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The Inflation thread, Discussion
nipper
post Posted: Jan 21 2015, 09:03 PM
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Central bank prophet fears QE warfare pushing world financial system out of control

Former BIS chief economist warns that QE in Europe is doomed to failure and may draw the region into deeper difficulties

http://www.telegraph.co.uk/finance/economi...of-control.html

QUOTE
The economic prophet who foresaw the Lehman crisis with uncanny accuracy is even more worried about the world's financial system going into 2015. Beggar-thy-neighbour devaluations are spreading to every region. All the major central banks are stoking asset bubbles deliberately to put off the day of reckoning. This time emerging markets have been drawn into the quagmire as well, corrupted by the leakage from quantitative easing (QE) in the West.

"We are in a world that is dangerously unanchored," said William White, the Swiss-based chairman of the OECD's Review Committee. "We're seeing true currency wars and everybody is doing it, and I have no idea where this is going to end."

Mr White is a former chief economist to the Bank for International Settlements - the bank of central banks - and currently an advisor to German Chancellor Angela Merkel.

He said the global elastic has been stretched even further than it was in 2008 on the eve of the Great Recession. The excesses have reached almost every corner of the globe, and combined public/private debt is 20pc of GDP higher today. "We are holding a tiger by the tail," he said.

He warned that QE in Europe is doomed to failure at this late stage and may instead draw the region into deeper difficulties. "Sovereign bond yields haven't been so low since the 'Black Plague': how much more bang can you get for your buck?" he told The Telegraph before the World Economic Forum in Davos.

"QE is not going to help at all. Europe has far greater reliance than the US on small and medium-sized companies (SMEs) and they get their money from banks, not from the bond market," he said. "Even after the stress tests the banks are still in 'hunkering down mode'. They are not lending to small firms for a variety of reasons. The interest rate differential is still going up," he said.

The warnings come just as the European Central Bank prepares a blitz of bond purchases at a crucial meeting on Thursday. Most ECB-watchers expect QE of around €500bn now that the eurozone is already in deflation. Even the Bundesbank is struggling to come with fresh reasons to oppose it.

The psychological potency of this largesse will depend on whether the ECB opts for shock-and-awe concentration or trickles out the stimulus slowly. It also depends on the exact mechanism used to conduct QE, a loose term at best.

ECB president Mario Draghi hopes that bond purchases will push money out into the broader economy through a "wealth effect", but critics fear this will be worse than useless if it leads to an asset bubble without gaining traction on the real economy. Classic moneratists say the ECB may end up spinning its wheels should it merely try to expand the money base.

Mr White said QE is a disguised form of competitive devaluation. "The Japanese are now doing it as well but nobody can complain because the US started it," he said. "There is a significant risk that this is going to end badly because the Bank of Japan is funding 40pc of all government spending. This could end in high inflation, perhaps even hyperinflation.

"The emerging markets got on the bandwagon by resisting upward pressure on their currencies and building up enormous foreign exchange reserves. The wrinkle this time is that corporations in these countries - especially in Asia and Latin America - have borrowed $6 trillion in US dollars, often through offshore centres. That is going to create a huge currency mismatch problem as US rates rise and the dollar goes back up."

Mr White's warnings are ominous. He acquired great authority in his long years at the BIS arguing that global central banks were falling into a trap by holding real rates too low in the 1990s, effectively stealing growth from the future through "intertemporal" effects.

He argues that this created a treacherous dynamic. The authorities kept having to push rates lower with the trough of each cycle, building up ever greater imbalances, in an ineluctable descent to the "zero bound", where monetary levers stop working properly.

Under his guidance, the BIS annual reports over the three years before the Lehman crisis were a rising crescendo of alarm calls at a time when other global watchdogs were asleep. His legendary report in June 2008 openly discussed whether the world was on the cusp of events that might prove as dangerous and intractable as the Great Depression, as it indeed it was.

Mr White said central banks have been put in an invidious position, compelled to respond to a deep economic disorder that is beyond their power. The latest victim is the Swiss National Bank, which was effectively crushed last week by greater global forces as it tried to repel safe-haven flows into the franc. The SNB was damned whatever it tried to do. "The only choice they had was to take a blow to the left cheek, or to the right cheek," he said.

