Completely bogus. These hucksters worship dubious theories and justify just about everything with their common sense defying mumbo jumbo.
Here's why zero inflation is good. We pay less and get the benefits of progress directly in prices. Our money goes further. The government does not get to steal our purchasing power. Retirees can look forward to making ends meet. And much more.
The problem for Fed Governors is they're forced to think like Keynsians. Their mandate is Keynsian (price stability), and the system they're given is Keynsian.
So of course they're going to say stuff that sounds absurd to Austrians and occasionally even to moneterists, but what choice do they have? They don't have the power to revert to a gold standard. Only Congress has that power.
In spirit, I agree with you. We've been robbed of our productivity efficiences through =excessive= inflation. However, Mishkin is correct to assert that zero inflation or deflation are just as unhealthy for an economy.
When the world still had commodity backed currencies, inflation was kept in check by rates of extraction of the monetary commodity. For most of the world, that has historicaly been gold and silver, of which the supply has consistently (if I recall the figure correctly) increased by 1 or 2 percent per year... even across millenial gulfs of time.
Seems almost, umm.... divine... that that represents about 'ideal' inflation. Additionally, when population growth slows, so does extraction. It's not nice to cheat Mother Nature!
BTW... check out "The Great Wave" by D.H. Fischer... it really illustrates this point well. I think Mises discussed the same topic, too.
Nice catch CR and Tanta! I'm a monetary uber-nerd. Love it.
THAT is why we should be colonizing the solar system. The growth model is excellent if you have PHYSICAL FRONTIERS. Stuck on this planet, which is really small, you just end up with "To many critters in the cage". We're much to curious a species to be trifling with this BS we do in today's world. We used to really achieve some great things. Ipods???? Puke!! Where's my jet pack??!!!
Ben wants "positive inflation" and thus higher prices which in theory (retarded as it may be) forces more money into the system which results in greater stability, versus having prices crash ans not enough money in the system.
However, as everyone with a human brain has witnessed in realtime, models and theories are about as useful as dog crap in a park.
Remarks by Governor Ben S. Bernanke
Before the National Economists Club, Washington, D.C.
November 21, 2002
Deflation: Making Sure "It" Doesn't Happen Here
By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Can anyone parse the "Downward nominal wage rigidities" paragraph for me? He starts out by asserting that low inflation is bad because firms won't cut nominal wages. But then he ends the paragraph by contradicting himself, stating the Swiss and Japanese experience disproves his earlier assertion. Why bother making it at all then?
Deflation has been the historical norm, because the benefits of progress give increased efficiencies of several kinds. For example, the glabalization boom (all other considerations aside) effectively lowered wages, hence the cost of manufactured products. That deflationary pressure on prices has served to conceal the true rate of inflation here in the US. It has been far higher than measured.
So the wage argument is bogus. As efficiencies increase, wages should increase in buying power.
Furthermore, the money supply should only increase at the rate of increase in a country's useful assets (housing, transportation infrastructure, farms and factories, and more abstract assets like patents and education of its citizens).
Given that PM's are extracted at a slower rate than such increases in the the real GDP, there ought to be consistent deflation, if the monetary base is gold and silver.
With downward rigid nominal wages, some positive inflation is essential to foster labor market (real wage) adjustment to unemployment disturbances. Price stability, on the other hand, lowers real wage flexibility and the allocative efficiency of the labor market. Accordingly, the cost of eliminating inflation is higher than many believe since at low levels of inflation a permanent tradeoff between unemployment and inflation emerges; the unemploy-ment costs of eliminating inflation increase as inflation approaches zero.7
7 In other words, the Phillips Curve is non-linear and not vertical at low levels of inflation.
Inflation in a number of economies fell below one per cent in early 2003 and, in some cases, inflation even turned negative. This raised serious concerns about a generalised global deflation and its adverse consequences. In particular, the episode highlighted the limitations of monetary policy in countering deflation. The constraints on monetary policy arise due to a lower bound of zero on nominal interest rates and the concomitant 'liquidity trap'. Coupled with downward nominal wage rigidities, a lower bound of zero on nominal rate restricts the ability of the monetary policy to drive down real interest rates. Rather, with falling prices, real interest rates would increase and further reduce domestic demand leading to a vicious circle. Due to the zero interest rate floor, the probability of a deflationary spiral increases sharply - from nil for an inflation target of two per cent and above to 11 per cent when inflation target is zero (IMF, 2003). If the shocks are large, the deflationary spiral cannot be reversed by adjustment of the short-term nominal interest rate alone. Deflation's adverse effects also take place through financial fragility due to debt-deflation cycle - harm to bank's balance sheets from reduced collateral and from debtors' diminished ability to service loans and widening of risk premium on corporate bonds in view of worsening balance sheets.
Mishkin, Bernanke and Greenspan will spend the rest of their lives writing papers in a desperate attempt to salvage some shred of their prior exalted reputation.
Our entire financial system is now a monster Ponzi scheme. Of course in this world, any hint of zero inflation or god-forbid, deflation, would lay bare and then flatten the financial world.
Fancy theories and models cannot coverup what is plainly visible: the Fed abandoned their duty to regulate the financial system. Under the Fed's nose, trillions of dollars of debt has been issued that cannot be supported by income today or in the future.
And now the Fed is stuck: it cannot figure out a way to raise home prices, nor can it figure out a way to raise incomes -- so the debt is effectively defaulted and the losses must be taken.
And as it appears, we are headed towards a socialization of the losses -- with the government talking about directly buying mortgage securities.
Under this scenario, we are looking at either a) enormous consumer price inflation and/or b) a disorderly fall in the dollar AND c) a declining standard of living for all Americans.
The argument about reluctance to invest is somewhat bogus, too. It may be that capital investment might slow down, but probably it would be wiser investment of capital.
Trade merchants have been investing for thousands of years, gambling in risk/profit. This despite PM monetary standards and deflation. And industrialization took place under the gold standard, did it not?
The only excuse for inflation is when PM extraction rises faster than the growth of real assets, as when the Spanish flooded the Old World with PM's they looted from the New World.
This whole debate was gone over years ago in the early 60s when some economists thought inflation was "too low." Even as they spoke, as it were, it started to rise, until Nixon finally imposed price controls around 1972. He was alarmed by a rate of, what was it?, 3.5%! Today of course it is 4.3% and the Fed is lowering interest rates. LOL. Times change.
Such convoluted and over-analyzed claptrap is further evidence why academics shouldn't be allowed in the halls of power.
We don't live in a model world. We live in the real world, which is made up of active and changing systems. And it is a far simpler world than all that analysis makes it out to be.
We have (asset) inflation because (asset) inflation is what makes the banking/financial system profitable. It really is that simple.
Inflation does not happen all by itself. It happens because someone profits from it.
However, since constant inflation leads to exponential growth in prices, we need the occasional "reset", also known as the
"downturn" or "recession". The purpose of the recession is to create another possibility for the financial elite to execute the proverbial buy-low-sell-high strategy.
As George W. Bush once said: "economies should cycle."
3% long term inflation may be best.
Home prices, wages are sticky.. People are stubborn about nominal prices. Inflation deals with the bubble by letting people have their nominal money back, if only in a few years...
And it gives the central bank the room for negative real interest rates if in a Japan or 1930s type depression.
Perhaps the Fed is in a conundrum on how to solve the housing problem but they sure know how to make those commodity prices skyrocket. The prices of wheat and copper etc. which are soaring should help alot.
I think one must expand on the following from the speech:
"A number of researchers in the Federal Reserve System and elsewhere have analyzed the implications of the zero lower bound in estimated dynamic rational expectations models.11 If the economy faces a large contractionary shock, the optimal monetary policy response is to push the short-term nominal interest rate below the level of expected inflation, thereby reducing real interest rates enough to mitigate the impact of the shock. But if the central bank has an inflation objective very close to zero, the zero lower bound can prevent the full implementation of this policy response, and hence the economy will tend to exhibit greater volatility of economic activity and inflation."
Higher-Order Perturbation Solutions to Dynamic,
Discrete-Time Rational Expectations Models
Eric Swanson
Federal Reserve Bank of San Francisco
We focus on the Taylor series solu-
tion for (log) consumption in particular, although the results are very similar for all of the
non-predetermined endogenous variables in the model. The table reports both absolute
errorsthe raw difference between the machine-precision coefficients and the true values
of those coefficients computed out to 23 decimal places or moreand the relative errors,
which are the absolute errors divided by the true values.
While the errors from using machine-precision arithmetic are very small for the first few orders, they contaminate a larger and larger number of coefficients and become progressively larger as we proceed to each higher order. Coefficient errors as large as 10% become quite common by about the fourth or fifth order and coefficient errors of about
1% are present even in the second-order solution.
Machine-precision arithmetic varies significantly from machine to machine, and even from software package to software package. Thus, there is no guarantee that the results
above will be representative of other researchers experiences using different hardware or different software packages.
Re: If the shocks are large, the deflationary spiral cannot be reversed by adjustment of the short-term nominal interest rate alone.
What kind of shocks are you talking about? The kind that periodically arise under a fiat regime? Well, here's an idea--get rid of the fiat regime in your model and then we can talk about shocks and how to deal with them.
Where's Misean when you need him?
You make my point for me when you talk about "adjustment of the short term nominal interest rate." What on earth happened to the free market? Why does the rate have to be adjusted? Why can't it set itself?
The present administration received a debt economy expanding at 9-10% and decided to kick it up a notch to 11+%. The annual per household debt service on $13.8T, assuming 7% interest, is ~$9000.
Re: "Thus, there is no guarantee that the results above will be representative of other researchers experiences using different hardware or different software packages."
Governor Frederic S. Mishkin, ends his prayer for stability with:
Finally, you may have noticed that I haven't said much about the United States in this speech. Nevertheless, the issues that I've discussed today have potentially important implications for the ongoing process of refining the Federal Reserve's policy framework and of enhancing our communications. Indeed, as Chairman Bernanke has recently indicated, our communication strategy is "a work in progress," and the Federal Reserve "will continue to look for ways to improve the accountability and public understanding of U.S. monetary policymaking" (Bernanke, 2007). And I certainly hope that my remarks will be helpful in contributing to the continuation of that process.
