It’s 1978 All Over Again
January 22nd, 2008 - 3:54 pm
Stephen Bainbridge presents the case against fiscal stimulus.
Consider the link an endorsement. I think the Fed’s move today was panicky, shortsighted, and inflationary. Other than that, though, Bernanke is just brilliant.
You’re dead wrong, Stephen. The Fed caused the subprime crisis to occur when it did by keeping rates too low for too long and starving the traditional lending sectors of capital.
Look at how low rates are on T-bills–they’re below the Fed Funds rate! How are the banks supposed to make money in that environment? The only way they could, by getting their lending capital from non-traditional sources. Unfortunately, the non-traditional sources were willing to put up with non-traditional loans, and caused a train wreck.
The current commodity inflation is coming from China, and cannot be fixed by the Fed (short of causing a world-wide depression). The monetary inflation we’re seeing is a lack of demand for dollars, not a supply of too many dollars. Re-liquidate the traditional capital markets, and demand for dollars will go up. Or as Larry Kudlow so succinctly put it today, a lower cost of money will increase demand for it. I realize that’s backward from the model we all grew up with, but these are deflationary times, not inflationary times.
I agree that the “stimulus” plans that will pass Congress are not going to do any good for the overall economy. But the Fed needed, and probably still needs, to act aggressively here.
Aaaargh! Strike that. Reverse it.
Should be:
“The Fed caused the subprime crisis to occur when it did by keeping rates too high for too long”
Neil -
I’ve been wrong before, so I could be again. But here’s the way I see it.
I don’t agree with you that we live in deflationary times. We had a nice 15 years or so of disinflation. But inflationary forces are back, big time.
Chinese and Indian laborers kept a lid on wage growth here, leading to disinflation. As those one-time laborers enter the middle class, they’re adding to demand-side inflation pressure. We’re agreed here, I think, that there’s nothing the Fed can do about that one.
We’re also agreed on commodity inflation coming from China (and to a lesser extent, India). And that there’s nothing the Fed can do about it.
Part of the dollar decline is that it’s our most popular export. Furriners snapped up so many of them, they were bound to get cheaper. And considering how much furrin stuff we pay for with those dollars, the dollar’s decline is another inflationary factor. There is something the Fed can do about this one: Keep rates high (or at least steady).
And then there’s the Baby Boomers. They started retiring 22 days ago, and collecting Social Security. The population explosion just turned into an inflation bomb. Congress could fix this one by means-testing SS, raising the retirement age, or some other smart political fix – but are you willing to lay money on it? How about tomorrow’s inflated dollars? Even want to bet any of those?
So we’ve got four major inflation factors that I can see. What I don’t see is deflation (although I was worried about deflation as recently as two or three years ago [search the VP archives!]). I don’t even see how we go back to the wonderful disinflationary days of the ’90s or early ’00s. And now the Fed has made the dollar even cheaper and less desirable, all to fight the temporary scourges of a stock market correction and a little credit crunch.
But again, I could be wrong — and hope I am!