Krugman: The Rage of the Bankers

[eridani]

http://www.nytimes.com/2015/09/21/opinion/paul-krugman-the-rage-of-the-bankers.html?_r=1

Last week the Federal Reserve chose not to raise interest rates. It was the right decision. In fact, I’m among the economists wondering why we’re even thinking about raising rates right now.

But the financial industry’s response may explain what’s going on. You see, the Fed talks a lot to bankers — and bankers reacted to its decision with sheer, unadulterated rage. For those trying to understand the political economy of monetary policy, it was an “Aha!” moment. Suddenly, a lot of what has been puzzling about the discussion makes sense: just follow the money.

The basic principles of interest rate policy are fairly simple, and go back more than a century to the Swedish economist Knut Wicksell. He argued that central banks like the Fed or the European Central Bank should set rates at their “natural” level, defined in terms of what happens to inflation. If rates are too low, inflation will accelerate; if rates are too high, inflation will fall and perhaps turn into deflation.

By this criterion, it’s hard to argue that current rates are too low. Inflation has been low for years. In particular, the Fed’s preferred inflation measure, which strips out volatile food and energy prices, has consistently fallen short of its own target of 2 percent, and shows no sign of rising.

It’s true that rates — near zero for the short-term interest rates the Fed controls more or less directly — are very low by historical standards. And it’s interesting to ask why the economy seems to need such low rates. But all the evidence says that it does. Again, if you think that rates are much too low, where’s the inflation?

[JDPriestly]

1. I'm not an economist, but I am wondering about this:

In particular, the Fed’s preferred inflation measure, which strips out volatile food and energy prices, has consistently fallen short of its own target of 2 percent, and shows no sign of rising.

http://www.nytimes.com/2015/09/21/opinion/paul-krugman-the-rage-of-the-bankers.html?_r=2

OK, if you omit food and energy prices, you have mostly industrial goods like computers, clothes, etc. -- all things produced abroad.

So the inflation index reflects a lot of products that are produced in low-wage countries, but don't reflect the costs of products produced in the US or at least let's say that the index is weighted to show higher prices on imported items.

Something about that troubles me. I'm not sure what it is. How accurate can that measure of inflation be? It does not measure the inflation on the most necessary items that people buy or have to pay for -- like food and utilities. Why is that the index?

I'm asking a question, not exactly disagreeing.

[eridani]

2. As I understand it, they are trying to keep the measurement from being too volatile n/t

[JDPriestly]

3. Yes. But what if the "volatility" is really inflation for people of limited means?

We are noticing price hikes at the supermarket. We are retired and really don't buy a lot of consumer goods. If food is not a part of the index, then that index is pretty irrelevant to our reality. It is no measure of the purchasing power of our Social Security checks.

[eridani]

4. That is why CPI-Elderly should be used to calculate increases in Social Security n/t

[Enthusiast]

7. Did you mean to say,

"That is why CPI-Elderly should not be used to calculate increases in Social Security."

[eridani]

10. The CPI-Elderly will give more income to retirees, as its basket of goods--

--contains more health care and less transportation, etc.

[rogerashton]

9. This goes too far.

OK, if you omit food and energy prices, you have mostly industrial goods like computers, clothes, etc. -- all things produced abroad.

Just not true. Remember, the US imports considerably less than 20% of its GDP.

http://data.worldbank.org/indicator/NE.IMP.GNFS.ZS

The index used by the fed mainly reflects the prices of the majority of US GDP that is domestically produced for domestic consumption, but not food and energy, including a large sector of nontradeable services, construction, and, despite all the political memes, a very significant amount of domestic manufacturing for domestic consumption. The purpose of the index is to capture persistent inflationary trends. Food and energy are excluded because they are relatively competitive -- in the case of energy the keyword is relatively, of course -- and so inflationary trends in these industries are not persistent. We used to believe that persistent inflation is based on the price/wage spiral, but that was back when wages sometimes went up.

[GeoWilliam750]

5. Social Security

With rates continuing to be this low, social security and pension funds will have a very hard time meeting their obligations.

[eridani]

6. Scrap the cap n/t

[essaynnc]

8. Inflation? Sure we have Inflation!!

Check out the "performance" of the stock market since the crash. A lot of that "free" has ended up back in the casino on Wall Street. Too bad we're not using more of it to build alternative energy systems or other useful long term stuff. Jobs anyone??

[StoneCarver]

11. I have to disagree with Paul

Have you been to the grocery store lately? I go occasionally as my wife usually goes. I was a little surprised by the prices yesterday. Apples are in season and the prices were $3/lb and organic honeycrisps were $6/lb. WTF? Milk prices also raised my eyebrows. Yogurt $1 each.
Stonecarver

[RussBLib]

12. food costs HAVE to be going up

they play such tricks. oh, here's the inflation rate, but we won't add in energy or food or whatever, which often turn out to be some of the biggest costs.

same with the unemployment rate; they don't even count people who quit looking. part-timers are not counted

we are so mired in bs we don't know which way is up