However, the policy we are getting is closer and closer to what I have wanted. The Fed is standing pat behind QE2 and opening the door to “make up inflation” or state dependent level targeting, whatever you want to call it. That’s clearly a win.
Congress is engaging in helicopter drop like tactics, a payroll tax cut – though a woefully small one, more unemployment benefits and an extension of the Bush tax cuts for everyone.
This goes towards my ideal policy – a money financed increase in transfers to private citizens. All of it is smaller than I hoped and there is no official commitment that the Fed won’t take away the punch bowl. All in all you have to be happy with the direction things are going.
We just want more of the same. As a reference here are the slides I gave last week as a presentation to a Chamber of Commerce breakfast. Most of them below the fold.
That's his fold, not mine. Head on over and check it out. He has graphs! (I love graphs.)
My take:
I am extremely skeptical of any solution based on tax cuts. Tax rates haven’t been this low since my mother was a child, and she’s 89. The arcs in the economy since Reagan have been lower taxes and declining growth in GDP, accompanied by nearly constant deficits, as the Uber-rich have sucked the cream off the top, and the life out of the economy.
Bush lowered taxes while waging two wars – then Obama did the same thing. Is this insanity, or am I all wet? Now, when we desperately need stimulus, the well is dry because of war expenses. Obama’s military budget request for 2011 is over $700 billion. The entire cost of WW II in 2005 dollars was about $630 billion.
And we were fighting both the Wehrmacht and the Imperial Japanese.
Monetary policy is a fine thing, but there’s that 0-interest bound problem. Remember Keynes? I think lost decades, a la Japan is an optimistic scenario.
What do you think?
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5 comments:
What do I think? "I used to be indecisive, now I'm not so sure." The question in my feeble mind, is, is this recent agreement between the WH and Republicans not a form of Keynesian deficit spending in slow/no growth times? Only if the economy picks up and job recovery takes place. Right? Absent a job component, this isn't very likely.
Note that since QEII, the 10 year T Bill is up to 3.10% from 2.35%. So much for the idea of bringing down longer term interest rates.(As I've noted before, the question is whether the markets believe the intent of the Fed policy objectives in regard to QEII.) Will this exacerbate the carry trade on near zero borrowing rates, thereby increasing reserve deposits? Let's keep an eye on your favorite M1 Multiplier rate. Cederic over at AB tells me I'm too focused on this factor, when in his words, "we now have fractional reserve banking cubed."
I've actually thought for quite some time, that while higher rates of interest are what is traditionally seen as a mechanism to check inflationary pressure, the current lack of "demand" for borrowing may in fact be a result of rates being too low. In essence, the banks aren't lending because the rate of return vs. the risk factor is too low. What a paradox, no? Or, maybe a case of the law of unintended consequences.
is this recent agreement between the WH and Republicans not a form of Keynesian deficit spending in slow/no growth times?
No. Not all deficits are created equal. Tax cuts in a low tax environment are doomed as stimulus. I just read somewhere today that the multiplier is about .28. Pitiful.
Note that since QEII, the 10 year T Bill is up to 3.10% from 2.35%.
T bill rates have been declining since 1981.
http://finance.yahoo.com/echarts?s=^TNX+Interactive#chart5:symbol=^tnx;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
QE II is supposed to raise interest rates and inflation expectations. Here's Beckworth.
http://macromarketmusings.blogspot.com/2010/11/about-that-runaway-inflation-fed-is.html
Your last paragraph will take some thought and reflection. Certainly there is a risk-reward element in play. Banks see any lending as risky, while getting easy interest on excess reserves is totally risk free, and doesn't even take any effort.
But I don't see low rates as the driver for this, per se. But
I'm no expert.
Sorry for not embedding the links. It's late and I'm tired.
Cheers!
JzB
I fully agree with your "tax cuts in a low tax environment are doomed as stimulus." As I noted, without a jobs component to the "deal" it is doomed to have any type of positive Keynesian impact on the growth of the economy. It doesn't seem to matter how much new money the Fed is attempting to inject into the system if in the end, the money doesn't multiply. I read Beckworth, and he states that rising rates will be a positive sign for the overall economy. But, that doesn't square with the intended,stated, policy objective of QEII, which was to bring down long term rates. (Am I wrong on this?) The problem with rising rates in a "velocity of money trap" in my opinion, is that it will only encourage more carry trade activity. Without a corresponding increase in the discount rate, this will most likely be the outcome. We know that the major financial institutions are in serious trouble, and their only concern right now, is paying down the bad debt with free money.
Politically speaking, it is a matter if the Republican will ever come to the realization that government spending in the form of directly creating jobs is the solution to the current jobless recovery. Given their history, and disdain for the policies implemented by FDR during the 30's, it is highly doubtful they will ever come to this conclusion. How they are going to convince the private sector to create demand remains to bee seen. And I for one, am not optimistic that the private sector is interested in creating job growth under current conditions. As you say, WASF
Nanute, it's all about demand. Employers hire employees when there is demand for their services. They don't hire employees if there is insufficient demand to justify it, because employers are in business to maximize profits (duh), which requires that they carry as few employees as possible on their payroll.
What demand for goods and services is going to be created by extending tax cuts to millionaires? None. I mean, we now have 8 years experience with those tax cuts, and they produced no (zero, nada) aggregate increase in demand, indeed, demand today is far lower than when the tax cuts were originally passed during the Bush Administration. The only way to get employment turning up is demand, because that's the only thing that "convinces" business to hire (when there's demand that requires them to hire), and without that... well, as Jazzbumpa points out over and over again, WASF :(.
- Badtux the Waddling Penguin
nanute -
Note that since QEII, the 10 year T Bill is up to 3.10% from 2.35%. So much for the idea of bringing down longer term interest rates.
This is where things get a little complicated. The goal of the Fed is to raise inflation expectations ('cuz wishing will make it so.)
Markets respond to higher inflation by raising interest rates. But these are nominal rates. the real interest rate is the nominal rate minus the rate of inflation.
The apparent paradox is that higher nominal rates are (within reason), in fact lower real rates. At, or near the zero-bound, real rates are HIGHER than nominal rates. In actual deflation, they are much higher. I've seen the real rate during the Great Depression estimated at north of 11%, when long T-bond nominal rates were negative.
Hope that helps,
JzB
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