Fed Officials Mull Inflation as a Fix

[cpwill]

...as the U.S. economy struggles and flirts with the prospect of deflation, some central bank officials are publicly broaching a controversial idea: lifting inflation above the Fed's informal target.

The rationale is that getting inflation up even temporarily would push "real" interest rates—nominal rates minus inflation—down, encouraging consumers and businesses to save less and to spend or invest more....

Others warn that pushing inflation higher than the target could create public confusion and risk fueling financial bubbles and market instability. They say Fed policy already is weakening the dollar and as a result prompting a gold and commodity boom. "The Fed is treading upon a mine-laden path that has never been tip-toed through in this country," said Andrew Busch, a currency strategist at BMO Capital Markets...

Officials outside the Fed have proposed using higher inflation to get real interest rates down. Earlier this year, International Monetary Fund chief economist Olivier Blanchard suggested that nations doubling their inflation target to 4% from 2% wouldn't be risky.

Such a move could provide more room to support the economy at a time when central banks have cut short-term interest rates nearly to zero but still face weak economies, a scenario Japan has faced since the 1990s and the U.S. is confronting now. Axel Weber, head of the Deutsche Bundesbank, and Philipp Hildebrand of the Swiss National Bank called the proposal "severely flawed."..

But in a speech this summer, Mr. Bernanke said that raising medium-term inflation goals would amount to a "drastic" measure that's inappropriate for the U.S. economy. "Raising the inflation objective would likely entail much greater costs than benefits," he said. Inflation would be more volatile, bring more uncertainty and possibly create destabilizing moves in commodity and currency markets that "would likely overwhelm any benefits arising from this strategy," Mr. Bernanke said...




luckily, we have an administration noted for not overreacting by engaging in drastic measures that make the problem worse... :roll:

 

[Lord Tammerlain]

...as the U.S. economy struggles and flirts with the prospect of deflation, some central bank officials are publicly broaching a controversial idea: lifting inflation above the Fed's informal target.

The rationale is that getting inflation up even temporarily would push "real" interest rates—nominal rates minus inflation—down, encouraging consumers and businesses to save less and to spend or invest more....

Others warn that pushing inflation higher than the target could create public confusion and risk fueling financial bubbles and market instability. They say Fed policy already is weakening the dollar and as a result prompting a gold and commodity boom. "The Fed is treading upon a mine-laden path that has never been tip-toed through in this country," said Andrew Busch, a currency strategist at BMO Capital Markets...

Officials outside the Fed have proposed using higher inflation to get real interest rates down. Earlier this year, International Monetary Fund chief economist Olivier Blanchard suggested that nations doubling their inflation target to 4% from 2% wouldn't be risky.

Such a move could provide more room to support the economy at a time when central banks have cut short-term interest rates nearly to zero but still face weak economies, a scenario Japan has faced since the 1990s and the U.S. is confronting now. Axel Weber, head of the Deutsche Bundesbank, and Philipp Hildebrand of the Swiss National Bank called the proposal "severely flawed."..

But in a speech this summer, Mr. Bernanke said that raising medium-term inflation goals would amount to a "drastic" measure that's inappropriate for the U.S. economy. "Raising the inflation objective would likely entail much greater costs than benefits," he said. Inflation would be more volatile, bring more uncertainty and possibly create destabilizing moves in commodity and currency markets that "would likely overwhelm any benefits arising from this strategy," Mr. Bernanke said...




luckily, we have an administration noted for not overreacting by engaging in drastic measures that make the problem worse... :roll:

You do know this is the policy of the fed chairman, who was refered to as Helicopter Ben for just such reasoning before he was appointed fed chairman by GWB.

You should also realize this was a predicted outcome by plenty of people, good or bad, generally because it is the easiest political move to make for any government. Had this crisis occurred in the Bush admin he would have pushed inflation (tarp and QE and was done) had McCain been elected it would still be the same policy.

No American politician wants to see the type of social unrest that Greece is seeing, and inflation is a way to disguise the economic hardships

 

[washunut]

You do know this is the policy of the fed chairman, who was refered to as Helicopter Ben for just such reasoning before he was appointed fed chairman by GWB.

You should also realize this was a predicted outcome by plenty of people, good or bad, generally because it is the easiest political move to make for any government. Had this crisis occurred in the Bush admin he would have pushed inflation (tarp and QE and was done) had McCain been elected it would still be the same policy.

No American politician wants to see the type of social unrest that Greece is seeing, and inflation is a way to disguise the economic hardships

They do not call inflation the cruelest tax for nothing. We are starting to see price inflation in food and oil. This hits the poorest among us the hardest as they use a greater percent of their income on it. One reason China is pushing back on raising the value of their currency is just for this reason.

