I agree that the CBs will lean toward money pumping. But, they willdo so precisely because deflation has already kicked in.
Japan has been experiencing nominal deflation for a year but they only started two weeks ago to pump a little.
Without a need, or perceived risk, there would be no money pumping.
Haven't you heard of Humphrey-Hawkins?
Deflation is here in numerous sectors,
A deflation argument can't be built micro-economically, but a core element like ad rates, can imply the intrinsic nature of the macro-economic structure.
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.
It took no time to build all that capacity. It will take no time to fully engage it. Production need not catch up with capacity to have inflation. We had periods in the '80s with low capacity utilization and rising inflation. Those factors are a posteriori to the cause of inflation. It is inflation thinking that encourages excess borrowing to build capacity to benefit from rising prices. Those factors blow themselves out in the default free market in which they operate. The same can't be said of compensation. During periods of wealth, feeling good, you have demanders of compensation confident in being able to increase wages. They don't care about their productivity since jobs are plentiful. Their utilization is 96% in this country now. That's the stuff of future inflation which the FED well knows. Concerns about it have kept FED from high gear pumping all year. Over the last several weeks they have gone into 5th.
Also, there is the issue of utilizable capacity. Antiquated machinery won't be engaged even at inflating rates of return. To choose smoke stack industries as an example of inflation constraining factors misses the reality of the modern world. That reality is the ability to do something of value, not do something machines could and should be doing. The fact that ability is of value gives the owner a stronger bargaining position when angling for inflationary compensation increases.
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.
The old refuted 90% argument. Can't even sail that one in Econ 101. FED doesn't believe that as they have written many papers in the "F.R. Bulletin" refuting it. The capacity argument went out in the early '70s, if for only the reason that no one knows what the demand pull inflation effective capacity level is. Inventories? Inventory position is micro-economic. It has no macro effect at all. If you have excess inventories, you slow production or purchases to pare them back. No monetary consequence in that. Inventory financing causes excess demand for loanable funds? Market raises interest rates. Ah. But FED can't tolerate the pain so they supply reserves at the margin preventing the free market from adjudicating between demand and supply of money. The outcome is excess money per unit good mfged. That is a form of monetization, but that doesn't cause inflation either. It causes short term price pressures that force the FED to get out of the way so the free market can balance demand and supply. When they do, it's back to business as usual. Price push, demand pull, sounds good in Samuelson's text book, but these are not the problem of inflation facing this country in particular, and the rest of the world soon. The problem is that there is no free market in labor. There is local fiefdoms of price setting behavior only. The brief period of the early '90s was an aberration in the long term will to inflate, to steal from the weak who can't steal from others.
Thus, the key to timing of reflation lies with measurement of inventory/consumption ratios, in numerous industries, on a global basis.
Now what were you saying about micromanagement? East Coast schools think it's great and follows fine tuning which requires the superior intellect. It is not possible to do what you're suggesting and by the time you accumulated such info, it would be outdated. You can't even do that in one company of intermediate size, much less any larger scale. An econometrician would laugh at that claim even though they have spent 40 years trying to make it fly with dismal results.
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,
I agree with this part and have been saying as much for 8 months. The Japanese don't agree with either of us though they are starting to change.
a decline in interest rates,
Money pumping doesn't result in declining interest rates except over the short term and then only under the sufferance of the market. In deflation pumping only props prices and buys time to make changes. In inflation pumping raises rates because it stimulates price increases more than it increases production. CBs have no business creating money any faster than productivity in any environment. If they do, it's monetary inflation: you can't get something for less unless you debase the denominator.
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.
Labor productivity is only nominally connected with the business cycle. You can't make monetary or fiscal policy based on cyclic states. Productivity has two core components. The desire to achieve and the improvements of machines to leverage the desire.
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.
This last paragraph indicates that once things get back to where they were, then we will have all those problems that are of consequence. It isn't CBs pumping per se that causes inflation, but you say "triggering reflation" when the basic argument you have is that we are in deflation. If we are in deflation, how can CBs inadvertently initiate a reflation, a coming from an inflationary state or flat state? I quite agree that the CBs are in danger of reflating. That has Greenspan worried. But it is inflationary state from which that state is coming. You can argue all you want that we are in deflation, but though some prices have fallen in 20 years, most are higher if not substantially higher. So how can you claim we are in deflation? At best we are in a flat state which is tenuous at best. If that wasn't the case, the FED would have been pumping far more than they have over the last year. They are all err-on-the-side-of-ease types. The SOMC types were eliminated long ago when it was re-determined that money doesn't matter. |