He deplores the rush to QE as an "unthinking fashion". Those who argue that the US and the UK are growing faster than Europe because they carried out QE early are confusing "correlation with causality". The Anglo-Saxon pioneers have yet to pay the price. "It ain't over until the fat lady sings. There are serious side-effects building up and we don't know what will happen when they try to reverse what they have done."

The painful irony is that central banks may have brought about exactly what they most feared by trying to keep growth buoyant at all costs, he argues, and not allowing productivity gains to drive down prices gently as occurred in episodes of the 19th century. "They have created so much debt that they may have turned a good deflation into a bad deflation after all."




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"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne

Said 'Thanks' for this post: boy  wren  
 
wren
post Posted: Jan 21 2015, 01:32 PM
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From Bloomie today……..This post shows Confirmatory Bias,as it agrees with my long held view.So,take it or leave it.

"A specter from the past hovers over the major industrialized nations: deflation. A decrease in the overall price level, deflation was a term relegated to economic history, with the notable exception of Japan following the bursting of its land and stock market bubble in the late 1980s. The everyday experience of the post-World War II generations has been inflation or rising prices. Besides a few exceptions, such as New York Times columnist and Nobel laureate Paul Krugman, many economists, central bankers, and Wall Street strategists primarily fret over prospects for inflation. Sure, prices may be tame at the moment, but inflation’s resurgence is inevitable—or so we’re repeatedly told.

Really? The trend in consumer price indices clearly point toward increasing deflationary pressures. The epicenter of current concern is Europe, with its latest consumer price index reading at 0.7 percent, down from 1.1 percent a month earlier. Spain’s year-over-year inflation rate is at 0.1 percent. Germany sports a mere 1.2 percent annual inflation rate, and a number of smaller, troubled countries are in deflation, such as Greece, Latvia, and Bulgaria. A parallel story unfolds in the U.S. America’s CPI is running at a 0.9 percent year-over-year pace, down from 2.2 percent a year ago.

Here’s the thing: Deflation has become the modern condition. The emergence of deflation isn’t a temporary phenomenon reflecting the economic weakness and high unemployment. No, the underlying trend toward deflation stems from heightened international competition for markets (globalization), widespread migration (immigration), and rapid technological advances (Amazon.com (AMZN)). The Great Recession and the anemic recovery simply accelerated the trend from disinflation and toward deflation."


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wren
post Posted: Jan 17 2015, 12:46 AM
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Just in..."The consumer-price index, which measures what Americans pay for everything from coffee to airline tickets, declined a seasonally adjusted 0.4 per cent in December from the prior month, the Labor Department said Friday. That was the index's largest one-month decline since December 2008. "
Remember when we were warned daily that hyperinflation was just around the corner?That was 6 years ago and we are still waiting!

 
early birds
post Posted: Jan 15 2015, 08:17 PM
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In Reply To: wren's post @ Jan 15 2015, 08:08 PM

have look at 2 minutes chart of all major index for last hour wren.
they are all over the places----up and down. madness!

http://www.cnbc.com/id/102340182




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wren
post Posted: Jan 15 2015, 08:08 PM
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In Reply To: early birds's post @ Jan 15 2015, 07:55 PM

.Market crashing? Where?

Just got it:my system has been slow all day.
Interesting times with future opportunities I reckon.

 
early birds
post Posted: Jan 15 2015, 07:55 PM
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In Reply To: boy's post @ Jan 15 2015, 07:11 PM

Swiss Central Bank Ends Minimum Exchange Rate, Lowers Interest Rate to -0.75%
=======================

market is crashing down atm.!!!!!!!
looks we are all gonna be screwed! weirdsmiley.gif


 


boy
post Posted: Jan 15 2015, 07:11 PM
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In Reply To: early birds's post @ Jan 15 2015, 03:54 PM

We look to be going down hill and off the road, in an accident the vehicle will wreck, can we expect the airbags to work?

 
early birds
post Posted: Jan 15 2015, 03:54 PM
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In Reply To: nipper's post @ Jan 15 2015, 03:21 PM

it stuck with me for a while by now.
all these QE by FED JGB ECB eg.... is trying to jack up inflation to get growth...
but, they seems over done it--------------there is too much cheep credit in the system that create massive over supply of basics----that in turn creates deflation pressure , not inflation.
unsure.gif



 
nipper
post Posted: Jan 15 2015, 03:21 PM
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Central banks must target growth not inflation

Warwick McKibbon
QUOTE
Many policymakers and economists believe in the centrality of inflation targeting as the basis for monetary policy. Inflation targeting was first implemented by the Reserve Bank of New Zealand in 1988 and has become a widespread guiding principle for many central banks. This is about to change. There are two main reasons. One is related to some key flaws in inflation targeting in a world driven by productivity or supply shocks and the other relates to the problem of having a large number of countries with excessive levels of government debt.

