Krugman Won! (Updated)

[cthulu2016]

Last edited Fri Sep 14, 2012, 12:37 AM - Edit history (10)

Long story as short as I can make it...

The Fed's main power is to raise or cut interest rates. Since Fed interest rates hit 0% years ago the Fed has lost the ability to cut rates further, which is one reason this economic downturn just keeps going on.

Japan had a similar situation in the 1990s and Krugman wrote an influential paper about it concluding that despite being stuck at 0% the central bank could still use its control of rates to some effect by promising to not raise rates in the future.

If inflation goes up 1% and you do not raise rates 1% that is the same as cutting rates by 1%. The rate is 1% more attractive versus inflation either way. So if a central bank promises to not raise rates when inflation goes up that is equivalent to a promise to cut rates in the future. And knowing that the Fed will "cut rates" in the future affects what people do today. It is not as good as a rate cut today, but it is better than nothing.

Essentially the Fed would have to promise to overheat the economy somewhat tomorrow in exchange for getting a recovery started today. It's like offering odds. Maybe it is marginal for you to open another location today because you don't know if the economy will recover soon. We can't guarantee a recovery but we can guarantee that if/when there is a recovery it will be BIG... the Fed will not strangle the recovery baby in the crib out of fears of inflation.

Bernanke agreed with that Krugman paper back when he was a professor, and even taught its lessons, but as Fed Chair he has been reluctant to actually say we won't fight inflation if it shows up, because that freaks people out. (They immediately picture a return to the late 1970s, but high inflation today would be like 4%)

So I was delighted to see this today...

NEW YORK (AP) — The stock market staged a huge rally Thursday after investors finally got the aggressive economic help they wanted from the Federal Reserve. The Dow Jones industrial average spiked almost 240 points.

The gain pushed the Dow above 13,500 for the first time since December 2007, the beginning of the Great Recession, and to within about 600 points of its all-time high.

In an open-ended step, the Fed said it would spend $40 billion a month to purchase mortgage securities because the economy is too weak to reduce high unemployment.

The central bank also extended its pledge of super-low interest rates into 2015, and promised to keep ‘‘highly accommodative’’ monetary policy in place even after the economic recovery strengthens

http://www.boston.com/business/markets/2012/09/13/stocks-surge-after-fed-announces-more-help/sr4YLeDjczvt0mNtPqBeoO/story.html

This promise to the markets of low rates and a level of concern with inflation is only as good as Bernanke is. There is no way to bind the Fed to future policy. And Bernanke's promise extends beyond his term. Bernanke's term ends in early 2014 so he cannot really promise what the Fed will do "into 2015" or how the Fed will react to the first signs of robust recovery. Romney has promised to replace Bernanke.

So a vote for Romney is a vote for Higher Future Interest Rates. Wall Steet hates higher interest rates worse than flying monster heads. And the markets can only get these promised low rates if Obama wins. (I expect that the donations from Wall Street will start going more Obama's way.)

__________________________

UPDATE: It's not every day one gets to scoop Krugman on what Krugman thinks, but he was travelling today so I got to write this OP before he commented publically on the "even after the economic recovery strengthens" promise. Here's Krugman's take from this evening:

A Quick Note on the Fed

I was airborne until late, so no chance until now to weigh in on the Fed’s new move. And now I really need to get some sleep to fight off this cold! So just a few points:

1. It’s good to see the Fed moving, finally.

2. It certainly sounds as if Bernanke is reacting to the Woodford critique, which argues that quantitative easing is mainly effective through its effect on expectations. While the policy does take the form of purchases of unconventional assets — mortgage-backed securities — Bernanke is not relying on portfolio balance effects alone; instead, he’s trying to move expectations by declaring that the Fed will continue to ease for some time after the economy has begun to recover:

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.

In effect, the Fed seems to be trying to “credibly promise to be irresponsible”, which is what I advocated way back when in this kind of situation. ...

http://krugman.blogs.nytimes.com/2012/09/13/a-quick-note-on-the-fed/

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[Control-Z]

1. Thank you for the

simplified and easy to understand explanation. Otherwise I don't think I would have understood the changes.

[FightForMichigan]

6. Yes - thanks!

I didn't really understand it until you explained it like this!

[cthulu2016]

59. You're welcome!

[porphyrian]

2. ! n/t

[ailsagirl]

3. When Paul Krugman talks...

(intelligent) people listen.

He's brilliant!!!

