Category Archives: inflation

current Japanese inflation? ..there is none

November 2, 2016 By in economics, inflation, inflation vs deflation, Japanese development, Uncategorized Tags: , , , , , , Leave a comment

Deflation means that prices in general are falling.  If this is the case, it’s better to put off buying new things for as long as possible, until they’re 100% absolutely needed.  That’s because anything you buy today will be cheaper tomorrow.

After a while, non-consumption becomes a habit, and an economy stagnates.

Conversely, in an inflationary environment, everything is more expensive tomorrow than it is today.  So consumers buy in advance.  In addition to things they need, they may also purchase items they have no intention of consuming.  They may think that keeping physical objects which they can later resell is a better way of preserving or enhancing purchasing power than keeping savings in the bank.

Japan has been in a deflationary economic funk for over a quarter century.   When Shinzo Abe became Prime Minister of Japan in late 2012, he decided to attack deflation as a way of boosting economic growth.  He had a plan that has become famous for its three “arrows”:  a massive depreciation of the yen, large-scale government deficit spending, and corporate/regulatory reform.  Each of the three should have been enough by itself to spark inflation.

The expense of the plan has been enormous, both in terms of the loss of international purchasing power of yen-denominated assets and in increased national debt.

The result after close to four years?   ….as the Tokyo government reported last week, no inflation at all.

How can this be?

From its outset, I’ve believed that Abenomics would be unsuccessful.  I thought the stumbling block would be corporate reform.  The earliest evidence that would indicate I would be wrong would, I thought/think, take the form of an effort to remove the legislative barriers to reform that the Liberal Democrats in the Diet had installed after the deflationary crisis had already begun.  So far, for all practical purposes there’s been nada.  So I continue to be convinced that corporate leaders will resist any changes to the status quo, aided as they are by the Diet’s removal of any levers to force reform from the outside.

Of course, any inflation-induced oomph to consumption won’t last forever.  People and institutions adjust. If nothing else, consumers run out of storage space for the extra stuff they’ve bought.  They then have to throttle back their spending   …or rent a storage unit  …or contemplate a McMansion.

What’s surprising to me, however, is that the same reluctance to spend–although perhaps not to the same degree–is evident in both the US and in Europe.  We might figure that the austerity approach of EU countries wouldn’t exactly spur consumers on.  But the lack of inflation and the paucity of mall-storming or website-crashing consumption in the US after eight years of extraordinary stimulus seem to argue that the overarching economic theories about how to induce inflation are incorrect.

Demographics as the cause?

 

inflation on the rise?

May 5, 2015 By in bond market, currency effects, currency markets, Current Market Thoughts, Dividends, inflation, securities markets, stock market, Strategy Tags: , , , , , , , Leave a comment

Regular readers know that I like the economic work done by Jim Paulsen of Wells Capital, the Wells Fargo investment management arm.  His May 1st “Economic and Market Perspective” piece argues that the US has turned the corner on inflation, which will –contrary to consensus beliefs–be on the rise from now on.

His argument:

–the first signs of upward wage pressure in the US are now becoming visible (in developed economies, inflation is all about wages)

–recently, a rising dollar has kept the price of imported goods from rising (in some cases, they’ve been falling) and suppressed demand for US goods abroad.  That’s changing, turning the currency from a deflationary force into in inflationary one

–productivity is low, meaning that companies will have no way of offsetting higher wages other than to raise prices

–in past economic cycles, the Fed has somehow invariably remained too loose for too long.

 

I’m not 100% convinced that Paulsen is correct, and to be clear, he expects only mild inflation, but I’ll add another point to the list:

–although it doesn’t talk much about this any more, the Fed has clearly in mind the lost quarter-century in Japan, where on three separate occasions the government cut off a budding recovery by being too tight too soon.  In other words, there’s little to gain–and a lot to lose–by being aggressive on the money tightening trigger.

 

Suppose Jim is right.  What are the implications for stocks?  This is something we should at least be tossing around in our heads , so we can have a plan in mind for how to adjust our portfolios for a more inflationary environment.

My thoughts:

–inflation is really bad for bonds.  As an asset class, stocks benefit by default.  But bond-like stocks–that is, those with little growth and whose main attraction is their dividend yield–will be hurt by this resemblance.

–if the dollar is at or past its peak, it’s time to look for domestic-oriented stocks in the EU and euro earners in the US (the basic rule here is that we want to have revenues in the strong currency and costs in the weak).

–companies that can raise their prices, firms whose labor costs are a small percentage of the total, and consumer-oriented firms that are able to expand unit volumes without much capital investment should all do well.

–I think that average workers, not the affluent, are the main beneficiaries of a general rise in wages.  So firms that cater to them may be the best performers.

 

 

 

inflation: where we are now

June 25, 2014 By in economics, inflation Tags: , , , Leave a comment

Yellen

In the early days of the financial crisis, after the Fed had opened the monetary flood gates and aggressively pushed short-term interest rates down to zero, Janet Yellen commented on the cries of prominent hedge fund managers that this would immediately lead to disastrous runaway inflation of the type that plagued the US in the late 1970s.  Her reply was “We should only hope,” or words to that effect.

