The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Sunday, April 10, 2011

McKibbin's ZIRP-inflation thesis getting traction overseas

I have been expressing my concerns about inflationary pressures in these pages for well over a year, and throughout the hoopla around deflation and a double-dip recession. More recently I highlighted Warwick McKibbin's argument that commodity price inflation is being driven more by the zero interest rate policies being run by the G7 than by Chindia's rebound. Central bankers like to dismiss commodity price rises as once off level effects, so long as "expectations remain anchored". Of course, this is the rub. Expectations have no real history of remaining especially well-anchored over multi-decade periods with the exception of the mid 1990s to mid 2000s. Today almost everyone is becoming an inflation hawk save for those defending dovish forecasts. And you are starting to see more and more offshore economists recycle the McKibbin thesis. For example, here are two charts from FT Alphaville reporting on some global macro research on the relationship between deviations from idealised interest rate settings prescribed by the Taylor Rule and commodity prices:

"Our latest contribution to the “Yes, quantitative easing is making commodity prices go bananas” comes from Vivin Oberoi, head of global macro research and Trading at Telluride Asset Management — a hedge fund based in Wayzata, Minnesota."

And here Bloomberg reports:

"The CHART OF THE DAY shows the Journal of Commerce-ECRI Commodity Price Index reached the highest since at least 1985 yesterday after the Fed more than doubled its balance sheet to $2.6 trillion in the past three years. The difference between yields on two-year Treasuries and inflation-indexed debt, a gauge of expectations for consumer-price gains, has climbed with commodities to reach a 33-month high this week.

“The cheap money Bernanke’s using to prop up the economy is the same cheap money that’s causing commodity prices to rise,” said Peter Schiff, president of Euro Pacific in Westport, Connecticut. “The Fed is going to pretend inflation doesn’t exist, even though it’s creating it.”

Bernanke said on April 4 any boost to consumer prices would be “transitory” as long as expectations for inflation remain stable and well anchored, and the rise in commodity prices slows. If those assumptions prove to be incorrect, the U.S. central bank would have to respond to maintain price stability, he said.

Kansas City Fed President Thomas Hoenig, who has described the latest round of bond purchases as “unnecessary,” said on March 30 that the central bank’s policies are partly the cause for surging commodities. Ford Motor Co., Wal-Mart Stores Inc. and Krispy Kreme Doughnuts Inc. have cited rising raw-materials costs when raising prices in recent weeks."