Wednesday, February 20, 2013

Fed Puts Macho Bada$$ery At Risk




  1. Well, as Abraham Lincoln once said" You can fool some of the people some of the time..... How anyone paying attention to what's going on could expect inflation with unemployment at 8% is just "irrational exuberance." I think what we're seeing is that monetary policy is not efficient at fiscal policy. Monetary policy can offset excessive fiscal policy, for sure, but right now it looks as though the powers that be are intent on making fiscal policy matters more austere. Instead of trying to fix the problem with the economy there is one party that is more focused on affixing blame, at the expense of the unemployed and fixed income citizens.

    1. Not sure if I understand you correctly, but I wouldn't go so far as saying inflation can't persist with high unemployment. Even ignoring earlier periods of actual stagflation, developed countries around the world have had persistently low, but positive inflation over the past 3-4 despite high unemployment rates (that includes Spain and Greece). IMO the chances of high rates of inflation given current levels of unemployment is pretty low, but the chances of actual deflation appear substantially lower.

  2. Should have been a bit clearer. What I'm saying is that in our economy, the rate of unemployment has been at 8% or more since the beginning of the first Obama term. Massive amounts of liquidity have been added to the system via mostly monetary and some fiscal side efforts. Interest rates have barely moved in an upward direction, and have not shown any signs of inflation. It would seem that the concern was more about deflation than inflation by policy makers at the Fed. Granted, key consumer prices have been rising, but the question is this because of external price pressure or from excessive demand from within the domestic economy? I suspect it is from the former. The recent spike in gas prices could be the result of refiners and big oil trying to recapture some of the lost revenue as a result of the recent hurricane Sandy. Speculation on my part, but I can't see what else is driving price in this market. You?

    1. I agree with you on inflation being driven by pricing pressure but would lean towards a more internal factor as the primary cause...debt. Most economists don't consider the interest payments on debt as part of production costs but I think that's incorrect, in accordance with many Post-Keynesians (certainly Marc Lavoie and Wynne Godley). Over the past couple decades and even throughout the crisis, nonfinancial corporation have relying increasingly on debt to fund current production. Regardless of whether these companies price at cost or use cost-plus pricing, the rising interest burden should push up prices over time. (Art Shipman at The New Arthurian Economics frequently discusses this topic.)

  3. Woj, That's an interesting (no pun intended), observation. I'm a big fan of the Arthurian, and he is always talking about the excessive amount of private debt. I must have missed the nexus about the interest being the primary cause of rising prices. I'm sure this could be a factor. Is it the primary factor? What about the notion that prices are rising to offset the anemic consumption? Or, my observation with regard to the recent spike in gas pricing? If the mechanism is interest rates, as you say, it would seem like a good time to refinance at lower rates. But, then again, banks are unwilling to lend at rates that are in line with the cost of their own borrowing rates. Let's call it the "paradox of interest rates."