If people think Americans are angry now, let food and gas prices rise substantially, within an economy that does lend itself to rises in income.

I agree that the current Fed chairman may do this and politicians may think it is the easy way out. They will find there is no easy way out of this.

 

[cpwill]

You do know this is the policy of the fed chairman, who was refered to as Helicopter Ben for just such reasoning before he was appointed fed chairman by GWB.

You should also realize this was a predicted outcome by plenty of people, good or bad, generally because it is the easiest political move to make for any government. Had this crisis occurred in the Bush admin he would have pushed inflation (tarp and QE and was done) had McCain been elected it would still be the same policy.

No American politician wants to see the type of social unrest that Greece is seeing, and inflation is a way to disguise the economic hardships

yes i do know this.


which is why a year and a half or so ago i diversified into commodities.


which has since been the fastest growing part of my (little) portfolio.

 

[cpwill]

They do not call inflation the cruelest tax for nothing. We are starting to see price inflation in food and oil. This hits the poorest among us the hardest as they use a greater percent of their income on it.

one potential upside to this; could it serve as fuel for the fire to get rid of agricultural subsidies?

 

[winston53660]

Someone told me the other day that if gold hits 5k the US debt would essentially be wipped out.

 

[Orion]

Someone told me the other day that if gold hits 5k the US debt would essentially be wipped out.

How's that?...

 

[winston53660]

How's that?...

Ft Knox gold reserves.

 

[Orion]

Ft Knox gold reserves.

Is the price of gold increasing because the U.S. is buying bullion though?

 

[winston53660]

Is the price of gold increasing because the U.S. is buying bullion though?

I don't think the US has made any large purchases of gold lately. Awhile back India I think dumped about 7 billion into gold though.

 

[Orion]

I don't think the US has made any large purchases of gold lately. Awhile back India I think dumped about 7 billion into gold though.

So then how would gold rising to 5K mean the U.S. debt is about to disappear, if the U.S. isn't in fact the one buying the gold?

 

[winston53660]

So then how would gold rising to 5K mean the U.S. debt is about to disappear, if the U.S. isn't in fact the one buying the gold?

because the US already owns 8,133.5 tons of gold

Gold reserve - Wikipedia, the free encyclopedia

 

[Orion]

because the US already owns 8,133.5 tons of gold

Gold reserve - Wikipedia, the free encyclopedia

Oooohhh.... aduh

But that's assuming the U.S. would dump its reserves to the open market. I hope it does because then it'll fall to ridiculously low prices.

 

[phattonez]

The rationale is that getting inflation up even temporarily would push "real" interest rates—nominal rates minus inflation—down, encouraging consumers and businesses to save less and to spend or invest more....

This can't be serious. Banks would only respond by raising their nominal rates, or else we would be fueling another bubble. Both are horrible outcomes. The only real way to get interest rates to fall (in a safe way) would be to get more savings. But oh no, we can't have that. :roll:

The supposed 'paradox' of savings was attacked by Austrian economist Friedrich Hayek in a 1929 article, "The 'Paradox' of Savings", attacking the paradox as proposed by Foster and Catchings.[5]

Austrian economists agree that if a population saves more money, total revenues for companies will decline, but they deny the assertion that lower revenues lead to lower economic growth.

Austrians believe the productivity of the economy is determined by the consumption-investment ratio, and the demand for money only tells us the degree to which people prefer the utility of money (protection against uncertainty) to the utility of goods.

They argue that hoarding of money (an increase in the demand for money) does not necessarily lead to a change in the population's consumption-investment ratio.[6] In other words, suppose the demand for money increased to the point that the level of spending in the economy fell by half. If the remaining spending is still divided into the old consumption-investment ratio, then all prices would simply fall by half and productivity would remain unchanged.

http://en.wikipedia.org/wiki/Paradox_of_thrift#Austrian_criticism

 

[cpwill]

no no no, this is a great idea. imagine, we could get back to the economic boom times of the 70's....



oh wait. :doh

 

[Lord Tammerlain]

no no no, this is a great idea. imagine, we could get back to the economic boom times of the 70's....



oh wait. :doh

Instead lets go to the government stimulus driven good times of the 80, where government debt exploded and made everyone feel richer while going deeper into debt. Just hope you die before the bill comes due

 

[phattonez]

Instead lets go to the government stimulus driven good times of the 80, where government debt exploded and made everyone feel richer while going deeper into debt. Just hope you die before the bill comes due

That's more of a strawman than a real argument. It's a false dilemma, we don't need one or the other. There are plenty of other options.

