Inflation, Here and There (Wonkish)

 April 16, 2011, 8:51 am, Krugman Blog

A few notes about recent inflation developments.

Inflation is now a big and growing problem in emerging economies. Why? It’s the combination of the liquidity trap in advanced economies and the unwillingness of emerging nations to let their currencies rise.

The story runs like this: in advanced economies, the collapse of housing bubbles and the overhang of debt run up during the Great Moderation is leading to persistently depressed demand, even with very low policy interest rates. The result is low returns to investment; not much point in adding to capacity when you’re not using the capacity you have.

Meanwhile, emerging economies have plenty of demand, in part because they’re emerging, in part because they didn’t share in the big debt runup. So what the world economy “wants” to do is have large capital flows from North to South, and, correspondingly, large current account deficits in the emerging world — which would, of course, help the advanced economies recover.

The Future of Finance

Na, besonders viel kapiert hat er nicht aus der Krise, der Herr Wirtschaftsnobelpreisträger (und LTCM Gründer!) hfk

MIT Video

Robert C. Merton Ph.D. ’70, School of Management Distinguished Professor of Finance, MIT Sloan

1997 Nobel Prize in Economics

“Going back to Glass-Steagall literally doesn’t make sense. It’s like saying get rid of Google or Facebook. It’s the same thing. The world has changed; we can’t go back. Let’s talk about what we should do going forward. ”

Robert C. Merton

In his keynote address, Robert Merton chooses not to focus on the financial crisis. It is clear to him there were “fools and knaves,” as well as “many structural elements that would have happened even if people were well behaved and well informed” — risks are simply “embedded in our systems.” Instead, Merton explores how financial engineering is essential in preparing for the inevitable next crisis, and in solving critical challenges. “The world has changed; we can’t go back. Let’s talk about what we should do going forward.”

Zur größten Finanz- und Wirtschaftskrise seit 80 Jahren. Ein kritischer Rück- und Ausblick mit Alternativen

von Heinz-J. Bontrup. Veröffentlicht vom DGB.

Betrug das gesamte weltweite liquide Finanzvermögen 1980 noch 12 Billionen US-Dollar, so lag der Wert 2007 bei rund 196 Billionen US-Dollar. Dies entspricht in 27 Jahren einer Steigerung von weit über 1.500 Prozent! Das weltweite Bruttosozialprodukt konnte da nicht mithalten. Von 1980 bis 2007 legte es nur um 450 Prozent zu. Betrug das Verhältnis zwischen Bruttosozialprodukt und Finanzvermögen 1980 noch 1 zu 1,2, so war die Relation 2007 auf 1 zu 3,6 angestiegen.
Selbst 2008, als das Finanzvermögen durch die Finanzkrise um 16 Billionen zurückgegangen war, lag das Verhältnis immer noch bei 1 zu 3,0

Chinese Recycling and U.S. Interest Rates

Michael Pettis, RGE Monitor, Apr 18, 2011 12:00PM

I mentioned in last week’s blog entry that during my trips to New York, Washington and Hangzhou in the past two weeks one of the common themes was concern about rising debt levels and weaknesses in the banking sector.  Another theme – one which I want to discuss in this entry – was the possible impact of China’s rebalancing on US and global interest rates.  A lot of people were very concerned that if China does indeed rebalance, US interest rates will soar. 

Deflating Inflation / Inflating Deflation

Satyajit Das, RGE Monitor, Apr 14, 2011 5:35PM

Quantitative easing (“QE”), the currently fashionable form of voodoo economics favoured by policymakers in the US, is primarily directed at boosting asset values and creating inflation. By essentially creating money artificially, central bankers are seeking to return the world to stability, growth and prosperity.

 The underlying driver is to generate growth and inflation to enable the problems of excessive debt in the economy to be dealt with painlessly. It is far from clear whether it will work

Monetary Phenomenology…

QE is designed to create inflation, at least just at the correct level. Given that one of the objectives of central banks is to keep inflation under control, it is ironic that they now want to create more inflation. Higher inflation would reduce the value of debt. Inflation may also induce more consumer spending, as people accelerate purchases, anticipating higher prices in the future.

Rethinking (Macro)Economics

Roberto Tamborini, RGE Monitor, Apr 18, 2011 11:08AM

Bashing economists has become a fashionable sport today. Healthily, self-criticism and rethinking also come from inside the profession. RGE has recently posted three authoritative reflections, by Olivier Blanchard, Joe Stiglitz and Michael Spence, about the state of the discipline taking stock of the hard lesson imparted by the crisis in the face of the policy challenges ahead. This welcomed attitude should not remain a moment’s penance in the wait for the next upswing in the business cycle that will push the sorrow days of the crisis far back in the memory. A wide-ranging and long-lasting correction is needed of major faults in the way in which economics has been thought, taught and practiced for some decades.