To repeat my earlier comment, I'm leaning toward Mish's view that deflation is the dominant force at work. Inflation in fuel and food prices, while real, is not enough to make up for the massive deflation in asset prices, especially housing; with the real money and credit supply contracting, this is looking a lot more like a classic deflationary spiral than like stagflation.
NEWS ALERT, Economic Gurus are getting clost to understanding if unemployment and inflation are related, in the latest tweaking of the latest fine-tuned models:
Phillips Curve Inflation Forecasts
James H. Stock
Department of Economics, Harvard University
and the National Bureau of Economic Research
Joined by his best friend from the high school locker room
Mark W. Watson*
Woodrow Wilson School and Department of Economics, Princeton University
and the National Bureau of Economic Research
Re: "But if the economy is near a turning point if the unemployment rate is far from the NAIRU then knowledge of that large unemployment gap would be useful for inflation forecasting.
Further work is needed to turn these observations into formal empirical results. "
Rest assured, we are in great hands and that hyperinflation is not a threat, unemployment not a factor and that things are good...
As has happened in the past, the long-run benefits of financial innovations were easier to anticipate than the problems. Especially, because, we at the Federal Reserve, sit around with our thumbs up our butts when we should be performing serious quality control and oversight of financial innovation. We have come to the conclusion that we are incompetent and that only fools would allow us oversight of the integrity of their monetary system.
In retrospect, it is clear that investors were too reliant on credit ratings: Because many of the securities were rated very highly by the credit rating agencies, investors did not understand the underlying risk and had a false sense of safety. While there is literature suggesting that credit rating agencies are lagging indicators and we have previous concrete examples, such as Enron, we chose a strategy of inaction. Back to my earlier point, since we at the Federal Reserve sit around with our thumbs up our butts, addressing the systemic weakness due to the credit rating agencies had a low priority.
When these problems came to light, investors--including leveraged financial institutions--took large losses as the values of mortgage-related assets were marked down in anticipation of higher defaults on the underlying collateral. Fortunately many of these institutions are Too Big Too Fail, so we allowed them to exchange their Beanie Babies for Treasuries. With the addition of these high-quality assets, these institutions are able to speculate in commodities and win back some of their losses.
The turning point in the abandonment of this concept of full employment came in the 1950s when the discussion turned to inflation and the trade-off between the 'twin evils' of unemployment and inflation. This era was exemplified by the emergence of the Phillips curve literature. However, the orthodox reinterpretation of the trade-off was devastating in that the classical (pre-Keynesian) notions of a natural unemployment rate (being full employment) was revived and this led to a rejection in theory of demand management policies aimed at minimising unemployment to its frictional component. Soon after full employment was redefined to be colisistent with the NAlRU and full employment, in the sense of an absence of involuntary unemployment, was abandoned by the dominant economics paradigm.
Future That Works, A
Involuntary Unemployment - Getting to the Heart of the Problem
Lucas Papademos, the inventor of NAIRU (the non-accelerating-inflation rate of unemployment). This concept implies that inflation is not a monetary phenomenon but is caused by a low unemployment rate. This is inconsistent with the econometric evidence (as Keith M. Carlson has shown).
In the medium term, the Fed is likely to start taking back the rate cuts a lot sooner
than it did in the last cycle. Given the continued weakness in the US housing market
we do not see this occurring until into 2009.
Our ESN bottom-up estimates point to aggregate earnings growth of 4.1% and 13.3% across Europe in 2008 and
2009 respectively. Our ESN bottom-up earnings sentiment indicator is currently reading 4.8, which is below the
neutral 5.0 level and suggesting that downgrades are more likely than upgrades over the near term.
From a top-down perspective, we are more cautious, expecting a slower economy, rising commodity prices and
the strong Euro to push European earnings growth down to a nominal rate of 2%- 5% in 2008.
Looking further out, our top-down view is that any cyclical benefits to margins from re-acceleration in the
economy will be relatively short lived as margins gradually come under pressure from structural mean
reversionary forces. Over the coming few years, we see earnings growth persisting but at a below-trend rate of
about 5% nominal or lower.
Structurally strong oil price is a re-distributor rather
than a destroyer of growth, wealth and earnings, but recent acceleration is too much too soon
and could be partially self correcting.
With headline inflation too high for comfort, central banks are no longer prepared to gamble
that high headline inflation will not lead to high core inflation and a resulting inflationary wage /
price spiral. The issue as to whether headline inflation leaks into core inflation is basically
down to whether global labour markets acquire independent pricing power either through a
tightening supply / demand balance, political appeasement or some combination of both.
Labour represents over 75% of GDP while commodities represent 10%-15%, so it is highly
unlikely that continuing firm commodity markets would generate a broad ongoing acceleration
in inflation if labour inflation remains subdued.
Inflation in fuel and food prices, while real, is not enough to make up for the massive deflation in asset prices, especially housing
fuel prices are causing some home prices to deflate more than others. The "economical commute radius" has shrunken, thereby leaving some developers high and dry (with homes to sell, but no takers).
OT, someone needs to sell T-shirts that say "My mortgage is current, is yours ?"
First first
To repeat my earlier comment, I'm leaning toward Mish's view that deflation is the dominant force at work. Inflation in fuel and food prices, while real, is not enough to make up for the massive deflation in asset prices, especially housing; with the real money and credit supply contracting, this is looking a lot more like a classic deflationary spiral than like stagflation.
Is Mishkin a CEO/Chair or on on BOD in Bermuda or some other pirate hangout -- like his mate Lockhart?
