El-Erian Warns Vexed Central Bankers "The Lowflation Demon Is Real"

Tyler Durden's picture

Authored by Mohamed El-Erian via Bloomberg.com,

Persistently low inflation, or "lowflation," is vexing lots of people. According to the recent minutes of policy meetings of the Federal Reserve and the European Central Bank, central banks on both sides of the Atlantic have been trying to identify the causes -- but with limited success so far. This complicates monetary policy decisions and undermines the range of institutional solutions that have been proposed by academics. Until this changes, central banks may need to think more holistically about the objectives of monetary policy, including the unintended consequences for future financial stability and growth of being too loose for too long.

Four facts stand out in reviewing recent inflation data:

  • Inflation rates have been unusually and persistently low.
  • This is primarily an advanced-country phenomenon.
  • Inflation has not responded to the prolonged pursuit of ultra-low interest rates and huge injections of liquidity by central banks through quantitative easing. 
  • This has coincided with a period of notable job creation, especially in the U.S., thereby flattening the "Phillips curve" that plots unemployment and inflation rates.

Many economists worry that such lowflation frustrates the relative price adjustments that are critical to a well-functioning market economy. And if the inflation rate, and related inflationary expectations, flirt with the zero line for too long (as had occurred in Europe), there is an increased risk of actual price declines that encourages consumers to postpone their purchases, weakens economic growth, and undermines policy effectiveness (as had been the case in Japan).

The many reasons that have been put forward for the lowflation phenomenon range from benign measurement errors to worrisome structural drivers, with a host of "idiosyncratic factors" in the middle. Indeed, the Fed minutes released last week contain a list of possible drivers. These also note that a few central bankers are questioning the usefulness of traditional models and approaches in explaining and predicting inflation behavior. The recent ECB minutes also refer to "a number of explanatory factors" for lowflation and the importance of monitoring "the extent to which such factors could be transient or more permanent." (And that is not the only issue vexing central bankers and economists more generally -- productivity and wage formation have also been puzzles to an unusual extent.)

Turning to solutions, some economists have suggested that central banks increase their inflation targets, typically set at 2 percent currently. Others have proposed that the monetary authorities should pursue a price level target so that shortfalls in meeting the desired inflation rate in one year would require aiming for a higher rate in the subsequent year.

As attractive as they may sound to some, these solutions are operationally challenged, particularly if structural factors are depressing inflation. 

Having failed to meet the 2 percent target despite aggressive monetary policy, it is far from obvious that central banks would be able to meet a higher objective. And no one is quite sure how the political system would respond to a central bank that pursues much higher inflation as it tries to offset the shortfalls of prior years. Indeed, until we have a better understanding of how the transmission mechanism has evolved, there is no guarantee that a change in policy approach would do anything more than threaten even greater collateral damage and unintended consequences.

Already, economies on both side of the Atlantic must contend with the risk that a loose monetary policy approach may have overly repressed financial volatility, excessively boosted a range of asset prices beyond what is warranted by economic fundamentals, and encouraged too much risk-taking by non-banks. Indeed, in the Fed minutes, the central bank staff noted that "since the April assessment, vulnerabilities associated with asset valuation pressures had edged up from notable to elevated." Robust job creation, financial conditions, and the overall health of the economy should guide monetary policy formation rather than the excessive pursuit of a still-misunderstood lowflation.

The lowflation demon is real and, in the case of the U.S., the market now believes that it will likely dissuade the Fed from delivering on the next signaled step in the gradual normalization of monetary policy, including an interest rate hike in the remainder of 2017. Yet a lot more work is needed to understand the causes and consequences of persistently low inflation. Until that happens, central bankers may be well advised to stick with the demon they know rather than end up with one of future financial instability that undermines prospects for growth and prosperity.

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NotApplicable's picture

This reads like the fucking Twilight Zone.

Who the fuck thinks about "persistenly low inflation?"

Can't meet the 2% target? Well, raise it then!

Dr.Carl's picture

It is a typical Zerohedge article in that sense.

mtl4's picture

It's only low inflation if you chage how you calculate it over time.

 

http://www.shadowstats.com/alternate_data/inflation-charts

 

Ask the average Joe how much he's got left over now vs 2008.

thesonandheir's picture

there is an increased risk of actual price declines that encourages consumers to postpone their purchases, weakens economic growth, and undermines policy effectiveness (as had been the case in Japan).

 

 

Yeah, cos Japanese consumers have postponed purchasing anything for 25 years and counting.

 

This is total bollocks and anyone with half a brain can see that it's bullshit. 

Pool Shark's picture

And because computers only get cheaper and more powerful, it's been YEARS since ANYBODY purchased a computer.

Oh,... wait...

skbull44's picture

This is why I love mainstream economics: using manipulated statistics to build a narrative constructed of assumptions built upon assumptions within an echo chamber of self-flagellating and self-congratulatory PhDs...what could possilby go wrong?

