The Sequester

[astralis]

JAD,

Those mountains of cash out there that corporations saved up to weather the downturn will flow back into the economy at some point. Not in a slow dribble, but a flood, because once full recovery seems imminent, corporations will have no choice but to race to expand plant capacity and output. That will be wonderful for employment, and we'll be cheering, but serious inflation will be right behind. It will come as demand for industrial goods outstrips supply, at least initially. When the price of industrial goods rise, so will the price of all goods.

employment's always been a lagging indicator-- when it does happen, that'll be a big sign that the Fed will no longer need QE and can also raise rates.

to put it in another way, i expect deflationary action by the Fed to be much more noticeable and much more effective than action to inflate, because it's a lot easier to go the other way without resorting to "extraordinary measures".

If you can't lower prices or raise wages to offset inflation, the next best thing is to put more money in people's pockets. It may not make them richer in reality, but it helps if the cost of ice cream has doubled.

and would also contribute to inflation, right?

the time for tax cuts is during a recession, not during the recovery. besides, as employment goes up, so will wages.

[JAD_333]

JAD,



not in a liquidity trap. this is easily reversible-- not only are rates at the zero-bound, we're doing QE. stop QE and raise rates and supply goes off sharply.

And then?

people have been screaming about inflation since 2008 and rates have fallen to historic lows. inflation has dipped and then held steady at these lows despite an extraordinary amount of inflationary action by the fed.

I am not screaming about inflation. I am expecting it to rise as an outcome of the economic recovery. How high, I don't know, but over 6% is a reasonable estimate, and I wouldn't be surprised if it went to 10% for several years. It will come in the form of excess demand for goods and services.

How? Those mountains of cash out there that corporations saved up to weather the downturn will flow back into the economy at some point. Not in a slow dribble, but a flood, because once full recovery seems imminent, corporations will have no choice but to race to expand plant capacity and output. That will be wonderful for employment, and we'll be cheering, but serious inflation will be right behind. It will come as demand for industrial goods outstrips supply, at least initially. When the price of industrial goods rise, so will the price of all goods.

but this is not the 70s, and we're not going through stagflation right now. nor was it reagan's tax cutting that 'overcame the damage', it was volcker whom tamed inflation via the Fed.

Back up a second. I didn't say that Reagan's tax cut tamed inflation. It compensated for the buying power consumers lost when inflation was running at 10%. If you can't lower prices or raise wages to offset inflation, the next best thing is to put more money in people's pockets. It may not make them richer in reality, but it helps if the cost of ice cream has doubled.

[astralis]

JAD,

They could lead to high inflation if the economy continues to experience sluggish growth.

not in a liquidity trap. this is easily reversible-- not only are rates at the zero-bound, we're doing QE. stop QE and raise rates and supply goes off sharply.

people have been screaming about inflation since 2008 and rates have fallen to historic lows. inflation has dipped and then held steady at these lows despite an extraordinary amount of inflationary action by the fed.

I assume a $600 one-year loss to inflation hurts unless you get a pay raise to offset it, but most people don't get 6% annual pay raises.

indeed. my pay's been frozen for the last 2 years and will likely be frozen for several more...

But we haven't fully recovered, and we certainly aren't recovering at the typical post-recession rate. All inflation does now is eat away buying power. In 2012 it took $10 to buy what $9.72 would buy in 2011. That doesn't seem like much, but move the decimal out and what we've lost to inflation in one year is, for example, $270 on $10,000. If wages keep pace, all is good, but they aren't.

slightly higher inflation expectations will cause markets to make plans to use cash they're sitting on now. this will raise demand. this is not an extraordinary idea-- in fact, the US urged the same course on japan 15 years ago.

The damage is even worse when the rate doubles, as it did from 1979 through 1981, with rates of 10.1%-13.5%-11.3% respectively. Recession followed that bout. Remember? Reagan had to cut taxes to overcome the damage caused by high inflation.

but this is not the 70s, and we're not going through stagflation right now. nor was it reagan's tax cutting that 'overcame the damage', it was volcker whom tamed inflation via the Fed.

the Great Recession should be viewed through the lens of the Great Depression, not 70s stagflation. the underlying conditions are far closer to the former.

but rates in the low double digits are very possible if we continue to add to the money supply without a corresponding increase in GNP.

that's not likely. the Fed has even more leeway for action now than it did when Volcker was around, largely because so much of the inflationary pressure is being created by one body, vice a number of inflationary factors.

