Home > Inflation, Japan > Don’t Cross the Streams, Mr. Draghi

Don’t Cross the Streams, Mr. Draghi

Egon Spengler: There’s something very important I forgot to tell you.
Peter Venkman: What?
Spengler: Don’t cross the streams.
Venkman: Why?
Spengler: It would be bad.
Venkman: I’m fuzzy on the whole good/bad thing. What do you mean, “bad”?

Eurostat HICP vs Japan CPI

Eurostat HICP vs Japan CPI

Oh, too late.  Read Lars… and Bernanke (1999).

Categories: Inflation, Japan
  1. ChrisA
    November 29, 2013 at 01:10

    It will be interesting to see how tolerant the Japanese electorate are to a period of higher inflation. With an increasingly large retired population on presumably fixed incomes due to their poor demographic profile, one would think that the pressure to keep inflation low is very strong.

    • November 29, 2013 at 02:01

      Abe scored very well in elections both last year and this year on a pro-inflation ticket, according to everything I’ve read.

  2. ChrisA
    November 29, 2013 at 05:31

    Yeah I know, but we will see if they can tolerate the actual versus the promise. I must admit I like Scott Sumner’s way of presenting required inflation as a promise to increase working incomes, which sounds more acceptable to the average Joe. But if you don’t work this is not persuasive. Compared to Japan, in Europe, at least people have the potential to move away from the deflation zones into the expanding zones, so maybe we will see sorting by different populations, retired folks to the med, working folks to UK and Germany, which might relieve some pressures. We are already seeing this with the Irish economy, where net emigration to UK has again increased. If the retired folks are funded by savings invested in UK and Germany, the low growth in the Med need not be an issue. However this analysis won’t work for Japan since most of the Japanese savings are in investments in Japan and they don’t like to move or let in immigrants. So Japan faces a future where the income of the young is depressed to maintain living standards for the old, or the young see great income growth, but the old get poorer relatively speaking. If the economy grows faster enough, maybe income transfers can solve this, but getting there might be hard.

    • November 29, 2013 at 08:11

      I suppose I am sceptical there is even a “problem” here – as opposed to a perceived problem, an exaggerated problem. A commenter here a little time ago pointed out that the UK data on retirees’ income shows that there is very little dependence on fixed income. Yet the UK “grey lobby” is vociferous in attacking QE and the BoE.

      The breakdown of UK household income says that “the old” have had significant relative success over the last five years (Chris Giles has written a lot on this in the FT). Partly that is fiscal choices, but it makes me doubtful of intuition that “high inflation” is good BAD for “the old”. Maybe we should talk purely about NGDP not inflation.

      For Japan I have only seen the data on household assets – which were disproportionately made up of bank deposits. It seems likely those are not long-term fixed income investments… and we’d expect rates to rise with NGDP growth.

      If you are holding JGBs and don’t want to “because inflation”… well, that means Abenomics is working :). You can always sell to Mr. Kuroda, he’s a buyer!

  3. james in london
    November 29, 2013 at 14:43

    What’s really, really bad for the wealthy retirees is Cyprus-style writedown of deposits. But you can get there quite quickly if you have deflation. Banks go bust in a deflation, as liabilities stay level yet ability to repay them, income, falls And deflation is where we are going at the moment in many places.

    I just had an entertaining seminar with the Financial Stability team from a European central bank. The commercial banks tell them that deflation is one of their biggest risks, but the Financial Stability people can’t publicly discuss the risk because it might tread on the toes of the Monetary Policy gods who are their bosses. As usual, the biggest risk is the one that can’t be discussed, but is nevertheless staring you in the face.

    Perhaps Draghi can push through QE in the EZ on the grounds that deflation is a threat to financial stability? Not a monetary policy, but better than not doing it.

    • November 29, 2013 at 16:59

      James – yes, you are right, it is all backwards. The massive transfer of wealth from the young via UK bank bailouts in 2008/9 is also a clear example: inflation barely blinked but NGDP fell 10% below trend. The young pay twice via unemployment and the future burden of taxes… double whammy.

      The institutional failures in the EU are interesting (but best viewed from a great distance)… they make HMT/BoE (old, conservative institutions) look flexible and innovative. I wonder why that is.

  4. ChrisA
    November 30, 2013 at 04:12

    Just to be clear, I support the idea of targeting NGDP and I think the ECB is following too tight a monetary policy especially for the Med countries. What I am doing is musing about what happens if this optimal policy is not followed. I think eventually Europe could adjust by cohorts moving. For instance, on the issue of risk of deflation to banks in areas like Cyprus, my point was this is probably more of a risk to locals, not to people retiring there from other parts of Europe who, if they are sensible, have left most of their assets in other more secure areas. In fact, apart from loss of value in property assets, a retiree in Cyprus from, say, Germany on a German pension would surely see a rise in living standards as deflation takes hold.

    Japan is a bit of a special case because of its demographics which creates more of a natural opposition to inflation. Perception is reality, if people perceive they are at risk from higher inflation, they will oppose it even if at the end of the day it is not true.

    • James in London
      November 30, 2013 at 07:25

      Japan was in a death spiral. Debt to GDP of 200% and rising meant the retirees in a Japan had much more to fear from deflation than inflation. There was no way their pensions could be paid if trends continued. The government was going to default. Yet the retirees responded rationally given (low/zero) inflation-targeting by saving more. It was a textbook trap.

      Luckily, Japan found leaders who could see it, explain it. Perceptions changed, and they voted in Abe. The wealthy retirees really can have their perceptions changed, there is nothing inevitable about them fearing inflation, it’s just a typical wrong-headed intellectual fashion.

      One practical consequence of deflation, that helps focus wealthy retirees minds, is them having to pass on their “wealth” to children, nephews and nieces, who have no hope of building up their own wealth due to the chronic state of deflationary economies. I am sure they’d much rather see their kids happily employed than on the parents’ or state dole.

  1. November 29, 2013 at 02:29

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