CRM114's picture

Reality creeps into the room, holding a pitchfork.

back to basics's picture

Exactly. Tired of this bullshit about "no inflation". Low inflation my ass. 

TBT or not TBT's picture

Housing prices and/rent levels don't go into Fedspeak inflation, I'd have to guess.   

detached.amusement's picture

The grocery store sure as shit doesnt.  Used to be able to fill a cart for under a hund, now you're lucky if you arent breaching 3 for a basketload.

AlphaSeraph's picture

exactly. "Shrinkflation" is real. What used to be 400g for 3.99$ is now 225g for 3.99$. That's occured in less than a decade. Low inflation my ass.

Here in Canada, a house that went for 110k in 2000, now costs 375-400k.

Low inflation? MMMMKKKAAAY.

Stackers's picture

Dumbest smart people.

Stop adjusting employment and inflation numbers and they will start making sense again.

TBT or not TBT's picture

It's the low labor force participation rate, stupid Fed.  

Creative_Destruct's picture

"Dumbest smart people."

IYI's on parade; El-Erian goes to the front for a time today!


Thought Processor's picture

 

 

 

Stupidity got us into this mess, maybe stupidity can get us out.

 

(to paraphrase a Will Rogers quote)

Blue Balls's picture

Low inflation except luxury items that a zionist might want.  Think 1984 permanate underclaas and a few elites jet setting.  Yea we understand.

ipso_facto's picture

'Can't meet the 2% target? Well, raise it then!'

Don't encourage them.  The '2% target' is an illegal tax.

NoWayJose's picture

What bunk - use real numbers on inflation! How can people claim home prices are up, rents are up, car prices are up, healthcare costs are up, and food prices are up - unless they ignore real inflation!

Dr.Carl's picture

Being a former economics professor there will be a deflatinoary problem. It has begun but is being ignored. 

Blue Balls's picture

You look at the DJIA?  New money benifits those closest to the source.  The Wall Street bankers and the federal gov.  Read some Ludwig von Mises.

AlphaSeraph's picture

I agree. Too much debt always results in deflation (after a persistent wave of asset price inflation). I think this time around though the deflationary collape will turn into hyperinflation as the START YOUR PRINTERS movement goes ballistic. 

Pollygotacracker's picture

Low inflation...HAHAHAHAHA!!!!! What does the Fed want? Prices in the real world are thru the roof! The only item that I purchase on a regular basis that has held steady is gasoline. Everything else is sky high. Liars. 

TBT or not TBT's picture

Have you hugged a fracker lately?   

Pollygotacracker's picture

Love frackers. I reside in the Ohio Valley...Wheeling WV. I drive I-70 in Pennsylvania and see their trucks and tankers, etc. I knew Trump would win the election what with all the Trump/Pence bumper stickers. Thanks oil/gas guys!!!

Dr.Carl's picture

Don't overthink this stuff. If you are in the markets as a trader or investor the people on ZH who have been following the short term market signals of Shepwave have been consistently making money. There is no denying that. 

auricle's picture

zero cost of capital, enables cheap credit fueling over production in most commodity sectors which suppress prices. All done to save the banks and their mark to fantasy of every asset they own. So all asset prices must remain elevated via ever lower interest rates or the game ends. Damn the producers and savers.

Low unemployment has not lead to higher wages which could fuel a few more years of this. Pitchforks are coming out. Unfortunately, the plebs don't know who to throw them at.  

Hikikomori's picture

Low inflation is wonderful for savers.

Our government is not a saver.

auricle's picture

Any savings due to low inflation is being nullified by low interest on savers. The latter will have a longer term effect and potentially horrifying if inflation comes back with a vengance. Massive commodity inflation in the future and no accumulated savings to help get through those tough times. Add on the potential for a bond crash and it will cripple the economy.

Gold is the best deferred savings vehicle for what is likely to come. 

Pernicious Gold Phallusy's picture

Low inflation means under 20%.

ipso_facto's picture

Velocity of Money.

Gadocat99's picture

That is correct. Take it to extremes to see it more easily - With a tax rate of 100%, you get deflation. With a tax rate of 0% you get inflation. You want more inflation then let folks keep and spend more of what they earn.

shizzledizzle's picture

We keep giving absurd amounts of money to the same people with the expectation that it will end up in the hands of the people we didn't give it to and we don't understand why it's not getting to them but the only clear anwser is to keep giving money to the same people. 

Batman11's picture

In the 1970s, we had high inflation and stagnation.

There was excessive demand and insufficient supply causing high inflation.

A supply solution fixed the problem.

In the 2010s, we had very low inflation and stagnation.

There was excessive supply and insufficient demand causing low inflation.

Supply side solutions didn’t fix the problem.

Now students can you help the global elite by pointing out the error in their approach?