[dalem]

dalem,
The Consumer Price Index is an index.
Inflation is the change in the index.
The most common measure of inflation is the percent change year-on-year.

The difference between the two graphs is read on the left side, vertically.


ADD: Since 1980, when unleaded gas was $1.25 a gallon, gas prices have increased one percentage point faster than overall consumer prices.

If the two rates of inflation were the same, that $3.90 gallon would now cost $3.20.

I know how to read a graph, hence my pointing out their differences. I rather suspect that you don't think any rate of inflation is bad, so I'm not going to quibble about 1% vs. 2% vs. zero.

-dale

[JAD_333]

dale,



i'm not sure what your point is. in the long-run, there will be inflation as economic activity and money supply increases.

3-4% inflation when the economy is cooking is indeed a healthy rate, and one would expect the money supply to increase concomitant with growth. But money supply increases designed as recovery measures are something else. They could lead to high inflation if the economy continues to
experience sluggish growth.

NOT having long-term inflation means your economy is not growing or even shrinking.

Yes, but inflation even at a relatively low rate of 6% can crimp growth by rapidly diminishing consumer buying power. A one-year loss in buying power of 6 cents on a dollar, $6 on a $100, $60 or a $1,000 and $600 on $10,000, isn't chicken feed. What are your household expenses annually? I'm guessing they're more than $10,000. I assume a $600 one-year loss to inflation hurts unless you get a pay raise to offset it, but most people don't get 6% annual pay raises. The damage is even worse when the rate doubles, as it did from 1979 through 1981, with rates of 10.1%-13.5%-11.3% respectively. Recession followed that bout. Remember? Reagan had to cut taxes to overcome the damage caused by high inflation.

currently inflation is at a very low rate. given that we're supposed to be economically recovering, it should be higher than it is today, at least in line with historical averages.

But we haven't fully recovered, and we certainly aren't recovering at the typical post-recession rate. All inflation does now is eat away buying power. In 2012 it took $10 to buy what $9.72 would buy in 2011. That doesn't seem like much, but move the decimal out and what we've lost to inflation in one year is, for example, $270 on $10,000. If wages keep pace, all is good, but they aren't.

...all the people whom fear hyperinflation is just around the corner as a result of Fed actions/stimulus have badly misplaced fears.

I know hyperinflation is not defined by any particular rate, but it suggests what happened in Germany in 1921-23 and more recently in Zimbabwe. I don't think that is what we'll see here, but rates in the low double digits are very possible if we continue to add to the money supply without a corresponding increase in GNP.

[astralis]

snapper,

So there were two bubbles bursting at the same time and they weren't related?

i already gave an explanation above. of course they're related, and both were in full swing by the time the Fed took any action.

More importantly if this was an attempt to increase liquidity what were rises in interest rates from 2004-6? Presumably attempts to reduce liquidity - and that of course is part of my point. By raising rates the Fed directly contributed to bursting of the bubble it had created by flooring rates after the dotcom bubble burst.

the bubble was NOT created by the Fed. much of the hot money came from unprecedented chinese/international monies flowing into the system. the 2000-2004 period was a global inflationary period, as the international economy grew faster during this period than it ever did in world history.

So if I get this right... and please correct me if this not what you mean - returning veterans, who presumably didn't have jobs, found jobs without some massive Government programme? I mean was there some 'stimulus package'? It must have been remarkably effective. So they chaps came home and interest rates were high to fight inflation and yet they found jobs etc? How can that be?

i'm surprised you don't know.

there WAS a huge stimulus-- it was called World War 1. the War spurred a huge development of american industry-- munitions, automative, and ship-building, much of this funded by the UK and to a lesser extent, france.

in any case, trying to compare Industrial-age employment to the current information-age employment is foolish. far easier to employ huge numbers of unskilled/semi-skilled workers in the former.

