The FT carries an article under this heading this morning:
Summers hypothesis is that if inflation looked like it was running away with itself we could be quite sure that central bankers would be acting, and fast. Because it is instead at or near negative territory they are so far from taking action it is as if they are asleep on the watch.
He concludes by saying:
Today's risks of embedded low inflation tilting towards deflation and of secular stagnation in output growth are at least as serious as the inflation problem of the 1970s. They too will require shifts in policy paradigms if they are to be resolved.
In all likelihood the important elements will be a combination of fiscal expansion drawing on the opportunity created by super low rates and, in extremis, further experimentation with unconventional monetary policies.
People's Quantitative Easing in other words, or Green Infrastructure Quantitative Easing as I once called it.
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Considering central banks are basically designed nowadays to focus on just creating low inflations, should we be really surprised if there’s no inflation in the economy?
And, given their narrow (minded) remit, surprised that they are asleep on the watch? There’s nothing to wake up for!
“as serious as the inflation problem of the 1970s.”
So-as the Central Bankers’ ‘tool box’ is empty can we at last see the emperor’s new clothes and watch the demise of Monetarism? Don’t hold your breath!
I think we will
Inequality is deflationary: when middle class incomes are compressed, both consumption and investment are reduced.
The poor, of course, are forced to consume less when their incomes are reduced, and the deflationary effect is immediate.
The very wealthy purchase rents, rather than supporting demand by deploying their surplus in productive investments; and, despite ‘conspicuous consumption’, they don’t actually consume very much.
Thebit that’s missing from the figures? A cost-of-living index captures rents – indirect rents, like former public services run as for-profit monopolies, as well as the familiar residential rents – and rising rents give the appearance of inflation. But they are a zero-sum transfer of wealth, and the involuntary consumers on the wrong side of those transactions are experiencing a sharp contraction in their disposable incomes: that’s deflation, if you measure it correctly.
The visibility of low inflation, or of net deflation, is therefore very worrying: it’s usually masked by unproductive transfers.
Agreed
I worry that there is a tipping point, a fiscal contraction ‘event horizon’ which cuts off the state from any prospect of expansionary recovery.
Far too many Third World countries have spent decades in that hole.
I suspect that we have already passed the point at which conventional expansionary policy would be effective: Green or People’s QE really is the only game in town.
QE for the banks patched up a monetary emergency, but all the benefits have gone to banks and wealthy individuals.
…So we turn to politics, and it is time to ask what mechanisms, and what political will, ensures that PQE does not get ‘captured’, too.
That’s the other ‘event horizon’: inequalities of wealth become so great, and so entrenched in economic power, that all gains from all policies accrue to the already wealthy – even (or especially) when policy objectives are the very opposite.
That’s not a counsel of despair: it is a call to be on your guard.
I agree with you, especially on that first event horizon
Excuse me folks.
But did I really see Larry Summers questioning someone elses’ credibility?
The man who single-handily prevented the proper regulation of financial derivatives in America prior to the 2008 crash?
How dare he. I mean…………..well I’m speechless. Summers banging on about the credibility of someone else is akin to a bunch of lepers judging a beauty contest.
In a real world, Summers would be a persona no grata as far as economics is concerned. He’d be finished. Hopefully that day for him and his ilk will come in my life time.
As with bankers so, too, with bankers’ pet economists: there is no cost or consequence of failure, and neither shame nor disgrace.