Let’s Get Down

The global interest rate cycle seems to be about to peak (of course at the ECB and in Japan it never really got started). The only thing which is surprising about this, is that anyone should be surprised. I am also convinced that Greenspan is nearly done at his end, and pretty much agree with Bill Gross, who “sees the Fed raising the rate on federal funds twice more, stopping at its August meeting at 3.5%”. I think one more quarter point is pretty much guaranteed (too much of a shock to the system if he doesn’t), the second one will be more debateable, just look what happened to the US bond market yesterday.

The Fed is really pretty much at the mercy of the ECB. Evidence for this? Well look at the impact of the Riksbank decision earlier in the week. I think you have to go back quite a distance to find a time when the financial world was waiting with baited breath to hear the latest prouncement from Sweden’s central bank governor. Or again, the entrails scrutiny on the BoE monetary policy committee minutes.

This process should have been fairly predictable, and once the Frankfurt/Washington consensus comes out of denial (that what is happening actually *is* happening) we can get down to the much more interesting little detail about *why* it is happening.

As Gross says “disinflationary forces are winning out”, now why would this be?

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

2 thoughts on “Let’s Get Down

  1. As Gross says ?disinflationary forces are winning out?, now why would this be?

    If this was intended as a rhetorical question on your part, then I presume the implied answer was ageing.

    Which is interesting, because if the textbooks can be trusted at all, not all of the expected results of ageing are deflationary. In particular, the most commonly emphasized effect of ageing, more people leaving the work force than entering it, might be expected to be inflationary: at least at first, a reduction in labor supply ought to slow the growth of, if not reduce the size of, the economy, while the retiring generation’s accumulated savings keeps the money supply large. If the same amount of money chases a smaller quantity of production, supply-shock inflation ought to be the result.

    While there are many other factors in play, perhaps the low interest rates we see at present are an intermediate stage that occurs when the boom generation has a great deal of savings out there seeking a return, but has not quite yet started leaving the work force in earnest.

  2. Robert, I’m sorry I’ve been so long getting back, I was “detained” elsewhere. Now…..

    “the implied answer was ageing”

    Well in part yes, but there are other factors like global labour arbitrage (read China, India etc), and undocumented inward migrants. And there is technology and things like Moore’s law driving down prices in some sectors. It’s a complicated picture.

    “because if the textbooks can be trusted at all, not all of the expected results of ageing are deflationary. In particular, the most commonly emphasized effect of ageing, more people leaving the work force than entering it, might be expected to be inflationary:”

    I fully accept your point here. There is a whole school of thought, especially the ‘swedish school’ who would agree with you.

    I am not bigotted, so I link to them on my demography page, I mean I think scientific investigation has to be open. Among the papers there is this one:

    http://www.nek.uu.se/Pdf/wp2002_4.pdf

    By Mattias Bru?r, which argues:

    “We conclude that the source of information embedded in the age shares is something the Riksbank should consider when conducting monetary policy. When extending the forecasting horizon, the age model predicts a significant rise in the inflationary pressure after 2005 when the big baby boom cohort of the 1940s enters retirement.”

    I think the whole problem needs to be treated in two stages. The first is to get a general recognition that age structures (or age shares) matter, and the second to then sort out how they matter. Refine the argument and hone it down. This is clearly the most difficult part.

    I have approached this using a typically Brit empirical methodology. Japan is ageing, Japan has deflation, now is there a connection? Then you look at other rapidly ageing countries and you find disinflationary pressures. And so on.

    “If the same amount of money chases a smaller quantity of production, supply-shock inflation ought to be the result”.

    No, I don’t think this part of your argument works. Too much money too cheap leads to: assett speculation (and then Irving Fisher type debt deflation) and excessive investment (poor allocation of resources) which leads to overcapacity (and which we are certainly seeing, especially in China) and this is deflationary.

    “While there are many other factors in play, perhaps the low interest rates we see at present are an intermediate stage that occurs when the boom generation has a great deal of savings out there seeking a return, but has not quite yet started leaving the work force in earnest.”

    I think you’re on the right track here. There may be first and a second stage here. I’ve been thinking about this, we could get deflation and then inflation, I’m not sure. Sounds of thinking zzzzzzzzzz :).

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