Other Alpha Sources
Team Macro Man has a nice perspective on what deflation might mean in the OECD context and it is difficult to disagree with the underlying rationale.
One sector that is glaringly not singing to the Deflationistas' hymn sheet is commodities. While a rapidly-growing global population continues to compete, like bacteria on a Petri dish, for the basic resources of food and energy, the input component to basic living will keep local prices firm even in an environment of other localised deflationary pressures.
The world is still steadily competing for raw materials, so any slow down in the West can only express deflation through lower wages as competition for jobs tightens and hence labour cost inputs fall. So whilst service sector (higher labour component) may see a higher relative price deflation, the basic cost of survival, food and energy to the individual stays the same, or rises as we are now seeing.
That isn't an individual enjoying deflation, that’s an individual suffering poverty.
I remain inclined to believe that the biggest problem for most OECD economies in the coming decades will be deflation (and the subsequent increase in the value of real debt) rather than inflation. But there is a world outside OECD too and especially commodities could very well be a source of inflation and thus in some sense stagflation (with the added spice that our relative wage in the West may fall at the same time)
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If you like me are prone to the occasional what the h'ck is going here mantle; this rap up by Gwen Robinson at FT Alphaville provides a good overview of the recent flurry. Highly recommended as the first read this friday morning or as weekend lecture.
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Jean Tirole is professor in Economics at Toulouse University and back in September 2009 he penned a very interesting article on illiquidity and what it means for a balance sheet (of a bank) to be liquid and illiquid.
The recent crisis was characterized by massive illiquidity. This paper reviews what we know and don't know about illiquidity and all its friends: market freezes, fire sales, contagion, and ultimately insolvencies and bailouts. It first explains why liquidity cannot easily be apprehended through a single statistics, and asks whether liquidity should be regulated given that a capital adequacy requirement is already in place. The paper then analyzes market breakdowns due to either adverse selection or shortages of financial muscle, and explains why such breakdowns are endogenous to balance sheet choices and to information acquisition. It then looks at what economics can contribute to the debate on systemic risk and its containment. Finally, the paper takes a macroeconomic perspective, discusses shortages of aggregate liquidity and analyses how market value accounting and capital adequacy should react to asset prices. It concludes with a topical form of liquidity provision, monetary bailouts and recapitalizations, and analyses optimal combinations thereof; it stresses the need for macroprudential
policies.
The best academic read I have a had in a long time.
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Eliana Marino takes a look a migration in the Baltics and tells one of the great unsung stories of this crisis and what it means when you loose your working age people to net migration;
- emigration of working age population makes the demographic burden increase: the number of inactive people (children and retired people) exceeds the number of active people, creating serious challenges for the sustainability of the welfare system;
- the most part of the outflows consists of working age population (from 15 to 65 years old) that includes people in reproductive age (from 15 to 49 years old). A huge number of emigrants in this particular age group means a further reduction of the natural increase of the population. In fact, they will probably have their children abroad or the migration decision itself will discourage the creation of numerous families.
I need to write a paper on this!
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Finally, Albert Edwards from Societe Generale is back from vacation (no link I am afraid) with another look at how the ice age scenario is coming along.
Inflation continues to ebb away. In Japan core CPI deflation, at -1.5% is the worst on record. While in the US, the corporate sector is seeing its weakest pricing power on record " even worse than that seen in the deflationary maelstrom during the Asian crisis (see chart below). We have consistently articulated the view that the severity of the current situation will only be appreciated when this current cycle ends in failure " and that is not too far away. That will be the time that equities will plunge to new lows. And that, not March 2009, will provide the buying opportunity of a generation to hedge against the coming Great Inflation.
Somehow he always manages to convince me of his ideas (at least in part) and boy does this sound good for those who are all cash at the moment. I also like the idea that the yield curve is a bad indicator when the Fed funds rate is at the lower bound. Still, the key issue here is not a double dip in the West (which is given in Europe), but a two-tempi growth market since Emerging Markets are already(!) inflating with a venegance and yield curves are flattening as short term rates increase. I know I have harped about this before, but it IS happening you know ...
I think Edwards misses this point (although he might just be making it differently)