[quote=davelj][quote=Rich Toscano]As far as slack and all that goes, I agree with John Hussman’s view:
“The Phillips Curve is simply a standard economic argument about relative scarcity. It says that when the labor markets are tight, nominal wages rise faster than the rate of general inflation (i.e. real wages rise), and when unemployment is high, nominal wages rise slower than the rate of general inflation (i.e. real wages fall). As we observed in the 1970’s, high unemployment can exist in concert with high rates of inflation. All that happens, in that case, is that wages tend to rise slower than prices. Assuming labor productivity is growing as well, real wages don’t keep pace with productivity growth. In any event, unemployment emphatically does not prevent the inflationary consequences of reckless creation of government liabilities.”[/quote]
This is true… but we didn’t see the kind of asset deflation in the ’70s that we’ve seen over the last few years either. We’ve got too many homes, offices and pretty much everything else at this point, which wasn’t the case in the ’70s. All of which is deflationary. Also, capacity utilization is around 74% and, if memory serves, 81% is the mean historically, and 82%+ is where inflation tends to get triggered. (Capacity utilization was higher-than-normal during the ’70s, but not for the whole decade. Then Volcker came along and started unwinding things in 1981.) Anyhow, lots of moving parts. I agree that getting fixated on one number – like unemployment – is not a good idea. But taking into account unempolyment + capacity utilization + asset deflation + a low savings rate (which will increase and cut into consumption) + a massive amount of debt that needs to get paid down… probably leads to low inflation for a while. What “a while” is is hard to know…[/quote]
What if prices are 25%-50% higher than they should be, but lower than they were a few years ago? What if these prices are the result of quantitative easing and artificially low rates, as opposed to being based on fundamental values? Is this not a form of inflation?
I would argue that we do not have too many houses, office buildings, etc., (though some are poorly located) but that they are priced too high. Our problem isn’t due to overcapacity, but rather demand destruction because the pricing mechanism isn’t being allowed to work. Look at all the people who are taking on roommates, moving in with family members, etc., because they cannot afford to form their own households at these artificially inflated prices.
Right now, our stock market is near the optimistic levels seen during the massive bubble years of ~1999 and ~2005, as are commodity, bond, and housing prices (in many locations). All this during the “Greatest Recession Since the Great Depression”! I see inflation all around us **right now.**
We didn’t have a crisis because of CDSs or “toxic” mortgages. The crisis was due to high prices that forced anyone who wanted to participate in the economy to take on risky debt, with the lenders trying to hedge against the obvious risk of default (because prices were too high!) via CDSs and other securities. It was a debt-price spiral that grew out of control, and it’s still with us because the govt has chosen to take on the risks and leverage in order to save the financial industry by keeping asset prices artificially high (inflated!).
IMHO, the **solution** to our problems is price deflation and much higher interest rates. Of course, you’ll never hear any of our politicians saying this.
