The federal reserve has worked full time for 5 years to create inflation

[cthulu2016]

Last edited Thu Feb 6, 2014, 09:36 PM - Edit history (1)

And even though it tragets have been too low it has sometimes failed in reaching even sadly under-fed targets... though it has probably prevented nominal deflation, which counts for something.

It is easier for the fed to reduce inflation than create it. This flies in the face of a lot of RW nonsense, but is what was expected byall the mainstream progressive-type economists, and is something we all knew a decade before the current mess even started because of Japan.

Now, since our national monetary objective, our national goal, has been to fight deflation, consider all the policies blocked by Republicans (and some Dems) the last five years because they might be inflationary.

The federal government has worked at cross purposes to the Fed since about February 2009.

And though there are many causes, effects and moving parts in play, analysis of the sluggishness of that period need look not further than that fact, which is sufficient explanation of the phenomenon.

[Ed Suspicious]

1. Inflation doesn't help lenders who I assume are a strongly republican demo. Pukes gotta protect

their rich friends money. Heaven forbid I get a little break as a borrower.

[unblock]

2. republicans certainly don't mind inflationary policies when they're the beneficiaries

if their donors get rich off it and they get the credit, then suddenly they don't mind inflation or deficits or socialism or big government or....

[RobertEarl]

3. How do you figure?

The fed has NOT worked to create inflation. Your statement is totally false.

The fed has been loaning money out at near zero interest. Had it wanted inflation it would have been loaning money at ever increasing rates.

[SolutionisSolidarity]

6. That doesn't make sense. Inflation and economic expansion are closely related.

The fed lowers interest rates to increase the money supply, encouraging economic expansion, which in turn causes inflation. It raises rates to restrict the money supply, dampening economic growth, which is supposed to lower inflation.

http://en.wikipedia.org/wiki/Monetary_policy

"Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. "

[CJCRANE]

8. But if there is still less money in circulation than before the recession

then there won't be any expansion and hence there is less inflation.

Businesses and corporations aren't investing as much as they should be.

(I'm not an economist but that's what it seems like to me).

[RobertEarl]

9. Encouraged economic expansion?

On what planet?

The fed has discouraged economic expansion. Any expansion came only because it kept the whole economy from a total crash.

If you pay more to borrow money, that is real inflation. The fed has worked to keep interest rates low.

If you work to keep wages down, that is working to limit inflation. The fed has worked to keep wages down by keeping unemployment high.

You can throw out the classical economic theories. What we are seeing is a crisis situation that was invented to save the banksters from utter collapse.

Has there been inflation? Yes. But not in interest rates or wages and certainly not in housing like we saw last decade.

Food has inflated the most, because that helps the large landowners and bankers increase their gains.

[Sgent]

11. Compared to what it would have been

without intervention, the Fed has expanded the economy through quantitative easing and discount window policies.

Within normal parameters unemployment moves in the opposite direction of inflation (the higher inflation is, the lower unemployment is), as inflation indicates the demand for more money for consumption or investing -- which drives unemployment. However, this can be thrown off balance by a deflationary spiral or hyper-inflation which indicate other problems (usually non-monetary) with the economy.

Interest rates are not an indicator of inflation -- but rather an effect. Today's nominal (real) interest rates are low for two reasons 1) quantitative easing has reduced the supply of bonds, and 2) there are relatively few people who want to borrow money, as they are scared of entering into debt in an uncertain economy, and have no productive way to use the debt. Interest rates = nominal rate + inflation.

[RobertEarl]

14. Higher employment means inflation

When there is a shortage of workers, wages increase. Prices then must rise to pay for higher wages. Causing inflation.

There is no shortage of bonds. Bonds are selling like crazy. That makes the interest on bonds go down.

Interest rates sure as heck do effect inflation. If you have to pay more to borrow money, you have to raise prices to cover.

[cthulu2016]

17. Cause and Effect: Raising interest rates has never caused inflation

Interest rates are highly correlated with inflation, but the relationship is not causative. In fact, it is inverse.

We have a ton examples of the Fed sharply raising rates. It is always done to reduce inflation. And it does.

See the early 1980s for the starkest example of the effect.

[PowerToThePeople]

4. What happens if it hits all at once?

There are a LOT of extra freshly printed dollars floating in the system that never existed before. The inflation is there, we just have not seen it yet.

[Fumesucker]

5. Not to worry, the wealthy have been hoovering up all those dollars for themselves

There is not much risk that they will get injected into the active economy any time soon.

[Sgent]

12. Money supply

is still lower today than it was in 2008.

You can look at http://www.businessinsider.com/the-myth-of-the-exploding-us-money-supply-2011-3 for an older (but still accurate) article.

