Keynes and the Current Crisis

by Dollars and Sense

We have just posted the latest installment of D&S collective member Alejandro Reuss's web-only series, "The General Theory and the Current Crisis: A Primer on Keynes' Economics."

The new installment (Part III) is entitled Keynes, Wage and Price "Stickiness," and Deflation.

The main page for the series is here.

Enjoy!

Labels: Alejandro Reuss, deflation, Keynes, Keynesianism, wages

 

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9/04/2009 03:53:00 PM 0 comments

 

Hyperinflation or Deflation?

by Dollars and Sense

Interesting piece from Counterpunch from a couple of days ago:

Is Hyper-Inflation Around the Corner?

By MIKE WHITNEY | Counterpunch | June 9, 2009

The Republicans are convinced that hyperinflation is just around the corner, but don't believe it. The real enemy is deflation, which is why Fed chief Bernanke has taken such extraordinary steps to pump liquidity into the system. The economy is flat on its back and hemorrhaging a half a million jobs per month. The housing market is crashing, retail sales are in a funk, manufacturing is down, exports are falling, and consumers have started saving for the first time in decades. There's excess capacity everywhere and aggregate demand has dropped off a cliff. If it wasn't for the Fed's monetary stimulus and myriad lending facilities, the economy would be stretched out on a marble slab right now. So, where's the inflation? Here's Paul Krugman with part of the answer:

"It's important to realize that there's no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger....

"Is there a risk that we'll have inflation after the economy recovers? That's the claim of those who look at projections that federal debt may rise to more than 100 percent of G.D.P. and say that America will eventually have to inflate away that debt—that is, drive up prices so that the real value of the debt is reduced....Such things have happened in the past....

"Some economists have argued for moderate inflation as a deliberate policy, as a way to encourage lending and reduce private debt burdens (but)... there's no sign it's getting traction with U.S. policy makers now."

Krugman believes that conservatives have conjured up the inflation hobgoblin for political purposes to knock Obama's recovery plan off-course. But even if he's mistaken, there's little chance that inflation will flare up anytime soon because the economy is still contracting, albeit at a slower pace than before. A good chunk of the Fed's liquidity is sitting idle in bank vaults instead of churning through the system. According to Econbrowser, excess bank reserves have bolted from $96.5 billion in August 2008 to $949.6 billion by April 2009. Bernanke hoped the extra reserves would help jump-start the economy, but he was wrong. The people who need credit, can't get it; while the people who qualify, don't want it. It's just more proof that the slowdown is spreading.

That doesn't mean that the dollar won't tumble in the next year or so when the trillion dollar deficits begin to pile up. It probably will. Foreign investors have already scaled back on their dollar-based investments, and central banks are limiting themselves to short-term notes, mostly 3 month Treasuries. If Bernanke steps up his quantitative easing and continues to monetize the debt, there's a good chance that central bankers will jettison their T-Bills and head for the exits. That means that if he keeps printing money like he has been, there's going to be a run on the dollar.

Now that the stock market is showing signs of life again, investors are moving out of risk-free Treasuries and into equities. That's pushing up yields on long-term notes which could potentially short-circuit Bernanke's plans for reviving the economy. Mortgage rates are set off the 10 year Treasury, which shot up to 3.90 per cent by market's close last Friday. The bottom line is that if rates keep rising, housing prices will plummet and the economy will tank. This week's auctions will be a good test of how much interest there really is in US debt.

Read the rest of the article.

Labels: Ben Bernanke, deflation, financial crisis, Inflation, recession

 

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6/12/2009 05:46:00 PM 1 comments

 

Consumer Prices Fall Despite Stimulus, PPIP

by Dollars and Sense

It's energy and food prices to a big extent, which is good, but even the whiff of deflation is precisely what scares the bejeezus out of policymakers. Coupled with an industrial production drop (about which, more below), and yesterday's retail sales figures, the spectre can not be dismissed out of hand. From Bloomberg:

U.S. Economy: Consumer Prices, Industrial Production Decline

By Shobhana Chandra and Courtney Schlisserman

April 15 (Bloomberg) Consumer prices posted their first annual decline since 1955 and unused American manufacturing capacity reached a record, alleviating concern that Federal Reserve actions will cause inflation to soar.

The consumer price index fell 0.4 percent in March from a year before, and 0.1 percent from the previous month, the Labor Department said in Washington. Output at factories, mines and utilities dropped 1.5 percent last month, when the share of industrial capacity in use slid to 69.3 percent, the Fed said.

