Inflation or Deflation 2020?
Look at the price of anything (bread) over any length of time and it goes up. Bread has quadrupled since the 80s.
While it tends to go up, in any year the price of bread can drop below 0.0 that's deflation.
Go to Office for National Statistics for Inflation Figures: They look at thousands of goods in a consumer's "consumption basket such as shelter". There are urban consumers, argri users etc.
Basket changes as consumer tastes change.
Drivers of Inflation:
Four Types: Demand Pull Inflation, Cost Push Inflation, Wage Push Inflation.
Rapid Expansion of Money and Credit = Demand Pull Inflation. Usually done by central banks to counteract a crisis.
Concern is that it will increase the price for goods and services: more dollars chasing the same amount of goods and services.
During 2008 and now the FED's balance sheet is now 6 trillion dollars. It makes loans, not grants.
Many Hedgefunds thought inflation inevitable, but it didn't happen.
The Velocity of Money
An increase in money supply will only cause inflation if the velocity of money remains constant.
- The frequency at which one unit of currency is used to purchase domestically-produced goods and services within a given time period.
- The number of times one dollar is spent to buy goods and services per unit of time.
- Increasing velocity of money means more transactions between individuals in an economy.
Velocity of Money decreases dramatically in a downturn - there are fewer transactions.
Because there was a degree in slack in the labour market, there wasn't any inflation because they weren't spending.
How does actual unemployment compare against NAIRU, or the "natural level of unemployment." If unemployment dips below NAIRU, that's inflationary.
Expansion of money supply didn't generate inflation because of:
Liquidity Trap.
Increase in money supply fully absorbed by excess demand for money (liquidity).
Investors hoard the increased money instead of spending it.
Opportunity cost of holding cash = nominal interest rate = zero.
Increased money supply via long-term debt purchases.
Investors shift their portfolio holdings from interest-bearing assets to cash.
If banks and individuals holds extra cash, then inflation could be possible.
Control of Inflation.
2% inflation is just right. Price stability and maximum employment.
Value of stocks is affected by inflation. 2 per cent is perfect, when inflation rises, stocks fall quite rapidly and likewise when it falls.
What about Hyper Inflation?
- weakened economy
- large govt debt
- uncontrolled increase in money supply.
2005 - Zimbabwe.
Gold is a lowsy inflation hedge.
Bad for savers, bad for lenders.
Deflation?
Deflationary spike - rising unemployment, large scale lay offs and cuts in wages, lower demand for goods and services, so oversupply, companies then suffer from decreased revenue, corporate loans start to default, which leads to bankruptcy, which leads to more lay offs.
Cash and cash-like investments do well.
But corporate bonds suffer.
What to Watch for
http://fed.stlouisfed.org/
Bank of England in their biannual report does a section on inflation.
Shock produces both demand and supply in different markets: ie. toilet roll vs trucks. downward pressure on some prices and upwards on others.
Conclusion: Don't worry too much about inflation, worry more about corporate growth, which may create more of a problem with credit.
Comments
Post a Comment