Edward M. Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.
But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.
In 2001, a senior Treasury official, Sheila C. Bair, tried to persuade subprime lenders to adopt a code of best practices and to let outside monitors verify their compliance. None of the lenders would agree to the monitors, and many rejected the code itself. Even those who did adopt those practices, Ms. Bair recalled recently, soon let them slip.
The present administration received a debt economy expanding at 9-10% and decided to kick it up a notch to 11+%. The annual per household debt service on $13.8T, assuming 7% interest, is ~$9000.
Troy | 03.28.08 - 3:59 am | #
I bet incomes didn't go up by 10% each year. Don't worry, your asset price will always go up to cover your ass. Kind of sucks once it's realized that the cash flow to service the debt will eventually not be able to service the debt and a normal life. Hence the housing collapse.
Debt can consistently expand above real wage growth as long as the cost to service the debt can be deferred to the future (ARMs). When it can no longer be deferred, the reckoning comes and the excess debt is washed away. But in America we socialize that loss, nobody can lose.
Asset price inflation above the productive value that the asset produces will eventually correct. When asset prices go up it is speculation that the productive value of the asset will go up. If someone bids on an oil rig above current oil price productive value, they are betting the rig will be profitable. If it never does, the asset deflates.
Sadly, I really don't think any elected official understands anything about assets.
Re: "Why does the rate have to be adjusted? Why can't it set itself?"
I think the reason for systemic failure is that banks see the realities of deflation and hyperinflation and thus stagflation and a liquidity trap. The risk of exchanging money is too large in relation to the potential profit or loss; better to fold in this card game and keep your powder dry. Thus these nervous members of the financial tribes are setting rates by inaction and The Fed is in a panic to force an immediate turnaround, much like a doctor prescribing a pill as a quick fix for cancer, i.e, the patient is going through the motions and may return for more checkups, but at some point, the inefficiency of the overnight cure, which drags on and on, becomes an obvious and un-wanted illusion!
Lowering rates again in a few weeks by 1/2% is as retarded as giving an enema to someone that is suffering from dehydration. yes, you can go through the motions and experiment, but at some point, stupidity can begin to look like incompetence!
Ok, Bernanke, on your knees, bow yourhead and say after me:
\tI swear by Apollo, Asclepius, Hygieia, and Panacea, and I take to witness all the gods, all the goddesses, to keep according to my ability and my judgment, the following Oath.
To consider dear to me, as my parents, him who taught me this art; to live in common with him and, if necessary, to share my goods with him; To look upon his children as my own brothers, to teach them this art.
I will prescribe regimens for the good of my patients according to my ability and my judgment and never do harm to anyone.
To please no one will I prescribe a deadly drug nor give advice which may cause his death.
Nor will I give a woman a pessary to procure abortion.
But I will preserve the purity of my life and my arts.
I will not cut for stone, even for patients in whom the disease is manifest; I will leave this operation to be performed by practitioners, specialists in this art.
In every house where I come I will enter only for the good of my patients, keeping myself far from all intentional ill-doing and all seduction and especially from the pleasures of love with women or with men, be they free or slaves.
All that may come to my knowledge in the exercise of my profession or in daily commerce with men, which ought not to be spread abroad, I will keep secret and will never reveal.
If I keep this oath faithfully, may I enjoy my life and practice my art, respected by all men and in all times; but if I swerve from it or violate it, may the reverse be my lot.
One could have seen the entire housing collapse without even talking to an economist or reading a blog. All one had to do was look at the cost to rent vs. the cost to own. The productive value of the home was so out of line with rents, and rents were up only 5% annually in hot markets (where homes were up over 30-40% annually).
Just because people can ignore reality doesn't mean reality will ignore people. Housing prices aren't going to the mean, housing prices are going to the historical rent norm.
I've had some people try to dismiss this since the housing "ownership" rates are above 65%. They say rents don't matter because most people don't rent. Guess what is happening now though, people can't keep their second homes because the productive value doesn't support the asset price that the loan was taken out on. SF homes can't sell at asking prices because what moron will pay double what it costs to rent to merely own. And it isn't even a choice for most people, they literally cannot afford ownership.
Until pigmen can convince people to take out 50 year loans or inter-generational loans to merely be able to own a home, prices are going to the rent norm.
better to fold in this card game and keep your powder dry.
Which is why those who still hold cards and can't get rid of them are in panic mode.
Kind of like a game of hearts, except that now there are many players who still have that deadly Queen of Spades in their hands, and are realizing they can't get rid of it.
I think Mishkin is spot on. There is never one inflation rate for all sectors of the economy. Currently, housing prices and (maybe education expenses?) are deflating, while lots of other stuff (medical costs, commodities etc.) are inflating.
People have a really tough time wrapping their minds around deflation (prices are sticky downwards). So markets that undergo deflation often don't clear. Buyers offer new, lower pricers and sellers offer older, higher prices. Just look at all the housing markets for a good example of this. When markets don't clear, you have a big problem.
An inflation rate of zero means large sectors of the economy are undergoing deflation at any one point. And there's probably a big cost to this.
Of course, this all assumes inflation is measured properly (a big caveat). And I doubt inflation is being measured correctly.
Sounds like BB and his gang have decided on getting us out of this mess via inflation. All of the trash in the Level 2s and 3s will eventually be worth the right amount with a enough time and inflation. Assuming the assets on average have dropped to 60%, aim for about 66% over 4 years and everyone is whole.
Of course core inflation will remain at 3 or 4%.
So it is time for the Feds to start talking positive to the sheeple about inflation.
A little is good, a little more is better.
You'll sleep better at night,you'll have more stamina, when you awake you won't remember any of this until you hear the magic word.
0 inflation may convince people to save money. What would markets do if there wasn't a fresh supply of money to be stolen by wallstreet from mainstreet suckers.
"investors will never choose to lend money at a negative nominal interest rate"
If presented with the choice of losing money at -10% in the Stock market. -15% in nominal interest rates(non-hedonic calculations) in a savings account. They will Run to Bonds at -5% instead.
No wonder these guys have been runing our economy into the toilet.
What a shell game. When basicly what he is saying is "OMG!!! what if we had to pay back money at the rate negotiated"
So "downward nominal wage rigidities becoming less prevalent" is a bad thing? This is pure AG babblespeak. What the hell are our Fed Governors doing, passing around snakes?
Ann Rand followers need to all be rounded up and put on reservations, seeing how well that worked for the Indians and their casinos.
No, really! Inflation is good for you. Trust us. It's better to lose a little bit of your wealth every year than make some. Really. Honestly. C'mon, I am not kidding.
In the following video, a professor argues very convincingly that there are no AGGREGATE benefits to inflation. Certain sectors of the economy benefit from inflation but only at the expense of other sectors. Namely, the groups that get the "early" inflation benefit (primarily wall street).
To me the most important points were the last 2.
The only reason you would bring up the zero bound in this environment is if we're headed to zero. If shadowstats.com is right - a zero percent interest rate would mean a real interest rate of -7 to -10% at current shadow inflation levels. And debt deflation comments were a clear FU to the Chinese - we're going to let our inflation take care of our debt over time.
Seems pretty silly to me. Obviously there is good deflation and bad deflation. Where prices are falling in certain sectors because of increases in productive efficiency (e.g. home computers), what do we see -- falling wages? Can inflation be too low? Price stability is the goal of the Fed -- the idea that acheiving stable currency is harmful is wrongheaded.
The only way "inflation can be too low" is if it is failing to destroy the middle class and savers. From the viewpoint of the crooked elite and their nearly infinite wealth and free loans ("Here, Fed, take this worthless MBS in return for cash!"), allowing the peasants enough cash to eat and maybe even save is just not acceptable.
Which is why those who still hold cards and can't get rid of them are in panic mode.
Oooh, that Queen of Spades will get you every time! (Sorta like holding C stock at the moment.) On the other hand, if you take all the tricks ... um, what do you get? ALL the C stock? Ick.
The story below is why moral hazard will bite the FED. Give Wall Street an inch, and they will sell derivitives on 1000 miles! Note the last lines: With a governemnt printing money, Lehman is attractive as a stock. Who knew?
Lehman Raised to Buy' at Citigroup onAttractive' Valuations
March 28 (Bloomberg) -- Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, was upgraded to buy'' fromhold'' at Citigroup Inc., which cited extremely attractive'' valuations.
The brokerage also said Lehman's recent profitable quarter and the coordinated actions taken by the Federal Reserve and the U.S. Treasury to inject liquidity into the market providedexcellent downside protection.''
In our view, it's tough to have a liquidity-driven meltdown when you're being backed by government entities that have the ability to print money,'' analysts including Prashant Bhatia in New York wrote in a note to investors today.Lehman has ample liquidity to run its business.''
Sure, I think it's reasonable to suggest that inflation can be too low.
What I think is completely unreasonable is to suggest that "too low" inflation is justification for the Federal Reserve bank to go and destroy some other part of the economy in an attempt to fix it.
Under this scenario, we are looking at either a) enormous consumer price inflation and/or b) a disorderly fall in the dollar AND c) a declining standard of living for all Americans.
Simian said: "So it is time for the Feds to start talking positive to the sheeple about inflation."
My first reaction to the article was that they're trying to set us up to embrace the coming inflation as being a good thing. I don't think it's going to work though.
More info suggesting the meltdown and collapse crowd need to be careful with their predictions. See Washington Post Opinion column by editor of the Economist titled Lessons from Japan's Malaise.
"It took so long for the underlying economic impact to become visible because the first losers in Japan's stock market crash were financial: banks, insurance companies and other institutional investors. The damage to the real economy came when private companies and consumers began to find their credit conditions worsening and their debt-service costs unaffordable.
So far, given the magnitude of events in U.S. and European credit markets and in the U.S. housing market, the economic data are quite mild. It feels as though a recession is coming, but unemployment has not risen much and credit conditions for corporations have not tightened much. This week's housing data even suggest the construction slump might soon be over and price drops might slow."
BTW the fundamental problem here is that the Fed is thinking in terms of simplistic "1-dimensional" concepts here "debt deflation is bad", and applying them to a vastly complex "3-dimensional" reality.
There's simply a gross impedance mismatch between model and reality in this case, and this is leading to disasterous outcomes when the Fed attempts to apply their theories to the real world.
