Erratic inflation and large fluctuations in GDP growth tend to go hand in hand.

Does the latest financial crisis signal the end of a golden age of stable growth? America’s economy, for so long seemingly impregnable, has been growing rather meekly for the past year, weighed down by a slump in house building. The ongoing crisis in credit markets threatens it with recession. Some observers, long mystified by America’s ability to live beyond its means and postpone what they see as an unavoidable downturn, think that the world’s biggest economy might finally have run out of luck.
As reported by Economist.com, competing views about what lies ahead are themselves cyclical. When growth is steady, the belief that the business cycle can be tamed is understandably high. When recession threatens, that confidence can quickly vanish. On a pessimistic view the “Great Moderation“--the sharp drop in economic instability in America and other rich countries--will prove illusory. But an optimist would counter that the vast improvement in economic stability has been so marked that it will not just disappear overnight.
The world economy has reached a decisive point. If that magical combination of growth and stability was just luck, it is now due a long-postponed and painful correction. But if it was thanks to changes in the way the world works, does that mean the golden age will endure?

Luck or Judgment?
Much of the focus has been on America, where fluctuations in economic growth have fallen by around half since the early 1980s. In upswings the economy’s growth rate has varied by less from one quarter of the year to the next and from year to year. Recessions have been rarer, shorter and shallower.
The most visible symptom of this smoother trajectory is in the jobs market. Since the mid-1980s, America’s unemployment rate has fluctuated far less than it did in earlier generations. Between 1961 and 1983, America’s annual unemployment rate varied from 3.5 percent to 9.7 percent. Since 1984, it has stayed within the tighter bounds of 4 percent to 7.5 percent.
In the last decade the rich world has weathered the Asian financial crisis, Russia’s debt default, the dotcom boom and bust, terrorist attacks on America, sharp increases in oil prices and the uncertainty that came with wars in Afghanistan and Iraq. Still, economic volatility has not picked up. It is true that the abrupt curtailment of energy supplies to a world that was highly dependent on oil was a unique and traumatic event. But economies were more hidebound then: job markets were less flexible and producers more stymied by regulation. The painful results cannot wholly be put down to energy dependency.

Flexible Economy
The more likely explanation is that economies have become far better at absorbing shocks, because they are more flexible. There are many structural shifts that might have contributed to this, from globalization to the decline of manufacturing in the rich world. The academic literature keeps returning to three: improvements in managing stocks of goods, the financial innovation that expanded credit markets, and wiser monetary policy.
For such a tiny part of GDP, the content of warehouses has had a surprisingly big effect on its volatility. When industries cut or add stocks according to demand, that adjustment magnifies the effect of the initial change in sales.
Stock levels were once much larger relative to the size of the economy, so a small slip in demand could easily blow up into a recession. But thanks to improvements in technology, firms now have timelier and better information about buyers. Speedier market intelligence and production in smaller batches allows firms to match supply to changing conditions.
This makes huge stocks unnecessary and minimizes the lurches in inventories that were once so destabilizing. The entire inventory of some lean-running companies now consists of whatever FedEx or UPS is shipping on their account.

Conclusion
In principle, controlling inflation helps steady the economy. High inflation tends to be volatile and research has shown that erratic inflation and large fluctuations in GDP growth tend to go hand in hand. That statistical link might be more than chance.
High and variable inflation interferes with the smooth functioning of economies. It obscures the changes in relative prices that tell producers about how customer tastes are always changing. It also leads to variations in real interest rates and volatile patterns in spending.
The prospect of a coordinated global housing slump is a very frightening one. For the moment, it remains a plausible risk. If house prices hold up, the credit-market disruption is still likely to harm growth in 2008. Even if money markets settle down the loans that banks have been unable to sell as securities will instead sit on balance sheets, crimping their ability to lend.
A more careful approach to credit means businesses and households will find it harder to borrow. That will hurt the world economy.

