Tuesday, March 16, 2010

Doing Homework By Candlelight

Candlelight? Sounds romantic? Wait a second, this is going to be a daily routine?

Albert Edwards, the prominent strategist at Societe Generale, writes today:

Ultimately, as my colleague Dylan Grice writes, I think we head back to double-digit inflation rates as governments opt to default. I certainly again expect to see CPI inflation above 25% in the UK and indeed in most developed nations in my lifetime – I have happy memories of the three-day week and doing my homework by candlelight. In the near term, however, the deflationary quicksand will suck us ever lower until we suffocate. A key driver for underlying inflation remains unit labour costs. While unit labour costs decline at an unprecedented rate, they are sucking us inevitably into a Fisherian, debt-deflation spiral. Only then will we see how far policymakers are willing to go to debauch the currency. Last year saw them cross the Rubicon. Monetisation is now the policy lever of first resort.
Click on chart to enlarge, courtesy of Societe Generale.

Sub-prime crisis evolved as people did not have enough income to serve large debts. Large debts are here because of high asset prices. So, welcome asset reflation? I am glad to think especially about the food and energy inflation of 2008 proportions ...

Globalisation has brought developed world into a deflation spiral of unit labour costs, as corporate sector relocates labour intensive production to low cost countries, which is combined with productivity growth via technology... Unemployment and deflation in labour compensation reduces the global aggregate demand, but corporate profits are distributed to ever fewer people. Does money in the hands of ever fewer people reduce its velocity in the economy, especially if bank lending is declining? So, let's cut the costs again and reflate the assets!

"2007-lite" balanced world around ...

Equities are good investments, if one believes that - without structural changes - governments around the world, by not "touching the corporate sector profits", will be able to compensate indefinitely the decline in aggregate demand that results from productivity growth and unemployment ...

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