It's like having a kid that's been building cars out of legos try to fix your real car when it breaks down.
Chances are you'll be looking for a new car soon after.
Likewise when doctors first try out new procedures, the patient often fares very badly the first few times around (that's why they use rats).
In this case the patient that the Fed is trying it's radical new procedures on is the US economy.
There have been no rats to experiment on.
As with any radical new procedure, we should not expect the first few patients to fare very well. If they continue faring at all.
As one of the grouchy old retirees all I can say is with this bunch of thives we'll never have to worry about zero inflation much less 2% if it was measured as it was in the 70's without the new math.
Discussion on CNBC this morning about GSE having 76% of secondary market for mortgages was not a surprise. They are the only game in town and will effectively end up holding all of the mortgages in the country. Long term implications are inflationary because the printing presses will be running at full speed. Concern about 0 inflation is misplaced.
The timing of that speech is curious. Many of the Fed's actions taken in the past few weeks are outlined in Bernake's 2002 speech. They are clearly acknowledging that they are going to print their way out of the credit crunch/housing asset bubble and we should expect to see continued private asset purchases, potentially right to houses, in the name of preventing the wrath of deflation.
How will this play out in investments? Hold cash, buy Euro? What is worth more in a deflationary envrionment?
So let me get this straight, the reason two percent-plus inflation is better than zero percent, is so you guys at the Fed have an easier time of it (since we don't want the whole thirteen trillion dollar economy to have assuredness regarding the value of the medium of exchange since it would "...cause monetary policy to become constrained...")
Squatting in our McMansions wondering how we can afford to fill the SUV with gas to get to the grocery store and how much rice and Maxwell House coffee we can buy.
Surrounded by our plastic gewgaws from China
Reassured by words from the modern-day Irving Fisher.
Except that deflation combined with rigidity in nominal wages would help to resolve the issues of wealth distribution that are going on in the United States right now.
What we need is flat wages and decreasing prices to soak up the profit margins that are making the rich richer on the back of debt slaves.
Second chart is awesome as an illustration of the relative amount of borrowing and as a political statement (the way it breaks through the bottom border of the chart).
After looking at both charts, I have come to the conclusion that everything is contained, and that this will be a mild recession - if it happens at all.
So markets that undergo deflation often don't clear.
rcryran you get the A in this class, after having to read through the usual "fiat..blahblahblah...thieves...blah...Fed abolished...blah...killing my savings..." ugh. My kingdom for cogent thought.
You hit the nail on the head. 0% inflation is bad exactly for the reasons you cite. Markets don't clear, and that would mean, in aggregate (because these measures are ACROSS the entire economy) parts of the system would be in deflation. And the current housing debacle is indeed the best demonstration of what happens.
This follows unemployment discussions and the question "why can't we have 0% unemployment?" Because that's bad too, as a natural rate of unemployment helps to clear the labor market and indicates orderly job transitions and, in fact, growth.
So I think he's spot on also. A natural low rate of inflation indicates that the markets are healthy, and provides for an underlying rate of clearing and balance on the positive side so that one segment doesn't tip into severe deflation and prevent orderly investment and clearing.
Tables Turn Quickly on Chinese Developers After Buying Up Land,
Firms Can't Raise Enough Cash to Build
By JONATHAN CHENG-WSJ
March 26, 2008; Page C10
HONG KONG -- Just six months ago, Chinese property developers were on a shopping spree, dipping deep and borrowing heavily to snap up more, and more expensive, pieces of land.
How quickly things have changed.
Three months into 2008, China's property developers are under siege. Property prices are showing signs of weakness in many of the country's key markets, and capital markets have all but seized up for these -- and other -- offerings. The Chinese government is on a high-profile campaign to clamp down on new bank loans, hoping to curb inflation, rising at its fastest clip in a decade....
"Of course we have to have inflation that's at least as much as the interest we charge. Otherwise the Fed would go broke. People have to pay us back our pound of flesh, afterall."
Specifically TG. let's take the curent RE market which is, in any definition, in delation.
Prices tend to be sticky when face with deflationary forces, as no one actually ever wants to LOWER prices for assets. Buyers of those assets see the deflation, and will not pay the current price so hold out for a lower one. Anyone in a lending situation is reluctant to lend against an asset facing deflationary pressure because no one wants to get stuck with paper that doesn't cover the asset over a long term. (Auto loans are NOT a good example of this because they have a regular depreciation schedule that is well-known and the risk can be priced into the loan in advance). So now you have a situation where price discovery isn't forthcoming and the market can't effectively clear. Transfer this analogy to other sectors including business capital investment, a market with real negative interest rates, and the like.
If the RE market could clear, price discovery would be forthcoming and the markets could recalibrate even in the face of serious loss. But now they can't. So all these market seizures are directly related to the fact that there is no price discovery so no one really knows what the ultimate losses/price floor is so no one can recalibrate an move on. Also, think of the shock to the system if this were to stick for a period, and then happen all at once.
Remember, these instruments/houses/land/CRE aren't worth NOTHING and therefore the financial instruments aren't worth NOTHING either. But with the market stuck, no one really knows or can estimate WHAT.
Insightful points on asset deflation. Another reason prices are currently sticky is that the financial companies are "banking" on the fed or the government to bail them out.
Why sell at a loss now if you believe you can hold the economy hostage and dump the junk on the tax payers at a higher than market price?
OK, let's assume for a moment that deflation is always bad (which I don't believe). Then the next question is what forces make it happen. And the answer is: crashing asset bubbles. Both Great Depression and Japaneese lost decade was caused by imploding bubbles. And the cause of the bubbles was expansionary (=inflationary) policies beforehand that were not supported by productivity and wealth increases. So how to assure that "it will not happen"? Dear Fed members, could you stop blowing one after another asset bubbles with your policies? Then, you will not need to worry about harmful deflation.
Is this zero inflation idea related to double taxation? Essentially, if we have "higher" positive inflation, that increases the tax rate in proportion, but if we have deflation, taxes are reduced. I think the rich will end up with tax breaks and the poor will pay more.
What if we were to look at The Fed model, as if they are running a huge used car lot?
Re: By increasing the number of U.S. cars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a cars (in terms of goods and services, which is) equivalent to raising the prices in cars (of those goods and services). We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Hence, to simplify:
By increasing the number of U.S. cars, the U.S. government can reduce the value of cars, equivalent to raising the prices in cars.
This reminds me of theologians debating how many angels can dance on the head of a pin. (Maybe theologian never debated that exact point, but they've debated plenty of absolute nonsense in their centuries.)
Now these theologian were well-educated, intelligent, and regarded as pillars of society in their time. But ultimately they had devoted their lives to contemplating and theorizing nonsense. The modern central banker seems to be of a similar religion.
As most of you know, economies had hundreds of years of amazing economic progress without systemic inflation (and hundreds of years of amazing progress even without the miracle of Texas Tea). But facts rarely get in the way of religion.
Obviously, the Federal Reserve lacks any real credibility in what they say. Almost anything they say is taken with a large grain of salt.
What happened to the coordinated gold sales by most western central banks? That sort of made them like a bunch of idiots. Hilarious. Trying to supress the gold market will never work.
Another reason prices are currently sticky is that the financial companies are "banking" on the fed or the government to bail them out.
No. You don't sit around and do nothing thinking there is a bailout in the works at all. And furthermore, that figures into the discussion I just put out there: the bailout only affects the ultimate price which, now, no one knows because the market can't clear...and since that is the case the effect of any bailout is also unknown and precludes it since no one knows exactly what to bailout.
Home prices? No. Those will sink no matter what and the Fed isn't interested in propping up homeowners. Perhaps Congress, but we'll be well past the point of doing any good by the time they act. The holders of paper? The Fed doesn't care about them either, only about their orderly unwind. Shareholders? Ask BSC what they think of $10 a share. So where does the bailout happen? Answer: there isn't going to be one. The new term facility was just vastly under-utilized.
TG you can mull over the fact that we had manias throughout history, even when there was a gold standard. They happen, and it just happened first with the dot com boom and then with real estate. Years ago it was tulips. What they didn't have in the past was all the counter-party risk. And that's the new issue for us to deal with here. Other posters statements about the economy of the British Empire 100 years ago notwithstanding.
Dissertation on the Failure of Fed National Accounting related to summarizing aggregate economic activity
By Scotty @ the carlot
Introduction:
The first problem with the metaphorical valuation of cars on the lot or the valuation of money is found in statistical distortion:
In statistics, a result is called 'statistically significant' if it is unlikely to have occurred by chance. "A statistically significant difference" simply means there is statistical evidence that there is a difference; it does not mean the difference is necessarily large, important or significant in the common meaning of the word.
Hence, not all cars on the lot have the same value, and thus we need to have a discretionary policy which reacts to how our dealership values one car versus another. How do we value one greenback (one car) versus the aggregate values of time related distributions relating to dynamic inventory? Does the valuation on our car lot account for cars in total distribution everywhere or just the supply of cars in storage on the car lot? Hence, are we as a car lot able to produce enough cars to influence the value of all the cars we have sold which are now on the street driving or parked?
IMHO, the greatest mistake of Helicopter Ben's assumption in regard to policy, is that all dollars or metaphorical cars are of equal value, and thus the implication that The Fed can have a single policy to print more money or produce more cars and thereby effect valuation across the board (the car lot + all registered cars everywhere) to produce positive inflation, is erroneous.
Part 2:
A Katrina-like Flood of new cars will cause traffic flow problems and reduce market efficiency
All those shmuck Fed leaders should be forced to live on minimum wage for a few years (like an every increasing number of our nearly jobless citizens) while watching the price of everything spiral upwards and out of control while their wages decrease. Then, we'll see if they still inflation is a cure to anything but the commonfolk still being able to afford food.
Economist Robert Solow of MIT suggested that the 2001-2003 failure of the expected economic recovery should be attributed not to monetary policy failure but to the breakdown in productivity growth in crucial sectors of the economy, most particularly retail trade. He noted that five sectors produced all of the productivity gains of the 1990s, and that while the growth of retail and wholesale trade produced the smallest growth, they were by far the largest sectors of the economy experiencing net increase of productivity. "2% may be peanuts, but being the single largest sector of the economy, that's an awful lot of peanuts."
