Category Archives: monetary policy

Will Higher Inflation Help the Economy?

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The New York Times’ Eduardo Porter has a column in yesterday’s paper “Making the Case for a Rise in Inflation”, arguing that a 4% inflation rate, for example, would be a better target rate for the Federal Reserve than its present 2% target rate.   The idea is that higher inflation would lessen the value of a dollar, thereby eating away at our $12 trillion in public debt (on which we pay interest).  A lower value of the dollar would also boost the economy by making exports less expensive.  Higher inflation would likewise encourage consumers to spend more because the value of the dollar is decreasing more rapidly.
Mr. Porter does point out that there would be opposition to any policy of purposely letting inflation go up.  The best known Fed Chair in recent years, Paul Volcker, says that “All experience amply demonstrates that inflation, when fairly and deliberately started, is hard to control and reverse”.
The biggest problem, though, is the risky procedure of trying to boost the economy with monetary policy (quantitative easing, QE1, QE2 and QE3) rather than using fiscal policy (tax reform and deregulation).  The creation of an enormous amount of new money in a slow recovery creates huge upward pressure on inflation.  The economy is slowly improving on its own accord.  Very soon (in the next few years) the Fed will have to perform the difficult function of withdrawing money from the system fast enough to avoid inflation and, at the same time, slow enough, to keep interest rates from skyrocketing.  So the question is, will the Fed be able to simultaneously keep both inflation and interest rates under some kind of control?
For sure we don’t want to make its job more difficult by pushing inflation any higher than necessary at the present time!

Whither the American Economy? II

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In today’s Wall Street Journal the columnist Holman Jenkins, with “The Reinhart and Rogoff Distraction”, writes that “Washington has signally failed to enact confidence-building and growth-inducing reforms that would make its fiscal and monetary stimulus seem less reckless and more like part of a coherent therapy.  The real problem is the incentive of voters and their representatives to stonewall any serious adjustment to the status quo….Hardly has the time been riper for another reform spasm like the Carter-era deregulation efforts, Reagan’s tax overhaul, … The ill-timed Obama campaign to magnify the perversities of our health-care system epitomizes a failure of political leadership to do its part to make the global monetary Hail Mary come off.”
The Republican House can slam on the brakes to try to slow down excessive federal spending but there is not much else it can do by itself.  The Democratic Senate is showing that it can address important but less central issues like Gun Control and Immigration Reform.  But only the President can provide game changing leadership on our fundamental economic and fiscal problems.  His political base of liberals and minorities does not want either spending cuts or reduction in tax rates.  So he proposes spending increases, small adjustments to entitlements, and tax increases on the wealthy.  This amounts to a political posture in order to appear to be addressing important issues without really engaging on them.
What has Obama accomplished?  He has shown that a liberal can be elected President  but can’t govern effectively from the left.  What is the likely outcome?  A stagnant economy with a slowly dropping unemployment rate from now until 2016 when we’ll have our next chance to vote for a reform agenda.  Eventually our rapidly growing national debt will lead to a new fiscal crisis, much worse than the Great Recession which we’ve just been through.  However it probably won’t happen until sometime after 2016.  So Obama is temporarily off the hook, so to speak, but he’ll still catch much blame later on.
Oh well, what is life without challenges!

Are Low Interest Rates Hurting the Economy?

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The former Chairwoman of the Federal Deposit Insurance Corporation, Sheila Bair, has recently stated that “Low interest rates are hurting, not helping, the economy”.  According to Ms. Bair, historically low interest rates have helped the housing market recover but are hindering business lending, which holds the key to the overall recovery.  “Very low interest rates on your (the banks) balance sheet … is not good for business lending”, says Bair.  She would like the Fed to start increasing rates in a gradual and methodical manner so that the market can adjust.
Even the WSJ’s conventional economics columnist, David Wessel, admits that “big companies continue to build an enormous cash hoard as if they are preparing for catastrophe”.  He says that “Ben Bernanke sees the exit, he just doesn’t know how to get there”.
Current policies for fixing the economy are clearly not working and may be doing grave damage.  There are lots of policy measures which might help, and certainly won’t hurt, such as broad-based tax reform, loosening regulation of small business, aggressively pursuing new trade agreements, visa reform, targeted job training, etc..  Concentrating on implementing such measures is what our national leaders should be doing!