Monday, Sep 06, 2010
Some in the FED will be only to happy to follow the advice...
Telegraph: Fed must embark on new stimulus blitz, urges retiring deputy chairman Donald Kohn
'The Federal Reserve must embark on a new blitz of measures should the recovery continue to make little dent in unemployment, a leading light at the central bank for the last four decades has said. Donald Kohn, who retired as chairman Ben Bernanke's deputy with little public fanfare last week, admitted that "it's going to be a slower recovery. But acceptance of that reality is not a reason for the central bank not to do everything it can to help the recovery along." '
Posted by hpwatcher @ 07:58 PM (659 views) Add Comment
6 Comments
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1. hpwatcher said...
Nice little exchange:-
mark fowler
QE might inflate away debt burden but does it mean more spending?
Sure it bailed out the banks and allowed the government to pay the housekeeping.
I have got no time at all for the idea money creation on a vast scale is not inflationary. OK there might be spare capacity etc and deflationary forces but more cash works in the opposite direction.
In the global economy how much of this cash has found its way into commodities buying them up even before they are produced or dug up driving up the price. The result is hundreds of millions cant afford their staples.
Holders of cash savings,pensions and those on fixed incomes see a reduction in buying power. The indebted do not necessarily borrow more or buy more goods and services.
QE I suspect leads to a reduction in economic activity
johnwilson
Mark, it is only price inflationary when it circulates, this is known as velocity of money, Unfortunately, at this point in time, people are tending to save and/or not spend so the velocity has therefore slowed; consequently no matter how much more money the Fed pumps in it will not make a scrap of difference unless it circulates hence the expression "it's like pushing on a piece of string".
In addition if spending drops then so does GDP, so the authorities have quite a job on their hands in trying to get things moving.
My own gut feeling tells me that the best option in the States is for the government to create and spend its own money into existence on their crumbling infrastructure. That would put the money into business, create employment and more importantly, that money would then be spent and would circulate.
(Edited by author 2 hours ago)
mark fowler
Thanks for your considered comment for I regard this debate as both fascinating and important.
I believe vast sums from QE have bought up commodities which is highly inflationary, true the velocity of money has slowed which is deflationary.
The cost of essentials continues to climb at an alarming rate both in the US and the UK energy, food etc.
John Smith and Joe Sixpack are paying 30% more to feed his family, inflation.
His wages are falling the value of his pension likewise, and his house, deflation.
Both of these are giving Mr Average and the middle classes a terrible hammering.
I did not suggest that immediately after QE we get lots of inflation, however regardless of the velocity of money at present I cannot in my wildest imaginations believe creating vast amounts of money can do any other than reduce the value of the currency.
It may be the state of the economy being so asset value based cannot cope with a big drop in said values which in the case of the UK are absurdly high and in my view unsustainable. If this is the case then I worry it has all gone too far because the young especially should not have to pay 8 9 10 years take home pay to buy a semi and either cannot or will not.
andrewx
You are correct that it is price inflationary when it circulates into the real economy, and presently this is not occurring because banks and individuals are saving and building up larger capital reserves, and thus as you say the velocity of money is slower.
Also, I agree that money, if spent at all by the government, should go into longer term real infrastructure. In the US, most of the stimulus is NOT going into to real infrastructure, and is instead propping up prices of financial assets and property etc.
Regarding your comments about inflation.... Inflation in modern economic theory is defined very narrowly and defined only to include consumer items. If the price of gold or property were included in this measure (I am not suggesting this should occur, but purely as a point of illustration), then we would see inflation occurring.
Due to the difficulty of properly measuring inflation using statistically means which are largely defined by economists or for political reasons, you can consider inflation purely as the expansion of base money, and money printing, in this sense certainly causes inflation!.. Whether the price rises (the symptoms) of this inflation are yet evident, or have yet occurred is difficult to see, and perhaps is evident in hindsight only, but printing base money from nothing, is debasing our currency. The inflation of the gold price is free-market evidence of this.
mark fowler
Andrewx
And oil as well as gold.
I argue that many financial funds and institutions without QE would have gone under instead they they find even more money available for even greater leveraged punts on commodities which is causing inflation of the most insidious kind. This goes some way to explaining why banks are not lending I mean a 40% increase in wheat is very sweet.
It is simply not true you cant reduce the value of the currency until the new money goes into general circulation. Markets can and I think do anticipate a fall in the value due to QE and try to get out of that countries currency and debt, China have reduced their exposure to the dollar buy some 30%.
The price of basics should have fallen along with the reduction in world economic activity but because there is far too much money available for speculation it has led to big price rises causing inflation rather than deflation of essentials.
ianbb
If you were to consider economic reality rather than what your stomach tells you, you'd realise that that won't work.
Of course GDP drops if spending drops, because GDP is just a survey of, er, spending. It has some merit as a general indicator, but it isn't that useful. What we're interested in is production; that means the creation of goods and services which are of value to the people purchasing them.
Which is one reason that a public works programme never has the desired effect. Consider Keynes's famous "let them build pyramids" suggestion. What happens? You waste a lot of production building pyramids (quarrying stone, buying fuel for the stone moving equipment, buying ropes, etc). At the end what have you got? A useless pyramid. The economy is now smaller, by the cost of building a pyramid, than it was before. You've made matters worse, even if during the process you stirred up more spending and improved another aggregate statistic- "unemployment".
It's better to give the unemployed welfare and tell them to sit on their backsides than have them do workfare. At least that way you save the cost of all that stone, petrol, rope, etc etc.
johnwilson
A pyramid, yes, certainly it has no value, but, roads railways hospitals schools do have value and also create value. The cost of providing this type of infrastructure is self liquidating.
ianbb
They are still a net loss of economic value; the pyramid is an extreme case that illustrates the point. Those things have some value, but less value than the costs of their construction; which is why they weren't built during the boom times.
Keynes and his followers should have realised that a theory that predicts that pyramid building is an economic benefit (which it does; Keynes himself said that if there was nothing apparently useful to build, then pyramids would do) has something terribly, terribly wrong with it.
2. sureseam said...
It may be a counter intuitive heresy but the diminishing benefit from deficit spending is explored in chart B of this:
http://www.zerohedge.com/article/eric-sprott-we-are-now-paying-funeral-keynesian-theory
Those in the driving seat just can't help themselves so on it goes.
3. Crunchy said...
'The Federal Reserve must embark on a new blitz of measures should the recovery continue to make little dent in unemployment,"
It's that old chesnut again. Printy, printy = profit.
Ben, how about saving some 'serious' money and stop trying to be the global police. Do I see a conflict of inerests here?
Whilst your at it, stocking up on some possible missing gold may help also. Time is running out.
4. wdbeast said...
From Blackadder Goes Forth
Episode 1
Melchett: Good man. Now, Field Marshal Haig has formulated a
brilliant new tactical plan to ensure final victory in the
field. [they gather around a model of the battlefield]
Blackadder: Now, would this brilliant plan involve us climbing out of
our trenches and walking slowly towards the enemy sir?
Darling: How can you possibly know that Blackadder? It's classified
information.
Blackadder: It's the same plan that we used last time, and the
seventeen times before that.
Melchett: E-E-Exactly! And that is what so brilliant about it! We
will catch the watchful Hun totally off guard! Doing
precisely what we have done eighteen times before is
exactly the last thing they'll expect us to do this time!
There is however one small problem.
Blackadder: That everyone always gets slaughtered the first ten
seconds.
5. sj032 said...
The addict's answer is always more of the same poisen. God help us. Wdbeast, that's hilarious. I remember it well. What a class joke.
6. the number cruncher said...