I would be grateful is someone could turn this into lower-level language!
If you recall the stories told about Germany after WW1, they jacked up their inflation because their repayment (pmts were to France, I believe) amounts were set in Deutsche Marks. Because the German gov't could print marks, they could raise inflation arbitrarily. Inflating the volume of deutsche marks in circulation makes each individual deutsche mark less valuable.
So in the late 20s or early 30s, the German got had cut themselves a sweet deal handing worthless deutsche marks over to the French and the german people would buy loaves of bread with wheelbarrows of Deutsche marks, according to the tales.
Inflation is not only the result of printing extra money. If workers become more valuable, their salaries rise and they have extra money to spend, the merchants they trade with can raise prices as well, etc.
So from a naive, freshman macroeconomics view (ie mine), increased trade, increased demand drives inflation in the currency. By that same token, decreased economic activity, laid off workers etc drives deflation. In that scenario, money is worth more and more because many people don't have it. That's when someone on the street in the Great Depression trades a pound of apples for a nickel, when currency is scarce and valuable.
So betting on deflation can be tantamount to betting the U.S. economy at large will tighten up and times will be rough. It is my understanding of the Telegraph headline that many traders bet on an economic downturn that never got as bad as they had hoped for.
The less pessimistic view of this (which my aged father holds) is that the saving grace of the US is while we have problems, China + Japan + Europe have awful demographics and we're stealing many of their best youngsters. And our popular culture is amazing- nobody else is even close. Unfortunately, this means we probably won't address our problems in a timely manner. A Chinese meltdown makes the US a more attractive place to put money.
You're totally right.The slowdown in emerging markets relative to their strength in the wake of the financial crisis could be the lion's share of the dollar's strength.
The fact that we haven't had a government shutdown in a while could be playing a big part. This stuff is so complicated.
I don't think this part is quite right. The workers become more valuable when they produce more. (This is different from the workers command more dollars because their wages went up because the cost of living went up.)
If the workers are producing more, they can also buy more, and both supply and demand go up, and people are better off, regardless of whether they are seeing the same number of dollars, more, or fewer. (If they produce more but wages do not go up, there's more stuff for sale but only the same number of dollars chasing it, so prices go down. The workers are still better off, because they can buy more stuff with the same number of dollars.)
So increases in productivity are not inflationary. They tend to be deflationary, because they drive the cost of goods down.
Unless by "lowered" you mean "lowered compared to the hypothetical situation where we had more workers". But the way you said "worker shortages that lead to higher wages and thus lower productivity", you sound like you mean that the higher wages cause lower productivity, and I can't see how that cause-and-effect is supposed to work.
Workers won't put in the same effort if they know that the employer has no replacement so the worker productivity will go down.If you buy a bond that yields 1.00% and inflation is negative 1.00% (i.e. deflation) then your real yield is positive 2.00%. On the other hand if inflation is positive 1.00% then your real yield is 0.00%.
As data is coming out is showing that inflation is occurring and not deflation, investors are selling their low yield bonds. This lowers the market price of the bonds and since a bond's yield moves inversely to its market price, it raises the yield.
EDIT: mild inflation is really what you want with our monetary system, not deflation. So this is not a bad thing for the economy per se but some investors that bought low yield bonds will lose money or opportunity as interest rates rise.
Is he basically saying that the shit is about to get real? If so, what is the shit?
edit: apologies for swearing, but I thought it was appropriate here given the _very_ strong language of the article. And I hate using/(being subjected to) aster*sks.
And yes, I would also like to know who gets burnt. It isn't very clear.
People who can afford to lend money to others for extended periods of time are the wealthy and those with a lot of money in pension funds. So the losers' side is skewed towards the wealthier and the older.
On the winning side are heavily indebted governments and corporates as well as people with fixed rate mortgages. As government spending has a redistributive effect and wages tend to rise with (moderate) inflation, the less well off, younger, working people are on the winning side as well.
So there you have your political dividing lines. Newspapers who cater to those on the losing side (such as the Telegraph) are going to get hysterical at the sight of even the slightest whiff of inflation.
There are global implications as well. Money flows where interest rates are higher. If interest rates rise in the US and in Europe, money will flow there from countries like India, Brazil or Indonesia. The currencies of those countries will fall versus the dollar because they are being sold, and as they are indebted in dollars, their debt load increases.
In previous episodes that has lead to defaults among poorer countries. But this time, these countries are not as heavily indebted as back in the 1980s and 1990s. Some of them are under pressure from low commodity prices though.