So right now some inflation would be good right? It would help boost aggregate demand? Is this correct?

in the specific scenario of a liquidity trap, a slightly higher inflation rate would indeed be a good thing. note the qualifiers.

[DOR]

By 1980 method of calculation inflation it is just below 10%. See Alternate Inflation Charts

Why do we never hear of the Great Depression of the 1920s?

The 1980 method of calculation includes rotary dial telephones, coal fired trains, plaid bell-bottom double-knit suits and vinyl records.

It’s what economists call ‘retro.’

[DOR]

Hmm. But I see

http://research.stlouisfed.org/fred2/graph/?s[1][id]=CPIAUCSL

(can't get the pic to load for some reason).

I see inflation.

-dale

dalem,
The Consumer Price Index is an index.
Inflation is the change in the index.
The most common measure of inflation is the percent change year-on-year.

The difference between the two graphs is read on the left side, vertically.


ADD: Since 1980, when unleaded gas was $1.25 a gallon, gas prices have increased one percentage point faster than overall consumer prices.

If the two rates of inflation were the same, that $3.90 gallon would now cost $3.20.

[snapper]

sry

[snapper]

housing bubble had already peaked by late 2006-early 2007. the financial crisis was already in full swing by 2007.

So there were two bubbles bursting at the same time and they weren't related?

Fed action in 2007-8 were emergency measures to increase liquidity, which did little in comparison to the complete collapse of aggregate demand and wealth (holdings in the stock market fell from $20 trillion to $12 trillion-- nothing the Fed could do was going to offset -that-). it was a small amount of inflationary pressure against a hugely deflationary environment.

Hmm wasn't that a bit like trying to shut the stable door after the horse has bolted? More importantly if this was an attempt to increase liquidity what were rises in interest rates from 2004-6? Presumably attempts to reduce liquidity - and that of course is part of my point. By raising rates the Fed directly contributed to bursting of the bubble it had created by flooring rates after the dotcom bubble burst.

OTOH, when you do a deflationary measure in a deflationary environment the effect is not drowned, but is instead amplified.

On this I think we can agree but my point is that no 'measures' should be taken.

the immediate injection of millions of war veterans caused significant short-term deflation. but it only happened once, and as the economy adjusted to millions of new workers the medium-term environment became inflationary. this, coupled with looser Fed policy, led to a dramatic expansion of monetary supply in 1922-1925-- the real start of the "Roaring Twenties".

So if I get this right... and please correct me if this not what you mean - returning veterans, who presumably didn't have jobs, found jobs without some massive Government programme? I mean was there some 'stimulus package'? It must have been remarkably effective. So they chaps came home and interest rates were high to fight inflation and yet they found jobs etc? How can that be?

this is a different situation from today. if you look at the historical record of recessions/depressions as a result of inflation-fighting, you'll see the aftermath is significantly different from the recessions/depressions that result because of lack of aggregate demand.

So right now some inflation would be good right? It would help boost aggregate demand? Is this correct?

as krugman notes, "it's much harder to push private spending higher than to stop holding it down."

Yea... but a false scare of alien invasion would also boost demand right? If you have any contact with the Nobel Laureate please ask him to help feed the needy in New York to the tune of $105,000 (of which $250 is mine) by debating Robert Murphy on the business cycle. He's been dodging a debate since 2011; Robert Murphy vs Paul Krugman Debate - Austrian Economics vs Keynesian Theory - Food Bank NYC Charity Benefit

[astralis]

snapper,

In this why did the foreclosure rate rise? My argument, as you probably know, is because the Fed raised interest rates was it 6 times in early 2008?

housing bubble had already peaked by late 2006-early 2007. the financial crisis was already in full swing by 2007.

I can't see the difference between this and what you accept the Feds actions did in the 1920s when they acted too quickly against inflation.

Fed action in 2007-8 were emergency measures to increase liquidity, which did little in comparison to the complete collapse of aggregate demand and wealth (holdings in the stock market fell from $20 trillion to $12 trillion-- nothing the Fed could do was going to offset -that-). it was a small amount of inflationary pressure against a hugely deflationary environment.

