“Severe deflation pressures are rippling across the country,” said Alistair Thornton and Xianfeng Ren from IHS Global Insight. “Deflation, not inflation, is the greatest short-term threat to the Chinese economy.”
“The hard landing has happened,” said Charles Dumas from Lombard Street Research. “We don’t believe official data. We think GDP slowed to a 1pc rate in the second quarter.”
A blizzard of weak data has caught policy-makers off guard, though shares rallied in Shanghai on hopes for monetary loosening fromChina’s central bank after consumer price inflation (CPI) fell to 1.8pc.
New property starts fell 27pc in July. Industrial output growth fell to 9.2pc for a year ago but has been flat over recent months.
“This was the moment when stimulus was supposed to bite. It didn’t,” said Global Insight. Critics say Beijing let the property boom go too far and then hit the brakes too hard last year. Monetary tightening led to a contraction in real M1 money. The delayed effects kicked in this year just as Europe fell back into recession and the US slowed abruptly. (full article here).
Paul Krugman wonders why others worry about inflation when he sees no evidence of inflationary trends:
Joe Wiesenthal makes the well-known point that aside from certain euro area countries, yields on sovereign debt have plunged since 2007; investors are rushing to buy sovereign debt, not fleeing it. I was a bit surprised by his description of this insight as being non-”mainstream”; I guess it depends on your definition of mainstream. But surely the notion that what we have is largely a process of private-sector deleveraging, with government deficits the consequence of this process, and interest rates low because we have an excess of desired saving, is pretty widespread (and backed by a lot of empirical evidence).
And there’s also a lot of discussion, which I’m ambivalent about, concerning the supposed shortage of safe assets; this is coming from bank research departments as well as academics, it’s a frequent topic on FT Alphaville, and so on. So Joe didn’t seem to me to be saying anything radical.
But those comments! It’s not just that the commenters disagree; they seem to regard Joe as some kind of space alien (or, for those who had the misfortune to see me on Squawk Box, a unicorn); they consider it just crazy and laughable to suggest that we aren’t facing an immense crisis of public deficits with Zimbabwe-style inflation just around the corner.
Krugman, of course, thinks it crazy and laughable that in the face of years of decreasing interest rates that anyone would believe that inflation could still be a menace. In fact, Krugman has made the point multiple times that more inflation would be a good thing, by decreasing the value of debt and thus allowing the private sector to deleverage a little quicker.
Guest post by Azizonomics.
As BusinessWeek asked way back in 2005 before the bubble burst:
Wondering why inflation figures are so tame when real estate prices are soaring? There is a simple explanation: the Consumer Price Index factors in rising rents, not rising home prices.
Are we really getting a true reading on inflation when home price appreciation isn’t added into the mix? I think not.
I find the idea that house price appreciation and depreciation is not factored into inflation figures stunning. For most people it’s their single biggest lifetime expenditure, and for many today mortgage payments are their single biggest monthly expenditure. And rental prices (which are substituted for house prices) are a bad proxy. While house prices have fallen far from their mid-00s peak, rents have continued to increase:
The individual mind usually focuses on a few subjects only. Over the past weeks investors have focused on JPM, Grexit and Facebook, but let’s not forget about Japan’s downgrade. Yes, domestic investors are the main buyers of Japanese debt, and they have been “loyal”. The question is though, how much more debt can/want they take down. By Edward Hugh.
The recent decision by Fitch Ratings to downgrade the Japanese sovereign by one notch, from from AA minus to A plus, has all the outward appearance of being a predictable non event.
Yet something somewhere fails to convince me that this nonchalance is really justified . Something tells me that this process of rising debt and falling credit ratings cannot go on and on forever, and that at some point we will reach what Variant Perception’s Claus Vistesen calls “the end of the road”. In which case, we could start to ask ourselves, what then gets to happen next? Certainly there is nothing in conventional economic theory which can help us anticipate the answer, since this kind of end of the road point has not been forseen, anywhere, unless I am mistaken.
While people are trying to figure out Apple’s latest numbers, here is Ice Cap Management’s latest on Secular Bear markets, P/E ratios, inflation/deflation and much more.
1982 was the best year ever. The crazy disco craze was finally over.Spielberg’s E.T. was hitting the big screens and Van Halen was just 2years away from learning how to jump.Yet, the biggest reason for celebration was the end of 16 tortuousyears of stock market losses. Since 1966, investors in the stockmarket had lost -10% of their money. Imagine that, a -10% loss fromthe stock market over 16 years.Well, at least these 1970 era investors were not invested during the1937-41 market. These unfortunate souls lost -38% of their hardearned savings over a 5 year period.Better yet, the only good news for these pre-war investors was thatthey managed to avoid the 1929-32 market when the luckiestinvestors only lost -80% of their money.These 3 prolonged stock market slumps are forever known as SecularBEAR Markets. And to be fair, and balanced, the stock market hasalso banged out 4 equally opposite periods where investors madeboat loads of money during Secular BULL Markets.Unknown to many, and ignored by the rest, we are right in the middleof another long and dragged out Secular Bear Market which hasseen investors lose -7% since the year 2000. That ’s 12 years of highhopes for nothing.
