Eric Janszen on Hyperinflation vs. High Inflation

[bart]

Re: Eric Janszen on Hyperinflation vs. High Inflation

Bart

What other assets are you referring to? What good would buying foreign stocks do although I doubt it is even allowed?I can understand buying bonds as this would in theorey stop yields rising in countries like Italy and Spain and so lower borrowing cost with its associated benefits.

mmr mentioned one - direct Fed "lending" to consumers and small businesses, bypassing the banking system entirely.

The Fed is explicitly allowed to buy foreign bonds, per the "Monetary Control Act of 1980" if memory serves.
Part of my thinking in why they might do it is that Central Banks are cooperating partnerships with many shared common and vested interests.

[thriftyandboringinohio]

Re: Eric Janszen on Hyperinflation vs. High Inflation

For the kind of business I used to run that made wireless networking gear, payroll was nearly 40% of total costs. But neither your business nor mine is representative of businesses across the entire economy. See The Average Company Budget Allocation. It's the aggregate that matters with respect to the impact of Fed policy.
....

Point well taken.
Plus, your central idea, to let labor costs flex downward with reductions in demand, remains entirely valid.
With my techniques, I would keep pay rates constant but reduce working hours on the floor; either way the employee takes a smaller paycheck in a slow period.


Another Thought
I may have been talking past your point a little. For your aggregates, you are looking at total payroll costs. When I saw your comment about labor cost shifting down as demand drops, my thinking jumped right away to what I called "direct labor" -that portion of payroll that goes up when we add a third shift and goes back down when we fall back to just one shift. My "direct labor" does not include those salaried professionals in the sales and engineering departments, or the accountants, or the purchasing dept...only the people who "touch the product".

Direct labor is a constant focus of attention in manufacturing, much of it misguided.
.
.

[Bundi]

Re: Eric Janszen on Hyperinflation vs. High Inflation

What do you think?
If they don't have it now, will they have enough at some point in the future, givne the strong disinflationary forces?

Do they even actually need cover, given the relative lock up in Congress?
Will Congress be relieved to see pressure off of them, and (while making negative noises) actually glad to see someone doing something?

I don't think they have cover to pursue direct to consumer type strategies right now, no. I think they may need to do something though prior to the election to stem the disinflationary forces and something in conjunction with other central banks would make sense. After the election and given the Congress lacks functionality, the ability to act more aggressively is likely and if Congress is in total checkmate on another stimulus, mandatory even. I have for a while now wondered to myself if those thinking the Fed is neutered, may be underestimating what can be done. What I mean by this is they can always go outside the banking system so current mechanisms may not be all that efficient but others within the Fed's power may certainly be more direct and quickly impactful.

I do not though understand enough about the global implications of all this to say that I don't believe the Fed is neutered on solving structural imbalances over the long term. They may be. I am too ignorant on those issues to have a strong opinion but it seems like any Fed engineered dollar devaluation (I don't mean capital flight induced, I mean policy specific) is met with strong headwinds to reverse that, in relative terms and over the medium term.


So my highly speculation based opinion is the Fed will get to more unorthodox policy but not if it means tilting an election. I think these policies could be inflationary even without fiscal cooperation (maybe this goes against Koo's philosophy). I could see these policies being welcomed by some and not by others and accelerating the evololution of things currently in the pipeline, come what may.

One thing that I do sometimes wonder and this may put in me in line for a junior tin foil hat is whether the Fed would stay idle long enough to pressure the incumbent. In doing so, chances could increase for the challenger. If the Fed is inclined to impact the election in that fashion, doing nothing may be far less conspicuous.

[astonas]

Re: Eric Janszen on Hyperinflation vs. High Inflation

I see the P/C economy by walking the floor every day in modest factories making widgets. Perhaps payroll costs dominate for service businesses, but businesses that make widgets pay perhaps 15% of all costs as wages for people touching the product. Industry has spent decades automating and squeezing efficiency.

I've studied and applied the demand-flow techniques of John Costanza with great success, and they conform well with current lean-manufacturing ideas.
http://en.wikipedia.org/wiki/Demand_flow_technology

Costanza advocates that if one implements his techniques fully, the business should stop tracking direct labor costs altogether, and just roll them into overhead at the actual 10% to 15% number observed.

For most manufacturers, the big direct costs are inventory of raws and finished goods and the associated charges from FIRE, and the big indirect cost is customers changing the orders before the factory can ship the widgets. If one achieves highly predictable production, inventory levels for raw mtl can drop towards zero and just-in-time supply deliveries will work. If one gets production under strict control, dwell time in the plant drops dramatically and the orders fly out the door before the customer can change things and the inventory of finished goods can drop dramatically.

