In his latest column for the New York Times, Harvard economist Greg Mankiw shines light on the fundamental aspects of inflation risk. His insights are quite informative. The key takeaway is that while the conditions for inflation exist, the feeble interplay of these elements may help stave off significant price increases for the foreseeable future. A closer look at some pivotal excerpts highlights his analysis:
One fundamental principle of economics is that prices increase when too much money is produced by the government…
…Governments may turn to rapid monetary expansion when they face fiscal challenges. When expenditures exceed tax revenues, officials frequently resort to their central banks that essentially print money to bridge the budget gap…
Despite having the classic indicators for high inflation, the United States has only experienced mild price increases…
A portion of this puzzle lies in the fact that although we face substantial budget deficits and accelerated money growth, one does not necessarily lead to the other. Ben S. Bernanke, the chair of the Federal Reserve, has been printing money not to fund President Obama’s spending initiatives but rather to salvage the financial system and support a fragile economy.
Ultimately, he suggests that…
Investors purchasing 30-year Treasury bonds with yields under 5 percent are banking on the Fed’s ability to manage these inflation risks effectively. Their confidence is likely justified. However, due to the current monetary and fiscal policies dramatically diverging from historical norms, certainty remains elusive. A decade from now, we might reflect on today’s bond market as an example of this era’s irrational exuberance.
The Capital Spectator was recognized as one of the “top economics bloggers by scholarly impact” in a recent study—“Blogometrics”—published in the Winter 2010 issue of the Eastern Economic Journal. Refer to Table 1 (p. 4) and Table 2 (p. 6) in the linked PDF. We share this ranking with some other notable sites. Perhaps it’s only a matter of time until we receive an offer for a reality show! Meanwhile, here’s an abstract of the study:
This research compiles data about various economics bloggers and blogs to rank them based on citations of their academic work. This ranking is then used in an iterative process to create a list of economics blogs, which subsequently informs a ranking of economics departments based on blog popularity. The rankings generated align with external rankings founded on productivity, while the department rankings correlate reasonably well with those developed through traditional metrics of scholarship impact.
Curiously, the top economics blog recognized in the paper is Gary Becker and Richard Posner’s The Becker-Posner Blog. Our ranking, while nowhere near this prominent site, is still notable, especially considering we find ourselves alongside some illustrious names. After all, as they say in Hollywood, just being nominated is an honor.
While no new revelations have emerged in the realm of economics, fresh perspectives can indeed make a significant impact. Sometimes, that’s all that is needed.
To provide something constructive, let’s consider that reflecting on the underlying factors of risk premia can help clarify what is essential for keeping our financial situation stable—and perhaps lead us toward profitability with a diversified portfolio.
For those intrigued by the finer points, including an extensive review of existing literature and empirical data, good news awaits. Next month, I will release a book through Bloomberg Press titled Dynamic Asset Allocation: Modern Portfolio Theory Updated for the Smart Investor
As regular readers are aware, we start with a broadly defined market portfolio. A practical proxy for most investors can be modeled with a global assortment of stocks, bonds, REITs, and commodities, weighted according to their respective market values. In fact, that’s precisely how we compute our Global Market Index, which serves as the benchmark for The Beta Investment Report.
It’s clear that an economic recovery is in motion. However, we must not take for granted that this rebound is strong or guarantees comprehensive economic healing. This time, it’s different.
Positive trends appear in several metrics, such as the recent data on initial unemployment claims. Last week, new claims rose by 11,000 to reach 444,000, as reported by the Labor Department here. Yet, as illustrated in the chart below, this latest statistic is likely just random fluctuations. Essentially, the downward trend persists.
Since reaching a peak in March 2009, weekly jobless claims have consistently decreased. As mentioned before, a sustained decline in this measure signals positive prospects for the economic cycle. We have long held that the drop in jobless claims is sustainable, indicating the intrinsic recovery forces are strengthening. The latest report provides no reasons to alter this perspective for the near future.
The Federal Reserve’s recent “beige book” report indicates that while the U.S. economy is making a recovery, the pace remains slow. This revelation comes as no surprise, and we would have been taken aback if the central bank offered a differing assessment. Indeed, we have anticipated this outcome for some time, as expressed in past discussions, such as our view from last June, which cautioned that the ongoing economic challenges would impose a considerable burden for many quarters, and in some cases, years.
At present, inflation is not a pressing concern, allowing the Federal Reserve the flexibility to maintain interest rates at near zero.
The futures market does not anticipate an end to this free-flowing monetary policy anytime soon. Even when looking a year ahead, Fed funds futures continue to reflect expectations of a target rate below 1%. The Federal Open Market Committee (FOMC) has done nothing to suggest otherwise. The recent official monetary meeting press release confirmed that “the Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent…for an extended period.”
Following Friday’s disappointing labor market update for December, discussions about strategies to enhance employment will take on increased urgency, particularly since this is a mid-term election year.
Interconnected with the employment debate is the timing of potential interest rate hikes. The two primary objectives remain: preventing future inflation from taking hold while ensuring the economy retains enough strength to generate new jobs.
The jobs report for December serves as a stark reminder that the economic “recovery” will likely be both slow and susceptible to setbacks.
Last month, nonfarm payrolls declined by 85,000, according to the Department of Labor’s update. This figure is disappointing for various economic forecasts, many of which had anticipated slight gains. For example, MarketWatch.com reported that economists had predicted a small rise of 15,000 in the December nonfarm payrolls.
On a positive note, November’s job loss, initially reported as -11,000, has been revised upward to show a modest gain of 4,000. However, in a labor force of 130 million, such minor adjustments are trivial. In truth, only robust, sustained growth in the labor market over several years can mend the damage wrought by the Great Recession. Even if we achieve a consistent addition of 300,000 jobs per month, it would take over two years merely to return the labor market to its pre-recession high. Regrettably, hardly anyone anticipates such a favorable outcome, and today’s figures offer little indication of an impending positive shift.
Economist Stefan Karlsson presents a compelling critique of Fed Chairman Ben Bernanke’s defense of the central bank’s monetary policy in recent years.
The financial and fiscal stimulus implemented by governments worldwide has arguably been effective in mitigating the impacts of a recession and avoiding a depression. However, this raises an important question: At what cost?
In economics, nothing comes without a price; thus, the global economy must face the weight of substantial debt that has accumulated. Essentially, policymakers have traded short-term relief for long-term challenges. Was this sacrifice worth it? The verdict may take many years to determine, perhaps a generation.
Meanwhile, the associated risks should not be underestimated. A recent research paper by professors Carmen Reinhart (University of Maryland) and Kenneth Rogoff (Harvard) lays out the potential dangers ahead. Their working paper titled “Growth in a Time of Debt,” soon to be published in the American Economic Review, outlines three critical points. The authors caution:
