by Steve Roth
Don't Like "Money Printing"? Then Stop Borrowing. Whip Inflation Now!
Cross-posted at Asymptosis.
There's a widespread conception that "money printing" by the government causes inflation, and that "money printing" = government deficit spending.
But people don't realize that:
1. Most money printing is done by banks, not government.
2. Government deficit spending is only one of four flows that affect inflation.
by Rebecca
There is no shortage of speeches by US central bankers these days. The following is an excerpt from a NY Times article that highlights the debate among key Fed officials about the speed and method of stimulus withdrawal once the decision to exit has been made:
Mr. Bernanke and other officials want to see evidence that the economic recovery is self-sustaining, strong enough to generate jobs without the crutch of extremely low interest rates.We are far from seeing "irrefutable evidence of a solid expansion". This debate is likely confusing the public more than anything else, or as my title puts it: the Fed is attempting to assuage inflation fears that don't need assuaging. There is simply no measured inflation concern at this time, not even over the next ten years.
But Mr. Warsh, as a Fed governor, has begun arguing that the central bank cannot afford to wait for irrefutable evidence of a solid expansion. Mr. Warsh recently argued that the Fed should take at least some of its cue from stock prices and other financial indicators, which turn around earlier and more quickly than the underlying economy.
...
Mr. Warsh and some other Fed officials also argue that when the time does come to change gears, the central bank may have to raise rates almost as fast as it slashed them when the crisis began.
The chart illustrates the 30-day moving average of expected inflation for the next 5, 7, 10, and 20 years. Expected inflation, roughly speaking, is the nominal Treasury Security rate minus the associated Treasury Inflation-Protected Security (TIPS) rate, the real rate of return or the break-even rate. Technically this break-even rate is not a perfect measure of inflation expectations; but it's close and measured daily (see this SF Fed article for more on TIPS).As a rule, the Shiller Index uses the CPI as reported for All Urban Consumers (CPIAUCNS on Fred(r)).
But the Index is only updated Quarterly, so monthly data is estimated. Which produces a very interesting difference over August, not to mention September expectations:
The annualised inflation rate between June and August is 0.39%, which just shows that the trend is volatile. But if there really is another round or two of 2.5% annual inflation, the projected 3% growth for Q3 is either going to look a lot more anemic than we think, or there is going to be a major producvtivity increase.
The odds of being paid the Marginal Product of Labor just dropped a bit more.
Rebecca Wilder
With the developed and developing economies printing money like it's going out of style, the exit strategy - i.e., taking back the hundred percent increase in the monetary base (at least in the US) - is rumored to be the topic du jour at the G-20 summit later this month.
According to Reuters, the "G20 countries have agreed it is too soon to withdraw measures to end the global economic crisis and will discuss coordinating policy to wind up the trillions of dollars in support at talks in London this week."
The article focuses on fiscal policy, but only a delinquent discussion of exit strategy leaves out the record monetary easing of late. However, I would most certainly agree that it is too soon.
The global labor market is plummeting.
And global sticky wages are consequently growing at snail-speed rates.
I've always been a big believer in the output-gap story. And until that unemployment rate starts to fall, I just don't see how global inflation is going to be much of a problem.
but it doesn't do that much for the rest of us. Via The Ambrosini Critique, Scott Sumner discovers there was no housing crash:
The BLS claims that housing prices are up 2.1% in the last 12 months....According to the BLS, housing makes up nearly 40% of the core basket of goods and services.
Our findings do not provide much support for the usefulness of monetary aggregates in forecasting inflation.
Robert Waldmann
Matthew Yglesias is very smart, but he is not omniscient. In particular he doesn't remember things that happened before he was born and it appears that he has fallen for some Republican propaganda.
He writes
In the late 1970s, it just so happened to be the case that the structure of Great Society programs and of then-widespread union contracts meant that the objective interests of union members with automatic Cost of Living Adjustment (COLA) provisions, African-Americans, and public assistance recipients were quite a bit different from the objective interests of other Americans. By contrast, it was relatively easy for Ronald Reagan to assemble a coalition built around lower taxes and inflation that started with the well-off but expanded deep into the middle class. It was actually Carter who began the effort to fight inflation and deregulate certain key sectors of the economy, but that wasn’t a politically sustainable agenda for a Democrat (as witnessed by Ted Kennedy’s very strong primary challenge).
Robert Waldmann
Matthew Yglesias is very smart, but he is not omniscient. In particular he doesn't remember things that happened before he was born and it appears that he has fallen for some Republican propaganda.
