The FT is required reading, not on the basis it has great wisdom, rather that it embodies the opinion of “The Powers That Be (TPTB). Thus when it runs a story like the following, from Stephen Moore, apparently an advisor to Donald Trump, that not only advises pumping up the stock market as a ‘cure’ to the current collapse in demand, but displays an alarming lack of understanding of how markets work, let alone economies, we should take notice. And on this occasion comment and well.
Deflation is the real killer of prosperity
https://www.ft.com/content/c0cff3e0-913b-11ea-bc44-dbf6756c871a#comments-anchor
Stephen Moore Financial Times
And on this occasion, to comment as well.
https://www.ft.com/content/c0cff3e0-913b-11ea-bc44-dbf6756c871a?commentID=5e4c30eb-929e-4b16-a728-1c03579e19a6
For those without access beyond FT paywall.
It is alarming if the writer’s view of economies is influencing the President of the United States. Deliberately collapsing demand against a given level of supply will obviously cause a drop in prices so that markets clear, but that is not deflation. Equally, the idea that commodity prices are the ‘best day to day indicator of inflation’ has no basis in reality, where leveraged positions in commodity futures drive almost all day to day movements and where commodity prices themselves are a fraction of the input costs in a service based economy. Similarly the idea that in a world of QE and forced buying of government bonds for ‘risk’ reasons the bond yield, or even TIPS, has any predictive power of the CPI is up there with ‘assume perfect competition’ as a realistic way of predicting the economy.
Modern inflation has been a function of too much money chasing too few goods and that has tended to be in asset prices or where supply has been restricted in its ability to meet demand. Draining the leverage in the financial system may well lead to lower/correct pricing of financial assets, as will allowing more competition in the provisions of certain goods and services. I am sure that dis-inflation in drug prices would please everyone in the US except the drug companies and their lobbyists for example.
The idea that we should, once again fluff up asset prices in response to the collective act of self harm that is lockdown is akin to 16th century doctors applying leaches to cure everything, both obsessive and misguided. We need to remove the lockdown, allow the gig economy to recover and for prices in the real world (not the financial markets which remain utterly distorted by Fed policy) to balance demand and supply. Dis-inflation, driven by productivity and technology lowering unit costs of production is a driver of prosperity not a threat to it and should be embraced, not feared.