She didn’t elaborate   …but I will:

1.  The threat to the world at that time was just the opposite of inflation.  The real threat was deflation, or systematically declining prices.  If prices are falling at the rate of, say, 2% a year, making monetary policy accommodative means lowering the Fed Funds rate to -4%.  In practical terms, this is impossible.  So monetary policy is ineffective and a rerun of the Great Depression ensues.  Clueless financiers to the contrary, everything possible had to be done to avoid the deflationary outcome.

2.  Inflation , in contrast, is a little like the flu.  Treatment is well-understood and straightforward to put into effect.  So, yes, it may be unpleasant but we definitely know how to handle the situation.

where are we now?

The biggest problem the Fed has continues to be that it can’t create enough inflation.  The price level has remained stubbornly under the Fed’s target of a 2% average annual increase.

In the US at least, inflation is all about wages.  Nothing else is big enough to matter.  The (lack of) inflation problem is that there’s still enough available labor in the economy that employers don’t have to raise wages, either to find new workers or hold onto existing staff.

On the one hand, the Fed would like to begin to return interest rates to normal:  a

–five-year ICU stay can’t be good for a patient;

–with rates at zero the Fed has no ability to respond to any other economic disruption;

–world bond markets appear awfully bubbly at the moment; and

–the Fed is arguably an enabler of a dysfunctional Congress/administration.

On the other, the last thing the Fed wants is to choke off growth and create a recession.

my take

Personally, I’d expected the too-many-employers-chasing-too-few-workers syndrome to have developed long before now, and that we’d have 2%+ inflation already.  That’s because I believe that a lot of current unemployment is structural, not cyclical.  That is, I’ve been thinking that many long-term unemployed don’t have the educational or technical skills needed in the 21st century workplace.  Loose money policy doesn’t do them any good.  They need retraining, not low rates.

So far, that’s been wrong.

Taking back of the envelope numbers, there are about three million unemployed workers in the US.  The economy is now creating about a million new jobs a year more than the number needed to absorb people leaving school and entering the workforce for the first time.  If these are the only factors, and if I continue to be 100% wrong (that is, if there’s no structural unemployment), then we won’t reach full employment until 2017.

This would imply that we won’t have to worry about inflation for a long time.  This would also imply that the bond market–and, consequently, the stock market too–could get a lot weirder before the Fed pulls in the reins.

 

two types of inflation?

June 24, 2014 By in Asian economic development, economics, inflation, Japanese development Tags: , , , , , , , Leave a comment

two forms

Back in the 1970s, when inflation actually was a serious global economic problem, economists tried to distinguish between two types of inflation:

demand-pull

—demand-pull is what we typically think of as inflation today.  It’s the situation where an economy is at full industrial capacity and full employment but is still growing strongly.  The only way to find new workers to staff business expansion is to lure employees away from rivals.  How to do this is?  …offer them more money.  An intercompany bidding war for talent ensues. Salaries rise.

Newly flush workers want to spend on goods and services.  But these are also in limited supply because industry is capacity constrained.  How to get the stuff we want?   …bid higher prices.

Voilà!   …rip-roaring inflation.

This problem can be laid squarely at the feet of too-loose money policy.

cost-push

—cost-push.  This is the idea that the price of one or more key agricultural or mineral commodities rises by a lot (think;  the two oil shocks of the 1970s, when crude doubled or tripled in price).  Such a price increase is passed on to manufacturers and to consumers, causing the overall price level to rise.

This type of inflation is no longer talked about, for several reasons:

—-monetarists have successfully argued that oil shock inflation was caused more by the decision of central banks to soften the blow by rapid money supply expansion than by the price increase itself.  It was, they said, accommodation that caused the inflation, not oil.  After all, falling oil prices in the 1980s didn’t cause deflation.

—-wages are no longer routinely indexed for inflation for the vast majority of workers, so a key pass-through mechanism is no longer operating

—-advanced economies are much more involved in providing services that use intellectual resources, which are less subject to the physical constraints of plant, mine or farm capacity.

—-globalization has put significant upward pressure on commodities prices, but has also created downward pressure on wages in industries making tradable goods.  Of course, in the internet age, a lot more stuff is in the tradable category, too.

—-advanced economies, particularly the US, have evolved to the position where labor costs are perhaps three-quarters of the total economy, and therefore effectively the only thing that matters.

cost-push making a comeback?

I think so.

Japan recently depreciated the yen by 20%.  This has caused a surge in profits for export-oriented manufacturing, and a tsunami of Asian tourists seeking to buy, among other things, heated Toto toilet seats.  Prices have shifted from falling to rising.

But wages haven’t gone up at all.  So, yes, the depreciation has created inflation, but most individuals are worse off than they were before–because they’re paying 20% more for imported items like fuel and food.  (This isn’t quite correct.  There’s a substitution effect along with the income effect, meaning that people shift what they consume in order to lessen the harm to their well-being from higher prices.  They, say, eat tofu instead of beef or get clothes from a consignment store instead of Uniqlo.)

There’s also the effect of price rises on the long-term unemployed in the US or the EU.  It’s not quite the same thing, but it’s certainly different from the demand-pull world, where everyone is better off–but tricked by the fact nominal (but not necessarily real) wages are rising into thinking they’re better off than they are.

investment significance?

I’m not sure, other than to take a trip to Japan before the place falls apart.

But I do think that the failure of wages to rise, either in Japan or the US, despite highly stimulative monetary policy is a potentially explosive social/political issue.   It may reach a tipping point where big social changes are demanded.