Inflation, interest rates, and the Fed

[davelj]

Another good recent article on the topic, but with a global perspective.

http://jessescrossroadscafe.blogspot.com/2010/10/financial-times-martin-wolf-offers.html

[Rich Toscano]

[quote=davelj]
I just read this article today and thought it fit in well with this thread and previous post of mine. I like Dean Baker’s analogy of a counterfeiter. (Also, he approaches the issue from a “demand” standpoint, which is better than my “net worth” approach above.) What Dean doesn’t know – and no one on the planet does – is how much “counterfeiting” the economy can take before real, sustained inflation kicks in which can’t be easily controlled. Nevertheless, I like his analogy here.

http://www.guardian.co.uk/commentisfree/cifamerica/2010/oct/11/useconomy-usemployment

[And, by the way, Baker both identified the housing bubble early and was against all of the bailout activity, so he’s not a tool of the banksters or the Fed. Just to be clear.][/quote]

I also like the counterfeiter analogy. It is accurate in terms of its effects on the economy as well as (not pointed out by Baker) its effect in transferring real wealth from holders of existing cash to the counterfeiter.

Anyway I agree completely that the Fed could theoretically print a bunch of money to offset the recession-driven decline in demand, then “grabbed out of circulation” (his words) at precisely the right moment before it can cause inflation. In practice, it’s exceedingly unlikely to go down that way. As our mutual friend Jimbo Grant points out, the Fed has been typically been literally YEARS late in removing monetary accomodation — and that was BEFORE being scarred by the worst economic downturn in 3 generations (with attendant ubiquitous warning — including from the Fed itself — not to make the same mistakes as Japan and the Depression-era US in removing accomodation too early).

As you say, nobody can know at what level the money printing will cause a problem. But we do know that A) the Fed has had a historical tendency to overshoot and B) that they have outright stated that this time, they will be extra-careful to make sure and not undershoot.

But I guess we’ll see.

[Rich Toscano]

[quote=davelj]
I just read this article today and thought it fit in well with this thread and previous post of mine. I like Dean Baker’s analogy of a counterfeiter. (Also, he approaches the issue from a “demand” standpoint, which is better than my “net worth” approach above.) What Dean doesn’t know – and no one on the planet does – is how much “counterfeiting” the economy can take before real, sustained inflation kicks in which can’t be easily controlled. Nevertheless, I like his analogy here.

http://www.guardian.co.uk/commentisfree/cifamerica/2010/oct/11/useconomy-usemployment

[And, by the way, Baker both identified the housing bubble early and was against all of the bailout activity, so he’s not a tool of the banksters or the Fed. Just to be clear.][/quote]

I also like the counterfeiter analogy. It is accurate in terms of its effects on the economy as well as (not pointed out by Baker) its effect in transferring real wealth from holders of existing cash to the counterfeiter.

Anyway I agree completely that the Fed could theoretically print a bunch of money to offset the recession-driven decline in demand, then “grabbed out of circulation” (his words) at precisely the right moment before it can cause inflation. In practice, it’s exceedingly unlikely to go down that way. As our mutual friend Jimbo Grant points out, the Fed has been typically been literally YEARS late in removing monetary accomodation — and that was BEFORE being scarred by the worst economic downturn in 3 generations (with attendant ubiquitous warning — including from the Fed itself — not to make the same mistakes as Japan and the Depression-era US in removing accomodation too early).

As you say, nobody can know at what level the money printing will cause a problem. But we do know that A) the Fed has had a historical tendency to overshoot and B) that they have outright stated that this time, they will be extra-careful to make sure and not undershoot.

But I guess we’ll see.

