Inflation or Deflation?

There is a great deal of concern among policy makers that we will fall into deflation. And yet, aside from houses and natural gas, I can't think of many things that have decreased in price over the past five years. Last night we had some neighbors over in an impromptu manner and I went out for a large cheese pizza at Bertucci's. It was $18 plus tax, up from $14 the last time I bought one. (several years ago) Shoe polish (i.e. Kiwi shoe wax) has doubled in price since the recession's onset, perhaps because of the surge in job applications; pencils are way up, as are gasoline and electricity, and, here in Hingham, water rates. Yesterday the Bank of England announced that its growth expectations have been reduced from 1.3% in 2012 and 2.8% in 2013 to 0.6% and 2.0% respectively, while at the same time it raised its outlook for inflation, which is now running at 3.5%. What gives? These prices are definitely more reminiscent of the Great Inflation of the 1970's than the Great Depression of the 1930's.

Discussion of Eurozone breakup and default moves to the front burner

Charles Dumas of Lombard Street argued in a letter to the Financial Times this morning that further austerity would be "immoral" while Miller and Skidelsky say that Keynes would now be arguing in favor of default over depression. What was unthinkable two months ago is now on the front burner and will soon be accepted wisdom.

Profiles in Carnage: Luc Coene, Gov. of the Central Bank of Belgium

A refreshingly modest man, Luc Coene says that Greece may leave the Euro or stay; there is nothing central bankers can do about it: "But of course, if one member decides it no longer has a shared interest in being a member [of the euro], you must allow them to get out." Euro zone growth: "This is basically a crisis of confidence. . We [central banks] cannot stimulate the economy as such." Coene may be the only above-average central banker in the world.

JPM's trivial losses: too big to understand

JP Morgan has announced it has lost about $2 billion in its hedging portfolio. This is about 1.1% of its $183 billion of equity capital and is inconsequential in terms of the soundness of the bank. The problem is that the numbers are big; in fact, too big for the average person to understand how small they are. Let's reduce the scale. Our local bank, the Hingham Institution for Savings, is very sound and has $85 million in equity. A loss proportional to that of JPM would be about $900,000, which is 65% of the CEO's salary. Unfortunate, but not that important even for shareholders, let alone taxpayers. The problem is really one of management scale. I would estimate that Jamie Dimon weights around 200 pounds, about the same as the CEO of the Hingham Institution for Savings. Dimon would, however, have to scale up to 43,000 lbs to be big enough proportionally to manage JPM. JPM is too big for Dimon, as now proportioned, to manage.

`The Laughter Curve: The funny thing about California's growing deficit

Governor Brown just announced that the state's budget deficit for the fiscal year was likely to be $16 billion rather than the $9.2 billion he projected in January (NYT, May 13, 2012) The main culprits are lower-than-expected individual and corporate income tax receipts and, to a lesser degree, faster than budgeted growth in expenditures. The funny thing is that units of economic activity are having smaller tax revenues associated with them. The solution proposed by Gov. Brown? Higher taxes, of course.

The world's central bankers: Profiles in Carnage

We already discovered that both Ben Bernanke and Mervyn King were well below-average. To this elite group we must now add their Spanish counterpart, as revealed in today's FT: "Vicente Martinez-Pujalte, economy spokesman for the ruling Popular party, criticised Miguel Angel Fernández Ordóñez, governor of the Bank of Spain, for failing to identify the problems among Spain’s banks in his role as their supervisor. “There is a governor of the Bank of Spain who, despite being able to count on some magnificent professionals, has not done a good job,” Mr Martinez-Pujalte said in an interview with Madrid regional television."

Perhaps we should compile a book with each chapter devoted to the contributions of one of these leaders. We could all it Profiles in Carnage, or something like that.

Gotcha! Malawi delinks the kwacha

Malawi's new president Joyce Banda has ended the link of her country's currency, the kwacha, to the dollar. Like forward-thinking authorities all over the world, Banda is striving to achieve a valueless currency. The kwacha will now fluctuate in a relationship to other currencies to be known as "the banda."