It's not hard; anyone with an IQ over 70 should manage it.

Batman11's picture

The Central Bankers strategy relied on trickle down, but it didn’t exist and inflation never picked up.

Central Banks flooded the markets with liquidity to create a “wealth effect”.

Central Banks waited nine years and found nothing had really trickled down; inflation was going nowhere.

All the stimulus has gone into asset price inflation and artificially inflated asset prices will just crash when the liquidity supply dries up.

Oh dear.

TheSilentMajority's picture

El Elrian has zero credibility.

He lost what little credibility he had remaining by stating that there is "low inflation."

Fkn inflation-denier establishment creep!

Bam_Man's picture

Yes, the standard of living of the average American is not collapsing fast enough to satisfy the psychopaths at the Fed.

agstacks's picture

If 15 trillion in global QE didn't do the trick obviously we are going to need MOAR to get that sweet, sweet inflation average Americans desperately need. 

Pernicious Gold Phallusy's picture

What's the biggest number Krugman knows?

gregga777's picture

I don't know. But, the smallest numbers that he knows are his IQ and the size of his dick.

Glyndwr will return's picture

There is a mindset change underway:

1. More people now know that both debt and banks are inherently bad - so do the opposite of borrowing and spending

2. More people voting with their wallet - because we ALL ALREADY know real voting does not work

3. Advertising does not work anymore - if anything its very counter-productive.

4. Local is now rightfully seen as good and multinational very rightly seen as bad

5. More and more people of a certain age (say 45-65) have real fears about ever getting their pension post a reset

6. People are searching for far more meaning than "stuff" can ever provide - especially as our "leaders" are distinguishing themselves as the worst in modern history

7. If you are European, the likelihood of losing your country to immigration lowers your spending - its almost a subconscious protest.

8. Poeple now know large companies pay no tax, so are starting to give them two fingers. A taxpayer who knowingly buys from a company that pays no tax is basically a complete twat. Not so many twats around these days.

Albertarocks's picture

There is absolutely no mystery why inflation hasn't picked up as planned and the bankers all know it.  Because it wasn't "planned" to pick up.  All the money printing that has gone on since 2008 has been destined for the primary dealers of the Fed and was promptly put to work propping up the stock markets.  None of it has made its way into the economy yet as loans to businesses.  So the black magic of 'fractional reserve banking' hasn't even kicked in yet except in the housing markets where the chances of getting paid back in the long run are slim.  The problem is, with all manufacturing having left the USA there might not even be as much demand for borrowed money as in the past.  Nonetheless, until that money starts multiplying 10x over inflation is not going to appear.  After all, 99% of all currency on the planet was 'loaned into existence' and any future currency required to cause inflation will have to be 'loaned into existence' as well, and that's just not happening.  No mystery here!

And how will be bankers respond to this "mystery"?  They'll just print more and more and keep that for themselves too.  The vicious circle will continue in an effort to ensure the markets, and especially the banks themselves, won't fail.  The bankers know this.  Yet they're too damned stupid to fix the problem.  In fact it's too late... they are trapped.  Mohamed El-Alien knows this but just won't tell it like it is.

ReturnOfDaMac's picture

Release the hounds!  Take the chains off of gold and see what inflation really is.

boooyaaaah's picture

In the 1930s we can all agree we had deflation....what drove prices down

1) the tractor replaced farm hands and dropped the price of corn and wheat

2) The assembly line dropped the price of cars, refrigerators etc

3) Electricity 3 phase Tesla type lowered  millwork  costs, flour, clothing, 

4) Machine intensive oil replace labor intensive coal 

5) Railroads replaced wagons

So what is driving prices down despite the money printers grand plans?

1) Civilization capitalist style bringing on line China, India, Asia

2) Computers, hand held , individual ,communicating at the speed of light

3) Fracking and tapping into the earth's molten carbon rich core.

4) Basic non specialty quality  in food, clothing, shelter, ... 

6) Weapons military and private more digital less expensive

7, 8, 9 you choose

boooyaaaah's picture

In the 1930s we can all agree we had deflation....what drove prices down

1) the tractor replaced farm hands and dropped the price of corn and wheat

2) The assembly line dropped the price of cars, refrigerators etc

3) Electricity 3 phase Tesla type lowered  millwork  costs, flour, clothing, 

4) Machine intensive oil replace labor intensive coal 

5) Railroads replaced wagons

So what is driving prices down despite the money printers grand plans?

1) Civilization capitalist style bringing on line China, India, Asia

2) Computers, hand held , individual ,communicating at the speed of light

3) Fracking and tapping into the earth's molten carbon rich core.

4) Basic non specialty quality  in food, clothing, shelter, ... 

