Tuesday, April 29, 2014

In Which Izabella Kaminska Takes the Knife to Société Générale's Albert Edwards

Like a Canadian fishing guide gutting walleyes.
Or something.

Two quick points up front. There is only one reason to pay attention to Mr. Edwards. He has been right about interest rates. You could make an argument he has been right for the wrong reason; he firmly believed the world economy was going into a nuclear winter but even that probably would have happened if the Fed hadn't done the balance sheet expansion.

Second, kudos to Izabella for avoiding the pedantry of  "asset inflation is not inflation".
I know that, she knows that, our readers know that and I'm sure Mr. Edwards knows that. It's just a shorthand way of saying "this is where the money flowed.." Folks who go on-and-on about defining inflation are tiresome.

That said, she does, very courteously, rip him a new one.
From Dizzynomics:

Inequality and hyperinflation

I have bought Piketty’s book, but have not yet read it. I aim to do so shortly. But it will probably take me a while.

From all the reviews I’ve read, however, it does sound like it’s mainly a data-based confirmation of what most of us non-economists have suspected for a long time. Namely, that things like multi-generational property rights (a.k.a inheritance) make society more unequal. Also that concepts like trickle down economics are more wishful thinking. In other words, Paris Hilton isn’t all that economically useful for the rest of us and the fact that she is allowed to get away with a multitude of closets full of stuff she doesn’t even know she has, doesn’t work out too well for the rest of us.

Obviously, I commend Piketty on bringing us the quantitative data that confirm these common-sense suspicions, but I still find it incredibly hard to understand why it’s taken this long for something so obvious to be quantified.

But then I read this from Albert Edwards and sigh:
I believe that on a 3-5 year view they (long bonds) will prove to be a toxic investment. I believe on that timescale QE will result in a rapid rise in inflation, with Japan probably leading the way. But it is not the QE to date that will cause an uncontrolled break-out of inflation, but what is to come in the years ahead (and incidentally, we fully acknowledge that QE has already produced rampant inflation, but in the financial markets rather than at the CPI level).
Now, it is not inconceivable that I am the one who is a total idiot. At the end of the day my modelling strengths lie in Lego and Fimo, not IS-LM or DSGE. I don’t do data. And I certainly don’t do econometrics. If I have a world view, it’s one based on narratives, pattern recognition and logic.
Yet despite all those caveats, I’m at a loss to explain how anyone as qualified as Edwards can make such a poorly constructed argument — and do so without cringing at the obvious contradiction at the heart of the argument that’s being made.

To suggest that QE will inevitably cause inflation in the years to come, and to base that on the logic that QE has already produced rampant inflation, only that it’s happened in financial markets rather than at the CPI level strikes me as absurd.

Is it just me, or is it clearly very obvious that asset-price inflation is the very means by which the rich get richer and the poor get poorer, and the world gets more and more unequal? That QE, precisely because it pumps up asset prices and not the CPI , ends up being disinflationary (or even deflationary) in the long term because all the wealth ends up concentrated in ever fewer hands.

Also, that banks have very little incentive to lend in an environment where just sitting on existing assets provides them with capital gains, and where credit distribution not only threatens those asset gains but exposes banks to needless risk they would prefer not to take....MORE
On that last point she anticipated this Bloomberg headline from yesterday:
"Treasuries Irresistible to America’s Banks Awash in Cash"

See also last week's "Société Générale's Albert Edwards Is Worried".