[sabrina 1]

4. How does all this manipulation of the markets help the average working class person?

Eg, these low interest rates mean that there is no point in having a savings acount, the working class has no way to make any money on their small savings.

I'm sure this is all great for people who have investments etc, but the average person is lucky if they can pay the bills. And those lucky enough to have a few thousand dollars in savings, are out of luck as far as getting any interest on it.

I know they dragged everyone into the Market a few decades ago by investing their pensions etc, but that didn't work out very well either for the average person. They don't have enough money to gamble with.

Would the world fall apart if there was no Market, and people got paid for what they actually do to contribute to society, rather than betting on which stock is going to up or down every day?

The market does nothing for most people I know since most of them do not have investments to worry about.

[cthulu2016]

10. The same way the collapse of Lehman Brothers hurt working people.

Few workers were sitting on a lot of stock in Lehman when it went belly up, but all workers rue the day it did.

What the Fad announced today is that they will keep hitting this thing until jobs increase, not until some abstract economic number is reached.

Pegging policy directly to the unemployment rate is a good change for workers.

But as you say, the benefits to workers are indirect.

[HiPointDem]

12. but most workers have savings accounts and they're losing money on them.

[Ikonoklast]

17. If Deflation is allowed to continue unabated, they will be hurt far worse.

Modest Inflation can be dealt with using financial strategies, but Deflation is a economy destroyer.

That saved money will be used up as the jobs disappear after the economy spirals into disaster territory.

[cthulu2016]

18. The thing is, these rates are not artificially low

The Fed rate should be below 0%. The reason it isn't is that it's impossible, but with unemployment this high the Fed would normally being cutting rates sharply.

If the Fed didn't exist there would still be no bank paying attractive interest rates on deposits.

We have inflation of 1-2%. And since borrowing is way down they don't even stand to profit from more deposits. There's no demand to lend out that deposited money.

Now, if inflation was higher banks would pay more on deposits, but they are never going to pay more than inflation so there's no real money gain for the depositer.

The real problem people face is that we have a very low inflation environment, but we see price increases in some things people have to buy all the time—gas, medicine, some food.

So people get pinched between the two things. If gas goes up 20 cents and your house goes down $10,000 it is easy to see that there is no net inflation, but people have to buy gas but seldom buy a house.

But higher interest rates wouldn't help us on average. It would decrease GDP and increase unemployment.

But there are always winners and losers. A retired person whose only income is interest on deposits will be receiving no income.

[HiPointDem]

20. yes, there are always winners & losers. the winners are always big capital, the losers

inevitably the 80%.

[girl gone mad]

22. How will this have any impact on employment?

Your premise makes no sense.

[sabrina 1]

26. Well, maybe that's because we have a system that is too tied into Wall Street and it has

utterly failed the working class. Why should what happened to Lehmann's have affected the working class? If Lehmann's and Wall Street in general is that important to the working class, then what in *@ hell was Congress doing allowing them to gamble the way they were without any oversight? Who was looking out for the working class and who is now? Doesn't look like much has changed.

Seems to me we need a new system then because this one only works for those with money to burn, or who are willing to burn other people's money. That's the part that makes me nervous, they burn other people's money, pension funds etc. So I don't want to trust them with any money..

And when they lose it all there are no consequences, in fact they get rewarded. I don't like this system as part of the working class.

I would rather a system where people go to work, get paid, pay THEIR bills, don't run up any debt, put some money away in a savings account, contribute to a pension fund for their retirement, look forward to taking advantage of the funds they pay into all their working lives, such as SS to enhance their retirement incomes. And I thought that is how things were.

When I see all this focus on the Markets, it means nothing to me in my life. So it went up, or down. It doesn't change MY income one way or the other. And it never did.

Sorry I'm not trying to be difficult, but I just don't get the importance of what seems to me to be a giant Gambling Casino, unless you are a gambler. If there was as much focus on the Working Class as there is on the Market and its investors, then maybe the Working Class would have a chance.

From what you're saying, it seems that we are dependent on the gambling skills of Wall Street for our very jobs. Something is very wrong about this imo.

Edited to add that good news for me would be that Interests are up. I feel sometimes like I'm in an alternative universe where I'm supposed to be happy about things that actually are bad for me, like low interest rates. But I can't help it, I want people to be able to make a little money on their savings.

[cthulu2016]

29. I agree with most of what you say, but these are political questions

The Fed has no mandate to change the economy fundementally, merely to do the best job driving the economy we have.

Real change has to come from Congress and the President. (And voters)

[girl gone mad]

36. Yet you are applauding this as if it is the cure for our problems.

Monetarism has consistently failed to restore economic balance and growth for the majority of people. Previous rounds of quantitative easing have been unsuccessful, as Bernanke himself admitted. Why continue to promote Friedmanite economic ideas? This is anti-progressive and pretending that it can work is actually causing great harm.

[lumberjack_jeff]

14. Inflation used to be called a "wage and price spiral"

If people can borrow money today at super low interest, they have an incentive to buy now instead of waiting until next year when inflation will cause the price of the item in question to be higher.

High interest rates with low consumption risks deflation, a much trickier problem to solve.

Wages won't rise unless and until there's demand for labor.

[Nay]

30. "Wages won't rise unless and until there's a demand for labor." We've seen how the 1% handles

a demand for labor, though -- it ships jobs overseas; increases H1B visas; winks at illegal immigration; provides jobs for prison labor at slave wages; and does everything it can to bust everyone down to those prison slave wages. Oh, and it puts out one press release after another saying American workers are too stupid and untrained to be hired even IF there were jobs available.

Even if there is a demand for labor, every pressure available to the 1% will be brought to bear on the worker to accept less. God knows it's working now. Right this minute, employees are accepting lower wages, crappy hours, all the stuff unions were made to fight for. Pension systems have gone away, forget health insurance, etc., etc. Only a govt dedicated to improving the lot of ALL its citizens can counter this force, and I haven't seen that govt yet.

[lumberjack_jeff]

47. I don't disagree that labor demand has a hill to climb before it translates into higher wages.

Nevertheless, it has to climb that hill.

[sabrina 1]

40. But why should people be encouraged to 'borrow', to go into debt, to spend now if they

don't need to borrow. I thought being in debt was a bad thing. It has always been a bad thing for anyone I know who has borrowed and gone into debt.

What's wrong with NOT being in debt. And what's good about borrowing if you don't need to?

[lumberjack_jeff]

46. I recently borrowed $75,000 against my house.

My interest rate is 3.75%.

If the annual inflation rate of groceries is 5%, it would be prudent for me to invest the proceeds in twinkies. If I could lock in 10 years of twinkie demand at today's prices, I've saved myself... uh... a lot.

Debt isn't good or bad. It depends entirely upon the math.

[sabrina 1]

48. Most people do not get into debt in order to use it to profit from. They get into debt

either because they are desperate which means the money will only be spent on necessities like doctor bills eg and food and it COSTS them money, it doesn't make them money, or they get into debt to buy things they cannot afford. And again, they end up spending more money they do not have.

And that is what is wrong with this system in terms of ordinary working people. It assumes that everyone has the ability to go borrow money in order to invest it. Or it doesn't care that only a very few can do so.

But it encourages people who should not be taking on debt to do so. That is the equivalent of having bad parents who tell their kids to go ahead and use their credit cards to buy stuff the want but not need without warning them how much it will cost them.

I think being in debt is usually a losing proposition.

If you can do as you say, then you are not among the majority of the working class that I am talking about.

[Blanks]

60. However, if people who are already in debt...

Can borrow and pay off their debt at a lower interest rate than they are currently paying; it frees up a little bit of spending money after expenses.

Just refinancing your home at a lower rate can decrease your monthly expenses. For people who are upside down on their house it may allow them to keep it long enough so that they can eventually sell it for what they paid for it (assuming the market appreciates).

Some people are able to bundle their credit card debt into one payment for a lower interest rate. Folks who have had to go into debt to make ends meet would benefit from an availability of low interest money. As long as they have an income adequate to make the payments.

[cthulu2016]

61. True. Bankruptcies are caused both by too much credit and too little credit.

Available credit is a potential trap, but also is a lifesaver in some circumstances.

[Blanks]

63. We had land developers that had a good history...

Of selling lots, and a good history of selling houses that couldn't get financing to build new subdivisions.

They were being responsible, the credit just dried up. So you have engineers, surveyors, dirt contractors, plumbing contractors, electrical contractors, roofing contractors, truck drivers all work brought to a screeching halt.

You don't wait until you have the money saved up to build a subdivision. A lot of craftsmens' livelihood is tied up in new building construction.