Although emerging markets have not felt the recent financial market turbulence as much as developed economies have, some emerging market countries may be vulnerable to a decision by investors to pull back capital, the IMF said in its Global Financial Stability Report (GFSR).
This vulnerability may continue after funding problems in more mature markets subside, the twice-yearly report said.
Overall, emerging markets risks are balanced between slightly lower sovereign risks because of their generally good economic fundamentals and “rising risks in some economies experiencing rapid credit growth and increasing reliance on flows from international capital markets.“
Reflecting the same weakening in credit discipline that has led to problems in mature markets, “private sector borrowers in certain emerging markets are adopting relatively risky strategies to raise financing. Most noticeably, in some countries in Eastern Europe and Central Asia, banks are increasingly using capital markets to help finance credit growth,“ the report, released on September 24, said.
Although the indicators suggest that banking systems in emerging markets are profitable, well capitalized, with diverse sources of earnings and sound asset quality, credit issues “warrant increased surveillance as circumstances vary considerably across countries. Authorities in some emerging markets need to ensure vulnerabilities do not build to more systemic levels.“
The GFSR highlights areas that warrant increased surveillance in some emerging markets, including:
The growing market for privately placed syndicated loans for emerging market corporations that in some cases “may allow issuers to avoid the more extensive disclosures required by public listings.“
Rapid domestic credit growth funded by foreign borrowing, mainly “in emerging Europe and central Asia, which now absorbs nearly half of all international bank and bond financing.“
Increasing use of carry trade-style external borrowing and growing use of complex credit products, especially in Asia. For instance, some emerging Asian firms borrow in lower-yielding currencies, primarily the Japanese yen, which are a cheaper source of funding than what is available in local currency.
The search for higher returns has also led to growing issuance of complex credit products such as structured and synthetic instruments, possibly exposing investors to greater volatility.
The report also explored foreign investment flows to emerging markets. It finds that “contrary to what might be expected from reports of foreign investors crowding into small local markets,“ there appears to be little effect on equity prices from activities of institutional investors such as pension funds, mutual funds and insurance companies, although there is evidence consistent with herd behavior switching from one country to another within a region.
Hedge funds, and other highly leveraged pools of investment capital, are becoming more active in emerging market countries. They have moved away from their traditional fixed-income instruments there and are seeking other higher-yielding assets--both in equity markets and structured products.
Some are operating with higher tolerances for risk and may raise important regulatory questions. However, the line between hedge funds and institutional investors appears to be blurring, with some investment horizons lengthening for hedge funds and narrowing for institutions.
One outcome of the strong investment in emerging market securities is the convergence of returns on mature market and emerging market investments.
This “suggests that some global investors may be inclined to reassess the diversification benefits available from emerging market investments“ which also means that emerging markets behave more in line with mature markets “as the cushion of excess returns is reduced.“

Less waste and other improvements to the technology have enabled Xerox to significantly reduce the cost of the new toner, but the machines themselves are being offered at a higher price than those of competitors.

No one wants to get color into the office more than companies that manufacture printers; they love the high margins those machines bring. But without addressing the price differential, they’ve only gone so far.
Now Stamford-based Xerox says a machine hit the market September 24 will do just that. In a release announcing the launch, Ursula Burns, president of Xerox, says the company can now make printing a page in color as inexpensive as black-and-white. “Now, business can take the locks off the color printer,“ she told AP.
Color for the price of black-and-white is a dramatic promise. But on closer examination, Xerox’s latest gambit seems destined to fall short of launching a color printing revolution. Though its new technology is great in many ways the new machines carry a high price tag.
That, combined with plenty of competition from Hewlett-Packard, Canon, Konica, and Samsung Electronics, makes it hard to see this as a knockout blow. “It’s clear when you look at the price that the target is not every color user out there,“ says Angle Boyd, a group vice-president at IDC.
Boyd expects the move to solidify Xerox’s 10 percent market share in US color printers but not greatly increase it. “I don’t know that it’s going to move the needle that much,“ Boyd says.
Globally, the market for laser color printers and similar machines is $5.1 billion; for black-and-white, it’s $10.1 billion.
Five years in the making, the new printer, called the Phaser 8860, is clearly a technological step ahead for Xerox. The machine uses a technology called solid ink that Xerox acquired in 1999 when it paid $950 million for Tektronix’s color printing business. Unlike ordinary toner, which has to be thrown out or recycled, this technology’s color comes from crayon-like sticks of magenta, cyan, yellow, and black that simply melt as they get used up. They also require less packaging.
Less waste and other improvements to the technology have enabled Xerox to significantly reduce the cost of the new toner, but the machines themselves are being offered at a higher price than those of competitors.
For businesses that mainly print in color, the math makes sense. According to Jim Rise, who runs Xerox’s solid ink business unit, frequent business users will see a savings of 50 percent over the lifetime of the machine when both hardware and components are factored.
But analysts are skeptical that this device will make converts of the 80 percent of the world still printing in black-and-white. For one thing, in larger companies, the IT staff buys the hardware, while the operations staff buys the toner and components. So a higher price tag on the machine may be a hard sell to a group that won’t see a budget benefit from cheaper inputs.
And because the machine itself is more expensive without printing more pages per minute, it’s easy to see how competitors with cheaper boxes will sell against it.