6) Weapons military and private more digital less expensive

7, 8, 9 you choose

gregga777's picture

Approximately 102 MILLION out of ~250 MILLION working age Americans are unemployed for an unemployment rate of ~40.8%. But, the Goldman Sachs Feral Reserve System and The BLS (US Feral government Department of Liars Bureau of Lying Statistics) egregiously lie that unemployment is only 4.3%.

Everyone knows that inflation is far higher than 2%. Home prices have skyrocketed. Rents have skyrocketed. Healthcare costs have skyrocketed. Prescription prices have skyrocketed. Motor vehicle prices have skyrocketed.

The Anglo-Zionist FAKE NEWS Media dutifully repeats these lies daily as if they are the Gospel truth. The Anglo-Zionist FAKE NEWS Media is willing to tell you bald-faced lies without batting an eyelash. So, how can anyone really believe what they say about anything else? Who is going to believe a known liar?

Therefore, why should anyone believe them about the subject nearest and dearest to their hearts: the Holocaust? They claim that the Nazis murdered 6 MILLION Jews during WW2. But, there were no bodies.

They claim that, when it became clear that they were going to lose the war, they forced Jewish prisoners to dig up Jews murdered by the Einsatzgruppen and incinerate them. The Wehrmacht and Waffen SS were crippled by fuel shortages in the last year of the war. But, supposedly they diverted massive fuel stocks to incinerate corpses.

There were no bodies at the extermination camps because the Nazis built huge crematoria to incinerate those bodies. But, why should anyone believe them when they are so willing to lie about everything else that we know are lies?

Perhaps the Holocaust was a massive hoax designed to get a guilty West to establish the state of Israel in Palestine. Maybe the Holocaust was a massive hoax designed to get West Germany to pay Israel $ hundreds of billions in reparations to Israel. Maybe the Anglo-Zionist FAKE NEWS Media and their Hollywood operations have been perpetuating a massive hoax for more than 70 years. After all, who is stupid enough to believe a known liar? Hmm?

gregga777's picture

Down vote all you want. The point being, that if you tell lies about subjects where we can prove you are lying, then you are undermining your credibility everywhere. People eventually totally discount everything said by known liars. They just turn away. That's why so many people are turning away from the Crony Capitalist CONporate FAKE NEWS Media. Why listen to know liars?

detached.amusement's picture

huge crematories?  are you fucking stupid?  crematory math is well established and the FASTEST way to do it is to burn one at a time, if you want to burn it completely.

 

and nevermind the maternity ward at Oswiecim, asshole!

gregga777's picture

So, you are claiming that they used one crematory chamber to incinerate millions of bodies?

Sub MOA's picture

Q: How long does it take to cremate a body?

A: On the surface, this is a simple question, but answering it requires an understanding of the factors that influence cremation time.

First, let's assume that by "cremation time," we mean the time it takes to physically reduce the body and casket or container. In this assumption we are not including the pre-heating of the afterburner chamber, which can add anywhere from 20 minutes to 60 minutes to the total processing time, depending on the state environmental requirements.

The factors that affect cremation time are the size of the body (weight), the percentage of body fat to lean tissue or muscle, the type of container or casket, the performance standards of the cremation equipment, and whether it is the first cremation of the day, the second, the third and so on. Some operators believe that the medical history of the deceased and type of treatment can also affect the time it takes to cremate.

As a result, actual cremation times vary from 60 minutes to more than 5 hours. In the cremation profession, it is widely stated that it takes about 2 hours to cremate an average body of 150 pounds in a cardboard cremation container.

 

so assume mid point 2.5 hours per body

ok so again assume mid point 3 million burnt up)

now time for the math 3 million x 2.5 hrs = 7500000 hrs

7500000 hrs / 24hrs (assume round the clock burning) =312500 per day

312500 / 365 days = 856 yrs  

now for fun lets assume the number of ovens needed to get er done

6 years of continuos burning so 856 / 6 = 142 dedicated non stop gas ovens

only pictures document around 12 or less such ovens existing

so if only 12 such ovens hell lets up the number even to 50

we get 856 / 50 = 17.12 years

yeah cremation math LOL those NAZI"S sure were hard at work long after the war huh?

but but the ... blah blah all of the hollowhoax shit never adds up NEVER oh and open air pyres take so much feul to burn even one body it's not cost effective nor even feasible...

 

same story with 2 planes full of kerosene collapsing massive structures ..LMAO 

Sub MOA's picture

above Q and A taken from here

https://www.iccfa.com/cremation/support/how-long-does-cremation-take

 

also the math and figures  are calculated to match the "burn time" in modern enclosed gas "furnaces"  not the brick and mortar ones photographed in the so called crematoriums of Germany and Poland ...so yeah there's that to consider too !! 

 

Math doesn't lie but jewish maff does mystical magical accounting ...look up gematria

333 = 9  26 =8 blah blah everything is some form of numerical twisted logic 666 = 18 = 9 a kabbilsts wet dream