21
Nov
2018
Murphy Triple Play
==> My recent LMR blog post on price inflation.
==> The Bob Murphy Show ep. 5 features Scott Horton on Waco, foreign policy, and Trump’s electoral strategy.
==> My latest IER post highlights the impact on state budgets from the new Capital Alpha carbon tax study.
You can just say “inflation”. (Unless you’re trying to make a point about “increase in money supply” vs “increase in prices”.)
‘Unless things turn around drastically, the Fed has run out of options; it will have to keep hiking interest rates.’
You make it sound like that is a bad thing. If the demand to hold money has decreased from the abnormal levels of the past 10 years, and the natural rate of interest has returned to its historic norm then this seems like a sign that economic recovery is almost complete and fed policy just reflects that. I agree its possible that higher interest rates may be bad for stock valuations – but isn’t that just how those things interact ?
It hasn’t
https://fred.stlouisfed.org/series/SAVINGS
good point.
https://fred.stlouisfed.org/graph/?g=ma6u
Growth in savings (green line) has dipped below growth in PPI and also just barely below growth in CPI which means in real terms savings are shrinking. Also, this kind of dip tends to be happening before a recession.
Savings as a % of GDP is still currently 2x what it was on the eve of the 2007 recession, and 3x what it was prior to the 2001 recession. The ‘demand’ for money has clearly not come back down, even it it has stopped growing (or alternatively finally reached equilibrium).
https://fred.stlouisfed.org/graph/?g=maZt
There’s been a slow, long term deleveraging (i.e ratio of total credit to total savings) since the 1980’s and it maps quite closely to falling interest rates. I’m using 15 year mortgage rates as a “real world” indicator because real people can borrow on these rates. The Fed official rates are not available for real world borrowing.
It actually maps surprisingly well when you consider that mortgage rates contain a time preference built into them, while credit leverage (at least on the face of it) should be a unitless quantity. I don’t find it difficult to imagine how they are related, but I wasn’t expecting them to come out quite that close. That’s useful though, because the red line (which clearly has already turned the corner) could be seen as a slightly leading indicator of the blue line (which probably is getting ready to turn the corner). Don’t forget that the blue line is lagged by reporting delays.
At any rate, Keynesian business cycle economics is always a short term thing. You can stimulate an economy by pumping easy money and all the macro-indicators jump … but apparently positive short term gains are offset by long term negative consequences. We haven’t had a good and proper reset since the Savings and Loan Crisis in the late 1980’s. Personally I don’t see a lot more room for mortgage rates to keep falling so I would argue that long deleveraging cycle is over this time and we are ready for another period of rising inflation and rising rates. I’m not the only one suggesting that, Schiff and Stockman have been suggesting similar things… more a question of how much and how quickly.
That said, mortgage rates did get much lower in Japan, so it’s at least hypothetically possible to keep going on the downward slide, but either way the outlook on the timescale of a few years in the future is we go over the crest of this current boom and into some sort of recession. Whether that recession is another “stagflation” type of recession remains to be seen.
Even taking your graph there is no deleveraging from 1983 through 2009, characterizing it as a long, slow deleveraging is misleading. There was a sharp deleveraging in the late 70s to early 80s which is the bulk of the visual effect in that graph (or you could say there has been a deleveraging since 1995).
Ignoring that- the deleveraging since 1995 has been entirely due to an increase in the savings rate, with savings as a % of GDP increasing, while household debt+federal debt is up 35 percentage points worth of GDP since 2005 (up 5 points since 2010).
“At any rate, Keynesian business cycle economics is always a short term thing.”
As far as I can tell Keynesian business cycle economics is just wrong.
“Also, this kind of dip tends to be happening before a recession.”
The past three recessions it has occurred 2 years, 1 year and 4 years prior. Doesn’t seem like much of a pattern.
Not a pattern because sometimes the timing can change by a few years?
So, nothing ever is a pattern then.
As in its meaningless for predictions with that amount of variability. A 3 year spread is huge for only 3 observations, where the recessions weren’t even 10 years apart.
“Unless things turn around drastically, the Fed has run out of options; it will have to keep hiking interest rates.”
Only there is surprisingly little correlation between increasing/decreasing rates and shifts in inflation.