While there is no doubt a housing glut now; it doesn't make sense that bankers make $13 billion loaning money to the FED (that they have just borrowed from the FED) while folks who actually 'make stuff' are made to sit around.

We are doing something wrong.

[girl gone mad]

25. Third time's the charm, right?

Of course it will do absolutely nothing for the average person because the theory behind these policies are grounded in the same failed neoclassical models that brought us the global financial crisis and subsequent 99% depression.

The idea being more private debt is always good, even when we're suffering a collapse brought on by too much private debt. Whatever is good for the 1% owners and speculators is good for America. Never mind that it is wreaking havoc on those who have to work for a living or must rely on their meager savings to get by.

[sabrina 1]

37. Maybe it's just me, but I always that being in debt was a bad thing.

Now all I see is talk of 'loans' and 'lending' and if people are NOT in debt, THAT is a bad thing. I know I don't understand all of these high finances, I'm just looking at the results for ordinary people. I just can't get excited about what the Market is doing because it does nothing much for anyone I know.

Otoh, I'm learning that the Market is in control of all of our jobs. To me, that is even worse news. To think these failed institutions hold the fate of the average American's income in their hands, is a very scary thought to me.

[girl gone mad]

41. Yes, it is scary.

The reality is that our current wages and output cannot support our current levels of private debt.

Rather than allowing debt writedowns or promoting policies which would lead to higher wages, increased employment and sustainable growth in order to help people reduce debt levels, our government is now hellbent on propping up prices by encouraging even greater levels of indebtedness.

The disturbing part is that now we have Democrats cheering on this madness. We used to be the party that stood for a living wage and economic security and against rent-seeking predation.

[sabrina 1]

44. It's what the IMF was doing to Third World countries, putting them into debt and then

controlling everything they spent and how they spent it. Again, that was never a good thing as we saw when those economies collapsed or never progressed remaining in debt and with poverty rates in many of them as high as 80%. That is why Chavez paid off Ven. IMF and World Bank debt.. I thought he would be applauded for doing so, instead they appear to hate him.

This is a conversation this country really, really needs to have. I remember the President once saying that 'the people do not understand economics' in response to a question he was asked.

I think he meant, the people do not understand THIS system of economics, because it only makes sense to the top 1%. We are not stupid, we CAN learn, but frankly I have no clue about our current system other than to look at the results and that tells me it is a failed system and needs to be changed.

I do not want to be in debt. I remember what it felt like to have even a small amount of Credit Card debt and never being able to make a dent in it, because of the high interest rates. Just keep paying and spending and running up more debt with no end in sight. This to me is totally irresponsible. But what do I know?

[Nay]

54. Sabrina, you know a whole lot more than most people. All of your posts here are right on the

money. The powers that be are running a huge casino, and they've sucked everybody in. Now that the casino is, in effect, the entire U.S., even people who don't want to gamble in it are forced to, simply by where they live. Sure, you and I are debt free and have decided to stay that way, but we're in a tiny minority. The same type of tiny minority that doesn't eat junk food. In other words, we are atypical Americans.

Of course, when the casino cashes the 99% out for good and they are wandering around hungry and homeless, it will be all their fault for believing the propaganda that the way to prosperity is to gamble at the casino. So the house always wins! Even the propaganda war!

[sabrina 1]

62. Thanks Nay.

'The House always wins'! So true, and nothing made that more clear than the Meltdown when the 'House' got bailed out, and the 99% were left to fend for themselves.

Hopefully something will happen to change our culture especially regarding our foreign policy and our economic policies. The are obviously not working, here or anywhere else they have been implemented.

[lastlib]

27. One thing it does is induce spending (DEMAND) now!

A dollar spent now in a low-inflation environment buys more than a dollar spent later in a higher-inflation environment. That effective extra buying power gives people an incentive to spend their cash now rather than later. This increases demand for goods/services, which means producers have more incentive to produce those. Meaning they're more likely to hire workers.

Yes, it's somewhat painful to people on fixed income, and savers who have money in low-interest-rate savings accounts--I guess that's part of the trade-off. But since savings interest rates and commensurate bond yields have been so low in recent years, fewer people have been holding assets in these vehicles, so perhaps that is a mitigating factor to the pain. But the key fact is that there is more incentive for people to SPEND money now, rather than in the expected inflationary future when the dollars buy less. And it's more incentive for people to re-elect Obama, who is more likely to re-appoint Bernanke.

