Transcript Professor David Blanchflower

Higher inflation is inevitable
Professor David Blanchflower
Dartmouth, Stirling, NBER, IZA,
The New Statesman and Bloomberg
2
Financial collapse
• The world economy was hit by a once in a 100
years financial shock – a Taleb black swan
• Geithner this week at Dartmouth said that
‘most of what feels bad about the American
economy today is the aftershock of the crisis….we
were on the edge of a catastrophic collapse....we
looked into the abyss….we were at the cliff edge”
• Bernanke worries about the death spiral
• The scale of the shock has been under-estimated
3
ALISTAIR DARLING
Vince Cable: UK Secretary of State for Business, 25 May 2011
”The thing that worries me more than anything
else [is that] we really haven't engaged with the
real depths and seriousness of the financial crash.
I was very impressed with that Warren Buffett
metaphor that asset-backed mortgage lending was
the atomic bomb, and that there are hydrogen
bombs out there.
I just don't think that collectively governments
have got to grips with this at all. So another huge
bomb could go off, sooner rather than later? It's
not imminent. But you can see this happening.”
6
Where we are (1)
• The central problem over the last decade was that
risk was under-priced, hence that price must rise.
• This is a negative productivity shock
• Most of the recent rise in inflation is ‘transitory’
due to oil and commodity price increases and in the
UK a rise in VAT and a depreciation of the currency
• The spreading sovereign debt crisis in Europe is a
major problem especially as the ECB is fighting
non-existent inflation.
7
Annual inflation rates (%) – May 2011
Euro area
EU 27
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Source: Eurostat, June 16th 2011
2.7
3.2
3.7
3.1
3.1
3.4
2.2
2.4
3.1
1.2
3.0
Netherlands
Norway
Portugal
Spain
Sweden
UK
2.4
1.6
3.7
3.4
1.7
4.5
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Where we are (2)
• The evidence from around the world is that growth
is slowing and the recovery will be protracted
• This is no time to remove the fiscal stimulus
• The US deficit needs to paid off within 10-15 years
is the view of Geithner and Bernanke
• Tax cuts look like a good idea especially to firms to
stimulate investment and employment.
• Greece has big structural problems and will default
9
Ease of Doing Business, 2011
1. Singapore
2. Hong King
3. New Zealand
4. UK
5. USA
6. Denmark
7. Canada
8. Norway
9. Ireland
10. Australia
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
Source: United Nation’s Doing business Project www.doingbusiness.org/rankings
Guyana
Guatemala
Sri Lanka
Papua New Guinea
Ethiopia
Yemen
Paraguay
Bangladesh
Marshall islands
Greece
10
Greece
• Greece suffers from endemic tax evasion and a
poor tax collection infrastructure
• It has parochial patronage policies, corruption
and big delays in courts dealing with tax disputes
• It ranks 149th in ‘ease of starting a business’ and
153rd in ease of registering property
• Providing more highly priced debt to an overindebted country is ‘kicking the can down the
road’
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Employment Change and GDP in the Great Recession (%) *=2009Q4-2010Q3
Employment change
2008Q1-2010Q4
European Union
-0.8
Euro area
-1.5
Australia
+6.4
Belgium
0.9*
Estonia
-11.9*
France
-0.6*
Germany
+1.5*
Greece
-2.4*
Ireland
-13.3*
Italy
-1.6*
Netherlands (2010Q2)
+0.5
New Zealand
+2.1
Portugal
-4.2*
Spain
-9.8
Sweden
+1.0
United Kingdom
-0.7
USA*
-3.7
GDP (at market prices)
2008Q1-2009Q3 2009Q4-2010Q4
-4.6
+2.4
-4.2
+2.2
+2.9
+2.6*
-1.9
+2.1*
-22.3
+7.6
-3.1
+2.1
-4.1
+4.2
-1.1
-7.3
-12.6
-0.7*
-6.2
+1.2
-3.9
+2.5
-3.1
+1.4
-3.0
+1.1
-4.4
+0.4
-6.9
+6.7*
-6.2
+2.1
-3.8
+3.9
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The Exhibition Industry
“Prior to last year, the largest single year decline
ever recorded by the U. S. exhibition industry was
3.1%... and that was in 2008.
The 12.5% decline recorded in 2009 and reported
in this, the 2010 CEIR Exhibition Industry Index
Report (CEIR Index), is four times greater than the
downturn the industry experienced in 2008.”
CEIR president Carrie Freeman Parsons
Source: The Center for Exhibition Industry Research (www.ceir.org)
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Exhibition Industry Decline Tracks GDP Fall But is Bigger
Source: The Center for Exhibition Industry Research (www.ceir.org) – ‘The CEIR Index Report. An analysis of the 2009 Exhibition Industry and Future Outlook’
14
Exhibition Industry Decline
Source: The Center for Exhibition Industry Research (www.ceir.org) – ‘The CEIR Index Report. An analysis of the 2009 Exhibition Industry and Future Outlook’
15
Real GDP by industry and % changes in value added
Gross Domestic Product
Total private industries
Construction
Total Manufacturing
Durable goods
Transportation and warehousing
Arts, entertainment, recreation,
accommodation, & food services
Government
Private goods producing industries
Private services producing industries
Source: Economic report of the President, February 2011, Table B13
2008
0.0
–0.7
–5.7
–4.8
1.0
0.8
2009
–2.6
–3.0
–15.6
–8.6
–12.7
–13.0
–4.6
2.1
–4.2
0.4
–8.7
0.8
–6.4
–2.1
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QE and slowing growth prospects
• The likelihood of QE in the US has risen. Rates
will remain low for an ‘extended period’
• The point of ‘competitive’ QE is to 1) raise asset
prices and 2) depreciate the currency.
