gdcox states> The US Congress requires by statute that the Fed keep inflation low AND growth going.
Well, not technically correct. The fed must keep inflation low and try to maintain full employment. If you believe the government stats, employment is not doing badly. (And if you believe the government stats, inflation isn’t too bad either. But one of my major points is that this fantasy is getting readily dismissed in a surprising number of places these days.)
Also gdcox states> You can’t blame Bernanke for trying to take the edge of a probable recession. He is required to by his employers.
Well maybe. But I sure can blame him and his predecessor for being asleep at the wheel, and telling everyone that everything was just fine and dandy, when they should have been putting on the brakes. But… this is somewhat besides the point. I’m not that concerned with placing blame. (Although I’m gonna do it, it’s not my real question)
Finally gdcox wrote> In short, the best outcome is a period of slugflation as the Fed raised rate when the economy stabilises
Uhh… yeah…. and when the heck are things going to stabilize, and how is the fed going to raise rates when this reported stabilization occurs without further clobbering any recovery that might be starting? Isn’t it far more likely that the fed will continue to lower rates, ultimately the credit mess will bottom out, but then we will spend years with high inflation while the economy sputters trying to get back to it’s feet. I’m no economic expert, but isn’t it the case that when inflation takes hold, inflation causes the economy to stagnate because of the inflation? That this becomes a vicious cycle, the fed can’t raise rates because the economy is stagnated, and inflation continues unabated because the fed keeps rates low. Isn’t that what happened in the 70’s?
And if the above scenario occurs, then who is going to have the cajones to change policy and act like Paul Volker?
