Prieur’s readings (October 5, 2009)

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This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

• Michael Ehrmann and Panagiota Tzamourani (European Central Bank): Memories of high inflation, September 2009.
Inflation has been well contained over the last decades in most industrialized countries. This implies, however, that memories of high inflation are likely to fade, because over time larger parts of the population have never experienced high inflation, whereas those who have might forget. This paper tests whether memories of high inflation affect agents’ preferences about the importance attached to price stability, using a large database covering over 52,000 survey responses from 23 countries over the years 1981-2000. It finds that memories of hyperinflation are there to last, whereas those of less drastic inflation experiences tend to erode after around 10 to 15 years. The recent decline in the importance attached to price stability does therefore most likely reflect mitigated inflation concerns in an environment of low and stable inflation, but also the consequences of fading memories of high inflation. The longer central banks have successfully delivered price stability, the more important it is for them to engage in a proactive communication, especially with the younger generations, about the merits of low and stable inflation.

• Ian Cowie (Telegraph): Gold has proven historically to be a poor hedge against major inflations, October 2, 2009
Professor Roy Jastram, of the University of California, conducted the longest-term analysis of this precious metal’s purchasing power, stretching back to 1560 when Elizabeth I ordered new coinage to restore the reputation of the English currency.

• Please do feed the bears, October 1, 2009.
When the bears say, as they do now, that the stockmarket rally is built on sand, they are worth listening to. On historical measures, Wall Street looked cheap only briefly, earlier this year, and now looks expensive again. The rally has once more been driven by interest-rate cuts. That rich-world central banks feel the need to keep rates close to zero shows how many economic problems remain.

• The end is nigh (again), October 1, 2009.
Pessimistic commentators remain anything but convinced by the stockmarket rally.

• Robert Reich (Huffington Post):  The truth about jobs that no one wants to tell you, October 2, 2009.
Unemployment will almost certainly hit double-digits next year – and may remain there for some time. And for every person who shows up as unemployed in the Bureau of Labor Statistics’ household survey, you can bet there’s another either too discouraged to look for work, or working part-time who’d rather have a full-time job or else taking home less pay than before. In other words, ten percent unemployment really means twenty percent underemployment or anxious employment. All of which translates directly into late payments on mortgages, credit cards, auto and student loans, and loss of health insurance. It also means sleeplessness for tens of millions of Americans. And, of course, fewer purchases (more on this in a moment).

• Willem Buiter (Financial Times): A stronger US economy requires a weaker dollar, October 2, 2009.
Which currencies would the dollar depreciate against?  Not the euro, surely, which has been too strong for comfort since before the crisis.  Not against sterling (the UK is pretty much in the same boat as the US, with the balance sheet position of the household sector if anything worse than in the US), and certainly not against the yen.  The US dollar will mainly have to depreciate, if a long spell of over-capacity, high unemployment and low growth is to be avoided, vis-a-vis the currencies of the roughly 50 percent of the known economic universe that we call emerging markets and developing countries.  China is the largest of these, but amounts to only about 6 or 7% of global GDP.

• Simon Johnson (Baseline Scenario): A short question for senior officials of the New York Fed, October 3, 2009.
Are we heading for another speculative bubble that will end up damaging US bank balance sheets and all American taxpayers?

• Michael Pettis (China Financial Markets): The IMF warns about surplus countries and global imbalances, October 3, 2009.
As Beijing slowly unlocks from its 60th anniversary celebrations – the streets are still relatively empty but more and more people are going out, although my local Starbucks still hasn’t reopened, forcing me to go elsewhere for my hardcore caffeine fix – a lot is still going on in the rest of the world. Both the US and the IMF have come out with releases that help us to pick through the problems that China and the world are facing.

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