[Rich Toscano]

[quote=davelj]
I just read this article today and thought it fit in well with this thread and previous post of mine. I like Dean Baker’s analogy of a counterfeiter. (Also, he approaches the issue from a “demand” standpoint, which is better than my “net worth” approach above.) What Dean doesn’t know – and no one on the planet does – is how much “counterfeiting” the economy can take before real, sustained inflation kicks in which can’t be easily controlled. Nevertheless, I like his analogy here.

http://www.guardian.co.uk/commentisfree/cifamerica/2010/oct/11/useconomy-usemployment

[And, by the way, Baker both identified the housing bubble early and was against all of the bailout activity, so he’s not a tool of the banksters or the Fed. Just to be clear.][/quote]

I also like the counterfeiter analogy. It is accurate in terms of its effects on the economy as well as (not pointed out by Baker) its effect in transferring real wealth from holders of existing cash to the counterfeiter.

Anyway I agree completely that the Fed could theoretically print a bunch of money to offset the recession-driven decline in demand, then “grabbed out of circulation” (his words) at precisely the right moment before it can cause inflation. In practice, it’s exceedingly unlikely to go down that way. As our mutual friend Jimbo Grant points out, the Fed has been typically been literally YEARS late in removing monetary accomodation — and that was BEFORE being scarred by the worst economic downturn in 3 generations (with attendant ubiquitous warning — including from the Fed itself — not to make the same mistakes as Japan and the Depression-era US in removing accomodation too early).

As you say, nobody can know at what level the money printing will cause a problem. But we do know that A) the Fed has had a historical tendency to overshoot and B) that they have outright stated that this time, they will be extra-careful to make sure and not undershoot.

But I guess we’ll see.

[Rich Toscano]

[quote=davelj]
I just read this article today and thought it fit in well with this thread and previous post of mine. I like Dean Baker’s analogy of a counterfeiter. (Also, he approaches the issue from a “demand” standpoint, which is better than my “net worth” approach above.) What Dean doesn’t know – and no one on the planet does – is how much “counterfeiting” the economy can take before real, sustained inflation kicks in which can’t be easily controlled. Nevertheless, I like his analogy here.

http://www.guardian.co.uk/commentisfree/cifamerica/2010/oct/11/useconomy-usemployment

[And, by the way, Baker both identified the housing bubble early and was against all of the bailout activity, so he’s not a tool of the banksters or the Fed. Just to be clear.][/quote]

I also like the counterfeiter analogy. It is accurate in terms of its effects on the economy as well as (not pointed out by Baker) its effect in transferring real wealth from holders of existing cash to the counterfeiter.

Anyway I agree completely that the Fed could theoretically print a bunch of money to offset the recession-driven decline in demand, then “grabbed out of circulation” (his words) at precisely the right moment before it can cause inflation. In practice, it’s exceedingly unlikely to go down that way. As our mutual friend Jimbo Grant points out, the Fed has been typically been literally YEARS late in removing monetary accomodation — and that was BEFORE being scarred by the worst economic downturn in 3 generations (with attendant ubiquitous warning — including from the Fed itself — not to make the same mistakes as Japan and the Depression-era US in removing accomodation too early).

As you say, nobody can know at what level the money printing will cause a problem. But we do know that A) the Fed has had a historical tendency to overshoot and B) that they have outright stated that this time, they will be extra-careful to make sure and not undershoot.

But I guess we’ll see.

[Rich Toscano]

[quote=davelj]
I just read this article today and thought it fit in well with this thread and previous post of mine. I like Dean Baker’s analogy of a counterfeiter. (Also, he approaches the issue from a “demand” standpoint, which is better than my “net worth” approach above.) What Dean doesn’t know – and no one on the planet does – is how much “counterfeiting” the economy can take before real, sustained inflation kicks in which can’t be easily controlled. Nevertheless, I like his analogy here.

http://www.guardian.co.uk/commentisfree/cifamerica/2010/oct/11/useconomy-usemployment

[And, by the way, Baker both identified the housing bubble early and was against all of the bailout activity, so he’s not a tool of the banksters or the Fed. Just to be clear.][/quote]

I also like the counterfeiter analogy. It is accurate in terms of its effects on the economy as well as (not pointed out by Baker) its effect in transferring real wealth from holders of existing cash to the counterfeiter.

