Biggs on Finance, Economics, and the Stock Market: Barton's Market Chronicles from the Morgan Stanley Years

Section 1B: Fire and Ice

The Fire and Ice Debate

April 3, 1997

Fire:	You Ice guys, with your bet on low inflation and falling interest rates, will be lucky if you get a light frost. The latest batch of economic statistics shows the U.S. economy is heating up, wage gains are accelerating, the European economies are improving, and even Japan is doing better.
Ice:	The Ice case was never based on economic growth slowing. We think inflation will stay low because at the margin, there is an oversupply of low-cost labor, manufacturing, and services capacity in the world. In the new global economy, there is competition almost everywhere, putting pressure on prices and wages. In the United States, financial services, health care, hospitals, retail, and fast food all have excess capacity. As result, in a relatively strong economic environment, many companies in very different businesses are reporting loss of pricing power. Obviously, this is a broad generality, and there are important exceptions. The price of gold continues to drift lower, and commodity prices are flat to down. We think that when the next recession comes, there will be even more downward pressure on prices, and for a time the CPI may actually be negative.
F:	You are missing the point. There has been disinflation, but it is ending. Haven't you guys ever heard of the Phillips Curve? In a modern industrialized economy, ...