The textbook growth model is an enhanced version of a model developed by Robert Solow, a pioneer in the theory of growth accounting. The textbook growth model incorporates the assumption that economic output is determined by the number of hours of labor workers supply, the size and composition of the capital stock (for example, factories and information systems), and total factor productivitywhich represents the state of technological expertise. The model is not forward-looking: The people it represents base their decisions about working and saving entirely on current economic conditions. In particular, they do not respond to expected future changes in government policy. Moreover, instead of incorporating effects from demand-side variations in the economy, the model assumes that output is always at its potential (or sustainable) level.
"The supply-side argument these days really applies to upper income people," said Robert Solow, a Nobel laureate in economics who served in the Kennedy administration. "They are portrayed as the golden geese and you don't want to discourage them from laying their eggs."
Part 3, why are retards using models that can not work on used car lots????
The Models Used to Analyze the Supply-Side Macroeconomic Effects of the Presidents Budgetary Proposals
The Congressional Budget Office (CBO) used three modelsa "textbook" growth model, a life-cycle growth model, and an infinite-horizon growth modelto estimate the supply-side effects of the Presidents budgetary proposals from 2009 to 2018, the period covered by CBOs current 10-year baseline projection.
Incurred deficits can lead to higher private saving for several reasons, including a response to higher interest rates.
Another factor affecting the results is that the reduction in national saving would not entirely translate into reductions in domestic investment. Instead, part of the reduction would be reflected in increased borrowing from abroad, which allows the domestic capital stock to increase more rapidly than the capital stock (which is mainly but not entirely domestically located) owned by U.S. citizens.2
The textbook growth model accounts for those tendencies by including two assumptions, each based on past relationships. First, the model assumes that every dollar of deficit leads people to increase their private saving by 40 cents and thus reduces national saving by only 60 cents. Second, the model assumes that every decline of $1 in national saving leads to a 40 cent increase in the amount of foreign capital invested in the United States. Together, those assumptions imply that a $1 increase in the budget deficit results in a 40 cent increase in private saving, a 24 cent increase in capital inflows (24 cents equals 60 cents times 0.4), and a 36 cent decline in domestic investment.
Re: The Congressional Budget Office (CBO) used three modelsa "textbook" growth model, a life-cycle growth model, and an infinite-horizon growth modelto estimate the supply-side effects of the Presidents budgetary proposals from 2009 to 2018, the period covered by CBOs current 10-year baseline projection.
Obviously, The Fed, Bush, The Republicans have distorted America into a supply-side disaster which has resulted in chaos and systemic instability -- failure!
See also: Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates. This can be contrasted with Keynesian economics (or "demand side economics"), which argues that growth can be most effectively managed by controlling total demand for goods and services, typically by adjusting the level of government spending. Supply-side economics is often conflated with trickle-down economics, a derogatory term given to right-leaning economists' views by political opponents.[1] The term supply-side economics was coined by journalist Jude Wanniski in 1975, and popularized the ideas of economists Robert Mundell and Arthur Laffer.
The extreme promises of supply-side economics did not materialize. President Reagan argued that because of the effect depicted in the Laffer curve, the government could maintain expenditures, cut tax rates, and balance the budget. This was not the case. Government revenues fell sharply from levels that would have been realized without the tax cuts.
- Karl Case & Ray Fair, Principles of Economics (2007)
In 2003, the Wall Street Journal declared the debate over supply-side economics to have ended "with a whimper" after extensive modeling performed by the Congressional Budget Office failed to support the most extreme claims of supply-side policies. [37] It was also suggested that Dan Crippen may have lost his chance at reappointment as head of the CBO for failing to support supply-side inspired dynamic scoring. This research undermines the claim that tax cuts can completely compensate for the initial loss of revenue due to the cut, but does acknowledge that resulting growth from the tax cut does replace some of the lost revenue, and the CBO has come under fire for using low estimates.
Before President Bush signed the 2003 tax cuts, the left-leaning Economic Policy Institute (EPI) released a statement signed by ten Nobel prize laureates entitled "Economists' Statement Opposing the Bush Tax Cuts," which states that:
\t
Passing these tax cuts will worsen the long-term budget outlook, adding to the nations projected chronic deficits. This fiscal deterioration will reduce the capacity of the government to finance Social Security and Medicare benefits as well as investments in schools, health, infrastructure, and basic research. Moreover, the proposed tax cuts will generate further inequalities in after-tax income.[38]
Ok, hee you have it, a massive push by Bush to extend supply side retardation:
Finally, because of fear of capital losses on assets besides money, Keynes suggested that there may be a "liquidity trap" setting a floor under which interest rates cannot fall. (In this trap, bond-holders, fearing rises in interest rates (because rates are so low), fear capital losses on their bonds and thus try to sell them to attain money (liquidity).) Even economists who reject this liquidity trap now realize that nominal interest rates cannot fall below zero (or slightly higher). In the diagram, the equilibrium suggested by the new I line and the old S line cannot be reached, so that excess saving persists. Some (such as Paul Krugman) see this latter kind of liquidity trap as prevailing in Japan in the 1990s.
Even if this "trap" does not exist, there is a fourth element to Keynes's critique (perhaps the most important part). Saving involves not spending all of one's income. It thus means insufficient demand for business output, unless it is balanced by other sources of demand, such as fixed investment. Thus, excessive saving corresponds to an unwanted accumulation of inventories, or what classical economists called a general glut[2]. This pile-up of unsold goods and materials encourages businesses to decrease both production and employment. This in turn lowers people's incomesand saving, causing a leftward shift in the S line in the diagram (step B). For Keynes, the fall in income did most of the job ending excessive saving and allowing the loanable funds market to attain equilibrium. Instead of interest-rate adjustment solving the problem, a recession does so.
Mishkin is right, but he leaves out one point, of whom I don't know how important it is: In deflation, the velocity of money decreases and deepens the deflation. Steady inflation induces people to store their money in (guaranteed) banks instead of under the matrasses, to get interest as compensation for inflation.
Frankly, I'd prefer target core inflation in the 1-4% range, meaning that core inflation rates below 2% are to be avoided, since it's not unusual for demand shocks to reduce inflation by such a magnitude.
Deflation and liquidity traps are to be avoided. The Fed Funds rate is now below the core inflation rate: such stimulus could not achieved if the core inflation rate were at zero and falling.
Interesting post. Would you be interested in syndicating your content on the home page of my site? It's an online community of finance professionals ( WallStreetOasis.com | Wall Street Community, Career Advice, and Business News ). I could add an RSS feed that will allow me to promote your blog posts to my home page (when i think it will lead to a good discussion and/or is appropriate), but I wanted to make sure you were comfortable syndicating first. The syndicated post would have a link back to your original post. Thanks, Patrick (you can reach me at wallstreetoasis@wallstreetoasis.com if you have any questions)
Well, don't look at me. I'm not going to post first.
Completely bogus. These hucksters worship dubious theories and justify just about everything with their common sense defying mumbo jumbo.
Here's why zero inflation is good. We pay less and get the benefits of progress directly in prices. Our money goes further. The government does not get to steal our purchasing power. Retirees can look forward to making ends meet. And much more.
The Fed is also concerned about the recent upswing in sightings of magical purple unicorns relative to house leprechauns.
The problem for Fed Governors is they're forced to think like Keynsians. Their mandate is Keynsian (price stability), and the system they're given is Keynsian.
So of course they're going to say stuff that sounds absurd to Austrians and occasionally even to moneterists, but what choice do they have? They don't have the power to revert to a gold standard. Only Congress has that power.
Inflation is a blank check that the government can drwa a little from everyone with. Zero inflation is the only defensible central bank policy.
Spectator,
In spirit, I agree with you. We've been robbed of our productivity efficiences through =excessive= inflation. However, Mishkin is correct to assert that zero inflation or deflation are just as unhealthy for an economy.
When the world still had commodity backed currencies, inflation was kept in check by rates of extraction of the monetary commodity. For most of the world, that has historicaly been gold and silver, of which the supply has consistently (if I recall the figure correctly) increased by 1 or 2 percent per year... even across millenial gulfs of time.
Seems almost, umm.... divine... that that represents about 'ideal' inflation. Additionally, when population growth slows, so does extraction. It's not nice to cheat Mother Nature!
BTW... check out "The Great Wave" by D.H. Fischer... it really illustrates this point well. I think Mises discussed the same topic, too.
Nice catch CR and Tanta!
I'm a monetary uber-nerd. Love it.
Oh... And what happens when the Au/Ag run out?
THAT is why we should be colonizing the solar system. The growth model is excellent if you have PHYSICAL FRONTIERS. Stuck on this planet, which is really small, you just end up with "To many critters in the cage". We're much to curious a species to be trifling with this BS we do in today's world. We used to really achieve some great things. Ipods???? Puke!! Where's my jet pack??!!!
Much obliged... I'll shut up and read
I'd agree the gold standard would result in some modest inflation. Does not make it necessary.
The case for positive inflation is based on dubious assumptions, and ex post facto observations.
Spectator,
IF we have zero population growth. That cat's outta' the bag.
But like I said... I think we agree from a sentiment standpoint.
Ben wants "positive inflation" and thus higher prices which in theory (retarded as it may be) forces more money into the system which results in greater stability, versus having prices crash ans not enough money in the system.
However, as everyone with a human brain has witnessed in realtime, models and theories are about as useful as dog crap in a park.
Example:
Remarks by Governor Ben S. Bernanke
Before the National Economists Club, Washington, D.C.
November 21, 2002
Deflation: Making Sure "It" Doesn't Happen Here
By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Can anyone parse the "Downward nominal wage rigidities" paragraph for me? He starts out by asserting that low inflation is bad because firms won't cut nominal wages. But then he ends the paragraph by contradicting himself, stating the Swiss and Japanese experience disproves his earlier assertion. Why bother making it at all then?
Deflation has been the historical norm, because the benefits of progress give increased efficiencies of several kinds. For example, the glabalization boom (all other considerations aside) effectively lowered wages, hence the cost of manufactured products. That deflationary pressure on prices has served to conceal the true rate of inflation here in the US. It has been far higher than measured.