[PowerToThePeople]

13. Reads like WOO to me.

Having the column name "Pragmatic Capitalism" does not help sway me. I think your quoted dude is a ponzi schemer, who is just spewing shit to line his pocket books.

edit - an article linked there http://pragcap.com/mechanics-qe-transaction explains it a LOT better. Not so much woo after reading that one.

edit2- ya, it is bullshit. They just printed the new cash. That IS inflationary.

[cthulu2016]

15. Those dollars only become real in the economy by being lent out by a bank

The money supply is much larger than the number of dollars extant and is largely potential dollars.

Say you have a home equity credit line of $50,000 that you have never used. That is $50,000 of money supply but $0 of economic activity. The bank has permission to create those $50,000 in the form of a loan, but only if you ask for it. And then you buy stuff with it and it has its inflationary effect.

And borrowing is very interest rate sensitive, so the Fed is in a strong position to rein all that in if need be.

But raw money supply doesn't affect inflation much at all.

Printing tons of currency not backed by a promise of new wealth backing them would indeed debase the currency. If we printed a trillion new $100 bills backed by little more than the paper they're printed on and handed them out that would be very inflationary.

But we have not done that.

[CJCRANE]

7. I assume the QE was intended to fill a liquidity gap

that wasn't being filled by government or corporate investment.

Even with the QE, the amount of money circulating in the economy is probably still less than before the Recession.

[roamer65]

10. The actual goal is called "inflation targeting".

The Fed is aiming for an inflation rate of 2 pct, but we all know the actual rate is much higher than 2 pct. The real rate is around 6 pct.

[Downwinder]

16. Look at the DOW and S&P index. There has been inflation in the

pockets of the 1%.

[Yo_Mama]

18. I think this is off-base; the problem is prior borrowing

The reason the Fed keeps printing money without circulating money (which is why you don't have a lot in the way of inflation) is that we previously went into a sustained borrowing frenzy. Incomes had not risen in line with the borrowing, which implied that a great deal of money would be destroyed.

What that looks like in the "real" economy is that more people are trying to reduce their loan balances than are trying to increase them. And this makes absolute sense but defies the textbook theory that loan expansion follows a drop in rates, because although rates for good borrowers drop, rates for bad borrowers don't drop in sync. Thus, when you have had a previous overexpansion in borrowing of this magnitude, the outcome even by flooding the system with money and driving rates down is not inflationary (in the short term).

It is thus absolutely true that fiscal policy (federal spending) is more useful in balancing the economy after borrowing sprees than monetary policy, because fiscal policy circulates money directly.

HOWEVER, the federal government also spent a lot of money to offset the fiscal problems, and coming back into a long-term balance implies that we cannot ignore the money the federal government spent, which still hangs around as debt. In other words, federal spending doesn't "cure" an excessive debt load in a society if it is done to the point that federal spending will have to be sharply cut in the future.

There are natural ratios of debt to income that have to be maintained, and when those are exceeded BK (writing off excessive debt) is the best way to rebalance the system over the longer run.

Implicit in the OP is the idea that if we just got the right mix of policy, all negative effects or most of them could be mitigated and we could just go on as before, but that is an idiotic theory. All experience suggests that societies have to find a long-term balance, and that therefore periods of expansionary credit growth that exceed income servicing capacity are followed by periods of much slower growth.

Thus, the real effect of Fed policy has been to boost asset valuations and therefore help correct the rapid degradation in asset/liability ratios that follows when you have a debt overrun and a lot of debt has to be written off:
Nonfinancial noncorporate business:
http://research.stlouisfed.org/fred2/graph/?id=TABSNNB,TLBSNNB,
Households and nonprofits:
http://research.stlouisfed.org/fred2/graph/?id=TABSHNO,TLBSHNO,
Nonfinancial corporate business:
http://research.stlouisfed.org/fred2/graph/?id=TABSNNCB,TLBSNNCB,

This cushions the adjustment (cuts out some of the short-term downside), but over the longer term the downside is still there. One of the aspects of the current situation that is rarely discussed is the epic level of increase in state and local government debt in the run-up to the GR:


Much of federal policy has essentially been offsetting that trend since the ugly reality hit:


Note that the state and local debt excludes future pension and medical retirement obligations.

Therefore it is obvious that state, local and federal tax rates must continue to increase, but that drops future incomes and ability to service debt, meaning that the circulating money supply will continue to be restrained. If the US population were rapidly expanding without access to substantial social services, the net impact of the government debt increase would be substantially mitigated.

But that is not the nation we want. We don't want hungry, cold, desperate people without recourse. We want a certain level of basic human security for our population. Thus when we increase population we increase social spending.

So there is no possible policy that could restore us to the growth rates that were funded by very large increases in debt in prior decades. None whatsoever.