OTOH, when you do a deflationary measure in a deflationary environment the effect is not drowned, but is instead amplified.

More importantly I don't see your explanation of why the 1920s crash was so brief. Could you give me your account of this please?

the immediate injection of millions of war veterans caused significant short-term deflation. but it only happened once, and as the economy adjusted to millions of new workers the medium-term environment became inflationary. this, coupled with looser Fed policy, led to a dramatic expansion of monetary supply in 1922-1925-- the real start of the "Roaring Twenties".

this is a different situation from today. if you look at the historical record of recessions/depressions as a result of inflation-fighting, you'll see the aftermath is significantly different from the recessions/depressions that result because of lack of aggregate demand.

as krugman notes, "it's much harder to push private spending higher than to stop holding it down."

[dalem]

dale,



i'm not sure what your point is. in the long-run, there will be inflation as economic activity and money supply increases.

NOT having long-term inflation means your economy is not growing or even shrinking.

the ideal situation is one where there is steady, low-level inflation, just as for a developed economy GDP growth should be steady, and relatively low.

currently inflation is at a very low rate. given that we're supposed to be economically recovering, it should be higher than it is today, at least in line with historical averages.

the fact that it isn't, shows that all the people whom fear hyperinflation is just around the corner as a result of Fed actions/stimulus have badly misplaced fears.

I call $3.90 for a gallon of regular unleaded hyperinflation these days.

-dale

[snapper]

snapper,



you're confusing the events that caused the Great Recession with factors that have prolonged the recession.

the housing bubble burst because of an uptick in home foreclosure rates. this in turn began a wave of panic that forced multiple subprime lenders into bankruptcy.

this, in turn, affected investment banks with holdings in mortgage-backed securities. this then led to further repercussions that affected home prices in the non-subprime category.

the financial field was already undergoing issues of its own prior to this, but the collapse of lehman brothers as a part of the housing bubble crisis led to a full-blown international financial crisis. this in turn led to an unprecedented tightening of credit/liquidity in the private market, leading to a collapse in aggregate demand.

it's this continued collapse which has prolonged the Great Recession, even as its original causes have largely been solved or ameliorated.

Ok now you're making more sense. So the burst of the housing bubble was related to the financial crisis yes? It 'added to it' can we say? In this why did the foreclosure rate rise? My argument, as you probably know, is because the Fed raised interest rates was it 6 times in early 2008? I can't see the difference between this and what you accept the Feds actions did in the 1920s when they acted too quickly against inflation. More importantly I don't see your explanation of why the 1920s crash was so brief. Could you give me your account of this please? - when you have time.

[astralis]

dale,

But the graph you guys are using that looks flatter is just showing percent change from the previous month, and except for the one trough, it's all positive. Inflation is going steadily up and you know it.

i'm not sure what your point is. in the long-run, there will be inflation as economic activity and money supply increases.

NOT having long-term inflation means your economy is not growing or even shrinking.

the ideal situation is one where there is steady, low-level inflation, just as for a developed economy GDP growth should be steady, and relatively low.

currently inflation is at a very low rate. given that we're supposed to be economically recovering, it should be higher than it is today, at least in line with historical averages.

the fact that it isn't, shows that all the people whom fear hyperinflation is just around the corner as a result of Fed actions/stimulus have badly misplaced fears.

[astralis]

snapper,

So what caused the housing bubble to burst - and the international financial crisis? You see to me you have this the wrong way around... I struggle to understand your view.

you're confusing the events that caused the Great Recession with factors that have prolonged the recession.

the housing bubble burst because of an uptick in home foreclosure rates. this in turn began a wave of panic that forced multiple subprime lenders into bankruptcy.

this, in turn, affected investment banks with holdings in mortgage-backed securities. this then led to further repercussions that affected home prices in the non-subprime category.

the financial field was already undergoing issues of its own prior to this, but the collapse of lehman brothers as a part of the housing bubble crisis led to a full-blown international financial crisis. this in turn led to an unprecedented tightening of credit/liquidity in the private market, leading to a collapse in aggregate demand.

it's this continued collapse which has prolonged the Great Recession, even as its original causes have largely been solved or ameliorated.