Disinflation

[drz-400]

Today, the Bureau of Labour Statistics released its latest consumer price data, which showed a seasonally-adjusted decline in headline prices of 0.1%.

Inflation: Look out below | The Economist

http://www.calculatedriskblog.com/2010/05/cpi-declines-01-core-cpi-flat.html

Turn up the helicopter press Ben! Just imagine how many jobs we would be making if inflation was moving the other way.

 

[Kushinator]

Inflation: Look out below | The Economist

Calculated Risk: CPI declines 0.1%, Core CPI Flat

Turn up the helicopter press Ben! Just imagine how many jobs we would be making if inflation was moving the other way.

There is only so much monetary policy can offer in a zero inflationary environment. The demand for money becomes perfectly elastic as inflation approaches zero, therefore we can identify the macro issue as being demand driven. There are some monetarist approaches:

Long term corporate debt purchasing facilities: By injecting liquidity into corporate entities, firms have ample cash to either float through rough periods, or expand operations. In the event that longer term debt is targeted by the Fed, this mechanism allows for a greater propensity to invest, rather than hoard cash. Drawbacks include long term inflationary risks due to a potential devaluation in corporate debt if economic activity does not turn heavily positive.

Taxing excess reserves: My personal preference given our economic circumstance. Never in the history of the US banking system have lending institutions been so flush with reserves. Combined with the various stages of fiscal stimulus, such a measure can pressure banks to lend. Drawbacks include higher long term interest rates to "pass along" the tax to lenders.

Debt monetization: Allowing the Fed to effectively "fund" a percentage of short term auction purchases (say for example 5%). The mechanism would have to be constructed around results to avoid strong volatility among currency pairs. Drawbacks in this scenario can carry a double edged sword. Currency devaluations can be a net positive to both US exporters and tourism, but can lead to disinvestment from foreign sources of capital.

But in the end, another fiscal stimulus (equal in size to the ARRA of 2009) is the only realistic measure that can spur monetary velocity. An increase in purchasing (both public and private) is the key to a sustainable economic recovery.

 

[drz-400]

Taxing excess reserves: My personal preference given our economic circumstance. Never in the history of the US banking system have lending institutions been so flush with reserves. Combined with the various stages of fiscal stimulus, such a measure can pressure banks to lend. Drawbacks include higher long term interest rates to "pass along" the tax to lenders.

Is the fed currently doing this? It seems like a good idea at the moment.

 

[themostimproved]

Is the fed currently doing this? It seems like a good idea at the moment.

Actually, I think they just started paying on reserves for some reason. They've wanted to for ages (I don't get why at all). I don't understand why they would, when they could just use other factors to help control that money supply, that doesn't cost the tax payer (due to less federal reserve money being sent to the treasury).

 

[phattonez]

Alternate Unemployment Charts

:blowup:

 

[Kushinator]

Alternate Unemployment Charts

:blowup:

Can you explain how your post and the OP combined can explain the basis of the (expectations augmented) Phillips curve?

 

[phattonez]

The Phillips Curve? Wasn't that load of crap abandoned during the 1970s because of stagflation?

 

[washunut]

Inflation: Look out below | The Economist

Calculated Risk: CPI declines 0.1%, Core CPI Flat

Turn up the helicopter press Ben! Just imagine how many jobs we would be making if inflation was moving the other way.

Look at the elements that make up this number. See if they relate to the way most people spend their money.

 

[Kushinator]

The Phillips Curve? Wasn't that load of crap abandoned during the 1970s because of stagflation?

The original Phillips curve was abandoned due to simplicity, however an expectations augmented Phillips curve is still used by the Fed.

But still today, modified forms of the Phillips Curve that take inflationary expectations into account remain influential. The theory goes under several names, with some variation in its details, but all modern versions distinguish between short-run and long-run effects on unemployment. The "short-run Phillips curve" is also called the "expectations-augmented Phillips curve", since it shifts up when inflationary expectations rise, Edmund Phelps and Milton Friedman argued. In the long run, this implies that monetary policy cannot affect unemployment, which adjusts back to its "natural rate", also called the "NAIRU" or "long-run Phillips curve". However, this long-run "neutrality" of monetary policy does allow for short run fluctuations and the ability of the monetary authority to temporarily decrease unemployment by increasing permanent inflation, and vice versa. Blanchard (2000, chapter 8) gives a textbook presentation of the expectations-augmented Phillips curve.

source

 

[phattonez]

Yes, in another thread (I think the minimum wage one) I conceded that short-term inflation would lead to higher employment, but it would come with a correction and so there would be no long-term benefit.

 

[washunut]

Yes, in another thread (I think the minimum wage one) I conceded that short-term inflation would lead to higher employment, but it would come with a correction and so there would be no long-term benefit.

Haven't you folks learned that these theories from history just do not fully explain what drives the U.S. economy. Not sure what school you folks go to, but I would hope that while recanting theory may have been fine in high school, it should not get you a passing grade in college unless you can explain what works and does not work in the economy of 2010.

 

[phattonez]

These aren't theories from history. These are theories developed from apriori knowledge about human action. They always and everywhere apply to explain the behavior of humans.