Inflation + Deflation = Conflation
NEWS ALERT, Economic Gurus are getting clost to understanding if unemployment and inflation are related, in the latest tweaking of the latest fine-tuned models:
Phillips Curve Inflation Forecasts
James H. Stock
Department of Economics, Harvard University
and the National Bureau of Economic Research
Joined by his best friend from the high school locker room
Mark W. Watson*
Woodrow Wilson School and Department of Economics, Princeton University
and the National Bureau of Economic Research
http://www.bos.frb.org/phillips2008/papers/stock_watson_530.pdf
Re: "But if the economy is near a turning point if the unemployment rate is far from the NAIRU then knowledge of that large unemployment gap would be useful for inflation forecasting.
Further work is needed to turn these observations into formal empirical results. "
Rest assured, we are in great hands and that hyperinflation is not a threat, unemployment not a factor and that things are good...
What would Greenspan do?
"for some time"
"somewhat"
"rather"
"a bit"
"rather unlikely"
"perhaps"
see, I can speak Federalese too. It's a wonderful lingo.
Check this crap out in discussions:
Economist's View: Inflation or Unemployment?
As has happened in the past, the long-run benefits of financial innovations were easier to anticipate than the problems. Especially, because, we at the Federal Reserve, sit around with our thumbs up our butts when we should be performing serious quality control and oversight of financial innovation. We have come to the conclusion that we are incompetent and that only fools would allow us oversight of the integrity of their monetary system.
In retrospect, it is clear that investors were too reliant on credit ratings: Because many of the securities were rated very highly by the credit rating agencies, investors did not understand the underlying risk and had a false sense of safety. While there is literature suggesting that credit rating agencies are lagging indicators and we have previous concrete examples, such as Enron, we chose a strategy of inaction. Back to my earlier point, since we at the Federal Reserve sit around with our thumbs up our butts, addressing the systemic weakness due to the credit rating agencies had a low priority.
When these problems came to light, investors--including leveraged financial institutions--took large losses as the values of mortgage-related assets were marked down in anticipation of higher defaults on the underlying collateral. Fortunately many of these institutions are Too Big Too Fail, so we allowed them to exchange their Beanie Babies for Treasuries. With the addition of these high-quality assets, these institutions are able to speculate in commodities and win back some of their losses.
The turning point in the abandonment of this concept of full employment came in the 1950s when the discussion turned to inflation and the trade-off between the 'twin evils' of unemployment and inflation. This era was exemplified by the emergence of the Phillips curve literature. However, the orthodox reinterpretation of the trade-off was devastating in that the classical (pre-Keynesian) notions of a natural unemployment rate (being full employment) was revived and this led to a rejection in theory of demand management policies aimed at minimising unemployment to its frictional component. Soon after full employment was redefined to be colisistent with the NAlRU and full employment, in the sense of an absence of involuntary unemployment, was abandoned by the dominant economics paradigm.
Future That Works, A
Involuntary Unemployment - Getting to the Heart of the Problem
Mitchell, William; Muysken, Joa
Lucas Papademos, the inventor of NAIRU (the non-accelerating-inflation rate of unemployment). This concept implies that inflation is not a monetary phenomenon but is caused by a low unemployment rate. This is inconsistent with the econometric evidence (as Keith M. Carlson has shown).
FFDIC: What would Greenspan do?
http://thumbsnap.com/v/DsDgLr8O.jpg
Implications of a structurally strong oil price
http://www.cgd.pt/Mercados/Documents/Implications-of-a-structurally-strong-oil-price.pdf
In the medium term, the Fed is likely to start taking back the rate cuts a lot sooner
than it did in the last cycle. Given the continued weakness in the US housing market
we do not see this occurring until into 2009.
Our ESN bottom-up estimates point to aggregate earnings growth of 4.1% and 13.3% across Europe in 2008 and
2009 respectively. Our ESN bottom-up earnings sentiment indicator is currently reading 4.8, which is below the
neutral 5.0 level and suggesting that downgrades are more likely than upgrades over the near term.
From a top-down perspective, we are more cautious, expecting a slower economy, rising commodity prices and
the strong Euro to push European earnings growth down to a nominal rate of 2%- 5% in 2008.
Looking further out, our top-down view is that any cyclical benefits to margins from re-acceleration in the
economy will be relatively short lived as margins gradually come under pressure from structural mean
reversionary forces. Over the coming few years, we see earnings growth persisting but at a below-trend rate of
about 5% nominal or lower.
Structurally strong oil price is a re-distributor rather
than a destroyer of growth, wealth and earnings, but recent acceleration is too much too soon
and could be partially self correcting.
With headline inflation too high for comfort, central banks are no longer prepared to gamble
that high headline inflation will not lead to high core inflation and a resulting inflationary wage /
price spiral. The issue as to whether headline inflation leaks into core inflation is basically
down to whether global labour markets acquire independent pricing power either through a
tightening supply / demand balance, political appeasement or some combination of both.
Labour represents over 75% of GDP while commodities represent 10%-15%, so it is highly
unlikely that continuing firm commodity markets would generate a broad ongoing acceleration
in inflation if labour inflation remains subdued.
Inflation in fuel and food prices, while real, is not enough to make up for the massive deflation in asset prices, especially housing
fuel prices are causing some home prices to deflate more than others. The "economical commute radius" has shrunken, thereby leaving some developers high and dry (with homes to sell, but no takers).
OT, someone needs to sell T-shirts that say "My mortgage is current, is yours ?"
"However, some of the slowdown in mortgage lending has been warranted."
Funny, he can bring himself to say that but he can't state the other obvious fact:
Some of the declines in house prices have been warranted.
Re: OT, someone needs to sell T-shirts that say "My mortgage is current, is yours ?"
RayOnTheFarm | 07.02.08 - 5:56 pm | #
How about one that says "My mortgage is paid off! Is yours?"
Though this might lead to physical damage in the wrong place:)