So the wage argument is bogus. As efficiencies increase, wages should increase in buying power.
Furthermore, the money supply should only increase at the rate of increase in a country's useful assets (housing, transportation infrastructure, farms and factories, and more abstract assets like patents and education of its citizens).
Given that PM's are extracted at a slower rate than such increases in the the real GDP, there ought to be consistent deflation, if the monetary base is gold and silver.
Who does Mishkin think he's kidding? See John William's charts M3 and Annual CPI Inflation
Inflation, Money Supply, GDP, Unemployment and the Dollar - Alternate Data Series
Not sure this will help, but:
With downward rigid nominal wages, some positive inflation is essential to foster labor market (real wage) adjustment to unemployment disturbances. Price stability, on the other hand, lowers real wage flexibility and the allocative efficiency of the labor market. Accordingly, the cost of eliminating inflation is higher than many believe since at low levels of inflation a permanent tradeoff between unemployment and inflation emerges; the unemploy-ment costs of eliminating inflation increase as inflation approaches zero.7
7 In other words, the Phillips Curve is non-linear and not vertical at low levels of inflation.
Inflation in a number of economies fell below one per cent in early 2003 and, in some cases, inflation even turned negative. This raised serious concerns about a generalised global deflation and its adverse consequences. In particular, the episode highlighted the limitations of monetary policy in countering deflation. The constraints on monetary policy arise due to a lower bound of zero on nominal interest rates and the concomitant 'liquidity trap'. Coupled with downward nominal wage rigidities, a lower bound of zero on nominal rate restricts the ability of the monetary policy to drive down real interest rates. Rather, with falling prices, real interest rates would increase and further reduce domestic demand leading to a vicious circle. Due to the zero interest rate floor, the probability of a deflationary spiral increases sharply - from nil for an inflation target of two per cent and above to 11 per cent when inflation target is zero (IMF, 2003). If the shocks are large, the deflationary spiral cannot be reversed by adjustment of the short-term nominal interest rate alone. Deflation's adverse effects also take place through financial fragility due to debt-deflation cycle - harm to bank's balance sheets from reduced collateral and from debtors' diminished ability to service loans and widening of risk premium on corporate bonds in view of worsening balance sheets.
Mishkin, Bernanke and Greenspan will spend the rest of their lives writing papers in a desperate attempt to salvage some shred of their prior exalted reputation.
Our entire financial system is now a monster Ponzi scheme. Of course in this world, any hint of zero inflation or god-forbid, deflation, would lay bare and then flatten the financial world.
Fancy theories and models cannot coverup what is plainly visible: the Fed abandoned their duty to regulate the financial system. Under the Fed's nose, trillions of dollars of debt has been issued that cannot be supported by income today or in the future.
And now the Fed is stuck: it cannot figure out a way to raise home prices, nor can it figure out a way to raise incomes -- so the debt is effectively defaulted and the losses must be taken.
And as it appears, we are headed towards a socialization of the losses -- with the government talking about directly buying mortgage securities.
Under this scenario, we are looking at either a) enormous consumer price inflation and/or b) a disorderly fall in the dollar AND c) a declining standard of living for all Americans.
Sad.
The argument about reluctance to invest is somewhat bogus, too. It may be that capital investment might slow down, but probably it would be wiser investment of capital.
Trade merchants have been investing for thousands of years, gambling in risk/profit. This despite PM monetary standards and deflation. And industrialization took place under the gold standard, did it not?
The only excuse for inflation is when PM extraction rises faster than the growth of real assets, as when the Spanish flooded the Old World with PM's they looted from the New World.
real interest rates? since, those are negative, why not evacuate the sickly dollars to brazil or europe?
This whole debate was gone over years ago in the early 60s when some economists thought inflation was "too low." Even as they spoke, as it were, it started to rise, until Nixon finally imposed price controls around 1972. He was alarmed by a rate of, what was it?, 3.5%! Today of course it is 4.3% and the Fed is lowering interest rates. LOL. Times change.
Anonymous 3:17 and 3:23:
Such convoluted and over-analyzed claptrap is further evidence why academics shouldn't be allowed in the halls of power.
We don't live in a model world. We live in the real world, which is made up of active and changing systems. And it is a far simpler world than all that analysis makes it out to be.
Checked in Wikipedia. The controls came in August, 1971 because inflation "persisted" above 4%.
unirealist,
Claptrap? This is very dynamic bullshit and should be help light the way as we make progress through this tunnel.
I thought this made a great point:
Re: If the shocks are large, the deflationary spiral cannot be reversed by adjustment of the short-term nominal interest rate alone.
We have (asset) inflation because (asset) inflation is what makes the banking/financial system profitable. It really is that simple.
Inflation does not happen all by itself. It happens because someone profits from it.
However, since constant inflation leads to exponential growth in prices, we need the occasional "reset", also known as the
"downturn" or "recession". The purpose of the recession is to create another possibility for the financial elite to execute the proverbial buy-low-sell-high strategy.
As George W. Bush once said: "economies should cycle."
3% long term inflation may be best.
Home prices, wages are sticky.. People are stubborn about nominal prices. Inflation deals with the bubble by letting people have their nominal money back, if only in a few years...
And it gives the central bank the room for negative real interest rates if in a Japan or 1930s type depression.
Perhaps the Fed is in a conundrum on how to solve the housing problem but they sure know how to make those commodity prices skyrocket. The prices of wheat and copper etc. which are soaring should help alot.
These economists...FRB...Freddie Mac...they are not all that insightful.
I hate to urge this board toward something more 'tinfoil' but c'mon.
GDP was 0.6%.
what if inflation was understated by, oh i dunno, 0.7%? according to the official stats, a recession is far away! (sadly, proclamation wise)
i'm just a fellow traveler. Keep on keepin' on CR. We duz love the blog!
Inflation target is what Krugman suggested for Japan here:
Japan: still trapped
I think one must expand on the following from the speech:
"A number of researchers in the Federal Reserve System and elsewhere have analyzed the implications of the zero lower bound in estimated dynamic rational expectations models.11 If the economy faces a large contractionary shock, the optimal monetary policy response is to push the short-term nominal interest rate below the level of expected inflation, thereby reducing real interest rates enough to mitigate the impact of the shock. But if the central bank has an inflation objective very close to zero, the zero lower bound can prevent the full implementation of this policy response, and hence the economy will tend to exhibit greater volatility of economic activity and inflation."
FEDERAL RESERVE BANK OF SAN FRANCISCO
WORKING PAPER SERIES
Working Paper 2006-01
http://www.frbsf.org/publications/economics/papers/2006/wp06-01bk.pdf
Higher-Order Perturbation Solutions to Dynamic,
Discrete-Time Rational Expectations Models
Eric Swanson
Federal Reserve Bank of San Francisco
We focus on the Taylor series solu-
tion for (log) consumption in particular, although the results are very similar for all of the
non-predetermined endogenous variables in the model. The table reports both absolute
errorsthe raw difference between the machine-precision coefficients and the true values
of those coefficients computed out to 23 decimal places or moreand the relative errors,
which are the absolute errors divided by the true values.
While the errors from using machine-precision arithmetic are very small for the first few orders, they contaminate a larger and larger number of coefficients and become progressively larger as we proceed to each higher order. Coefficient errors as large as 10% become quite common by about the fourth or fifth order and coefficient errors of about
1% are present even in the second-order solution.
Machine-precision arithmetic varies significantly from machine to machine, and even from software package to software package. Thus, there is no guarantee that the results
above will be representative of other researchers experiences using different hardware or different software packages.
Re: If the shocks are large, the deflationary spiral cannot be reversed by adjustment of the short-term nominal interest rate alone.
What kind of shocks are you talking about? The kind that periodically arise under a fiat regime? Well, here's an idea--get rid of the fiat regime in your model and then we can talk about shocks and how to deal with them.
Where's Misean when you need him?
You make my point for me when you talk about "adjustment of the short term nominal interest rate." What on earth happened to the free market? Why does the rate have to be adjusted? Why can't it set itself?
Re: "debt deflation"; from the Federal Flow of Funds report, total outstanding household debt in billions (with % growth from prev year):
1997\t5492.8\t5.8%
1998\t5919\t7.8%
1999\t6413.8\t8.4%
2000\t7008.8\t9.3%
2001\t7680.3\t9.6%
2002\t8514\t10.9%
2003\t9496.8\t11.5%
2004\t10575.4\t11.4%
2005\t11754.1\t11.1%
2006\t12948.3\t10.2%
2007\t13825.4\t6.8%
The present administration received a debt economy expanding at 9-10% and decided to kick it up a notch to 11+%. The annual per household debt service on $13.8T, assuming 7% interest, is ~$9000.
Ok...so how does the commodity price explosion fit into these formulae?
Re: "Thus, there is no guarantee that the results above will be representative of other researchers experiences using different hardware or different software packages."
Governor Frederic S. Mishkin, ends his prayer for stability with:
Finally, you may have noticed that I haven't said much about the United States in this speech. Nevertheless, the issues that I've discussed today have potentially important implications for the ongoing process of refining the Federal Reserve's policy framework and of enhancing our communications. Indeed, as Chairman Bernanke has recently indicated, our communication strategy is "a work in progress," and the Federal Reserve "will continue to look for ways to improve the accountability and public understanding of U.S. monetary policymaking" (Bernanke, 2007). And I certainly hope that my remarks will be helpful in contributing to the continuation of that process.
See Also:
Fed Shrugged as Subprime Crisis Spread
Fed and Regulators Shrugged As the Subprime Crisis Spread - NY Times
Edward M. Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.
But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.
In 2001, a senior Treasury official, Sheila C. Bair, tried to persuade subprime lenders to adopt a code of best practices and to let outside monitors verify their compliance. None of the lenders would agree to the monitors, and many rejected the code itself. Even those who did adopt those practices, Ms. Bair recalled recently, soon let them slip.
Troy writes:
Re: "debt deflation"; from the Federal Flow of Funds report, total outstanding household debt in billions (with % growth from prev year):
1997 5492.8 5.8%
1998 5919 7.8%
1999 6413.8 8.4%
2000 7008.8 9.3%
2001 7680.3 9.6%
2002 8514 10.9%
2003 9496.8 11.5%
2004 10575.4 11.4%
2005 11754.1 11.1%
2006 12948.3 10.2%
2007 13825.4 6.8%
The present administration received a debt economy expanding at 9-10% and decided to kick it up a notch to 11+%. The annual per household debt service on $13.8T, assuming 7% interest, is ~$9000.
