A partial quote from my comment to Art summarizes where we are today:
In a time that calls for fiscal expansion, monetary expansion does not stimulate the economy, but instead rewards rent-seeking. This can manifest itself as asset bubbles. These lead to headline inflation, but (in the current economic environment) do not transfer into core inflation because the secular inflationary trend is negative.
Discuss.
Update: Hoisted from comments:
Nanute makes a comment indicating that we need inflation, aren't going to get it, and monetary policy can only be effective if it stimulates spending.
I concur, and I believe Milton Friedman would as well.
Art: "But I'm not sure about your 'time that calls for fiscal expansion.' what the phrase means to you, and how you determine we are at that stage."
What that means to me is that the economy does not exist in a single realm at all times, and that different times call for different policy action. The beautiful little "We got it covered" diagram you posted illustrates this brilliantly. We need fiscal expansion, and have needed it for years, because that works at the zero interest bound. I guess I place myself somewhere on the Krugman/Thoma/DeLong axis, and would refer you to everything Krugman has said over the last several years about fiscal and monetary policy at the zero interest boundary. I guess you know you're at that stage when QE ends up in bank reserves, not flowing through the economy, when U6 is above 16% (and stays there for over 2 years,) money velocity plummets, real GDP/Cap growth is negative for three straight years -- you know, great depression type values.
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4 comments:
I read at Mises (or somewhere) that when the Fed creates new money, those with first access to the money benefit the most. I bristled at the notion at the time. Now, however, I think the QE money is what created asset bubbles, as you say, and the headline inflation. Meanwhile, core inflation remains low because the extra money has not filtered down to our level yet.
But I'm not sure about your "time that calls for fiscal expansion." what the phrase means to you, and how you determine we are at that stage.
Jazzbumpa,
I think it is possible for monetary policy can stimulate the economy if the policy directly transfers money to individuals, and creates an inflationary cycle. It is probably much more effective if it comes from the fiscal policy side, but we know for sure that is not going to happen any time soon. Politically speaking the Fed is being hamstrung by the very inflation hawks that can't seem to realize that it (inflation), is exactly what is needed right now. Excess demand for money will remain, until inflation erodes real returns much higher than present levels.
BOTH of you think we need inflation. I agree that inflation can make debt less burdensome. But I do not consider it an economic policy. Just shows how bad things are, I guess.
Greg reminded me a while back that if wages are not rising, it isn't really inflation. It's just a cost-of-living problem. With today's high unemployment, wages are unlikely to rise. Plus, the mood of the country remains anti-inflation, I think (despite the two of you).
Jazz, I know you like Krugman. I do too. But I think he writes so well that he can convince me of things without even making an economic argument. So I approach his posts with caution.
Art -
I absolutely think we need inflation - now and always. It is a concomitant of growth. That is the deep, dark secret of capitalism.
I do not share your skepticism of Krugman for a number of reasons.
1) Unlike virtually everyone on the right, he is honest. The irony of seeing him called intellectually dishonest by cherry-picking libertards and close-minded right-wing ideologues is quite awe-inspiring.
2) Even if he doesn't explicitly spell out the economic argument every time, he has thought the issue through and speaks about it with considered intelligence.
3) His predictions are usually spot on - even across years. Further, when he's wrong, he admits it.
4) I think his path towards politicization paralleled my own. He sees the flaws in the Rethugs, but does not give Dems credit unless they deserve it. Note his criticism of Obama, that goes back at least to the inauguration speech.
For my money, he is not partisan -(and not even particularly liberal - economics is conservative to its core) he is a fair umpire who calls 'em as he sees 'em. The entire case for partisanship is rooted in the sad fact that Rethugs ARE ALWAYS WRONG.
WASF,
JzB
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