[girl gone mad]

31. This is the theory, but it hasn't had that effect in reality.

In fact, there is better theory which shows that these policies are killing demand by effectively removing tens of billions in interest from the economy year after year. That's money which would likely be spent in large part. Very good research shows that when savers earn a decent interest rate they feel more secure with their finances and spend more.

In terms of the housing market, home prices are sensitive to income growth and debt. Income is currently flat and we still deleveraging from the massive debt overhang of the last 3 decades. What's more, student debt has reached unprecedented levels which means young people are postponing marriage and families. Without qualified borrowers, the rate becomes irrelevant. It's pushing on a string.

[Nay]

38. Thank you, GGM. I said as much below, but ppl can't seem to get it in their heads that it doesn't

matter at all what interest rates are because 1) people won't borrow, even if they theoretically can, if their job situation is tenuous, 2) most ppl can't borrow anyway because they've been 'disqualified' by credit problems brought on by the very banks they now must borrow from, and 3) NO ONE feels secure enough to blow their cash on trivialities.

They've hinted that they've going to gut SS; make ppl buy health insurance from the very companies that have been ripping us off for 50 years; and they continue to shovel money to the assholes that have run this country into the ground. I simply can't imagine why ppl aren't out there spending every dime they have because of the low interest rates!


Until the govt can put a floor under the everyday person and stop acting like that person's need for a job, a home, food, etc., is a fucking annoyance to the 1%, nothing will change.

[Nay]

32. Except it doesn't seem to. Businesses don't want to hire or invest because there is no demand.

The 99% can't spend much because every force deployed by the 1% aims at destroying the wages and job structure that support the 99%. The 99% never sees any of this money -- this was the point of all the posts about the QE1-2-3 over the years. Only the banks see the money, and they sit on it or give themselves bonuses.

[sabrina 1]

39. Well, that seems like we are being constantly manipulated. Eg, working class people

who have a small savings account, if they are lucky, do not WANT to spend it, they are saving so that if they need it later on, they won't have to borrow and won't be stuck with no safety net. Forcing them to spend now when they can't afford it, and then leaving them without money when they might need it, seems wrong to me. Unethical really.

It's like a few people are playing a board game without much interest in the actual lives being affected by their clever games.

It's possible I am not understanding the benefits of all this to the average person, but the proof seems to be in the current status of the working class.

I have asked people about interest on savings in the past and have been told that at one time you could get 3% interest on your savings, something that encouraged people to save. What was wrong with that system and what changed it?

[cthulu2016]

42. The rate paid on savings deposits is

always lower than inflation, and moves up and down relative to inflation.

When inflation is low banks don't pay anything on deposits.

In the late 1970s you could clear a safe 10% in a money market account, but inflation was almost 20%.

[sabrina 1]

43. Well, wasn't that better for ordinary people? I don't know, I'm just asking.

Also, we have learned that they have been manipulating the interest rates, wrongfully in the LIBOR scandal. So how do we know that any of this is really necessary, to keep keep the interest rates so low? Or not part of the scheme that appears to have been going on to enrich once again, the already wealthy?

[BlueStreak]

5. The reality is the Fed can't raise rates -- ever

Because Bush and Reagan gave us such a degree of national debt that even a rate of 3% would be devastating.

I mean, do that arithmetic. If the government had to pay 3% for all the TBills that are out there, that's almost $500 Billion in interest charges a year.

Inflation is the only way out of this mess, it seems. Remember that the next time you hear Boehner, Ryan or any of those types talk about cutting taxes. Every time they cut a tax, that just means that inflation will hit you worse.

The only freedom that gives you is the kind Janis Joplin talked about, i.e. nothing left to lose. If you don't own anything and don't have any income, then you don't need to worry too much about inflation. You can starve on 50 cents a day as easily as you can starve on 1 dollar a day.

But anybody who has a 401K, a pension, a house, a job, or an expected inheritance is going to get screwed by inflation.

[cthulu2016]

7. Actually, global inflation is how our debt will be eliminated

(First, a techincal thing—the Fed rate doesn't affect the rate we have to pay on our debt. That is determined in auctions of people buying our bonds. But asumming the Fed raised rates in response to real inflation, that real inflation would cause what we pay on treasury bills to go up.)

We have trillions in debt on which we owe paltry percentages. In an inflationary environment it is no sweat for us to service a T-Bill paying 2-3%. We actually make money on that, while the holder of the bond is screwed.