Today's figures signal deflation, or prolonged price declines, is the bigger danger, and underscores Fed Chairman Ben S. Bernanke’s call for inflation to remain "quite low for some time." The Fed's record injections of cash into the economy have spurred warnings from some economists, including central bank historian Allan Meltzer, that consumer prices will surge.

"The more slack there is in the system, the longer it will take for inflation to become a concern," said Carl Riccadonna, a senior economist at Deutsche Bank Securities Inc. in New York. "Production data look terrible. Things do not look good and this means the dramatic pace of layoffs we've been seeing in manufacturing for the last several months is likely to continue."

A Fed survey today also showed that manufacturing in the New York area contracted in April less than forecast, an indication some businesses have adjusted to the economy's lower level of demand, analysts said. The Fed Bank of New York's general economic index rose to minus 14.7 from minus 38.2 the prior month, when the so-called Empire State index reached its lowest level since data began in 2001.

Dollar Rallies

Stocks and Treasuries were little changed, while the dollar rallied against the euro on demand for the U.S. currency as a haven amid concerns about the global economic outlook. The Standard & Poor's 500 Stock Index was at 838.52 at 11:12 a.m. in New York, benchmark 10-year note yields were at 2.77 percent and the dollar rose 0.6 percent to $1.3182 per euro.

Foreign demand for Treasuries spurred a net inflow of long-term international capital into the U.S. in February, government figures showed. The Treasury said net purchases of long-term equities, notes and bonds totaled $22 billion, compared with selling of $36.8 billion in January.

Net foreign purchases of Treasury notes and bonds were 21.6 billion in February compared with purchases of $10.7 million a month earlier.

Forecast to Rise

Consumer prices were projected to rise 0.1 percent, according to the median estimate of 75 economists surveyed. Forecasts ranged from a drop of 0.3 percent to a gain of 0.5 percent.

Companies from General Motors Corp. to Macy's Inc. are using incentives and promotions to draw customers as Americans contend with the biggest job losses in the post World War II era and shrinking wealth.

"We're in a very deep global recession that's going to hold prices down," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, who accurately forecast the drop in CPI. "Deflation is still something that's a risk, though I don't think we'll get into a deflationary spiral."

Declining food and fuel costs brought overall prices lower. Energy costs dropped 3 percent, led by decreases in fuel oil and gasoline. Food expenses dropped 0.1 percent on lower costs for dairy and meat products.

Inflation, Deflation

Some economists argue disinflation could lead to outright deflation, which erodes profits, makes debts harder to repay and delays purchases by consumers and companies. Others caution that in the longer term, the unprecedented fiscal stimulus and the Fed's policy of buying more assets and pumping money into the financial system will reignite inflation.

The cost of new cars rose 0.6 percent in March, the Labor report showed, even as automakers boosted discounts. Incentive spending by automakers jumped 30 percent in March from a year earlier to a record average $3,169, according to research firm Edmunds.com, helping to boost sales.

The decline in industrial production was led by decreases in consumer goods, including furniture and electronics, and by business equipment such as computers and communications gear.

"Businesses look like they are still quite uncertain about the outlook for the economy," said Zach Pandl, an economist at Nomura Securities International in New York. "These production cuts are still necessary because inventories are still bloated."

Intel Corp.'s Chief Executive Officer Paul Otellini yesterday said his company still faces a "fragile global economic environment."

Sales of personal-computer processors likely bottomed out in the first quarter after manufacturers worked through their stockpiles of parts, Otellini said. While the worst of the slump is "probably now behind us," the world's biggest chipmaker isn't ready to predict growth this quarter, he said.

Labels: bailout, CPI, deflation, financial crisis, industrial production, monetary pilicy

 

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4/15/2009 11:01:00 AM 0 comments

 

Stock Market's Loss Means Higher Wages?

by Dollars and Sense

Dean Baker has put forth a provocative claim on his blog:

The lead article in the New Year's Day edition of the Washington Post bemoaned the loss of $6.9 trillion in value in U.S. stock market last year. While those who own large amounts of stock have reason to shed tears, this may end being good news for the rest of us.

The loss of stock wealth means that stockholders have less claim to value of the country's output. The U.S. economy can produce just as much in 2009 as it did in 2008 (in fact somewhat more, because of labor force and productivity growth). If stockholders can demand less because of the reduced value of their stock, then this leaves more for the rest of us.

The most visible evidence of how the loss of stockholder wealth can benefit the rest of us was the sharp decline in consumer prices over the last three months. As a result, real wages rose at almost a 15 percent annual rate in the three months from September through November.

Of course, insofar as the demand generated by stockholders (and homeowners, who have also seen their wealth plummet) is not replaced by other sources, then workers are losing jobs. Eventually weakness in the labor market will put more downward pressure on real wages. However, if the loss of demand from stockholders is effectively replaced by demand from the government or foreign sector, then the vast majority of the country will be made better off by this plunge in stock prices.

