4% over a cycle would give more flexibility, but he is silent on the fact that even if this was a good idea, without other different solutions, he couldn't achieve it now anyway, given they can't get inflation up to even 2%.
Haldane seems to favour getting rid of cash, and having negative interest rates. Both frankly seem non starters politically and practically, which suggests he has been in an ivory tower too long.
Which leaves QE in some form. He primarily dismisses this because it "blurs the role of monetary and fiscal policy" as though doing so is seriously problematic. Haldane doesn't really distinguish between different forms of QE, and so seemingly accepts the current perceived orthodox method of channeling it through banks into more easy loans that will inflate asset prices, and that then may promote spending. He has specifically not referred to helicopter printing, which Mervyn King did do with £350 billion funding government deficits (although it was pretend packaged as a loan and not a grant) from the bond or other asset buying now generally in place.
In summary, from where the world is at now, higher inflation targeting is useless/impossible unless they use helicopter QE as well. Getting rid of cash won't happen in my life time, (and certainly not in the next 5 years), so is a non solution.
Ipso facto, there is no other solution. QE it is. (and I would argue the helicopter version). NZ can take everyone else's- National's favoured approach- but the catch is that means we sell off the country very quickly, and our competitive industries take the hit. Or we print at least our share.
You seem to be following a similar thought process to mine - the alternative to failed, pushing on a string monetary policy is a bit of fiscal profligacy.
Inflation is easy to produce - the government just needs to spend more than it taxes back. This was how things were done up to 1980, the goal was employment for all and the cost was inflation for all. When things got a bit too inflationary then monetary policy came into fashion as high interest rates kill inflation but destroy jobs, so bye bye full employment.
You would think the finance minister would cut taxes and spend big until unemployment went down and the RBNZ started putting up interest rates. Then he need only sit back and not increase spending, letting the increased taxes from rising incomes balance the books. Why is this not what happens?
Is the missing link the electoral cycle in NZ? A canny finance minister should be prudent in year one, cut taxes in year two and spend on shovel ready projects in year three. That way the economy should be humming along nicely at election time.
Roger,
we are largely on the same page. I was thinking globally, but for NZ you are in my view correct, in that monetary and fiscal policy should be more entwined. If and when loosening is required, then dropping interest rates is one choice, although as we see, it primarily boosts asset prices rather than spending. Very low interest rates also unfairly punish savers vs borrowers. Some fiscal priming, as you note, is an alternative. Then how that priming is funded is also key. Conventionally here a government deficit is funded by the Treasury borrowing money from private markets by issuing bonds. Much of this usually ends up being borrowed directly or indirectly, from offshore, which just boosts our exchange rate and current account deficit as well. As such it is monetarily neutral at best, with distortions.
In my view an independent central bank should be able to determine when monetary policy should be loosened, and then what tools were best used. If asset prices are already high, such that there is a financial stability risk, or if interest rates are already very low, then fiscal loosening is best. The central bank should advise the Treasury that it is willing to fund $x billion by direct printing. The government/ treasury then has a choice of whether to have tax cuts or spend on infrastructure or other general expenditure.
Ambrose covers it well here:
http://www.telegraph.co.uk/finance/economics/11869701/Jeremy-Corbyns-QE…
I should note that AEP dismisses much of Corbyn's approach, as I would, but an independent central bank controlled printing is the only next step for the world that will get it out of a funk, and NZ should play its share, or lose assets and wealth.
IMF now warning on potential GFC2 coming out of asia, too much cheap credit being borrowed
http://www.reuters.com/article/2015/10/07/imf-g20-emergingmarkets-idUSL…
Very interesting and worrying. #1 and 2 are consumer prices falling at the same rates or is so greedy bugger still profiting in the middle?
#4 is much more ominous than basic economic theory. Is there a similar chart for krill being harvested out of the oceans? This chart is indicative of improved technologies and practices used in all the marine harvesting industries that are pillaging our oceans. Krill is at the lower end of the food chain but supplies a large amount of our Omega 3 oil. Meanwhile much of the other marine life we are also dependant on is losing a basic food source. I fear the finite limit is closer in our marine food than it is for fossil fuels but a wealthy commercial fishing industry lobby does not allow the debate.
#5 get rid of cash? Does this make us more dependent on the banks? Whose idea is this? How will the basic wage earner in the street be protected. We cannot rely on the free market, we already know that it is manipulated by the big players. This also links to #1. Governments bailed out the creators of the mess (mostly) while leaving their victims to sink.
#7 Watch China put more diplomatic pressure on our Government to approve land sales to Chinese corporations so they can control and profit from their own food supply chain rather NZ benefiting.
What I think has changed in recent years is our attitude to debt. The idea that debt is a tradeable asset that can be borrowed against. Debt doesn't need to be repaid we can inflate our debt away.Borrowing and spending creates growth. Debt is money. Everyone can raise their standard of living if we all borrow and spend.
The financial system isn't failng we don't need bitcoin. The problem is we are living beyond our means. Austerity is the answer. We need to face reality. If we keep printing money it will lose it's crediblity as a store of our labour. The powers that be are abusing the system and buying everyones support with play money.
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