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- The economy – with full employment and dizzying stock markets – is creeping up interest rates. But the Fed and the ECB have announced that they will cut instead.
- Why are we living in a Bizarro world where an overheated economy generates low inflation and central banks are pouring more and more cash into a fiery market?
- The representative of the United States, Alexandria Ocasio-Cortez, raised the issue at a recent hearing: "Unemployment has fallen by three points since 2014, but inflation is not higher today it was not there five years ago ".
- This is because we have solved inflation. This is no longer a problem. Macro-deflationary forces are more powerful than central bank monetary forces.
- The next problem is whether governments will be willing to take advantage of the additional fiscal space provided by this historic opportunity.
- Visit the Business Insider home page for more stories.
The economy in Europe and the United States is an unusual beast right now. We have full employment, prolonged GDP growth and the stock market is booming. The S & P 500 has passed the 3000 mark, the Dow is at 27,000 and the FTSE 100 at 7530 – all reaching record highs or almost.
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Normally, these conditions would be particularly interesting. ascend. The economy is expected to overheat, inflation is expected to skyrocket, wages should increase, with the demand, and employers should have trouble finding additional staff and resources to fill their order books. "data-reactid =" 30 "> Normally, these conditions would require a rate of interest ascend. The economy is expected to overheat, inflation is expected to skyrocket, wages should rise, along with demand, and employers should have trouble finding additional workers and resources to fill their order books.
But the opposite is happening.
<p class = "canvas-atom-canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "The European Central Bank has just concluded that it should "be ready and ready to further ease the direction of monetary policy"after failing, again, to raise inflation to the 2% target." data-reactid = "32"> The European Central Bank has just concluded that it must "be ready and willing to further ease the stance of monetary policy" after failing, once again, to push up inflation at the target of 2%.
Inflation in the euro area June 2019
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Focus Economics"data-reactid =" 44 ">Focus Economics
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "In the United States, the president of the Federal Reserve, Jerome Powell, also reported that he will cut rates. "There is a risk that low inflation will be even more persistent than currently expected, "he told Congress." data-reactid = "45"> In the United States, Federal Reserve Chairman Jerome Powell also announced a rate cut. "There is a risk that low inflation will be even more persistent than we currently expect," he told Congress.
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "So, what's going on? Why do we live? we? Bizarro World where a powerful economy generates low inflation and central banks pour more and more money into a market on fire? "data-reactid =" 46 "> What's happening then? Why do we live in a world of Bizarro where a powerful economy generates low inflation and central banks pour more and more money into a market on fire?
The old relationship between employment and inflation is broken
<p class = "web-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "The response was raised by the representative of the United States to Alexandria Ocasio-Cortez, who turns out to be a surprisingly prolific Generator debates sure the fundamentals of the economy. "data-reactid =" 48 "> The response was raised by the US Representative, Alexandria Ocasio-Cortez, who proves to be a surprisingly prolific source of debate on the fundamentals of the economy.
<p class = "canvas-atom web-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "" Unemployment has fallen by three full points since 2014, but inflation is not higher today than it was five years ago, " she said at a congressional hearing with Fed President Jerome Powell [see mark 2.06.30]. "Data-reactid =" 49 ">" Unemployment has fallen by three points since 2014, but inflation is not higher today than it was. five years ago, "she said at a US congressional hearing with Fed President Jerome Powell [see mark 2.06.30].
Rep. Alexandria Ocasio-Cortez
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Jacquelyn Martin / AP"data-reactid =" 61 ">Jacquelyn Martin / AP
"The economy can withstand much lower unemployment rates than expected, without causing worrying inflation," Powell said.
This is basically the title: inflation no longer exists.
We should live in the Weimar Republic. But we are not.
Inflation is gone.
<p class = "web-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Even ten years of interest rates set at close to zero no The textbooks of the early 2000s indicated that we should live in the Weimar Republic, or Zimbabwe. real estate prices in London have been in decline since more than a year. "data-reactid =" 66 "> Even ten years of near-zero interest rates no longer generate consumer price increases, and textbooks from the early 2000s indicated that we should live in the Weimar Republic, or Zimbabwe.London real estate prices have been in decline since more than a year.
Inflation has been resolved. We solved it thanks to our new inventions.
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Spotify makes music cheaper. Uber makes taxis cheaper. Google makes the information cheaper. Facebook makes advertising cheaper. Amazon makes buying cheaper. The market economy makes wages cheaper. "data-reactid =" 68 "> Spotify makes music cheaper, Uber makes taxis cheaper, Google makes information cheaper, Facebook makes advertising cheaper, Amazon makes buying cheaper. show makes wages cheaper.
FILE PHOTO: View of the NYSE (NYSE) Main Trading Room during the IPO of Uber Technologies Inc. in New York, USA, May 10, 2019. REUTERS / Andrew Kelly
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Reuters"data-reactid =" 82 ">Reuters
The macro effect of all this "resolution" is a permanent pressure on prices, which is good for workers who do not want their wages to be eaten up by inflation (but which is unfavorable for those who want a rise in nominal wages).
The idea that inflation is extinguished is not obvious
In a note to clients last week, Rob Subbaraman and Andrew Ticehurst, analysts at Nomura, said: "The big central banks seem trapped in an era of extremely loose monetary policy. Low interest rates for an exceptionally long period imply declining returns and rising costs that make it increasingly difficult to normalize monetary policy. "
They feared that the "problem" of low inflation would create "a loop that makes standardization even more difficult".
An environment characterized by low inflation and low interest rates can definitely create problems:
But low inflation also creates opportunities.
In a deflationary world, tax policy – public spending – is more important than monetarism
Governments now have a bigger fiscal space to invest and build.
"In countries with fiscal space, it should be used more forcefully to stimulate sustainable growth, especially for useful spending such as infrastructure, education and R & D. ", said Nomura's Subbaraman and Ticehurst. They are part of a growing noisy group of investment banking analysts who beg governments to wake up and feel the money.
It's time to move on. Not just to create inflation (and avoid deflation, which can be even worse). But to build the energy infrastructure, transportation, defense, health and education we will need for the future. Low-cost debt makes these expenses cheap.
<p class = "web-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "This is a rare and golden opportunity for governments (and an intellectual defeat for conservatives). "data-reactid =" 97 "> This is a rare and golden opportunity for governments (and an intellectual defeat for conservatives).
Hopefully they will not waste it.
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "NOW WATCH: Kylie Jenner is the second highest paid celebrity in the world. Here's how she earns and spends $ 1 billion."data-reactid =" 104 "> NOW WATCH: Kylie Jenner is the second-best-paid celebrity in the world, where she earns and spends $ 1 billion.
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