He writes
In the late 1970s, it just so happened to be the case that the structure of Great Society programs and of then-widespread union contracts meant that the objective interests of union members with automatic Cost of Living Adjustment (COLA) provisions, African-Americans, and public assistance recipients were quite a bit different from the objective interests of other Americans. By contrast, it was relatively easy for Ronald Reagan to assemble a coalition built around lower taxes and inflation that started with the well-off but expanded deep into the middle class. It was actually Carter who began the effort to fight inflation and deregulate certain key sectors of the economy, but that wasn’t a politically sustainable agenda for a Democrat (as witnessed by Ted Kennedy’s very strong primary challenge).
by: Divorced one like Bush
Just a little point of order regarding how bad this economy is.
Lost in Space 120 episodes, 33.2 per season
Batman (on twice weekly) 120 episodes, 53.33 per season
The Virginian, 249 episodes, 27.67 per season
The Beverly Hillbillies, 274 episodes, 30 per season
Gilligan's Island, 98 episodes, 32.67 per season
New season started this year around September 22. Last Monday night (10/27/08), CBS sitcom night, my date night with my flower girl... every one of the shows was a repeat.
It's bad enough we get 7 minutes of commercials all timed to the other networks, but now they can't even get to Halloween before running out of new shows!
We're entering a depression, and we can't get new comedy? Guess I'll just have to rely on the real thing. All 190 of them.
On no! They've been co-oped.
There is only one solution. We must all immediately call our congress critters and the presidential candidates and demand a bailout for the sitcom industry! It is our only salvation, our only true hope. It is what worked in the past regarding our sanity and stopped us from becoming like the bankers we loath.
by: Divorced one like Bush
Just a little point of order regarding how bad this economy is.
Lost in Space 120 episodes, 33.2 per season
Batman (on twice weekly) 120 episodes, 53.33 per season
The Virginian, 249 episodes, 27.67 per season
The Beverly Hillbillies, 274 episodes, 30 per season
Gilligan's Island, 98 episodes, 32.67 per season
New season started this year around September 22. Last Monday night (10/27/08), CBS sitcom night, my date night with my flower girl... every one of the shows was a repeat.
It's bad enough we get 7 minutes of commercials all timed to the other networks, but now they can't even get to Halloween before running out of new shows!
We're entering a depression, and we can't get new comedy? Guess I'll just have to rely on the real thing. All 190 of them.
On no! They've been co-oped.
There is only one solution. We must all immediately call our congress critters and the presidential candidates and demand a bailout for the sitcom industry! It is our only salvation, our only true hope. It is what worked in the past regarding our sanity and stopped us from becoming like the bankers we loath.
Coal-fired generating capacity is decreasingly cheap:
The cost for Alliant Energy's controversial proposed new coal power plant has soared to a range of $1.1 billion to $1.2 billion, the company stated in a regulatory filing.That's $1.2 billion for 300 MW. This is blamed on producer-price inflation:
Alliant previously said the new plant proposed to be the third unit of the Nelson Dewey Generating Station in Cassville would cost $850 million to $950 million. When initially proposed in 2007, the plant's cost estimate was under $800 million.
Company officials said the increases stem from soaring construction costs that include big cost hikes for items such as concrete and steel.In case you were thinking that the BLS was incapable of finding inflation, the PPI for iron and steel is up 32.6% year-over-year (NSA), and while PPI for concrete ingredients are "only" up 4.6% over 2007, the 3-year average annual rate to last month is 7.8%.
Coal-fired generating capacity is decreasingly cheap:
The cost for Alliant Energy's controversial proposed new coal power plant has soared to a range of $1.1 billion to $1.2 billion, the company stated in a regulatory filing.That's $1.2 billion for 300 MW. This is blamed on producer-price inflation:
Alliant previously said the new plant proposed to be the third unit of the Nelson Dewey Generating Station in Cassville would cost $850 million to $950 million. When initially proposed in 2007, the plant's cost estimate was under $800 million.
Company officials said the increases stem from soaring construction costs that include big cost hikes for items such as concrete and steel.In case you were thinking that the BLS was incapable of finding inflation, the PPI for iron and steel is up 32.6% year-over-year (NSA), and while PPI for concrete ingredients are "only" up 4.6% over 2007, the 3-year average annual rate to last month is 7.8%.
There are things that economists "know" that (let us be nice; economists, sometimes understandably, have delicate sensibilities) are not demonstrably true, and other things that economists Of A Certain Age may be motivated to believe, even if they are demonstrably untrue.
