I agree that CPI is an irrelevant metric. But, it appears that the bond market is watching CPI. I'm looking at CPI only from that perspective i.e will the treasury also get routed if CPI goes up? I think, this might be the case and I think CPI might be going up (even though it is a lagging indicator of credit inflation, the lag could be too long like few years).
Argentina had about 15% credit, GDP deflation in 2002 and yet they had 40% CPI inflation. Japan had mild credit deflation and mild CPI deflation. Actually, CPI was positive until 1996 in Japan and turned negative only after 1997. May be, Japanese did not inflate credit sufficiently in early 90s, to reinvigorate housing and stock market. May be they did not do it because PPI was higher than CPI and hence people got laid off. But whatever be the case, Japan did not reach 1% interest rate until late 1990s. But US might attempt it and reinvigorate housing and stock market if treasuries fall.
Neither you nor I can prove/disprove that housing/stock would have reinvigorated in Japan if BoJ had lowered interest rate to 0.1% in 1992. Definitely, after a prolonged credit deflation, Japan was not able to reflate. Both of us agree with this fact i.e as BoJ lowered interest rate to less than 1% in mid 1990s, it did not have any effect in asset markets. My belief is that, if Japan had lowered interest rate to 0.1% in 1992, CPI, PPI would have been so high in Japan (and hence more layoffs) and Japanese treasuries would have been routed and Japan would have had 2002 Argentina experience. That would have been so painful and so Japan chose the path that they are on now. Your position is that, even if Japan had lowered interest rate to 0.1% in 1992, asset markets would not have reflated. I disagree with the timeline.
I keep stressing CPI only to illustrate the fact that cost of production (say PPI) is higher than cost of selling (say CPI) and this causes more layoffs and hence Fed will chose to maintain higher rates. |
