Dollars Signs and Portents
August 28th, 2002 - 12:12 am
Inflation pretty much sucks.
Oh, it can be fun at first. Sure, prices are going up
Inflation pretty much sucks.
Oh, it can be fun at first. Sure, prices are going up
I’m not an economist, so pardon what may be a stupid question:
What is to keep inflation out?
Sure, there’s no inflation NOW. W/ the help of Alan Greenspan, Paul Volcker, and a general global mindset during the 80s and 90s that inflation was bad (so central bank managers everywhere, including Japan, limited the growth in their money supply).
But it wasn’t so long ago (’round ’94, I think) that there were Democrats in the Senate, frex, who wanted to make the Fed “more democratic” because they felt that the anti-inflation policy was imposing too many costs on workers. At least a coupla Senators on the Banking Committee wanted to call hearings to demand of Greenspan why he was so het-up about keeping inflation down (and, presumably, economic growth, too).
Alan Blinder, brought in as Greenspan’s deputy, was also, iirc, a believer in the value of a little inflation. (The WaPo had a story about their tiff a year or so ago.)
So, it would seem to me, as Greenspan nears retirement, that there is certainly the possibility of a looser buncha folks coming in who would happily reintroduce us to the joys of soft money?
The bond market will act to keep a lid on inflation. The government is running a deficit again (I won’t point partisan fingers on this right now, as there is more than enough blame to go around.) Furthermore, out elected leaders lack the spine to deal with the impending demographic disasters that are Social Security and Medicare. That means that the government is going to have to do even more borrwing as costs for these programs exceed the taxes designated to support them.
Because the government needs to borrow, the bond market will be very wary of the risk of future inflation and will increase the rates the government has to pay. This will give the government a big incentive to avoid inflationary policy.
Please keep harping on this topic. It’s become a platitude among economists to compare this recession with pre-Great Depression slumps caused by busted investment bubbles but I don’t think there’s a lot of awareness in the general public about how dangerous the current situation is. I was just reading about the 1873 Depression which featured deflation and massive unemployment and business failures. The monetary policy pursued by the Federal gov’t at the time was as wrongheaded as it could have been — which is one of the things running in our favor. The business constituency moved decisively against a reflationary act being passed through congress at the time to combat the depression (the slump was too severe to be called a garden-variety recession). My worry is that, although we are light-years ahead of economists in 1873, the Fed may simply “run out of bullets” and, not through ignorance but through lack of tools, may be unable to reflate the economy. Then all bets are off. For example, the high leverage of the US consumer would become a millstone. And what would happen to the housing market? Oh, boy.
The best way to fight inflation? Abolish the Federal Reserve. It alone is responsible for increasing inflation – via increases in the money supply. Higher prices are merely a symptom of inflation, not inflation itself.
Study Japan. That’s the scenario the Fed is trying to avoid right now. The housing bubble is likely to collapse soon. There aren’t any other economies in the world capable of pulling us out of it.
Unemployment is considerably higher than they are letting on and people are not finding new jobs. I’m not just talking about production workers here, I’m talking about management and skilled IT folks. It’s bad out here on the West Coast, land of overly expensive housing.
There’s an interesting article today on Fall Street about the the Kondratieff Winter. Take a look at it here.
I have studied Japan. The BOJ have lowered their interest rates to almost zero. It hasn’t worked. It won’t work.
Alan Greenspan has lowered interest rates to almost zero. It hasn’t worked. It won’t work.
The bubble was created by the Federal Reserve with easy credit. Easy credit is not now and can never be the cure for a bubble. Only the washout of the unprofitable businesses can bring about the end of the bubble. There’s gonna be some tough love given by the economy.
The Federal Reserve is to blame.
Japan is a very instructive example, as adlskj suggests. Ever since their depression began about 1989 I have thought that what Japan needed was a strong dose of what the economically clueless Bush 41 called “Voodoo Economics”. I had hoped the present government would finally institute such poicies, buyt it has retreated in the face of the narrow special interests like the others.
“Voodoo Economics” (aka Supply side economics) is what we need too, as in the 1980s, combined with a large reduction of non-tax impediments to business (i.e. regulations). This policy mix is doing wonders in Ireland right now.