And since systemic inflation (as opposed to individual commodity fluctuations like corn or gas) cannot arise without some sort of recovery of demand, there are not many inflationary scenarios where government revenue doesn't go up. First, because the economy is better. (More taxable economic activity) and second because the dollar itself is worth less, so more nominal dollars in revenue.

The rates we pay to borrow would go up nominally, but the real cost to us should be offset by increased revenue requiring less borrowing, and our whole national debt would be cheaper and cheaper to service in real dollars.

We are in the same position a lot of folks were who bought a house in the 1960s. They had a 30 year mortgage at 4-5% and then 1970s inflation zoomed to double digits. So their mortgage payment was, in real terms, shrinking every month.

I am not suggesting that we would benefit from double-digit inflation. We would not. But we do need 3-4% inflation to crawl out of this thing.

[lastlib]

33. Another factor to consider about slightly higher inflation--

When inflation rises, currency depreciates in value. So as debt is repaid in an inflationary scenario, debtholders actually get less purchasing power--the debt is effectively repaid with cheaper money. This works to the borrower's advantage. In this case, the borrower being the government, we get to repay our debt more cheaply. The flip side is that interest rates will go up, so NEW borrowing will cost us more--but (we hope) our deficit to be financed will be smaller so we'll be borrowing fewer dollars.

Basic history lesson: Why did Germany have its hyperinflation in the 1920s? Because of the punitive debt burden of the Versailles peace settlement at the end of WWI. They couldn't pay that debt without printing truckloads of additional currency, which, by the laws of supply/demand, became worth less and less as more and more of it circulated. They diminished the value of the mark, which sent prices thru the roof in one of the most vicious episodes of hyperinflation in history, but made the postwar debt less burdensome.

[Guy Whitey Corngood]

8. Paul Krugman is tired of trying to reason with you people.

[eShirl]

19. it never gets old

[reformist2]

9. The biggest myth is that we'll have inflation. They're doing all they can to avoid deflation.

[cthulu2016]

11. Commodity effects confuse people

I have found it difficult to argue to someone paying $4 for gas that we have no inflation, even though it is true.

We have commodity price increases in things people buy every day, while things like houses that people buy once or twice in a lifetime slide downward.

[HiPointDem]

16. yeah, ordinary people lose on their housing value (primary asset at retirement for most) while

paying more for groceries and transportation and getting no interest on their savings.

win-win for the banksters.

[girl gone mad]

52. Commodity price increases being a knock-on effect of the quantitave easings and bank bailouts

In other words, it's another massive transfer of wealth from the middle class to the parasitic speculative class.

Demand-pull inflation would be welcome. These artificial risk asset bubbles are doing more harm than good.

[longship]

13. Incredible DU night. Lots to do. R&K. nt

R&K

[pampango]

15. When Krugman wins (when meaning someone with power listens to him) we all win! n/t

[NuttyFluffers]

21. that's nice. so when's the artificial wage suppression gonna end?

investors making money on speculation doesn't interest me. most consumers in the economy don't have enough to truly invest. so this change towards encouraging inflation (varying the cost of money by borrowing on time v. borrowing on value) does what for them if wages are not going to be released into inflation as well?

when's the wage slavery going to end?

[girl gone mad]

23. This is a bunch of neoclassical nonsense.

How much longer are you guys going to play these games?

People are suffering. The economic pain is real and the consequences of these policies have been very harmful to the average person. It's time to stop the Welfare to Wall Street and trickle-down madness.

[joshcryer]

51. Clear something up for me? I thought you liked the idea of printing money.

Last edited Thu Sep 13, 2012, 11:10 PM - Edit history (1)

How does this differ from what you want to happen and what is happening? Isn't the Fed basically printing money?

edit: nevermind I see your post here: http://www.democraticunderground.com/?com=view_post&forum=1002&pid=1336693

[Sherman A1]

24. Excellent!

[Hab Habit]

28. And Brooks Lost

In the immortal words of Nelson Muntz, "HA-HA!"

[grantcart]

34. Sanity won.

[valerief]

35. Wow, that's great news! nt

[Thrill]

45. Mittens changes mind will extend Bernake's term

Anything that needs to be said

[valerief]

49. Does this mean the companies sitting on their money will now hire more

people in China?

[Pamelajaynn]

50. He rules

Very good post!! How do we get it on the mainstream??

