Monday, August 27, 2012
The Great EconoMechanics Debate
Researchers at the Bank for International Settlements have suggested that a much broader spectrum of credit driven “imbalances10”, financial as well as real, could potentially lead to boom‐bust processes that might threaten both price stability and financial stability11. This BIS way of thinking about economic and financial crises, treating them as systemic breakdowns that could be triggered anywhere in an overstretched system, also has much in common with insights provided by interdisciplinary work on complex adaptive systems. This work indicates that such systems, built up as a result of cumulative processes, can have highly unpredictable dynamics and can demonstrate significant non linearities12. The insights of George Soros, reflecting decades of active market participation, are of a similar nature.As a testimony to this complexity, it has been suggested that the threat to price stability could also manifest itself in various ways. Leijonhufvud (2012) contends that the end results of such credit driven processes could be either hyperinflation or deflation14, with the outcome being essentially indeterminate prior to its realization. Indeed, Reinhart and Rogoff (2009) and Bernholz (2006) indicate that there are ample historical precedents for both possible outcomes.15
In current circumstances, two questions must be addressed. First, will ultra easy monetary conditions be effectively transmitted to the real economy? Second, assuming the answer to the first question is yes, will private sector spending respond in such a way as to stimulate the real economy and reduce unemployment? It is suggested in this paper that the answer to both questions is no.
So you create negative feedbacks, which is one reason why companies and individuals now want to save more.
I clicked on the link with much anticipation! I wanted to know who else was saving. The link took me to my own blog. Hahaha! Too funny (and tragic).
Yup, our demographics bias the system toward deflation and away from inflation. Whether that manifests itself as outright deflation or as hyperinflation depends on the details of fiscal policy and society's relationship with currency.
Mark - I'm truly irritated by the corporations-sitting-on-cash meme.
As you can probably guess, as a saver I am too.
I would suggest that it is at least partly true on two grounds.
Mere words cannot adequately express how much I am personally living your first of two grounds.
The more the government tries to force me to spend (by lowering investment returns on "safer" bonds) the less spending and more saving I must do to compensate (lest my nest egg runs dry before I am dead and buried).
In my opinion, these unintended consequences are lurking in the shadows until the next recession hits. They are being masked by yet another wave of false prosperity. Long-term 8.5% pension fund return expectations? Good luck on that one!
In order to prevent the effects of this being seen in the private sector, Congress passed a bill so that private pensions wouldn't have to up their contributions. Public pensions haven't been governed by the same laws, but then underfunding of public pensions is a major problem for many such funds.
Insurance companies providing casualty coverage are forced to raise rates, because such companies have to accumulate a pool of assets sufficient to cover future claims. So car insurance and property insurance rates rise.
This is playing out on a grand scale.
So car insurance and property insurance rates rise.
I offer anecdotal evidence to support your claim.
My car is 16 years old. I just have the minimum insurance (no collision). I don't drive much and am therefore willing to self-insure most of it.
After years of no increases (or slight decreases), 2012 marks a new milestone.
They raised my monthly rates from $30.86 to $34.11. That's a 10.5% increase.
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