In my world, direct labor costs are not a root cause for problems at the bottom line.

An excellent point.

However, the argument holds for the manufacturing sector, but not the service sector, which I believe is the larger share of the US economy today. The service sector's cost structure is dominated (~+90%) by labor costs.

Are you suggesting that we have no choice but to go back to a more manufacturing-oriented economy? This might be difficult.

[astonas]

Re: Eric Janszen on Hyperinflation vs. High Inflation

mmr mentioned one - direct Fed "lending" to consumers and small businesses, bypassing the banking system entirely.

If the banks have successfully executed a regulatory capture of the government, what would lead one to conclude that they have not similarly captured the Fed, and thus put a stop to such a move before it started?

They do, after all, literally OWN the fed, as its only shareholders. AND they were the ones (led by Goldman) who CREATED the structure and bylaws in the first place.

I suppose my question is: what incentive do the BANKS have to bypass their own system. I am having a hard time seeing one.

[thriftyandboringinohio]

Re: Eric Janszen on Hyperinflation vs. High Inflation

Are you suggesting that we have no choice but to go back to a more manufacturing-oriented economy? This might be difficult.

Nope. I'm suggesting that dropping the hourly pay of people who punch a clock doesn't fix much.

[astonas]

Re: Eric Janszen on Hyperinflation vs. High Inflation

Ah, in that case, agreed! Sorry for misunderstanding.

[charliebrown]

Re: Eric Janszen on Hyperinflation vs. High Inflation

I agree with this, the money is in the "wrong" form. J6P and Jane company already have a lot of debt and are unsure about their future income stream, ergo no more debt, I don't care what the rate is. Lower rates just mean existing debt will be refinanced. However, if the fed were to do a real dollar drop. Like print out out gift cards to Walmart and mail them out watch the store shelves empty and prices ramp. What about those paper checks from G.W. Seems to me a check in the mail is a good vote getter.

[gwynedd1]

Re: Eric Janszen on Hyperinflation vs. High Inflation

Think of public debt as the reciprocal of private debt. If the private sector isn't lending money into existence the government can and will.

I asked Janet Yellen last week whether the continuous decline in consumer credit outstanding and the countervailing force of increased federal government credit might hit a threshold.

She became defensive and explained to the group and the press that everyone is piling into Treasury bonds and isn't that a worry because they might get hurt when rates rise as they did in the early 1990s.

She's quite effective at redirecting a question.

There is now an enormous literature on inflating away government debt, such as this one picked at random.

The fact that such serious treatments exist today at all is important. The idea was unthinkable recently. But it is exactly what the US did after WWII.

This money system is dooming our democracy. It makes idiots out of the average citizen and wholly exists free from rational public over sight. Most troublesome to me is the abstraction layer of debt, treating the national debt as if it is all the same. As a monetary instrument it is, but as and obligation to repay ,the components that make it up are worlds apart. I cannot explain it to anyone with more than a 5-10% success rate. Its just a paradox to the average person.

[steph_m_chick]

Re: Eric Janszen on Hyperinflation vs. High Inflation

Bart,

So be it.

Apparently everyone but me thinks that Koo is correct.

I think I agree with you, but for a different reason. What if the definition of inflation is taken to be "a decreased value of the dollar" rather than "more money than goods" (granted, a subtle difference). I would argue that in fact the dollar is declining in value (particularly against a standard like gold), and therefore inflation is present.

[bart]

Re: Eric Janszen on Hyperinflation vs. High Inflation

I don't think they have cover to pursue direct to consumer type strategies right now, no. I think they may need to do something though prior to the election to stem the disinflationary forces and something in conjunction with other central banks would make sense. After the election and given the Congress lacks functionality, the ability to act more aggressively is likely and if Congress is in total checkmate on another stimulus, mandatory even.

Pretty much agreed, the coordinated QE concept that's going around now aligns very well with my view of CBs being a cooperating partnership.

I have for a while now wondered to myself if those thinking the Fed is neutered, may be underestimating what can be done. What I mean by this is they can always go outside the banking system so current mechanisms may not be all that efficient but others within the Fed's power may certainly be more direct and quickly impactful.

And that's the main reason that I think Koo is incorrect, let alone that none of his papers or speeches show conclusively that that real CBs are ineffective.