Guest post by Doug Short.
The April 2011 Consumer Price Index for Urban Consumers (CPI-U) released today puts the March year-over-year inflation rate at 2.65%, which is well below the 3.95% average since the end of World War II.
For a comparison of headline inflation with core inflation, which is based on the CPI excluding food and energy, see this monthly feature.
For better understanding of how CPI is measured and how it impacts your household, see my Inside Look at CPI components.
For an even closer look at how the components are behaving, see this X-Ray View of the data for the past five months.
The Bureau of Labor Statistics (BLS) has compiled CPI data since 1913, and numbers are conveniently available from the FRED repository (here). My long-term inflation charts reach back to 1872 by adding Warren and Pearson’s price index for the earlier years. The spliced series is available at Yale Professor Robert Shiller’s website. This look further back into the past dramatically illustrates the extreme oscillation between inflation and deflation during the first 70 years of our timeline. Click here for additional perspectives on inflation and the shrinking value of the dollar.
It takes some curage delivering the speech below, especially to a group of central bankers. PIMCO’s El Erian on the crisis, central banks avoiding the the Great Depression, and the most important; what do do next. With the ballooning balance sheets of the central banks, they better have a plan, or….Simply a must read.
After diffusing a material threat of a global depression, central banks in the advanced economies did a good job in maintaining a certain status quo in the midst of too much debt, too little growth, too much inequality, and an historic global economic realignment. Critically, they succeeded in their overwhelming priority of avoiding an economic depression. Concurrently, they reduced the risk of market overshoots and disruptive multiple equilibrium dynamics, thereby alleviating well-founded concerns about extreme negative tail risk events, including a renewed financial meltdown.
This success involved the unprecedented use of tools available to central banks. In the process, central banks stretched like never before in the era of modern central banking the very concept of a monetary institution. And while the benefits were immediate in the crisis management phase, they have been less consistent when it it comes to securing certain economic outcomes. Also they have come at a potential cost and with risks. They are also serving to alter behavioral relationships, change market functioning and modify the configuration of certain market segments.
I think that we have reached the legitimate point of – and the need for – much greater debate on whether the benefits of such unusual central bank activism sufficiently justify the costs and risks. This is not an issue of central banks’ desire to do good in a world facing an “unusually uncertain” outlook. Rather, it relates to questions about diminishing returns and the eroding potency of the current policy stances.
There has been a lot of talk lately of the old vs the new Bernanke. What did Bernanke actually think before he became the man ruling the markets? The scholar of the Great Depression gave a famous speech on the Japanese situation. We suggest a quick recap of what Bernanke said prior to becoming Mr Market.
The Bank of Japan became fully independent only in 1998, and it has guarded its independence carefully, as is appropriate. Economically, however, it is important to recognize that the role of an independent central bank is different in inflationary and deflationary environments. In the face of inflation, which is often associated with excessive monetization of government debt, the virtue of an independent central bank is its ability to say “no” to the government. With protracted deflation, however, excessive money creation is unlikely to be the problem, and a more cooperative stance on the part of the central bank may be called for. Under the current circumstances, greater cooperation for a time between the Bank of Japan and the fiscal authorities is in no way inconsistent with the independence of the central bank, any more than cooperation between two independent nations in pursuit of a common objective is inconsistent with the principle of national sovereignty.
I have argued today that a quid pro quo, in which the MOF acts to immunize the BOJ’s balance sheet from interest-rate risk and the BOJ increases its purchases of government debt, is a good way to attack the ongoing deflation in Japan. I would like to close by reiterating a point I made earlier–that ending deflation in consumer prices is only part of what needs to be done to put Japan back on the path to full recovery. Banking and structural reform are crucial and need to be carried out as soon and as aggressively as possible. Although the importance of reforms cannot be disputed, however, I do not agree with those who have argued that deflation is only a minor part of the overall problem in Japan. Addressing the deflation problem would bring substantial real and psychological benefits to the Japanese economy, and ending deflation would make solving the other problems that Japan faces only that much easier. For the sake of the world’s economy as well as Japan’s, I hope that progress will soon be made on all of these fronts.
Below is the full speech from the source.