There are things that economists "know" that (let us be nice; economists, sometimes understandably, have delicate sensibilities) are not demonstrably true, and other things that economists Of A Certain Age may be motivated to believe, even if they are demonstrably untrue.
Since I'm trying to cut a 24-page paper down closer to 15 today, I'll leave the Heavy Lifting to other. But two things probably should be discussed (or at least noted) here:
Increasingly, society views the purchase of a home as primarily an investment, not for the service it provides (don’t even get me started on this topic).
Since I'm trying to cut a 24-page paper down closer to 15 today, I'll leave the Heavy Lifting to other. But two things probably should be discussed (or at least noted) here:
Increasingly, society views the purchase of a home as primarily an investment, not for the service it provides (don’t even get me started on this topic).
Tom's doing some heavy lifting, PGL is in form, Bruce has started SocSec 101, and the entire economics blogsphere is having so many conniptions over Hillary that you'd think the CEA was actually the Shadow Government.
So I just want start easy, and take a look at three easy-to-compare data points:
First, the Federal Funds target rate since 2007 (I include the last change in 2006 since it was the rate for the first 8.5 months of 2007):
If you make money easier to get, standard theory says that people will get it. While this raises the "threat" of inflation, it makes credit easier to get as well. So the theory goes.
Steven J. Balassi (h/t Aaron Schiff for bringing his blog to my attention) notes that this isn't happening. Pull quote:
Friends in the mortgage industry are telling me you have to be "rich" just to get a home loan now.
Hoenig said rising inflationary pressures are "troublesome" and a "serious" matter. "The bigger concern is that these increases are beginning to generate an inflation psychology to an extent that I have not seen since the 1970s and early 1980s," he said. Hoenig added that "there is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it." He tied rising prices primarily to overseas factors, including a "sizable decline" in the U.S. dollar’s value.
Hoenig’s views on the economy were relatively upbeat, even as he described the nation as being "at the brink of a recession." He suggested interest rates were close to where they needed to be.
"The current accommodative stance should be sufficient to cushion the economy
from a deeper slowdown and the risks that financial disruptions could spill over to the broader economy," he said. As the economy and markets improve "it will be necessary for the Federal Reserve to remove the policy accommodation in a timely manner."
Citing "room for optimism," Hoenig said "financial markets appear to have stabilized somewhat, and the economy should pick up in the second half of the year as fiscal and monetary stimulus take hold." The official said he believe markets’ role in the current turmoil has been overstated, and that higher energy prices and housing woes have exacted the greater toll. He also said he believes the "credit crunch" hasn’t proved as damaging as some had feared.
Tom's doing some heavy lifting, PGL is in form, Bruce has started SocSec 101, and the entire economics blogsphere is having so many conniptions over Hillary that you'd think the CEA was actually the Shadow Government.
So I just want start easy, and take a look at three easy-to-compare data points:
First, the Federal Funds target rate since 2007 (I include the last change in 2006 since it was the rate for the first 8.5 months of 2007):
If you make money easier to get, standard theory says that people will get it. While this raises the "threat" of inflation, it makes credit easier to get as well. So the theory goes.
Steven J. Balassi (h/t Aaron Schiff for bringing his blog to my attention) notes that this isn't happening. Pull quote:
Friends in the mortgage industry are telling me you have to be "rich" just to get a home loan now.
Hoenig said rising inflationary pressures are "troublesome" and a "serious" matter. "The bigger concern is that these increases are beginning to generate an inflation psychology to an extent that I have not seen since the 1970s and early 1980s," he said. Hoenig added that "there is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it." He tied rising prices primarily to overseas factors, including a "sizable decline" in the U.S. dollar’s value.
Hoenig’s views on the economy were relatively upbeat, even as he described the nation as being "at the brink of a recession." He suggested interest rates were close to where they needed to be.
"The current accommodative stance should be sufficient to cushion the economy
from a deeper slowdown and the risks that financial disruptions could spill over to the broader economy," he said. As the economy and markets improve "it will be necessary for the Federal Reserve to remove the policy accommodation in a timely manner."
Citing "room for optimism," Hoenig said "financial markets appear to have stabilized somewhat, and the economy should pick up in the second half of the year as fiscal and monetary stimulus take hold." The official said he believe markets’ role in the current turmoil has been overstated, and that higher energy prices and housing woes have exacted the greater toll. He also said he believes the "credit crunch" hasn’t proved as damaging as some had feared.
Thanks to Rdan for the welcome.