Troy | 03.28.08 - 3:59 am | #
I bet incomes didn't go up by 10% each year. Don't worry, your asset price will always go up to cover your ass. Kind of sucks once it's realized that the cash flow to service the debt will eventually not be able to service the debt and a normal life. Hence the housing collapse.
Debt can consistently expand above real wage growth as long as the cost to service the debt can be deferred to the future (ARMs). When it can no longer be deferred, the reckoning comes and the excess debt is washed away. But in America we socialize that loss, nobody can lose.
Asset price inflation above the productive value that the asset produces will eventually correct. When asset prices go up it is speculation that the productive value of the asset will go up. If someone bids on an oil rig above current oil price productive value, they are betting the rig will be profitable. If it never does, the asset deflates.
Sadly, I really don't think any elected official understands anything about assets.
Re: "Why does the rate have to be adjusted? Why can't it set itself?"
I think the reason for systemic failure is that banks see the realities of deflation and hyperinflation and thus stagflation and a liquidity trap. The risk of exchanging money is too large in relation to the potential profit or loss; better to fold in this card game and keep your powder dry. Thus these nervous members of the financial tribes are setting rates by inaction and The Fed is in a panic to force an immediate turnaround, much like a doctor prescribing a pill as a quick fix for cancer, i.e, the patient is going through the motions and may return for more checkups, but at some point, the inefficiency of the overnight cure, which drags on and on, becomes an obvious and un-wanted illusion!
Lowering rates again in a few weeks by 1/2% is as retarded as giving an enema to someone that is suffering from dehydration. yes, you can go through the motions and experiment, but at some point, stupidity can begin to look like incompetence!
Ok, Bernanke, on your knees, bow yourhead and say after me:
Hippocratic Oath - Wikipedia, the free encyclopedia
\tI swear by Apollo, Asclepius, Hygieia, and Panacea, and I take to witness all the gods, all the goddesses, to keep according to my ability and my judgment, the following Oath.
To consider dear to me, as my parents, him who taught me this art; to live in common with him and, if necessary, to share my goods with him; To look upon his children as my own brothers, to teach them this art.
I will prescribe regimens for the good of my patients according to my ability and my judgment and never do harm to anyone.
To please no one will I prescribe a deadly drug nor give advice which may cause his death.
Nor will I give a woman a pessary to procure abortion.
But I will preserve the purity of my life and my arts.
I will not cut for stone, even for patients in whom the disease is manifest; I will leave this operation to be performed by practitioners, specialists in this art.
In every house where I come I will enter only for the good of my patients, keeping myself far from all intentional ill-doing and all seduction and especially from the pleasures of love with women or with men, be they free or slaves.
All that may come to my knowledge in the exercise of my profession or in daily commerce with men, which ought not to be spread abroad, I will keep secret and will never reveal.
If I keep this oath faithfully, may I enjoy my life and practice my art, respected by all men and in all times; but if I swerve from it or violate it, may the reverse be my lot.
Sadly, I really don't think any elected official understands anything about assets.
Amen to all you said, Erik. Sensible is good.
One could have seen the entire housing collapse without even talking to an economist or reading a blog. All one had to do was look at the cost to rent vs. the cost to own. The productive value of the home was so out of line with rents, and rents were up only 5% annually in hot markets (where homes were up over 30-40% annually).
Just because people can ignore reality doesn't mean reality will ignore people. Housing prices aren't going to the mean, housing prices are going to the historical rent norm.
I've had some people try to dismiss this since the housing "ownership" rates are above 65%. They say rents don't matter because most people don't rent. Guess what is happening now though, people can't keep their second homes because the productive value doesn't support the asset price that the loan was taken out on. SF homes can't sell at asking prices because what moron will pay double what it costs to rent to merely own. And it isn't even a choice for most people, they literally cannot afford ownership.
Until pigmen can convince people to take out 50 year loans or inter-generational loans to merely be able to own a home, prices are going to the rent norm.
better to fold in this card game and keep your powder dry.
Which is why those who still hold cards and can't get rid of them are in panic mode.
Kind of like a game of hearts, except that now there are many players who still have that deadly Queen of Spades in their hands, and are realizing they can't get rid of it.
Just because people can ignore reality doesn't mean reality will ignore people.
Oh, that's a neat way to put it.
I think Mishkin is spot on. There is never one inflation rate for all sectors of the economy. Currently, housing prices and (maybe education expenses?) are deflating, while lots of other stuff (medical costs, commodities etc.) are inflating.
People have a really tough time wrapping their minds around deflation (prices are sticky downwards). So markets that undergo deflation often don't clear. Buyers offer new, lower pricers and sellers offer older, higher prices. Just look at all the housing markets for a good example of this. When markets don't clear, you have a big problem.
An inflation rate of zero means large sectors of the economy are undergoing deflation at any one point. And there's probably a big cost to this.
Of course, this all assumes inflation is measured properly (a big caveat). And I doubt inflation is being measured correctly.
Sounds like BB and his gang have decided on getting us out of this mess via inflation. All of the trash in the Level 2s and 3s will eventually be worth the right amount with a enough time and inflation. Assuming the assets on average have dropped to 60%, aim for about 66% over 4 years and everyone is whole.
Of course core inflation will remain at 3 or 4%.
So it is time for the Feds to start talking positive to the sheeple about inflation.
A little is good, a little more is better.
You'll sleep better at night,you'll have more stamina, when you awake you won't remember any of this until you hear the magic word.
0 inflation may convince people to save money. What would markets do if there wasn't a fresh supply of money to be stolen by wallstreet from mainstreet suckers.
"investors will never choose to lend money at a negative nominal interest rate"
If presented with the choice of losing money at -10% in the Stock market. -15% in nominal interest rates(non-hedonic calculations) in a savings account. They will Run to Bonds at -5% instead.
No wonder these guys have been runing our economy into the toilet.
What a shell game. When basicly what he is saying is "OMG!!! what if we had to pay back money at the rate negotiated"
So "downward nominal wage rigidities becoming less prevalent" is a bad thing? This is pure AG babblespeak. What the hell are our Fed Governors doing, passing around snakes?
Ann Rand followers need to all be rounded up and put on reservations, seeing how well that worked for the Indians and their casinos.
No, really! Inflation is good for you. Trust us. It's better to lose a little bit of your wealth every year than make some. Really. Honestly. C'mon, I am not kidding.
All,
In the following video, a professor argues very convincingly that there are no AGGREGATE benefits to inflation. Certain sectors of the economy benefit from inflation but only at the expense of other sectors. Namely, the groups that get the "early" inflation benefit (primarily wall street).
21 Evils of Inflation - Prof. Krassimir Petrov
To me the most important points were the last 2.
The only reason you would bring up the zero bound in this environment is if we're headed to zero. If shadowstats.com is right - a zero percent interest rate would mean a real interest rate of -7 to -10% at current shadow inflation levels. And debt deflation comments were a clear FU to the Chinese - we're going to let our inflation take care of our debt over time.
I can't stand Fed Governors. Their words mean nothing.
It is all the saving glut matching out cinsumption glut.........
Seems pretty silly to me. Obviously there is good deflation and bad deflation. Where prices are falling in certain sectors because of increases in productive efficiency (e.g. home computers), what do we see -- falling wages? Can inflation be too low? Price stability is the goal of the Fed -- the idea that acheiving stable currency is harmful is wrongheaded.
The only way "inflation can be too low" is if it is failing to destroy the middle class and savers. From the viewpoint of the crooked elite and their nearly infinite wealth and free loans ("Here, Fed, take this worthless MBS in return for cash!"), allowing the peasants enough cash to eat and maybe even save is just not acceptable.
Which is why those who still hold cards and can't get rid of them are in panic mode.
Oooh, that Queen of Spades will get you every time! (Sorta like holding C stock at the moment.) On the other hand, if you take all the tricks ... um, what do you get? ALL the C stock? Ick.
The story below is why moral hazard will bite the FED. Give Wall Street an inch, and they will sell derivitives on 1000 miles! Note the last lines: With a governemnt printing money, Lehman is attractive as a stock. Who knew?
Lehman Raised to Buy' at Citigroup onAttractive' Valuations
March 28 (Bloomberg) -- Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, was upgraded to buy'' fromhold'' at Citigroup Inc., which cited extremely attractive'' valuations.
The brokerage also said Lehman's recent profitable quarter and the coordinated actions taken by the Federal Reserve and the U.S. Treasury to inject liquidity into the market providedexcellent downside protection.''
In our view, it's tough to have a liquidity-driven meltdown when you're being backed by government entities that have the ability to print money,'' analysts including Prashant Bhatia in New York wrote in a note to investors today.Lehman has ample liquidity to run its business.''
Don't you draw the Queen of diamonds boy, she'll beat you if she's able.
You know the Queen of hearts is always your best friend.
Sure, I think it's reasonable to suggest that inflation can be too low.
What I think is completely unreasonable is to suggest that "too low" inflation is justification for the Federal Reserve bank to go and destroy some other part of the economy in an attempt to fix it.
Under this scenario, we are looking at either a) enormous consumer price inflation and/or b) a disorderly fall in the dollar AND c) a declining standard of living for all Americans.
You forgot (d), political and social upheaval.
Simian said: "So it is time for the Feds to start talking positive to the sheeple about inflation."
My first reaction to the article was that they're trying to set us up to embrace the coming inflation as being a good thing. I don't think it's going to work though.
More info suggesting the meltdown and collapse crowd need to be careful with their predictions. See Washington Post Opinion column by editor of the Economist titled Lessons from Japan's Malaise.
Bill Emmott - Lessons From Japan's Malaise - washingtonpost.com
"It took so long for the underlying economic impact to become visible because the first losers in Japan's stock market crash were financial: banks, insurance companies and other institutional investors. The damage to the real economy came when private companies and consumers began to find their credit conditions worsening and their debt-service costs unaffordable.