[Honeycombe8]

53. Thanks, cthulu, for that informative post! I actually understood it! nt

[cthulu2016]

55. Nicest compliment possible. Thanks.

[MFrohike]

56. I just don't know

The guarantee of no interest raise hikes should provoke price inflation. The question is whether the policies of the central bank, by itself, are enough to also spark wage inflation. I hate to be the bird of gloom but it seems unlikely. It's far more likely that wages will continue to be depressed and that gains from this policy will not go to workers. If that happens, well, we all know how inflation and stagnant wages works.

There is another problem. If Obama goes through with his seeming willingness to do the "Grand Bargain," he'll undercut any gains Bernanke will make. The result will be 1937-38. The bright side of a double-dip is that it may finally discredit neoliberalism. The downside is that, with increasing xenophobia, it makes the far right, with its absolutism, far more credible.

I should have mentioned hiring in the first paragraph as well. I was thinking about really sparking demand through higher wages and kind of taking employment for granted. I'm not sure that price inflation will really tighten up the labor pool by the necessary amount. Sure, it will take some of the unemployment pressure off, and I don't mean to sound as though I'm downplaying that, but I have to wonder how much it really would do without Congressional action. During the 90s, we only had the beginnings of white-collar offshoring. Is it really believable that all of this would lead to significantly higher domestic employment without removing the ease with which companies can offshore jobs?

Sorry if I'm all over the place. I'm typing this as I think about it, so it's probably not the best organized thing I've ever written.

[cthulu2016]

57. I think the price inflation would be symptom more than cause

With such high unemployment there is little competitive pressure on wages, which in turn maintains a lack of consumer demand because so many are unemployed, and those who are employed have no upward pressure on wages.

With low interest rates and "full employment" (which may be structurally higher than it was when this downturn started... it might be as much as 5% unemployment) we should see some inflation.

No wages, no wage/price spiral.

As to the prospects for American workers, they are not great in any scenario. But some systemic inflation would, for instance, provide some modest COLA increases for SS recipients who are getting hammered on pockets of price inflation within a broadly non-inflationary economy—gasoline and medicine.

And in a balance sheet de-leveraging slump any inflation reduces the real-money cost of outstanding debt. (Not huge inflation. I am talking about 3%-5%.)

So if wages can merely keep pace with inflation, a little inflation would ease the burden of existing household debt.

And most importantly, the economy is like a car—easier to slow than to accelerate. Since we can reign in inflation effectively if it becomes a real problem it is best to give the economy a little room to run. (The problem of Fed rates being capped at 0% on the downside doesn't apply on the upside. We can raise rates to infinity. So the Fed is never out of inflation-fighting bullets.)

[MFrohike]

58. Let me clarify

When I say price inflation, I'm thinking of the old formula of boosting prices to boost income. I'm thinking of the Wallaces and agriculture. I think the goal here is to expand employment by raising income for the producers/sellers. I think we had a disconnect on this, but maybe I'm wrong.

A wage/price spiral is not my concern. Labor doesn't have the power to provoke the wage side. The 1970s happened the way it did because unions still had a lot of influence on the general wage level. That is not true today.

My first concern is moderately high inflation and stagnant/declining wages. That scenario is hell of a lot more likely than a repeat of the 70s. I figure companies would do some hiring but less than in the past. I also expect that hiring will be done on the cheap, so that while demand is boosted somewhat, it remains fairly weak. While this may be enough to drop unemployment a point or two, I really don't see much more than that. It's a better scenario than the present, but it's also just limping onward with more of the same.

The real problem is that with relatively low wages, even moderate inflation (say 5%) is painful. It makes it harder to reduce debt because that inflation is reducing disposable income. Without debt reduction (private not public), we're not going to see a real recovery for a very long time. Of course, we have ridiculously draconian bankruptcy laws which are so fundamentally anti-capitalist that it's funny to see the right defend them. I'm rambling again, and moving the goalposts a bit, but though I do know that inflation is usually a good thing for borrowers, I'm not sure it would be good without some changes by Congress.

I'm trying to express my concern that wages won't keep pace with inflation. Sure, in a perfect world, inflation is irrelevant as long as wages keep pace. That's not the case today. Today, the best we can hope is that wages stagnate, like during the 90s, rather than decline. That is why I'm not buying the traditional "inflation is good" thing. Inflation will probably prove to be good for retailers and some producers, but it is unlikely to be beneficial to anyone else. It seems like a fight between Corporate America and Rentier America. I don't see that it does much good for anyone else.