UBS: 1000% Inflation Is Perfectly Acceptable...

TBI ^ | 11-10-2012 | Sam Ro

[blam]

UBS: 1000% Inflation Is Perfectly Acceptable...

Sam Ro
Nov. 10, 2012, 6:35 AM

In a recent note to clients, UBS Chief Economist Larry Hatheway suggests that even 1000 percent inflation can be manageable as long as people see it coming.

From his recent Macro Keys note:

When 1000% inflation can be desirable In fact, the costs associated with inflation (price change) are less than commonly supposed. There is the famous “sticker price cost” – the cost of constantly changing price labels – but in a world of electronic displays and web based ordering this is not a serious economic cost (in fact, it never was). To take an extreme position, one can make the economic argument that there are only limited costs in having inflation running at 1000% per year, with one caveat. 1000% inflation is perfectly acceptable, as long as the 1000% inflation rate is stable at 1000%, and it is anticipated. Of course, one can argue that high inflation tends to be associated with high inflation volatility and uncertainty (and that is true empirically), but economically it is the volatility and uncertainty that does most of the damage.

The maximum damage from inflation comes if it is unexpected or if it is unpredictable. Unexpected inflation causes damage, because the investor who holds bonds yielding 1% for a decade is going to feel cheated if inflation turns out to be 1000%. Of course, no one would voluntarily buy 1% yielding bonds if 1000% inflation was expected. Thaler’s Law comes into operation here; people dislike losing money more than they like making money. As a result episodes of unexpected inflation will lead to a significant adverse reaction on the part of consumers.

(snip)

[SCalGal]

United Bank of Switzerland.

[catfish1957]

Huge brokerage firm and bank... United Bank of Switzerland. They got strong toe hold in the US when they absorbed Paine Webber.

[eyedigress]

Real Estate