Paul Krugman on Secular Stagnation

Good blog entry by Paul Krugman this weekend on secular stagnation.

A synopsis of the entry is:

• The great increase in debt that fueled the expansion between 1985-2007 is over and won't be back again.
• The decrease in the rate of growth of potential output due to demography but also due to productivity.
• This decline in the growth of potential output affects investment spending.
• Estimated decline in aggregate demand due to drop in debt and drop in growth is 4%.
• To offset this drop, interest rates need to stay low and real rates need to be low.
• Balancing current account could help but it is unlikely.
• Most likely way is a continuing weak dollar, low rates,  and a high inflation target.

Take a look at the post as it brings up some good points.

Dividends Are Keeping Pace With Prices

This is from the Crossing Wall Street blog.  In this post Eddy Elfenbein compares the increase in prices of the S&P to the rise in dividends over the last 25 years.  What the chart below shows is that dividends are keeping up with prices.  This seems to be another argument in favor of the market not being over inflated.  If you need more proof, take a look at the periods before the tech crash in 2000-2001 or the housing crash of 2008.

CPI is Low

The CPI was released today and it came in well below the 2% target that the Fed usually shoots for.

Below is a chart from Calculated Risk which shows how low inflation is (link).

Will ECB Go to Negative on Deposit Rate to Spur Lending

From Bloomberg:

Policy makers hope that the measure, obliging banks to pay to hold a liquidity cushion, would prompt them to lend cash to companies and households instead, the people said. At the same time, a negative deposit rate also risks curbing banks’ profit as loan rates fall while the institutions may be unable to pass negative rates onto depositors.

 By cutting by less than a quarter-point, the central bank could test the policy while minimizing disruption to the financial system, one of the people said. The ECB’s next interest-rate decision will be announced on Dec. 5. Denmark currently has a deposit rate of minus 0.1 percent.

It's interesting that Europe is considering this out of the box maneuver.  Could it mean that deflation is much more of a problem in Europe than we already think?

Elfenbein: The Effect of Inflation on Real Stock Returns

Interesting post by Eddie Elfenbein.  The expected but interesting none the less part of his post:

Here’s an interesting stat: The entire stock market’s real return has come during months when annualized inflation has been between 0% and 5.1%. The rest of the time, the stock market has been a net loser.