 

[washunut]

Instead lets go to the government stimulus driven good times of the 80, where government debt exploded and made everyone feel richer while going deeper into debt. Just hope you die before the bill comes due

Compared to what either debt or deficit as a percent of GDP the 80's were quite subdued. We do not have gameplan to REDUCE the deficit to 80"s levels.

 

[Lord Tammerlain]

Compared to what either debt or deficit as a percent of GDP the 80's were quite subdued. We do not have gameplan to REDUCE the deficit to 80"s levels.

Only compared to now and the time of WW2 would the Reagan era deficits be considered subdued (and of course the Bush2 years)

The goal should not be to reduce the deficit to the 80s levels but to the late 90's levels. \

The game plan should be a wholesale spending freeze. All budgets are frozen at current levels, no increases for any reason. Combine both inflation and economic growth (hopefully). The deficit would decrease a reasonable amout each year.

 

[phattonez]

The goal should not be to reduce the deficit to the 80s levels but to the late 90's levels. \

The late 90s should be continued and followed through on, not accompanied by another spending binge. Though it could be argued that a lot of that was just a bubble.

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

 

[washunut]

Only compared to now and the time of WW2 would the Reagan era deficits be considered subdued (and of course the Bush2 years)

The goal should not be to reduce the deficit to the 80s levels but to the late 90's levels. \

The game plan should be a wholesale spending freeze. All budgets are frozen at current levels, no increases for any reason. Combine both inflation and economic growth (hopefully). The deficit would decrease a reasonable amout each year.

Two problems with the above. First a lot of people like to point to the late 90's. Let's remember that the stock market was rolling so capital gain tax receipts were very high. Also because of the tech boom there was a huge growth in employment which is very unlikely in todays environment.

As to a freeze. Sounds good but not reality. For example medicare payments will be higher as there is annual inflation in health care. Social security will go up as more boomers retire. Interest expense goes up because of the $1.4 trillion of debt we added this year.

So we can get a handle on expenses if we are serious. I do not consider an across the board freeze as a realistic proposal.

 

[Lord Tammerlain]

The late 90s should be continued and followed through on, not accompanied by another spending binge. Though it could be argued that a lot of that was just a bubble.

United States public debt - Wikipedia, the free encyclopedia

I agree that the 90s was a bubble, and the overall economy appeared to be stronger because of it. I also agree that the bubble helped increase tax revenues a good deal

In the 2000's the housing bubble did the same, and kept revenues higher then they would have been

 

[Lord Tammerlain]

Two problems with the above. First a lot of people like to point to the late 90's. Let's remember that the stock market was rolling so capital gain tax receipts were very high. Also because of the tech boom there was a huge growth in employment which is very unlikely in todays environment.

As to a freeze. Sounds good but not reality. For example medicare payments will be higher as there is annual inflation in health care. Social security will go up as more boomers retire. Interest expense goes up because of the $1.4 trillion of debt we added this year.

So we can get a handle on expenses if we are serious. I do not consider an across the board freeze as a realistic proposal.

For the US to ever get any where near a balanced budget, it will have to be a combination of spending cuts and increasing taxes. Given the three largest spending areas for the US governemnt are the military, SS and medical costs, they will have to face spending restrictions as well. There will not be enough money found in other departments to be cut, in order not to have to cut from the military SS and medical costs

 

[washunut]

For the US to ever get any where near a balanced budget, it will have to be a combination of spending cuts and increasing taxes. Given the three largest spending areas for the US governemnt are the military, SS and medical costs, they will have to face spending restrictions as well. There will not be enough money found in other departments to be cut, in order not to have to cut from the military SS and medical costs

Social security is self funded so should be a seperate conversation. I agree that medical spending needs to be controlled. That is why the Health Care bill passed was such a disappointment. As to military spending, I would cut it dramatically. Get out of the two wars is something like $150 billion. Plus close done a bunch of our bases in Europe and cuts in weapon systems could be worth another $200 billion.

I think the day of America being the defender of the world is gone. You can't be a world power if you are broke.

 

[phattonez]

Social security is self funded so should be a seperate conversation.

How can you claim that when it is ready to go broke? Someone is going to have to pay for it.

I agree that medical spending needs to be controlled. That is why the Health Care bill passed was such a disappointment. As to military spending, I would cut it dramatically. Get out of the two wars is something like $150 billion. Plus close done a bunch of our bases in Europe and cuts in weapon systems could be worth another $200 billion.

I think the day of America being the defender of the world is gone. You can't be a world power if you are broke.

We've forgotten how to have an economy that produces wealth, not just borrows it.