• The latest MPC minutes show that QE is back
on the table in the UK and private sector asset
purchases likely but not possible in the USA .
• The UK market yield curve predicts interest
rates won’t rise until mid 2012
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Source: Financial Times, June 26th 2011
FOMC reduced growth forecasts
Change in GDP
April projection
2011
2.7-2.9
3.1-3.3
2012
3.3-3.7
3.5-4.2
2013
3.5-4.2
3.5-4.3
Unemployment rate
April projection
8.6-8.9
8.4-8.7
7.8-8.2
7.6-7.9
7.0-7.5
6.8-7.2
Inflation
April projection
2.3-2.5
2.1-2.8
1.5-2.0
1.2-2.0
1.5-2.0
1.4-2.0
Core Inflation
April projection
1.5-1.8
1.3-1.6
1.4-2.0
1.3-1.8
1.4-2.0
1.4-2.0
Source: Federal Reserve Board of Governors, June 21-22 FOMC meeting – economic projections
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Oil price
• Oil price has fallen to approximately $90 a barrel
• Driven by US releasing 30m barrels from strategic
reserve. The UK, Japan, Germany, France, Spain
and Italy also contributed.
• Done to prevent short term supply disruptions,
particularly from Libya, that 'could damage the
economy and threaten the global economic recovery'
• The fall in the oil price will push down on inflation
and help growth. Deflation worries persist.
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Inflation vs Deflation
• If there is hyper-inflation we know what to do
• Inflating the debt away looks attractive especially
where there have been large declines in house prices
such as the USA, Ireland, Spain and the UK.
• At some point interest rates need to rise to normal
levels so when the next shock arrives they can be cut
• Moves by the ECB to raise rates as in July 2008
even though Euro Area was already in recession –
and quickly reversed – is likely a major policy error.
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Wage Inflation
• After the oil price hikes of the 1970s unions were
able to obtain very large wage increases not least
because of the rapid increase in unionization rates
• Union density has fallen sharply. Globalization has
weakened workers’ bargaining power. Wage growth
is benign around the world. There is no evidence of
second-round effects.
• Central banks should react to an oil shock when
wages don’t rise by loosening monetary policy.
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Annual % change in hourly labor costs – Q12011
Euro area
EU 27
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Source: Eurostat, June 20th 2011
2.6
2.7
3.0
3.5
3.2
2.3
3.8
2.9
-6.8
-2.2
2.8
Netherlands
Norway
Portugal
Spain
Sweden
UK
2.6
4.4
0.8
1.9
1.6
2.1
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Difficulty paying bills ‘most of the time’
Belgium
Denmark
France
Germany
Greece
Ireland
Italy
Netherlands
Portugal
Spain
Sweden
UK
March 2011
7
3
14
5
35
18
13
3
19
14
2
10
May 2010
6
2
8
5
22
8
8
4
12
9
1
6
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Financial crisis a major failure of macroeconomics
•“The state of macro is good”
(IMF Chief economist Olivier Blanchard, ‘The state of macro’, NBER WP14259, August 2008)
•“Over the last three decades, macroeconomic theory
and the practice of macroeconomics by economists
have changed — for the better. Macroeconomics is
now firmly grounded in the principles of economic
theory”
(V. V. Chari and P. Kehoe (2006), ‘Modern macroeconomics in practice: how theory is shaping policy’,
Journal of Economic Perspectives, Fall, pp. 3–28)
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Nobel Laureate Robert Solow (2008)
“The other possible defence of modern macro is that,
however special it may seem, it is justified empirically.
This too strikes me as a delusion. In fact ‘modern
macro’ has been notable for paying very little rigorous
attention to data.
…I am left with the feeling that there is nothing in the
empirical performance of these models that could
come close to overcoming a modest scepticism. And
more certainly, there is nothing to justify reliance on
them for serious policy analysis”
Robert Solow (2008), Journal of Economic Perspectives, 22(1), Winter, pp. 243-249.
26
August 2008. GDP projection based on market interest
rate expectations – includes no financial sector
27
May 2011 GDP projection based on market interest rate expectations
and £200 billion asset purchases – still includes no financial sector
May 2011 CPI inflation projection based on market interest rate
expectations and £200 billion asset purchases
The Great Recession
• Growth comes from ‘bank lend or government spend’.
• There is no believable evidence that fiscal retrenchment
in a recession works e.g. Canada.
• Austerity failed in Portugal, Ireland, Greece and the UK
• Animal spirits are a major problem in many countries
• The recovery looks to be highly interest rate sensitive
• Consumer confidence and retail sales in the UK have
collapsed and growth has been revised down not up.
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Conclusion
• There does remain a major risk of deflation, especially
if growth disappoints. There is little evidence of secondround effects and inflation expectations remain anchored.
•
Deflation would be much worse than inflation.
• Expansionary fiscal contractions are ‘oxymoronic’ and
are not working. U-turns are coming.
•
Interest rates will remain low for a long time
• Monetary policy will remain loose for several years and
I certainly don’t rule out more QE.
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End
Thank you
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