tag:blogger.com,1999:blog-3448927642739850334.post4790144524270836964..comments2023-10-29T08:06:00.610+00:00Comments on The Political Economist: Graph(s) of the week: The year in reviewVuk Vukovichttp://www.blogger.com/profile/01878567452492217960noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-3448927642739850334.post-7226858683321687692013-12-27T11:42:26.921+00:002013-12-27T11:42:26.921+00:00First off, thanks for the kind wishes! I also wish...First off, thanks for the kind wishes! I also wish to you a successful and happy new 2014. <br /><br />Now let's take one step at a time. Monetary bubble. I suggest you read this new <a href="http://www.nber.org/papers/w19585" rel="nofollow">NBER working paper</a> by Bordo and Landon-Lane in which they evaluate the impact of loose monetary policy from 1920 to 2011. <br />Here is their main implication: <br />"We show that “loose” monetary policy – that is having an interest rate below the target rate or having a growth rate of money above the target growth rate – does positively impact asset prices and this correspondence is heightened during periods when asset prices grew quickly and then subsequently suffered a significant correction. This result was robust across multiple asset prices and different specifications and was present even when we controlled for other alternative explanations such as low inflation or “easy” credit."<br />“The issue still remains that asset price booms in addition to sometimes ending with damaging busts can be the precursors to a future run up in inflation...This then leads to the question of when central banks should tighten their policies to prevent inflation from becoming embedded in expectations."<br /><br />So basically, I agree that in the short run we won't experience this problem of asset price rises, since the Phillips curve isn't vertical so stable inflation is a likely result of a stagnating economy (or an economy growing below its potential).<br />But we simply cannot be sure of there being no inflationary effect whatsoever when asset prices start rising, when the economy starts fully recovering. I might have been a bit imprecise in my initial claims.<br /><br />You're right about debt issuance, I dropped the word up there, thanks for that, I'll correct it. <br />And I agree, they certainly are refinancing, that is actually ALL they are doing. <br /><br />Finally, as for Koo, I was merely pointing out that he could be right about a balance sheet recession, but I certainly don't agree with his proposed policy responses. <br /><br />anyway, I'm preparing a text on Abenomics sometime in January, and the few upcoming ones will be on the global predictions for 2014. Just as I did last yearVuk Vukovichttps://www.blogger.com/profile/01878567452492217960noreply@blogger.comtag:blogger.com,1999:blog-3448927642739850334.post-320052076212665252013-12-26T21:42:51.905+00:002013-12-26T21:42:51.905+00:00I do agree with you on the stock market story. Mon...I do agree with you on the stock market story. Monetary bubble story...not sure. Actually Im not sure what you mean by "monetary bubble". Reserves created trough QE are not same as (mostly temporary) excess reserves created trough traditional deposit creation. "Drainage" of reserves would mean also a reduction in Fed's asset holdings which would be tightening. Households and corporations do hold a higher share of liquid assets than before the crisis, so do the financials and depository institutions in the US. For depository institutions, reserves are the liquid asset they prefer, especially since the IOER was introduced. People calling S&P gains a bubble usually blame the Fed for the stock's high levels, which is incorrect. There could be a minor correction coming though... <br />Potential for inflation? Don't see it.<br /><br />The "corporate debt chart" is showing issuance - a flow. If they are using low rates environment, they could be as well refinancing and actually reducing total debt burden, or at least interest burden which could improve UFCF since they do not seem to be investing much. Nonfinancials did deleverage, but last data (debt/gdp) I saw was for 2011.<br /><br />With current policy responses most countries are damaging their long term prospects - you mentioned "wrong" austerity + more regulation and intervention. Just look at how Germany is set to reverse some success they had due to agenda2010. On demand side, well...we had that discussion. <br /><br />Koo argued that the liquidity trap was real and a reason for government to step in. Massive fiscal stimulus did nothing, but abenomics (monetary arrow at least) will work - both details showing Koo was wrong. Its also good to se that Abe is looking for a way to dismantle the gentan system. That will modernize the agriculture and open doors for more free trade talks.<br /><br />Different nations face different sets of challenges for 2014 and beyond. Mostly I don't see much decisiveness to tackle them thoroughly or efficiently. <br /><br />Anyways, I wish you a successful 2014!Anonymoushttps://www.blogger.com/profile/02665089266421768740noreply@blogger.com