The Post should have reporters who understand this fact.

--Dean Baker

Addendum: Since the question has been asked repeatedly, I will try to quickly explain how the fall in stock prices can make non-stockholders wealthier. There are two components to the wealth that people have in stock.

One component is the flow of income in dividends, which is turned based loosely on the growth of corporate profits. If, for the moment we make the unrealistic assumption that the growth in profits is unaffected by the crash (there will be feedback effects as we are seeing -- the plunge in demand that resulted from the stock and housing crash is also leading to declines in profits), then this future flow of dividend income will not be affected.

The second component of wealth is that value of the stock itself. How much can I get for selling my 100 shares of Verizon today. This second component is obviously directly affected by the fall in stock prices. Stockholders will consume based in part on the value of their stock wealth. The logic is that they try to more or less balance their consumption over their lifetime. If they have more wealth, then they can consume more over their lifetime.

To take a simple example, imagine a person is 75 and can expect to live another 10 years, and had $200,000 in stock. Then we might expect this person to spend roughly 10 percent of her wealth or $20,000 a year. Now suppose the market has crashed and her stock is only worth $100,000. Then we would expect her spend just $10,000 a year.

This is what is happening as a result of the stock crash. Stockholders have less wealth and therefore are spending less money on cars, vacations and everything else. The reduction in demand places downward pressure on the price of these goods, making them cheaper for everyone. Those folks who did not have a lot of stock gain in this story, assuming that they hold onto their jobs.

Labels: Dean Baker, deflation, Inflation, stock market, wages, Washington Post

 

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1/03/2009 02:38:00 PM 0 comments

 

Baker Deflates Deflation-Panic Bubble

by Dollars and Sense

There's a lot of talk in the business press about deflation and why we should be worried about it ("like trying to catch a falling knife" is the preferred metaphor).

Dean Baker takes issue with much of what's being written in a recent post on Beat the Press.

Okay, so let's parse this one. If prices are falling, why should we buy items today when we can get them for a lower price next month? That's a real good question.

Has anyone bought a computer in the last two decades? I have run across a few people who have. According to the Commerce Department, computer prices have been falling at the rate of more than 30 percent a year over most of the last two decades. If people felt that it made more sense to wait for prices to drop, we should expect the computer market to have been very weak. That isn't quite consistent with the explosion in computer sales over this period.

But, returning to the other items that might fall in price, if we turn to Japan, which supposedly suffered from deflation for a decade following the collapse of its bubbles, the rate of deflation was typically less than 1 percent a year. (Prices did rise in some years during this decade.)

This means that for a typical item in a typical year, the price would be falling at a rate of less than 0.1 percent a month. That means the pair of pants that i could buy today for $30 will cost just $29.97 cents next month. If I put off buying for two months, then I would only have to pay $29.94. You could easily understand how this would discourage consumption. Of course, the actual rate of deflation was slower in most years.

Baker acknowledges that housing prices are in a serious downward slide, and that this impacts consumer spending, saving, and a myriad of other related industries. But he argues that the housing market is a separate matter, and isn't even factored into the inflation indexes.

Labels: Dean Baker, deflation, housing bubble, Inflation

 

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11/23/2008 04:21:00 PM 0 comments

 

Historic Fall in CPI (Bloomberg)

by Dollars and Sense

The CPI fell 1% last month--the biggest fall on record--signaling the possibility of a "deflation-type scenario" (as one economist put it):

U.S. Economy: Consumer Prices Fall, Raising Deflation Danger

By Bob Willis and Timothy R. Homan

Nov. 19 (Bloomberg) -- The cost of living in the U.S. fell by the most on record and construction began on the fewest homes ever last month, evidence the economy is in the worst recession in at least a quarter century.

The consumer price index plunged 1 percent last month, the most since records began in 1947, the Labor Department said in Washington. Commerce Department figures showed housing starts tumbled to an annual rate of 791,000, indicating the industry's contraction may extend into a fourth year.

Today's CPI report signals deflation, or a prolonged price slide, may become another hazard facing Federal Reserve Chairman Ben S. Bernanke and President-elect Barack Obama. Deflation could worsen the economic downturn by making debts harder to pay off and countering the impact of Fed interest-rate cuts.

"The economy's really just in horrific shape," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York. Fed officials will "take rates as low as they have to" to avoid "a deflation-type scenario, which now all of a sudden is very possible."

Read the rest of the article.

Labels: CPI, deflation, financial crisis, recession

 

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11/19/2008 12:54:00 PM 0 comments