Roubini on deflation vs inflation

RGE Monitor

Overview:German Chancellor Merkel on June 3: “We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years’ time.” So far, government policies are replacing shrinking private demand in order to stave off a deflationary spiral. Crowding out occurs in a situation of full employment as opposed to the current situation of low capacity utilization (Krugman). However, sustained QE and loose fiscal policy need credible government backup (Buiter). Ultimately, deleveraging requires the writing down of debt as reflationary policies are not a free lunch and won't solve the debt overhang problem (Roubini). Important case study: Japan back into deflationary territory despite huge public debt and QE (Chinn). Rather than a sign of inflation, higher long-term yields may be pointing to higher real interest rates which are compatible with a deflationary environment (BofA).
# Ben Bernanke: “I respectfully disagree with her views”-->Exit Strategies from Monetary Easing: Will the Fed Avoid High Inflation?
# Jean-Claude Trichet: "I told her that we were very strongly determined to both, taking the appropriate decision in the current exceptional circumstances and being absolutely crystal clear on the exit strategy."--> ECB Unconventional Monetary Policy: QE to Begin July 2009
# Bank of America via ATX Markets, June 8: Between the inflation vs. deflation debate stands another possibility: rising interest rates. They reflect an increase in borrowing costs. A rise in real interest rates would be consistent with both rising nominal yields and a continued disinflationary environment accompanying a prolonged economic recovery.
# Spiegel Online: Unlike 1929, debts are being fought with debts, meaning that not only banks but entire countries could end up bankrupt. Perhaps the efforts to combat the current crisis are merely laying the foundations for the next crisis, which will be bigger still.--> 1929 vs. 2009: Parallels And Differences To The Great Depression
# Willem Buiter: 1) The nominal zero-bound need not restrict monetary policy in practice as central banks engage in quantitative easing (QE). However: 2) Central banks engaged in QE need a long‐term credible fiscal partner; 3) Central banks engaged in CE need a full fiscal indemnity for capital losses due to private sector asset purchases or secured lending
# Buiter: Problem in Europe: The ECB has no fiscal back-up. There is no guarantee, insurance or indemnity for any private credit risk it assumes. This huge error and omission in the design of the ECB. See Who Is The ECB's Recapitalizer Of Last Resort?
# June 1, Menzie Chinn (Econbrowser); Japan was facing rapidly rising net debt-to-GDP ratios (rising from 60.4 ppts of GDP to 84.6 ppts from 2000 to 2005), and was embarking upon a policy of quantitative easing in an attempt to stave off a deep recession. And yet opponents of quantitative easing worried about hyper-inflation, even as y/y inflation at the time remained mired in the negative range. I didn't understand the fears at the time; and I still don't. --> Japan: Worries Over Huge Public Debt, Is It Sustainable?; and Japan Is Facing Deflation Yet Again
# Chinn: Main difference to Japan: America is a big net debtor to the rest of the world, with extremely large holdings of US Treasurys by foreign private and state actors. This is why high real interest rates are more detrimental for the U.S. than higher inflation. Still, real yields according to TIPS seem fairly low in historical perspective.
# Niall Ferguson: The running of massive fiscal deficits in excess of 12 per cent of gross domestic product in 2009, and the issuance therefore of vast quantities of freshly-minted bonds is likely to push long-term interest rates up, at a time when the Federal Reserve aims at keeping them down. This may lead to a “painful tug-of-war between our monetary policy and our fiscal policy."
# Paul Krugman: "What I hear again and again is either the assertion that all this borrowing must drive up interest rates, or worries that the Chinese won’t be willing to lend us the money. We know as a matter of principle that these concerns are misplaced: if there were a shortage of savings, the economy wouldn’t be depressed. Indeed, one way to think about our current problem is that the world as a whole wants to save more than it’s willing to invest." --> Back to Global Reserves Accumulation?
# Axel Weber: Call for a more symmetric monetary policy across asset price cycles. To be more specific, a more symmetric policy would also realize implicit risks in times when money and credit growth is dynamic, asset prices go up and risk perceptions decline, possibly creating a need to act despite current inflation rates being sufficiently low.--> Should Central Banks Fight Asset Bubbles?
# Mohamed El-Erian (PIMCO), June: Relative to where it is coming from, the financial system will be de-levered, de-globalized, and re-regulated. Global growth will be lower and unemployment higher, notwithstanding the continued rotation of dynamism away from industrial countries and toward emerging economies.

Powered by ScribeFire.