I'm with Barry Ritholtz in admiring the NYT's interactive consumer price inflation mosaic, which the print edition didn't do justice to. As someone who occasionally gets a bee in the bonnet over the successes and failures of economic measurement methods, the graphic also helps illustrate a couple ways in which CPI can be unfairly maligned. As I read it, the graphic deals best with one class of arguments for why CPI is screwed up:
ZOMG the price of [CPI component in the news] is skyrocketing! Lo, prices of goods that headlines would lead you to believe should be measured as skyrocketing by-and-large are — +26% for gasoline, +48% for heating oil, etc. Gasoline is even a big enough component of average expenditures for the price increases to be legitimately painful for anyone without good substitution opportunities. But it's still only so much of a representative budget; cheese, bread, and eggs are much less so. And ample sums are spent on other things where there isn't much or even any inflation at all. (How these all should be treated for any given policy purpose is a separate issue.) Meanwhile, the gorilla in the room is housing, as housing rentals and equivalents account for 30% of expenditures.
However, that leads to a second bad argument:
ZOMG the biggest component of CPI is imputed! Indeed, Brad DeLong recently observed Michael Mandel suggesting that personal consumption expenditures be calculated ex-imputations — of which owner-occupied housing is the biggest. That wasn't the sharpest thing that'll appear in BusinessWeek this year. Catch is, it's not like homeowners don't (a) consume housing services and (b) incur opportunity costs doing so whether or not they (like my family among other leveraged real estate investment partnerships) actually shell out a lot of cash for house payments. We consume non-marketed goods and services all the time. Missing markets in almost everything, I like to say.
The details of the imputation of housing expenditures for owners certainly aren't sacred. For one thing, in much of the country, the rental and owner-occupied housing stocks resemble each other very little. For another, I'd like to hear why it would be unreasonable to calculate the imputed rent at a 'rational' rate given what the owners paid, which goes to the issue of whether housing expenditures above imputed market rents should be treated as consumption or investment. Anyway, between vacancies and the supply of foreclosed properties, I doubt shelter inflation will be a big problem in the near future.
So, I don't go to bed worrying about inflation, or that we've been in an especially protracted recession for years and apparently don't know it (an implication of claims you can find out there that CPI and like measures understate "true" inflation by very large amounts). Employment and the distribution of such growth as we have had is another matter.
Thanks to Rdan for the welcome.
I'm with Barry Ritholtz in admiring the NYT's interactive consumer price inflation mosaic, which the print edition didn't do justice to. As someone who occasionally gets a bee in the bonnet over the successes and failures of economic measurement methods, the graphic also helps illustrate a couple ways in which CPI can be unfairly maligned. As I read it, the graphic deals best with one class of arguments for why CPI is screwed up:
ZOMG the price of [CPI component in the news] is skyrocketing! Lo, prices of goods that headlines would lead you to believe should be measured as skyrocketing by-and-large are — +26% for gasoline, +48% for heating oil, etc. Gasoline is even a big enough component of average expenditures for the price increases to be legitimately painful for anyone without good substitution opportunities. But it's still only so much of a representative budget; cheese, bread, and eggs are much less so. And ample sums are spent on other things where there isn't much or even any inflation at all. (How these all should be treated for any given policy purpose is a separate issue.) Meanwhile, the gorilla in the room is housing, as housing rentals and equivalents account for 30% of expenditures.
However, that leads to a second bad argument:
ZOMG the biggest component of CPI is imputed! Indeed, Brad DeLong recently observed Michael Mandel suggesting that personal consumption expenditures be calculated ex-imputations — of which owner-occupied housing is the biggest. That wasn't the sharpest thing that'll appear in BusinessWeek this year. Catch is, it's not like homeowners don't (a) consume housing services and (b) incur opportunity costs doing so whether or not they (like my family among other leveraged real estate investment partnerships) actually shell out a lot of cash for house payments. We consume non-marketed goods and services all the time. Missing markets in almost everything, I like to say.
The details of the imputation of housing expenditures for owners certainly aren't sacred. For one thing, in much of the country, the rental and owner-occupied housing stocks resemble each other very little. For another, I'd like to hear why it would be unreasonable to calculate the imputed rent at a 'rational' rate given what the owners paid, which goes to the issue of whether housing expenditures above imputed market rents should be treated as consumption or investment. Anyway, between vacancies and the supply of foreclosed properties, I doubt shelter inflation will be a big problem in the near future.
So, I don't go to bed worrying about inflation, or that we've been in an especially protracted recession for years and apparently don't know it (an implication of claims you can find out there that CPI and like measures understate "true" inflation by very large amounts). Employment and the distribution of such growth as we have had is another matter.