So far, given the magnitude of events in U.S. and European credit markets and in the U.S. housing market, the economic data are quite mild. It feels as though a recession is coming, but unemployment has not risen much and credit conditions for corporations have not tightened much. This week's housing data even suggest the construction slump might soon be over and price drops might slow."
fyi - Roubini on CSpan now
BTW the fundamental problem here is that the Fed is thinking in terms of simplistic "1-dimensional" concepts here "debt deflation is bad", and applying them to a vastly complex "3-dimensional" reality.
There's simply a gross impedance mismatch between model and reality in this case, and this is leading to disasterous outcomes when the Fed attempts to apply their theories to the real world.
It's like having a kid that's been building cars out of legos try to fix your real car when it breaks down.
Chances are you'll be looking for a new car soon after.
Likewise when doctors first try out new procedures, the patient often fares very badly the first few times around (that's why they use rats).
In this case the patient that the Fed is trying it's radical new procedures on is the US economy.
There have been no rats to experiment on.
As with any radical new procedure, we should not expect the first few patients to fare very well. If they continue faring at all.
As one of the grouchy old retirees all I can say is with this bunch of thives we'll never have to worry about zero inflation much less 2% if it was measured as it was in the 70's without the new math.
Discussion on CNBC this morning about GSE having 76% of secondary market for mortgages was not a surprise. They are the only game in town and will effectively end up holding all of the mortgages in the country. Long term implications are inflationary because the printing presses will be running at full speed. Concern about 0 inflation is misplaced.
The timing of that speech is curious. Many of the Fed's actions taken in the past few weeks are outlined in Bernake's 2002 speech. They are clearly acknowledging that they are going to print their way out of the credit crunch/housing asset bubble and we should expect to see continued private asset purchases, potentially right to houses, in the name of preventing the wrath of deflation.
How will this play out in investments? Hold cash, buy Euro? What is worth more in a deflationary envrionment?
So let me get this straight, the reason two percent-plus inflation is better than zero percent, is so you guys at the Fed have an easier time of it (since we don't want the whole thirteen trillion dollar economy to have assuredness regarding the value of the medium of exchange since it would "...cause monetary policy to become constrained...")
Got it.
Expired
KB Home Swings to 1Q Loss
"The cancellation rate was 53 percent, up from 34 percent in the year-ago quarter but down from 58 percent in the fourth quarter."
There is no way the homebuilders can survive.
Ah, the endgame Inflation!
Squatting in our McMansions wondering how we can afford to fill the SUV with gas to get to the grocery store and how much rice and Maxwell House coffee we can buy.
Surrounded by our plastic gewgaws from China
Reassured by words from the modern-day Irving Fisher.
OT - but worth a look
Total Borrowings of Depository Institutions from the Federal Reserve" from 1919 to present.
St. Louis Fed: Series: BORROW, Total Borrowings of Depository Institutions from the Federal Reserve
And this one is the "Non-Borrowed Reserves of Depository Institutions" from about 1959 to present (updated).
TickerForum Error - Unauthorized Request
Except that deflation combined with rigidity in nominal wages would help to resolve the issues of wealth distribution that are going on in the United States right now.
What we need is flat wages and decreasing prices to soak up the profit margins that are making the rich richer on the back of debt slaves.
Expired
This ain't good news.
I sure hope he said all of this rubbish because someone is holding his family hostage or something....because if he is actually serious....wow.
Simian | 03.28.08 - 9:17 am
Second chart is awesome as an illustration of the relative amount of borrowing and as a political statement (the way it breaks through the bottom border of the chart).
After looking at both charts, I have come to the conclusion that everything is contained, and that this will be a mild recession - if it happens at all.
Oy.
So markets that undergo deflation often don't clear.
rcryran you get the A in this class, after having to read through the usual "fiat..blahblahblah...thieves...blah...Fed abolished...blah...killing my savings..." ugh. My kingdom for cogent thought.
You hit the nail on the head. 0% inflation is bad exactly for the reasons you cite. Markets don't clear, and that would mean, in aggregate (because these measures are ACROSS the entire economy) parts of the system would be in deflation. And the current housing debacle is indeed the best demonstration of what happens.
This follows unemployment discussions and the question "why can't we have 0% unemployment?" Because that's bad too, as a natural rate of unemployment helps to clear the labor market and indicates orderly job transitions and, in fact, growth.
So I think he's spot on also. A natural low rate of inflation indicates that the markets are healthy, and provides for an underlying rate of clearing and balance on the positive side so that one segment doesn't tip into severe deflation and prevent orderly investment and clearing.
Chinese CRE in trouble:
Tables Turn Quickly on Chinese Developers After Buying Up Land,
Firms Can't Raise Enough Cash to Build
By JONATHAN CHENG-WSJ
March 26, 2008; Page C10
HONG KONG -- Just six months ago, Chinese property developers were on a shopping spree, dipping deep and borrowing heavily to snap up more, and more expensive, pieces of land.
How quickly things have changed.
Three months into 2008, China's property developers are under siege. Property prices are showing signs of weakness in many of the country's key markets, and capital markets have all but seized up for these -- and other -- offerings. The Chinese government is on a high-profile campaign to clamp down on new bank loans, hoping to curb inflation, rising at its fastest clip in a decade....
Tables Turn Quickly on Chinese Developers - WSJ.com
Bust don't worry S&P says it will all work out.
Rated Chinese property developers will endure, says S&P
By Rosie Slater | 5 March 2008
Standard and Poor's forecasts a difficult year for many Chinese real estate developers, but says most companies it rates look relatively strong.
Rated Chinese property developers will endure, says S&P - General - FinanceAsia.com - The network for financial decision makers
Mishkin's mouth - the other side:
"Of course we have to have inflation that's at least as much as the interest we charge. Otherwise the Fed would go broke. People have to pay us back our pound of flesh, afterall."
Are severence packages included in Personal Income calculations?
Ipodius can you explain more on the concept of clearing? Thanks
Specifically TG. let's take the curent RE market which is, in any definition, in delation.
Prices tend to be sticky when face with deflationary forces, as no one actually ever wants to LOWER prices for assets. Buyers of those assets see the deflation, and will not pay the current price so hold out for a lower one. Anyone in a lending situation is reluctant to lend against an asset facing deflationary pressure because no one wants to get stuck with paper that doesn't cover the asset over a long term. (Auto loans are NOT a good example of this because they have a regular depreciation schedule that is well-known and the risk can be priced into the loan in advance). So now you have a situation where price discovery isn't forthcoming and the market can't effectively clear. Transfer this analogy to other sectors including business capital investment, a market with real negative interest rates, and the like.
If the RE market could clear, price discovery would be forthcoming and the markets could recalibrate even in the face of serious loss. But now they can't. So all these market seizures are directly related to the fact that there is no price discovery so no one really knows what the ultimate losses/price floor is so no one can recalibrate an move on. Also, think of the shock to the system if this were to stick for a period, and then happen all at once.
Remember, these instruments/houses/land/CRE aren't worth NOTHING and therefore the financial instruments aren't worth NOTHING either. But with the market stuck, no one really knows or can estimate WHAT.
Ipodius,
Insightful points on asset deflation. Another reason prices are currently sticky is that the financial companies are "banking" on the fed or the government to bail them out.
Why sell at a loss now if you believe you can hold the economy hostage and dump the junk on the tax payers at a higher than market price?
The fed is not helping the markets clear, it is preventing the markets from clearing via the bailout put.
AKA the tax payer bagholder/sucker put.
Sure, inflation is good for you. Here's a picture of the wonders of inflation (via USA Today) from Zimbabwe:
http://blogs.usatoday.com/photos/uncategorized/2008/03/27/q1x00184_9.jpg
Ipodius, thanks. I have to mull. There does seem to be an issue of why things got so overbuilt that is not taken in to account.
OK, let's assume for a moment that deflation is always bad (which I don't believe). Then the next question is what forces make it happen. And the answer is: crashing asset bubbles. Both Great Depression and Japaneese lost decade was caused by imploding bubbles. And the cause of the bubbles was expansionary (=inflationary) policies beforehand that were not supported by productivity and wealth increases. So how to assure that "it will not happen"? Dear Fed members, could you stop blowing one after another asset bubbles with your policies? Then, you will not need to worry about harmful deflation.
Is this zero inflation idea related to double taxation? Essentially, if we have "higher" positive inflation, that increases the tax rate in proportion, but if we have deflation, taxes are reduced. I think the rich will end up with tax breaks and the poor will pay more.
Mishkin is a schmuck.
Britain built an empire with decades and decades of modest deflation. The U.S. built a nation with such, too, over the 1700s and 1800s.
Strong real growth is not inimical with modestly falling prices.
What if we were to look at The Fed model, as if they are running a huge used car lot?
Re: By increasing the number of U.S. cars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a cars (in terms of goods and services, which is) equivalent to raising the prices in cars (of those goods and services). We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Hence, to simplify:
By increasing the number of U.S. cars, the U.S. government can reduce the value of cars, equivalent to raising the prices in cars.
This reminds me of theologians debating how many angels can dance on the head of a pin. (Maybe theologian never debated that exact point, but they've debated plenty of absolute nonsense in their centuries.)
Now these theologian were well-educated, intelligent, and regarded as pillars of society in their time. But ultimately they had devoted their lives to contemplating and theorizing nonsense. The modern central banker seems to be of a similar religion.
As most of you know, economies had hundreds of years of amazing economic progress without systemic inflation (and hundreds of years of amazing progress even without the miracle of Texas Tea). But facts rarely get in the way of religion.
Obviously, the Federal Reserve lacks any real credibility in what they say. Almost anything they say is taken with a large grain of salt.
What happened to the coordinated gold sales by most western central banks? That sort of made them like a bunch of idiots. Hilarious. Trying to supress the gold market will never work.
Another reason prices are currently sticky is that the financial companies are "banking" on the fed or the government to bail them out.
No. You don't sit around and do nothing thinking there is a bailout in the works at all. And furthermore, that figures into the discussion I just put out there: the bailout only affects the ultimate price which, now, no one knows because the market can't clear...and since that is the case the effect of any bailout is also unknown and precludes it since no one knows exactly what to bailout.