Anyway I agree completely that the Fed could theoretically print a bunch of money to offset the recession-driven decline in demand, then “grabbed out of circulation” (his words) at precisely the right moment before it can cause inflation. In practice, it’s exceedingly unlikely to go down that way. As our mutual friend Jimbo Grant points out, the Fed has been typically been literally YEARS late in removing monetary accomodation — and that was BEFORE being scarred by the worst economic downturn in 3 generations (with attendant ubiquitous warning — including from the Fed itself — not to make the same mistakes as Japan and the Depression-era US in removing accomodation too early).

As you say, nobody can know at what level the money printing will cause a problem. But we do know that A) the Fed has had a historical tendency to overshoot and B) that they have outright stated that this time, they will be extra-careful to make sure and not undershoot.

But I guess we’ll see.

[SD Transplant]

Here is another inflation data index coming to a PC near you :

http://www.cnbc.com/id/39626164

Google is using its vast database of web shopping data to construct the ‘Google Price Index’ – a daily measure of inflation that could one day provide an alternative to official statistics.

At the National Association of Business Economists conference in Denver, Colorado, Mr Varian said that the GPI was a work in progress and Google had not yet decided whether to publish it.

While the Federal Reserve is unlikely to panic just yet, Mr Varian said that the GPI shows a “very clear deflationary trend” for web-traded goods in the US since Christmas.

Although the data are not seasonally adjusted, Mr Varian said that prices rose during the same period a year ago. The ‘core’ CPI in the US, which excludes food and energy, rose 0.9 percent on a year ago in August.

“It’s a quite different picture if you go to the UK where you see a slight inflationary trend,” Mr Varian said. He attributed the rise in the UK GPI to the weakness of sterling.

Mr Varian emphasized that the GPI is not a direct replacement for the CPI because the mix of goods that are sold on the web is different to the mix in the wider economy. Housing accounts for about 40 percent of the US CPI, for example, but only 18 percent of the GPI.

… more in the article

[SD Transplant]

Here is another inflation data index coming to a PC near you :

http://www.cnbc.com/id/39626164

Google is using its vast database of web shopping data to construct the ‘Google Price Index’ – a daily measure of inflation that could one day provide an alternative to official statistics.

At the National Association of Business Economists conference in Denver, Colorado, Mr Varian said that the GPI was a work in progress and Google had not yet decided whether to publish it.

While the Federal Reserve is unlikely to panic just yet, Mr Varian said that the GPI shows a “very clear deflationary trend” for web-traded goods in the US since Christmas.

Although the data are not seasonally adjusted, Mr Varian said that prices rose during the same period a year ago. The ‘core’ CPI in the US, which excludes food and energy, rose 0.9 percent on a year ago in August.

“It’s a quite different picture if you go to the UK where you see a slight inflationary trend,” Mr Varian said. He attributed the rise in the UK GPI to the weakness of sterling.

Mr Varian emphasized that the GPI is not a direct replacement for the CPI because the mix of goods that are sold on the web is different to the mix in the wider economy. Housing accounts for about 40 percent of the US CPI, for example, but only 18 percent of the GPI.

… more in the article

[SD Transplant]

Here is another inflation data index coming to a PC near you :

http://www.cnbc.com/id/39626164

Google is using its vast database of web shopping data to construct the ‘Google Price Index’ – a daily measure of inflation that could one day provide an alternative to official statistics.

At the National Association of Business Economists conference in Denver, Colorado, Mr Varian said that the GPI was a work in progress and Google had not yet decided whether to publish it.

While the Federal Reserve is unlikely to panic just yet, Mr Varian said that the GPI shows a “very clear deflationary trend” for web-traded goods in the US since Christmas.

Although the data are not seasonally adjusted, Mr Varian said that prices rose during the same period a year ago. The ‘core’ CPI in the US, which excludes food and energy, rose 0.9 percent on a year ago in August.

