Economy | timiacono.com - Part 4

Inflation Since 1510 (in the U.K.)

Super long-term charts like the one below, painstakingly created at Deutsche Bank and appearing in this item at Business Insider, are fascinating in that they tell a story that few seem interested in hearing, namely, that the world’s financial system and conventional thinking about economics has transformed radically in recent decades as the world switched to a pure paper money system administered by central bankers.

Obviously, you’d see a similar chart for the U.S. where, prior to the 20th century, high rates of inflation used to coincide with wars and was followed by periods of deflation to reverse those price increases almost invariably caused by supply shocks and temporarily abandoning a hard money standard to fund the war effort. Technological advances also fueled prior bouts of deflation, however, even a hint of deflation these days is considered taboo and must be countered by central bank money printing on a grand scale.

In what is part of a growing trend, economists at Deutsche Bank are asking whether deflation is really as bad a thing as most dismal thinkers think it is, as conventional wisdom toward deflation increasingly appears to be another case of The Emperor’s New Clothes.

“I Don’t See a Downside”

We filled up the tank the other day and were again amazed at the numbers we saw while doing so. Consumer confidence in the U.S. is skyrocketing as we ‘Mericans are getting a nice little bonus every time we gas up the family car and, for those of modest means, saving $20 at the gas station can be a pretty big deal.

But there’s a downside…

As noted above, oil exporting countries around the world (most of whom we ‘Mericans dislike) are feeling a good deal of pain and that pain is likely to persist for some time.

But, what is not stated in the video is that there will be pain here in the U.S. too as the shale oil industry slowly comes to grips with the idea that $50 oil might not be so transitory. As noted in this report at The Atlantic, shale oil has been responsible for a good deal of the jobs growth in recent years and there are already reports of layoffs by shale oil producers, a trend that is likely to accelerate as long as oil prices are low.

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Can You Spot the Trend?

From The Increasingly Unequal States of America(.pdf) at the Economic Policy Institute (via this item at The Nation) comes the graphic below that helps explain why so many Americans feel so strongly that the economic recovery hasn’t yet reached them, despite news that U.S. job creation in 2014 reached a 15-year high and that the unemployment rate has tumbled.

The report notes this is “not just a story of those in the financial sector in the greater New York City metropolitan area reaping outsized rewards from speculation in financial markets”. These are broad-based trends that have occurred nationwide since the 1970s following many decades when, for example, there “was a cultural and political environment in which it was unthinkable for executives to receive outsized bonuses while laying off workers”.

That’s progress, I suppose.

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Amid all the hubbub about the implications of the Greek election and snowpmageddon on the East Coast we are reminded that there is a Federal Reserve meeting this week, during which central bank policy makers are sure to talk about the location of the dots and the shape of the curves in the graphic below from this story at the Financial Times.

Notwithstanding the fact that Fed funds futures are notoriously unreliable for saying much of anything relevant about the future of the Fed funds rate (though they’re  not nearly as bad as the Fed’s own projections in recent years), the point of this story is a good one, namely, that the brain trust at the central bank will be giving due consideration to a major re-think of the whole idea of a June “lift off” for short-term interest rates, though they’re not likely to share much about that discussion with the rest of us.

Given the global economic headwinds (everywhere but in the U.S., or so it seems), the bond market certainly isn’t expecting a rate hike anytime soon as yields have plunged anew and the Fed is surely not anxious for a repeat of Greenspan’s mid-2000’s “conundrum” that led to the events of 2008-2009. Things are getting interesting for Ms. Yellen.

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