He also opines on the "core vs headline" inflation disjunction that I have been keen to highlight here of late:
"Third on the policymakers’ list of barber-shopping techniques is to assure bondholders and citizens that inflation, and importantly inflationary expectations, should be extremely low in future years. “Forget about those $1.5 trillion annual deficits! With wages and the ‘core’ CPI firmly in check at 1 per cent or lower, there is no need to worry about the inflationary erosion of money as a ‘store of value,’” they would emphasise. “Good as gold – those dollar-based bonds – and they yield 2–3 per cent to boot! Try to match that, oh barbarous relic.” Well, yes, but somehow, as is increasingly obvious in the UK, the headline CPI seems to outdistance the core by several hundred basis points over a 5-year moving average and the barbarous relic morphs from the yellow metal to a long-term gilt that goes down in price and “haircuts” its owner by several points a year. US Treasuries are not in the same egregious company as gilts, but they’re hanging out in the “wrong neighbourhood,” as my parents used to say. Or maybe, to stick to the coiffure analogy, they’re sporting a ducktail and a beehive instead of a conservative crew cut and a ponytail. Whatever the haircut, the bondholder is missing some lean green or moolah at the end of the calendar year...
To rebalance debt loads and re-equitize financial institutions that should have known better, central banks and policymakers are taking money from one class of asset holders and giving it to another. A low or negative real interest rate for an “extended period of time” is the most devilish of all policy tools. And the asset class holder that it affects, or better yet, “infects”, is the small saver and institutions such as insurance companies and pension funds that hold long-term fixed income assets. It is anyone who holds bonds with coupons that cannot keep up with inflation or the depositor in a local bank who cumulatively holds trillions of dollars in time deposits that don’t earn a real rate of interest. This is the framework that has been created by modern-day policymakers who have innovated far beyond their biblical counterparts. To put it bluntly, they are robbing savers and taking money surreptitiously from longer-term asset holders who are incorrectly measuring future inflation."