“It’s a quite different picture if you go to the UK where you see a slight inflationary trend,” Mr Varian said. He attributed the rise in the UK GPI to the weakness of sterling.

Mr Varian emphasized that the GPI is not a direct replacement for the CPI because the mix of goods that are sold on the web is different to the mix in the wider economy. Housing accounts for about 40 percent of the US CPI, for example, but only 18 percent of the GPI.

… more in the article

[SD Transplant]

Here is another inflation data index coming to a PC near you :

http://www.cnbc.com/id/39626164

Google is using its vast database of web shopping data to construct the ‘Google Price Index’ – a daily measure of inflation that could one day provide an alternative to official statistics.

At the National Association of Business Economists conference in Denver, Colorado, Mr Varian said that the GPI was a work in progress and Google had not yet decided whether to publish it.

While the Federal Reserve is unlikely to panic just yet, Mr Varian said that the GPI shows a “very clear deflationary trend” for web-traded goods in the US since Christmas.

Although the data are not seasonally adjusted, Mr Varian said that prices rose during the same period a year ago. The ‘core’ CPI in the US, which excludes food and energy, rose 0.9 percent on a year ago in August.

“It’s a quite different picture if you go to the UK where you see a slight inflationary trend,” Mr Varian said. He attributed the rise in the UK GPI to the weakness of sterling.

Mr Varian emphasized that the GPI is not a direct replacement for the CPI because the mix of goods that are sold on the web is different to the mix in the wider economy. Housing accounts for about 40 percent of the US CPI, for example, but only 18 percent of the GPI.

… more in the article

[SD Transplant]

Here is another inflation data index coming to a PC near you :

http://www.cnbc.com/id/39626164

Google is using its vast database of web shopping data to construct the ‘Google Price Index’ – a daily measure of inflation that could one day provide an alternative to official statistics.

At the National Association of Business Economists conference in Denver, Colorado, Mr Varian said that the GPI was a work in progress and Google had not yet decided whether to publish it.

While the Federal Reserve is unlikely to panic just yet, Mr Varian said that the GPI shows a “very clear deflationary trend” for web-traded goods in the US since Christmas.

Although the data are not seasonally adjusted, Mr Varian said that prices rose during the same period a year ago. The ‘core’ CPI in the US, which excludes food and energy, rose 0.9 percent on a year ago in August.

“It’s a quite different picture if you go to the UK where you see a slight inflationary trend,” Mr Varian said. He attributed the rise in the UK GPI to the weakness of sterling.

Mr Varian emphasized that the GPI is not a direct replacement for the CPI because the mix of goods that are sold on the web is different to the mix in the wider economy. Housing accounts for about 40 percent of the US CPI, for example, but only 18 percent of the GPI.

… more in the article

[DWCAP]

My big problem with the baker argument about the counterfitter saving the US economy comes at the end.

[Quote]But the interesting part of the counterfeiter story is that his $2tn of phony money will not create problems even in the long run, assuming that he is eventually shut down. Suppose that the counterfeiter’s lavish spending gets the economy back towards full employment around 2012, at which point he gets nailed by the FBI who finally figure out how to recognise the dud notes.

At that point, the $2tn will be grabbed out of circulation and destroyed. Assuming that the economy is strong enough at this point to remain near full employment even as this counterfeit wealth disappears, then there would be no lasting damage from the episode. [/Quote]

Bullshit. All those formerly unemployeed maids and drivers and home builders and lavish car care specilists and investment advisors all get fired as soon as the FBI figues it out. Then all the employeed are unemployeed again, except this time with skills (how many expert 5star party planners or luxery car maintaince workers do we need???) that the economy doesnt really need. Not to mention all the luxery cars and houses that have little demand but already exist, weighing on future supply/ prices. We go right back into a recession that we were trying to get out of. Maybe we get two less shallow recessions than one really deep one, but there is no way, even at full employment, that the economy could withstand the shock of the withdrawl of the level of stimulus needed to get out of this recession/slowdown, without some pretty major disruptions.

