Ghost inflation

Let us not be afraid inflation. Our economies are still on artificial life support, so the rejection of the stimulus package at this stage may cause catastrophic consequences. As far as real inflation threat for the world economy? Conservative economists and organizations such as the International Monetary Fund and Organization for Economic Cooperation and Development, have different opinions on this matter. IMF and OECD forecasts a very low level of inflation in the next few years. But the former chairman of the Federal Reserve, Alan Greenspan, is concerned about the threat of inflation. Some bond markets also expect a sharp rise in inflation. Whatever the view was not correct, it largely determines the strategy. If the crisis is replaced by inflation, and this remains a major problem to date, the Government will have to cancel the policy to stimulate the economy (to withdraw money) as soon as possible. If the crisis does not retreat, then policies to stimulate the economy will need to maintain or even expand.


Everyone expects the inflation rate. In the period of low inflation that prevailed in the early 90-ies, in developed countries this figure, on average, did not exceed 2.4%. Inflation-targeting central bank, as a rule, hold at 2%. Proponents of monetarism believe the era of low inflation as his greatest achievement. They are proud of skilled work on central banks' management of expectations. But monetary policy has almost nothing to do with. Low level of inflation was triggered by a combination of supply of cheap goods and low demand. Producer prices in Asian countries with low wages have been under strong pressure, and, in turn, the percentage of unemployment in developed countries has reached an average of 5-6%, which is two times higher than in the first postwar decades. Rising inflation, observed before the crisis in 2008, was due mainly to sharp increases in commodity prices.


That is the basis on which today we can speculate about how real the threat of deflation. One of the first consequences of the crisis can be noted decline in capacity utilization compared to the situation 15 months ago: World production fell by 5% since 2008, and the performance of developed countries by 4.1%. Together with the fall in output was expected slowdown of inflation, this is what happened. Annual inflation rate fell in the OECD average of 3.7% in 2008 to 0.5% in 2009. We again observed its growth, mainly associated with changes in commodity prices. In addition, the IMF and the OECD believes that global inflation will be below average in 2008 for several years in other words, the era of low inflation is replaced by the era of even lower inflation.


But what about the massive quantitative easing (printing money)? Since the beginning of the crisis the Bank of England has invested 325 billion dollars in the UK economy, the Fed increased the monetary base to nearly U.S. $ 1 trillion. dollars, and the People's Bank of China has granted loans to a record $ 1.4 trillion. dollars. Only these actions constitute 4% of world GDP. Undoubtedly, this means that inflation is not far off, will not begin until the removal of excess liquidity. For those who have visited a couple of lessons on the quantity theory of money, such a conclusion seems quite substantiated. According to the quantity theory of money, the general price level will increase in proportion to the growth of money supply. Thus, if the money supply has increased globally by 5% last year, world prices would rise by 5% with a slight time lag. But, as never ceased to celebrate John Maynard Keynes, the quantity theory of money applies only under conditions of full employment. If the economy has unused capacity, a part of any increase in money supply will be spent rather on increasing production than the purchase of existing products.


But it's not so bad. By "money supply" experts usually understand monetary aggregate M3, a broad measure that includes bank deposits. Filling of banks with central bank money does not guarantee that the contributions arising from spending or borrowing money, in proportion to increase. In the 90 years the central bank of Japan has invested huge sums in banks, hoping to increase the money supply. In some cases, the increase of the Central Bank reached 35% in the year, despite a measure of M3 grew only 7%. These United States and Europe show that the rate of M3 fell most of 2009, despite unusually low interest rates and quantitative easing. A waste of money, not printing matters. Only when the money is spent, they cease to be a bundle of worthless paper. Any central bank can print money, but he can not guarantee that they will be spent. Money can be accumulated in bank reserves or savings accounts, or may propagate bubbles in asset markets. But in such cases, monetary growth is either very small or completely absent. The new money simply replace the old, which were eliminated during the economic meltdown.


For this reason, according to official figures, in the next few years will experience an extremely low level of inflation, although monetary and fiscal stimulus. This should serve as a warning: to assert that at the present high level of unemployment, inflation will remain low, it means to say that in the next five years, economic recovery will be sluggish. Moreover, after the crisis, the economic recovery is usually paired with a taller than average. This means that prices will be faster than usual. The lack of confirmation of price growth in the process, demonstrates a lack of clear evidence of economic recovery. Economy still in need of stimulation. Refusal of him is tantamount to death. Discussions about the threat of inflation - just intimidation. Instead, think about possible ways of healing. Undoubtedly, different economies at different stages of recovery, and rapid economic growth in some countries such as China and India, will help these countries with weaker economies like Europe and America. But until then, until the next quarter does not appear strong evidence of economic growth, European and U.S. authorities should be ready to accelerate and expand existing expenditure programs. Otherwise, the economies of these countries at risk of getting stuck in a state of crisis.

