Wednesday, May 21, 2008

Inflation v Deflation???

Has the Fed really flooded the world with dollars?

So let me throw it open to any readers who have a view: do we really face galloping inflation in the Atlantic and Japanese economies (still almost 60pc of world GDP), or is deflation lying in wait?

Posted by sold 2 rent 1 @ 12:38 PM (1081 views)
Please complete the required fields.



7 thoughts on “Inflation v Deflation???

  • notaneconomicsguru says:

    I’m barred my local IS policy from successfully following the link – Any chance of posting an extract???

    Reply
    Please complete the required fields.



  • sold 2 rent 1 says:

    Professor Charles Goodhart – (Goodhart’s Law, ex Monetary Policy Committee, and now Olympian sage at the LSE) – is too polite to say that the Federal Reserve has made an utter hash of the US economy by slashing interest rates to 2pc. But that is clearly what he thinks.

    US M1 money supply

    “I would have done exactly the same as Bernanke given the financial crisis they were in,” he told me this week, sticking to the “mutual admiration” etiquette of central bankers. Then comes the sting.

    “The M3 money supply is rising very rapidly indeed. There has been a very expansionary increase in the size of balance sheets,” he said.

    The professor warned that yields on 10-year Treasuries (now 3.79pc) have shot up so much on inflation fears since the Fed bail-out in March that the effect risks short-circuiting the whole monetary rescue. “They may find that they don’t benefit after all from cutting rates,” he said.

    Well, yes, this is the great fear. The Fed may now be trapped. The argument is that the US 10-year rate – set by market forces, and increasingly by the actions of Chinese and Mid-East governments – is the key price setter for the US housing market and corporate debt. Mess with bond vigilantes at your peril.

    Mr Goodhart warns that the Fed’s “ideological” attachment to core inflation – which strips out food and energy – could lead them up the creek this time. People do have to eat and drive. “The Fed thinks that headline inflation (3.9pc) will come back down to core inflation, but this time core may go up to headline,” he said. That would be nasty surprise.

    “Of course, it is not for somebody sitting 3,000 miles away to judge whether rate cuts are well chosen,” he added, tactfully. Quite so, quite so.

    I flag these comments because they touch on the most neuralgic issue of the day. My own view – if I dare dissent from the professor – is that the M3 surge is a false alarm. Needless to say, the Fed has not helped matters by abolishing the data.

    Paul Ashworth, US economist for Capital Economics, has reconstructed the M3 figures using the old Fed model. They show that the M3 growth rate has jumped from 8.1pc to 14.9pc since the credit crunch began in August – high, but nothing like the claims of 30pc that are bandied around.

    This rise is almost entirely due to a “bearish” flight from stocks and suchlike. Nervous investors have parked their wealth in money funds for safety until the crisis blows over. These money funds are distorting the M3 data (as Prof Goodhart also recognizes).

    “Everybody keeps saying the Fed is dropping money from helicopters and flooding the economy with liquidity, but it is not true. All that is happened is that the precautionary demand for money has gone up. That is not inflationary in any way,” said Mr Ashworth.

    Indeed, if you look at the narrower M1 money supply, which the Fed does control, it has actually fallen 0.7pc over the last year. The monetary base is contracting.

    This chart from the Saint Louis Fed sent to me today by a reader came as a shock. The slide is getting worse. Perhaps that is why gold is down $125 an ounce from its peak in March.

    It reinforces my fear that we are heading into a deflationary crunch. No doubt the Fed, ECB, the Bank of England, et al, will ultimately flood the system with money and set off another asset bubble. We are not there yet.

    So let me throw it open to any readers who have a view: do we really face galloping inflation in the Atlantic and Japanese economies (still almost 60pc of world GDP), or is deflation lying in wait?

    Reply
    Please complete the required fields.



  • sold 2 rent 1 says:

    One of the comments underneath:

    Ambrose, you’re an idiot and a shill.

    Anyone reading this, don’t waste any more of your time with this transparent disinformation agent. Take a look at John Williams, the founder of Shadowstats.com on YouTube, discussing M3 money supply on CNNMoney recently:

    http://www.youtube.com/watch?v=kRCiA-gy4ds

    As for this clown’s argument that credit is contracting and so the skids are under the gold price, is he blind to the $70 recovery already since the low at the end of April and the euro heading for $1.58 again?

    Reply
    Please complete the required fields.



  • The whole idea of this ponzi scheme is to keep inflating as the concept of creating money backed by nothing but debt is infinite.

    Reply
    Please complete the required fields.



  • sold 2 rent 1 says:

    debtfree,

    The US Inflation v Deflation debate rests on 1 key point.

    Who will be the next US president?

    Obama/Clinton/McCain – these are NWO puppets – the outcome will be inflationary destruction
    Ron Paul – the outcome will be deflationary destruction (a gold standard will not prevent a deflationary depression)

    But of course Ron Paul has no chance of being elected

    Reply
    Please complete the required fields.



  • stillthinking says:

    I think we will have deflation for the simple reason that I don’t think government borrowing will replace the previous credit expansion from mortgage borrowing. Also, artificially lowering the price of borrowing by the BoE will not make borrowing cheaper, because as they attempt to inflate it becomes in the banks interest (of safety) to lend externally outside the country, the weakness of the pound lowers the cost of borrowing outside the UK, not inside. The UK is going to be in a recession soon, we are reading about job losses now, and so all lending in the UK is moot. I consider the closing of the food processing factory up north significant because the major supermarkets can’t hold back the inflationary spike we have now, and they seem to have busted one of their own suppliers.
    Basically, I don’t think government borrowing will replace the previous credit expansion from mortgage borrowing.

    Reply
    Please complete the required fields.



  • I think we will see both deflationary and inflationary pressures in the UK.

    On the inflationary front, the collapse of North Sea oil and gas output will push our massive balance of payments deficit too far, and Sterling will fall further and further down, relative to the value of global currencies collectively, making imports of both commodities and finished goods much more expensive. This will make the balance of payments problem worse before it gets better. The return to UK manufacturing will be necessary, but painfully slow.

    On the deflationary front, we will see relatively few wage cuts, but we will see large numbers being made redundant, and unable to secure a job that pays anything like as well as their previous employer. This will create long lingering problems for millions who previously thought they could afford their mortgages.

    Overall, the inflationary pressures will prevail. The problems we face today are wholly unlike those faced by Japan a couple of decades ago.

    Reply
    Please complete the required fields.



Add a comment

  • Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
  • Please note that any viewpoints published here as comments are user´s views and not the views of HousePriceCrash.co.uk.
  • Please adhere to the Guidelines

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes:

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>