Inflation targeting was seen as a core guiding principle for central bankers because it gave central banks a clear goal for policy – a goal which the central bank could control in the medium term and which could be measured and forecast in the time frame relevant for monetary policy. Achieving the inflation target was important for maintaining the credibility of monetary policy and anchoring expectations about policy. This was an important driver of growth during the last two decades. Having an independent central bank with a clear mandate and quantifiable target diminished the problem of using monetary policy for political purposes that so many governments had done over many decades.

In Australia, inflation targeting was important in tying the hands of government and during the recent commodity boom since 2000, contributed to a much better outcome than in previous boom-bust cycles. The relative mishandling of fiscal policy over the same period demonstrates the outcome for the Australian economy would have been much worse if politicians also had control of monetary policy as well as fiscal policy.

The key benefit of inflation targeting as a concept, was not inflation as such, but having a measurable target the central bank could aim for and could influence. One of the strengths of inflation targeting is in the face of a demand shock. With demand rising faster than supply such as occurred in Australia from 2002, raising interest rates to dampen inflation would also reduce the extent of excess demand in the economy. This response of monetary policy would work to both reduce output volatility as well as inflation volatility over the cycle. In advanced economies, during the past two decades when demand shocks have been important, inflation targeting worked well. However, there has always been a well-known problem with inflation targeting, which is highlighted in the academic literature.

In the face of supply shocks this policy does not work well and can accentuate output volatility. Take the example of a fall in productivity growth (a negative supply shock). Falling productivity would cause both a rise in input costs and a fall in output. An inflation targeting central bank would tighten monetary policy as input costs rose but in doing so would reduce real GDP in the economy. Thus monetary policy would lead to a worse outcome for the real economy than caused by the shock alone. In joint work with Dale Henderson in the early 1990s, we showed that an inflation targeting central bank also accentuates output losses as risk increases in an economy.

This is important in several ways. It has always been a problem for emerging economies which face more extreme supply shocks (weather events, political instability and so on) than demand shocks (excessively exuberant consumers). The mantra that central banks in emerging countries should follow inflation targeting has caused problems for the real economy in many cases. The benefits of credibility in policy was offset by real output losses from overly tight policy. But it is even more relevant today for advanced economies because of the current problems in these economies of falling productivity and rising risk. Inflation targeting is not the best framework for central banks in these circumstances.

This problem can be addressed if the focus of the target is shifted from inflation targeting to nominal GDP targeting. Nominal GDP growth is the sum of inflation and real GDP growth. To understand why nominal GDP targets works well, consider the case of a fall in productivity (equivalent to a rise in input costs). An inflation targeting central bank would tighten policy in response to rising inflation. A central bank following a nominal GDP target would combine the rise in inflation with the fall in real GDP and not tighten policy or may even loosen policy if the expected fall in real GDP is larger than the expected rise in inflation. The outcome for the real economy would be better but expectations from having a clear policy rule would not be undermined.

Secondly, policy will need to adjust because of the prevalence of countries in the global economy with high ratios of nominal debt to nominal GDP. While fiscal policies will ultimately need to tighten to reduce the level of debt in many countries, it is also important that the rate of nominal GDP growth is maintained. Falling debt levels combined with falling nominal GDP growth means the ratio of nominal debt to GDP may rise, even as countries attempt to get their fiscal deficits under control. This is a recipe for bad economic outcomes, as southern European governments are discovering.

The realities show that clearly central banks in many countries need to shift their focus away from inflation targeting or exchange rate targeting to nominal GDP targeting. The sooner this happens the better for the world economy. The management of monetary policy in the next five years is likely to be very different from current conventional wisdom.


Warwick McKibbin is the Director of the Centre for Applied Macroeconomic Analysis in the ANU Crawford School of Public Policy and is a non-resident Senior Fellow at the Brookings Institution in Washington



--------------------
"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne
 
wren
post Posted: Jan 13 2015, 11:46 PM
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News just in.
UK inflation falls to 0.5%,the lowest level in modern times.So much for Team Inflation (read this thread for a bundle of laughs)

 
 


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