Yesterday in the middle of the debate over the wisdom of quantitative easing more hard evidence from the U.S. Bureau of Labour statistics arrived about the absence of the threat of inflation. Instead, as I and others have been suggesting for some time now the risk is on the downside, further disinflation and even perhaps deflation. Wholesale prices as measured by the producer price index for finished goods in the month of October rose only by 0.4 %. Once they are adjusted for volatile elements like energy prices and food prices they actually had declined by 0.6% . Clear evidence that inflation is nowhere near on the horizon and that concern about Q.E. somehow provoking inflation misguided.
Housing starts unfortunately also fell by 11.7 %, again not a sign of an overheating economy. The complete consequences of the burst bubble in real estate are still working their way through the system.
The one bright light is however the fact that restructured GM is making profits and will be issuing shares in a much touted IPO. Share prices are thought to be be around $32-33 and many observers, though not all expect the price to rise by 10 % or more in the first day. The IPO might even be oversubscribed. This means both the U.S. and Canadian governments and the UAW and CAW will be able to sell a significant portion of their shares acquired during the bailout of old GM and reduce their holdings substantially if they wish to. According to the Wall Street Journal the U.S. government hopes to sell off over 13 billion dollars worth of stock reducing their holdings substantially and recouping along side the 9.5 billion that GM has already paid back over 22 billion dollars of their bailout funding. The Canadian federal and provincial governments involved will be selling 35 million shares and recouping over a billion dollars of their investment in the bailout.
Harold, I find your recent writings on QE very informative. Also, you do well to show that JMK was also a monetary theorist and not simply a fiscal policy advocate. Would it be possible for you to briefly discuss the recent S&P report on banking trends, especially the parts on the weakness in loan demands, in light of your recent post and your views on QE? http://www.standardandpoors.com/products-services/articles/?assetID=1245240350454
ReplyDeleteBest wishes,
Giosafat
Thanks Giosafat. the report you refer me to and other readers should check out is a very interesting document. It contains lots of useful observations and data on the sluggish response of the financial sector to the fiscal stimulus, the bankers bailout and Q.E. and the relative weakness of both consumers and employers with respect to loan demand. just briefly i would say it confirms the need for further stimulus, establishes that for the time being , particularly with Q.E. in place there is no need to worry about crowding out and that there is clearly room for another round of fiscal stimulus without being worried about either inflation or interest rate crowding out. The charts are quite revealing since they show just how drastic a drop off occurred after the crash in 2008 in loans. Looking at past recessions from 1974 on this one has entailed a very much larger collapse in banking activity. So to conclude notwithstanding the Republican capture of the House they should still consider and pass another better designed stimulus bill.
ReplyDeleteFurther to the above it is important to note that Keynes had precisely argued that there was a possible tendency on the part of the public and banking institutions to hoard cash rather than spend or invest it.Keynes developed these ideas upon the base of economists like Wicksell who had seen that there could be temporarily cash hoards apart from savings in the form of bond purchases if interest rates were low and there was a fear that bond prices might fall in the future. Keynes developed this further in his concept of the speculative demand for money and he argued that there could be both decisions to hoard and dishoard which might have a destabilizing impact upon the business cycle.(See the discussion of this in Gardner Ackley, Macroeconomic theory pp.171, ff and in the General Theory, ch. 15 pp.194ff..See also Hyman Minsky John Maynard Keynes,p.72 ff. He would therefore not be surprised to see the build up of large cash balances after the crash in both firms and banks.his solution was to promote the conversion of these balances into job generating investments through loan financed deficit spending.
ReplyDeleteThanks, Harold, for your comments. To my surprise, Mr. Bernanke has recently voiced similar recommendations in a speech just yesterday:
ReplyDelete"In sum, on its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for many years. As a society, we should find that outcome unacceptable. Monetary policy is working in support of both economic recovery and price stability, but there are limits to what can be achieved by the central bank alone. The Federal Reserve is nonpartisan and does not make recommendations regarding specific tax and spending programs. However, in general terms, a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve." http://www.federalreserve.gov/newsevents/speech/bernanke20101119a.htm
Also, I wish to point out that Paul Krugman has recently released a working paper applying Hy Minsky's ideas in light of current economic conditions. http://www.princeton.edu/~pkrugman/debt_deleveraging_ge_pk.pdf
It would appear that today is a very ripe time for a re-examination of Keynes's policy formulations and prescriptions.
Best,
Giosafat