Home prices? No. Those will sink no matter what and the Fed isn't interested in propping up homeowners. Perhaps Congress, but we'll be well past the point of doing any good by the time they act. The holders of paper? The Fed doesn't care about them either, only about their orderly unwind. Shareholders? Ask BSC what they think of $10 a share. So where does the bailout happen? Answer: there isn't going to be one. The new term facility was just vastly under-utilized.
TG you can mull over the fact that we had manias throughout history, even when there was a gold standard. They happen, and it just happened first with the dot com boom and then with real estate. Years ago it was tulips. What they didn't have in the past was all the counter-party risk. And that's the new issue for us to deal with here. Other posters statements about the economy of the British Empire 100 years ago notwithstanding.
Dissertation on the Failure of Fed National Accounting related to summarizing aggregate economic activity
By Scotty @ the carlot
Introduction:
The first problem with the metaphorical valuation of cars on the lot or the valuation of money is found in statistical distortion:
In statistics, a result is called 'statistically significant' if it is unlikely to have occurred by chance. "A statistically significant difference" simply means there is statistical evidence that there is a difference; it does not mean the difference is necessarily large, important or significant in the common meaning of the word.
Hence, not all cars on the lot have the same value, and thus we need to have a discretionary policy which reacts to how our dealership values one car versus another. How do we value one greenback (one car) versus the aggregate values of time related distributions relating to dynamic inventory? Does the valuation on our car lot account for cars in total distribution everywhere or just the supply of cars in storage on the car lot? Hence, are we as a car lot able to produce enough cars to influence the value of all the cars we have sold which are now on the street driving or parked?
IMHO, the greatest mistake of Helicopter Ben's assumption in regard to policy, is that all dollars or metaphorical cars are of equal value, and thus the implication that The Fed can have a single policy to print more money or produce more cars and thereby effect valuation across the board (the car lot + all registered cars everywhere) to produce positive inflation, is erroneous.
Part 2:
A Katrina-like Flood of new cars will cause traffic flow problems and reduce market efficiency
Well, a lack of a bailout would be nice.
All those shmuck Fed leaders should be forced to live on minimum wage for a few years (like an every increasing number of our nearly jobless citizens) while watching the price of everything spiral upwards and out of control while their wages decrease. Then, we'll see if they still inflation is a cure to anything but the commonfolk still being able to afford food.
Part 2:
Too much dough results in traffic jams:
Economist Robert Solow of MIT suggested that the 2001-2003 failure of the expected economic recovery should be attributed not to monetary policy failure but to the breakdown in productivity growth in crucial sectors of the economy, most particularly retail trade. He noted that five sectors produced all of the productivity gains of the 1990s, and that while the growth of retail and wholesale trade produced the smallest growth, they were by far the largest sectors of the economy experiencing net increase of productivity. "2% may be peanuts, but being the single largest sector of the economy, that's an awful lot of peanuts."
The textbook growth model is an enhanced version of a model developed by Robert Solow, a pioneer in the theory of growth accounting. The textbook growth model incorporates the assumption that economic output is determined by the number of hours of labor workers supply, the size and composition of the capital stock (for example, factories and information systems), and total factor productivitywhich represents the state of technological expertise. The model is not forward-looking: The people it represents base their decisions about working and saving entirely on current economic conditions. In particular, they do not respond to expected future changes in government policy. Moreover, instead of incorporating effects from demand-side variations in the economy, the model assumes that output is always at its potential (or sustainable) level.
The Models Used to Analyze the Supply-Side Macroeconomic Effects of the President’s Budgetary Proposals
"The supply-side argument these days really applies to upper income people," said Robert Solow, a Nobel laureate in economics who served in the Kennedy administration. "They are portrayed as the golden geese and you don't want to discourage them from laying their eggs."
Retards, retards and retards:
Part 3, why are retards using models that can not work on used car lots????
The Models Used to Analyze the Supply-Side Macroeconomic Effects of the Presidents Budgetary Proposals
The Congressional Budget Office (CBO) used three modelsa "textbook" growth model, a life-cycle growth model, and an infinite-horizon growth modelto estimate the supply-side effects of the Presidents budgetary proposals from 2009 to 2018, the period covered by CBOs current 10-year baseline projection.
The Models Used to Analyze the Supply-Side Macroeconomic Effects of the President’s Budgetary Proposals
Incurred deficits can lead to higher private saving for several reasons, including a response to higher interest rates.
Another factor affecting the results is that the reduction in national saving would not entirely translate into reductions in domestic investment. Instead, part of the reduction would be reflected in increased borrowing from abroad, which allows the domestic capital stock to increase more rapidly than the capital stock (which is mainly but not entirely domestically located) owned by U.S. citizens.2
The textbook growth model accounts for those tendencies by including two assumptions, each based on past relationships. First, the model assumes that every dollar of deficit leads people to increase their private saving by 40 cents and thus reduces national saving by only 60 cents. Second, the model assumes that every decline of $1 in national saving leads to a 40 cent increase in the amount of foreign capital invested in the United States. Together, those assumptions imply that a $1 increase in the budget deficit results in a 40 cent increase in private saving, a 24 cent increase in capital inflows (24 cents equals 60 cents times 0.4), and a 36 cent decline in domestic investment.
JJL writes:
Don't you draw the Queen of diamonds boy, she'll beat you if she's able.
You know the Queen of hearts is always your best friend.
Does this make Bernanke a Desperado ?
Jim
Re: The Congressional Budget Office (CBO) used three modelsa "textbook" growth model, a life-cycle growth model, and an infinite-horizon growth modelto estimate the supply-side effects of the Presidents budgetary proposals from 2009 to 2018, the period covered by CBOs current 10-year baseline projection.
Obviously, The Fed, Bush, The Republicans have distorted America into a supply-side disaster which has resulted in chaos and systemic instability -- failure!
See also: Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created using incentives for people to produce (supply) goods and services, such as adjusting income tax and capital gains tax rates. This can be contrasted with Keynesian economics (or "demand side economics"), which argues that growth can be most effectively managed by controlling total demand for goods and services, typically by adjusting the level of government spending. Supply-side economics is often conflated with trickle-down economics, a derogatory term given to right-leaning economists' views by political opponents.[1] The term supply-side economics was coined by journalist Jude Wanniski in 1975, and popularized the ideas of economists Robert Mundell and Arthur Laffer.
The extreme promises of supply-side economics did not materialize. President Reagan argued that because of the effect depicted in the Laffer curve, the government could maintain expenditures, cut tax rates, and balance the budget. This was not the case. Government revenues fell sharply from levels that would have been realized without the tax cuts.
- Karl Case & Ray Fair, Principles of Economics (2007)
In 2003, the Wall Street Journal declared the debate over supply-side economics to have ended "with a whimper" after extensive modeling performed by the Congressional Budget Office failed to support the most extreme claims of supply-side policies. [37] It was also suggested that Dan Crippen may have lost his chance at reappointment as head of the CBO for failing to support supply-side inspired dynamic scoring. This research undermines the claim that tax cuts can completely compensate for the initial loss of revenue due to the cut, but does acknowledge that resulting growth from the tax cut does replace some of the lost revenue, and the CBO has come under fire for using low estimates.
Before President Bush signed the 2003 tax cuts, the left-leaning Economic Policy Institute (EPI) released a statement signed by ten Nobel prize laureates entitled "Economists' Statement Opposing the Bush Tax Cuts," which states that:
\t
Passing these tax cuts will worsen the long-term budget outlook, adding to the nations projected chronic deficits. This fiscal deterioration will reduce the capacity of the government to finance Social Security and Medicare benefits as well as investments in schools, health, infrastructure, and basic research. Moreover, the proposed tax cuts will generate further inequalities in after-tax income.[38]
Ok, hee you have it, a massive push by Bush to extend supply side retardation:
Finally, because of fear of capital losses on assets besides money, Keynes suggested that there may be a "liquidity trap" setting a floor under which interest rates cannot fall. (In this trap, bond-holders, fearing rises in interest rates (because rates are so low), fear capital losses on their bonds and thus try to sell them to attain money (liquidity).) Even economists who reject this liquidity trap now realize that nominal interest rates cannot fall below zero (or slightly higher). In the diagram, the equilibrium suggested by the new I line and the old S line cannot be reached, so that excess saving persists. Some (such as Paul Krugman) see this latter kind of liquidity trap as prevailing in Japan in the 1990s.
Even if this "trap" does not exist, there is a fourth element to Keynes's critique (perhaps the most important part). Saving involves not spending all of one's income. It thus means insufficient demand for business output, unless it is balanced by other sources of demand, such as fixed investment. Thus, excessive saving corresponds to an unwanted accumulation of inventories, or what classical economists called a general glut[2]. This pile-up of unsold goods and materials encourages businesses to decrease both production and employment. This in turn lowers people's incomesand saving, causing a leftward shift in the S line in the diagram (step B). For Keynes, the fall in income did most of the job ending excessive saving and allowing the loanable funds market to attain equilibrium. Instead of interest-rate adjustment solving the problem, a recession does so.
The Grand Court of the Cayman Islands has replaced KPMG Inc. as the liquidator of two now-infamous Bear Stearns...
Mishkin is right, but he leaves out one point, of whom I don't know how important it is: In deflation, the velocity of money decreases and deepens the deflation. Steady inflation induces people to store their money in (guaranteed) banks instead of under the matrasses, to get interest as compensation for inflation.
On the zero rate lower bound:
Frankly, I'd prefer target core inflation in the 1-4% range, meaning that core inflation rates below 2% are to be avoided, since it's not unusual for demand shocks to reduce inflation by such a magnitude.
Deflation and liquidity traps are to be avoided. The Fed Funds rate is now below the core inflation rate: such stimulus could not achieved if the core inflation rate were at zero and falling.
Interesting post. Would you be interested in syndicating your content on the home page of my site? It's an online community of finance professionals ( WallStreetOasis.com | Wall Street Community, Career Advice, and Business News ). I could add an RSS feed that will allow me to promote your blog posts to my home page (when i think it will lead to a good discussion and/or is appropriate), but I wanted to make sure you were comfortable syndicating first. The syndicated post would have a link back to your original post. Thanks, Patrick (you can reach me at wallstreetoasis@wallstreetoasis.com if you have any questions)