[DWCAP]

My big problem with the baker argument about the counterfitter saving the US economy comes at the end.

[Quote]But the interesting part of the counterfeiter story is that his $2tn of phony money will not create problems even in the long run, assuming that he is eventually shut down. Suppose that the counterfeiter’s lavish spending gets the economy back towards full employment around 2012, at which point he gets nailed by the FBI who finally figure out how to recognise the dud notes.

At that point, the $2tn will be grabbed out of circulation and destroyed. Assuming that the economy is strong enough at this point to remain near full employment even as this counterfeit wealth disappears, then there would be no lasting damage from the episode. [/Quote]

Bullshit. All those formerly unemployeed maids and drivers and home builders and lavish car care specilists and investment advisors all get fired as soon as the FBI figues it out. Then all the employeed are unemployeed again, except this time with skills (how many expert 5star party planners or luxery car maintaince workers do we need???) that the economy doesnt really need. Not to mention all the luxery cars and houses that have little demand but already exist, weighing on future supply/ prices. We go right back into a recession that we were trying to get out of. Maybe we get two less shallow recessions than one really deep one, but there is no way, even at full employment, that the economy could withstand the shock of the withdrawl of the level of stimulus needed to get out of this recession/slowdown, without some pretty major disruptions.

[DWCAP]

My big problem with the baker argument about the counterfitter saving the US economy comes at the end.

[Quote]But the interesting part of the counterfeiter story is that his $2tn of phony money will not create problems even in the long run, assuming that he is eventually shut down. Suppose that the counterfeiter’s lavish spending gets the economy back towards full employment around 2012, at which point he gets nailed by the FBI who finally figure out how to recognise the dud notes.

At that point, the $2tn will be grabbed out of circulation and destroyed. Assuming that the economy is strong enough at this point to remain near full employment even as this counterfeit wealth disappears, then there would be no lasting damage from the episode. [/Quote]

Bullshit. All those formerly unemployeed maids and drivers and home builders and lavish car care specilists and investment advisors all get fired as soon as the FBI figues it out. Then all the employeed are unemployeed again, except this time with skills (how many expert 5star party planners or luxery car maintaince workers do we need???) that the economy doesnt really need. Not to mention all the luxery cars and houses that have little demand but already exist, weighing on future supply/ prices. We go right back into a recession that we were trying to get out of. Maybe we get two less shallow recessions than one really deep one, but there is no way, even at full employment, that the economy could withstand the shock of the withdrawl of the level of stimulus needed to get out of this recession/slowdown, without some pretty major disruptions.

[DWCAP]

My big problem with the baker argument about the counterfitter saving the US economy comes at the end.

[Quote]But the interesting part of the counterfeiter story is that his $2tn of phony money will not create problems even in the long run, assuming that he is eventually shut down. Suppose that the counterfeiter’s lavish spending gets the economy back towards full employment around 2012, at which point he gets nailed by the FBI who finally figure out how to recognise the dud notes.

At that point, the $2tn will be grabbed out of circulation and destroyed. Assuming that the economy is strong enough at this point to remain near full employment even as this counterfeit wealth disappears, then there would be no lasting damage from the episode. [/Quote]

Bullshit. All those formerly unemployeed maids and drivers and home builders and lavish car care specilists and investment advisors all get fired as soon as the FBI figues it out. Then all the employeed are unemployeed again, except this time with skills (how many expert 5star party planners or luxery car maintaince workers do we need???) that the economy doesnt really need. Not to mention all the luxery cars and houses that have little demand but already exist, weighing on future supply/ prices. We go right back into a recession that we were trying to get out of. Maybe we get two less shallow recessions than one really deep one, but there is no way, even at full employment, that the economy could withstand the shock of the withdrawl of the level of stimulus needed to get out of this recession/slowdown, without some pretty major disruptions.

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