ahaha: I love macro analysis - it is helpful to often step back from the trees to see the forest. Just beware, when stepping back, that the micro root tangle doesn't trip you. I learned, as a Securities Analyst the Wall Street Journal labeled a "prominent Wall Street Analyst" to get down to the micro level to test the macro theories. Often the macro theory was totally out of touch with the micro.
I agree that the CBs will lean toward money pumping. But, they will do so precisely because deflation has already kicked in. Without a need, or perceived risk, there would be no money pumping. As to deflation, ask the miner trying to sell copper at $0.70/lb when it was $1.50 a short while ago. Ask the miner who built a gold mine based on $450 gold (May 1987) and is now shutting the mine down because its cash cost is $300 and gold sells at $290. Ditto zinc, silver, steel, cobalt, nickel, timber, prawns, salmon, expensive real estate in Vancouver, Tokyo, etc. Deflation is here in numerous sectors, if you care to get down to the micro level. Look outside the US. Plants are closing, production is declining, employment is slipping, consumption is stagnating or declining, prices are dropping.
Why? Because in many countries capacity was overbuilt during the debt bubble. Therefore, it will be quite some time before production catches up with excess capacity. In the ideal system (absent monopolistic control and administered pricing) real transactions pricing rises only as two conditions are fulfilled: 1) economically efficient capacity become more than 90% utilized such that inefficient capacity must be restarted, and, 2) inventory drops below the normal working stock level. Costs may be rising but prices won't until both conditions, 1&2, are fulfilled.
Therefore, monetization of the debt will not produce inflation for many years because, globally, capacity in many industries is too far underutilized. For example, some Japanese steel mills are going bankrupt. Idle capacity will be is always reopened as swiftly as demand warrants, hence, excess inventory is always not reduced until demand is again well above the level of economically efficient capacity. Thus, the key to timing of reflation lies with measurement of inventory/consumption ratios, in numerous industries, on a global basis.
Money pumping will likely result in the following order of events: voluntary reduction of debt private and public prior to a significant increase in demand, a decline in interest rates, a slow resumption of consumption growth as demand is stimulated by lower borrowing costs, slow gains in production accompanied by improved labour productivity such that employment improves only very slowly, a slow advance in consumption, a slow gain in capacity utilization, a reduction of excess inventory, acceleration of employment followed by rising production.
Recent US history was that labour productivity gained before wage demands increased because labour was chastened by the prior recession. Hence, the preceding may yield a reduction in unit labour costs as economies of scale from higher production kick in while wage demands remain muted. Therefore, the CB's may have a window within which to pump money without triggering reflation.
Lets see how the vast public opinion weighs in on deflation/reflation by checking the price of gold. Sideways, right? Public thinks we both are wrong.
RH |