The December unemployment rate in the United States was the worst since the Great recession.

Does history repeat? Some economists have accused President Obama is that he made the same mistakes that have made the policy in the United States during the Great Depression began with the collapse of Wall Street in 1929. The number of unemployed increased by 661 000. These data were not included in the main indicator of unemployment, because too many Americans simply dropped out of the system. Broader U6 unemployment rate was 17.3%, and only that matters. On Wall Street revival. And the bulls are hoping that the weak employment data will delay the time of tightening of monetary policy: a ray of light in the darkness, or further evidence of immaturity of the market.

Foreclosure home mortgage usually occurs approximately one year after the loss of work and disposal of all accumulated savings. The local sheriff evicted the deadbeat of the house, of course, with sympathy - That's what police in 1932, mostly Irish Catholics, who donate 1% of their salary to a charitable kitchen. According to Realtytrac, in February, the number of non-payments and transfers of property to the bank of more than 300 000 per month. One million American families lost their homes in the fourth quarter. Projected Moody's Economy.com, this year is 2.4 million homes will lose their owners. All this is terribly like "Grapes of Wrath" Steynbeka. Judges are looking for ways to block the eviction. A magistrate in the state of Minnesota dismissed the case, calling the creditor "gross, disgusting, vile and disgusting" human being. We are not far from being able to declare a de facto moratorium in some areas. This is what happened in the years 1932-34. When half of U.S. states have declared a moratorium or "Farm holidays". This flexibility has become a vaccine for the U.S. economy against the "Red Unions and fascists Father Coughlin. Alienation of houses continues, despite the furious efforts of the Obama administration to slow down this process.

Such a policy is absolutely justified, taking into account the extent of social crisis. However, it also masks the continuing decay of the housing market, allows creditors to hide their losses and contributes to the further growth of the surplus of unsold property. Must be extremely naive to think that the worst for the U.S. housing market are behind us (my apologies traditional Goldman Sachs). Another mortgage only to detonate a bomb in this year or next year, when he grew up floating interest rate on mortgage contracts totaling $ 134 billion (£ 83 billion). Case-Shiller index shows that housing prices in the U.S. grow for five months, but in October, half of urban dynamics began to fade even before the growth of mortgage rates by 40 bps According to Charles Keyes (author index), prices could fall another 15%. "When issued in 2008-2009. Credits will be bad, we find ourselves in the same place and were - in a nightmare."


David Rosenberg of Gluskin Sheff noted with surprise how little support had zero interest rates and incredible scale measures of financial incentives. In the third quarter of 2009 growth rate of the U.S. economy amounted to 2.2% (completely through incentives for the Obama administration). This compared to an average of 7.3% in the first quarter after every recession since the Second World War. The hawks at the Fed are playing with fire when raising the question of exit strategies, and not the first time. This theme was raised in June 2008. And we know perfectly well what happened after three months. For your information, capacity utilization was 67.2% and the rate of "auto purchase intentions" has reached a record low.


The money multiplier Fed in mid-December has fallen to historic lows 0,809. The volume of commercial paper from October-the month decreased by $ 280 billion (£ 175 billion). The reduction of bank lending in June, the month has been horrendous. On November 25 the volume of bank lending fell from $ 10.844 trillion. to $ 9.013 trillion. Annual rate of decline MZM money supply is 3%. While the decline in the broader indicator of money supply M3 is greater than 5%. Professor Tim Condon of International Monetary Research said that the Fed's actions will lead to an increase of deflation this year and possibly a recession with a double bottom. Situation is even worse in Europe. However, all these facts do not stop the army of commentators, which tries to bring the Fed's tightening of monetary policy. They accuse Ben Bernanke to repeat the mistakes of 2004, when the Fed waited too long. Sometimes on this just want to scream. In 2004 there was a collapse in the housing market, the unemployment rate was 5.5%, the banking system was in good health, and the multiplier Fed was at 1.73.


It is not clear how someone could see the looming inflation extinguished in terms of pure PCE, which in November was only 0.1%. Customers asked Mr. Rosenberg, why Wall Street is clearly not agree with his gloomy analysis. His answer was as follows: it is the same market that bought shares in October 1987, when prices were inflated by 25%, 10-year standardized basis earnings "Schiller - like today - and in 2007 bought them even more overpriced when the collapse of the housing market has long occurred, Bear Stearns funds had burst, and the crediting of August experienced a heart attack. Stock market has become a lagging indicator. Just throw his books.