I've been hearing that the Fed is out of bullets for years, way before all the crisis rescue actions like the PDCF, TAF, CPFF, TSLF, TALF... well, you get the picture. And then there's QE1, QE2 and Twist.

It's astounding to me that anyone can believe that a Central Bank, which can create virtually any amount of money at will, is powerless or ineffective at creating inflation - let alone a well known economist like Koo.

I do not though understand enough about the global implications of all this to say that I don't believe the Fed is neutered on solving structural imbalances over the long term. They may be. I am too ignorant on those issues to have a strong opinion but it seems like any Fed engineered dollar devaluation (I don't mean capital flight induced, I mean policy specific) is met with strong headwinds to reverse that, in relative terms and over the medium term.

A surprise dollar devaluation is indeed one of the things the Fed could do via the ESF, although that also has a fiscal component.

So my highly speculation based opinion is the Fed will get to more unorthodox policy but not if it means tilting an election. I think these policies could be inflationary even without fiscal cooperation (maybe this goes against Koo's philosophy). I could see these policies being welcomed by some and not by others and accelerating the evolution of things currently in the pipeline, come what may.

We're all speculating here, the overall situation is unprecedented. Everyone I know, from EJ through Faber, Finster and other luminaries, is very far from certain what's ahead.

It's far from just limited to the US (one of the 'unintended' consequences of globalization), is highly emotional (aka, peak ideologies) - and very much in my opinion not part of what Koo forecasts, especially in CB land. I think Koo's primary blind spot is too much economics, too little of the other social sciences.

One thing that I do sometimes wonder and this may put in me in line for a junior tin foil hat is whether the Fed would stay idle long enough to pressure the incumbent. In doing so, chances could increase for the challenger. If the Fed is inclined to impact the election in that fashion, doing nothing may be far less conspicuous.

I can't imagine that the Fed will do nothing. They'll be accused of trying to affect the elections no matter what they do or don't do, and my political take is that they're less fond of Obama than Romney.

[bart]

Re: Eric Janszen on Hyperinflation vs. High Inflation

If the banks have successfully executed a regulatory capture of the government, what would lead one to conclude that they have not similarly captured the Fed, and thus put a stop to such a move before it started?

They do, after all, literally OWN the fed, as its only shareholders. AND they were the ones (led by Goldman) who CREATED the structure and bylaws in the first place.

I suppose my question is: what incentive do the BANKS have to bypass their own system. I am having a hard time seeing one.

One incentive is simple survival. Deflation is deadly to banks and their balance sheets - and their bonuses. And that deadiness includes all CBs too.

One way the Fed could easily sweeten the pot is to increase Interest on Reserves. They've already given over $10 billion to the banks in the program.

[bart]

Re: Eric Janszen on Hyperinflation vs. High Inflation

Bart,



I think I agree with you, but for a different reason. What if the definition of inflation is taken to be "a decreased value of the dollar" rather than "more money than goods" (granted, a subtle difference). I would argue that in fact the dollar is declining in value (particularly against a standard like gold), and therefore inflation is present.

Indeed, and there are many valid definitions of inflation. Yours alings well with Finster's FDI, and yes we do have inflation currently but just barely (and Finster quite possibly will disagree).

The deflating dollar though is not only just a monetary effect, it's also fiscal in the sense that the Fed is only one part of the ESF, the institution that manages the dollar value in the US. The Treasury and other actual government folk are in there too, and it's a political decision.

[lektrode]

Re: Eric Janszen on Hyperinflation vs. High Inflation

One incentive is simple survival. Deflation is deadly to banks and their balance sheets - and their bonuses. And that deadiness includes all CBs too.

One way the Fed could easily sweeten the pot is to increase Interest on Reserves. They've already given over $10 billion to the banks in the program.

theres one thing i cant for the life of me figure out (other than the most cynical/likely answer)

why are the banks allowed to pay less than the stated rate of inflation on passbook savings accounts?
would seem that CPI +1 or 2% should be the minimum - and IIRC, wasnt it mandatory once upon a time?
(most of the time i actually had any money to 'save' it earned 5% or so - but my cynical self knows why, its to force us to spend it or send it into the casino (the one in lower manhattan) for a 'higher return' (tho at least at the ones run by the los wages mob they give ya free drinks, shows and cheap eats...)

[vt]

Re: Eric Janszen on Hyperinflation vs. High Inflation

ZIRP. The Fed wants the banks to lend at extremely low rates to get the economy moving, savers be damned.