Don’t Fear the Inflation, Goldman Says
Wednesday, September 30, 2009
Via FT Alphaville:
Goldman Sachs is putting an end to the deflation vs inflation debate, once and for all!
In a 30-page research note out on Wednesday, the bank comes down firmly on the side of (moderate) deflation in the near-term.
Here, GS analyst Andrew Tilton says, is why:
- Inflation is already low, with the core CPI down to 1.4% on a year-overyear basis and the overall CPI in deflation territory.
- Excess capacity in the economy is huge, probably at least 6% of GDP and possibly at its highest level since the Great Depression.
- Spare capacity is likely to persist for years [see below table]. While the financial crisis and recession probably have reduced the economy’s production capacity somewhat, we do not see strong evidence for persistently lower growth of capacity going forward. Even if we assume substantially above-trend real GDP growth of, say, 5% per year, it will take more than three years to get back to equilibrium in the labor market and two in the manufacturing sector. Our own assumptions of a somewhat slower recovery suggest it could well take more than five years to reach equilibrium in the labor market and nearly as long in housing.
- Monetary policy is arguably too tight despite a near-zero funds rate and unconventional easing. Our own calculations using estimated Taylor rule parameters, as well as those in recent research from the San Francisco Fed, point to an `appropriate’ funds rate of -5% or below.
- The default path of current policy is for removal of stimulus. Fed asset purchase programs are scheduled to end within the next several months and its balance sheet will begin to shrink after that point, while the growth impact of fiscal stimulus is already peaking.
Nevertheless, Goldman’s Tilton gets why investors are worried about inflation, and the bank itself is not oblivious to the possibility, given the massive unconventional fiscal and monetary policies undertaken by the Federal Reserve. In fact, Tilton says, there are a few inflationary warnings signs investors should be looking out for.
Continue reading the article here
Tags: deflation, economy, federal reserve, inflation
capitalism, deflation, fed, inflation |
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