Bernanke Sees Case for `Further Action' With Too-Low Inflation

[dex]

To me the article points out a couple of things
- the FED is seeing something we - the average person - do not see or have not been aware/focusing on

- The FED is loosing it if they think they can do something or can tell people high inflation is coming so buy now. It would signal to people that something is very wrong and now is a time to be conservative. Also, what would people buy? They would have to be an aspect of speculation to make it work and people are too fearful to do that.

Bernanke Sees Case for `Further Action' With Too-Low Inflation - Bloomberg

"Fed officials, concerned that expectations of lower inflation will become self-fulfilling, are debating whether to encourage Americans to believe that prices will start rising at a faster pace so that they would spend more of their money now, the minutes from last month’s meeting showed. That would reduce inflation-adjusted interest rates and stimulate the economy. "

[SunsetSail]

Similarly to your second point, when I read Bernanke's remarks my first thought was that they really fear a deflationary cycle where consumers and businesses freeze spending so they are trying to break the cycle giving lip service to fears of inflation. It seems like a rather weak position for the Fed regardless of the intent. I think it is fairly clear that no government entity has the power to immediately ramp up economic activity but they all want to appear to be taking action to ramp up the economy.

[haha]

This is vintage Bernanke. Over 10 years ago he was counseling the Japanese to get some inflation going to scare consumers into loosening their purse strings.

[ziggy29]

So I guess the current actual inflation rate on food, utilities, energy and health care isn't high enough for him? IMO it's not so much that inflation is too high or too low, but that "biflation" is hurting a lot of people, especially those on modest COLA'd income streams.

[FIREd]

Many economists think that monetary policy has reached the limit of its effectiveness and that we now have to rely on fiscal policy to get ourselves out of the hole.

Fed's $2 Trillion May Buy Little Improvement in Jobs - Bloomberg

[MichaelB]

It's not clear to me if the Fed is worried about consumer price or asset price deflation. I have the feeling they are more concerned about asset prices - but also want to see some higher CPI.

They must see a way for higher asset prices to stimulate aggregate demand. Either that, or they're not trying to stimulate demand, just keep asset prices high until real demand recovers.

Could be a while, and I'm not sure if they can do it.

[ziggy29]

Quote:

Originally Posted by MichaelB It's not clear to me if the Fed is worried about consumer price or asset price deflation. I have the feeling they are more concerned about asset prices - but also want to see some higher CPI.

I think the Fed feels more confident about its ability to cope with inflation than to fight deflation; the Volcker Fed had the experience of stopping double digit inflation. The problem is that the "everyday" cost of living is already going up for a lot of people even if the CPI doesn't reflect it (because it offsets food, energy and health care with cruises and big screen TVs). Could forcing asset price inflation (or even stability) cause even *higher* inflation in the everyday essentials of life?

And in reality, from an economic point of view, one big problem in terms of recovery is that any sign of a recovery is met with spiking oil prices -- which could stop any recovery before it really takes hold.

[MichaelB]

Quote:

Originally Posted by ziggy29 I think the Fed feels more confident about its ability to cope with inflation than to fight deflation; the Volcker Fed had the experience of stopping double digit inflation. The problem is that the "everyday" cost of living is already going up for a lot of people even if the CPI doesn't reflect it (because it offsets food, energy and health care with cruises and big screen TVs). Could forcing asset price inflation (or even stability) cause even *higher* inflation in the everyday essentials of life? And in reality, from an economic point of view, one big problem in terms of recovery is that any sign of a recovery is met with spiking oil prices -- which could stop any recovery before it really takes hold.

Our economy is overly dependent on asset prices. More than any other country or any other time in history. It drives some income and also the wealth effect for many. So higher asset prices could stimulate spending and inflation, but it will also continue to concentrate wealth and income even more.

Higher asset prices should also drive state tax revenues at least a bit, while consumer inflation (food & energy) should show up in higher sales taxes.

If it were to show up in housing the impact would be much greater. Stable or slightly increasing prices mean property tax revenues also stabilize and begin to climb again, which would have an immediate impact on state and local gov’t employment.

No matter what, lots of folks are going to suffer.

[dex]

Quote:

Originally Posted by MichaelB So higher asset prices could stimulate spending and inflation, but it will also continue to concentrate wealth and income even more.

There is no way to only affect one variable in the economic equation. If higher asset prices could stimulate spending and inflation then, the balance of trade deficit increases, interest payment on the debt increases, USA debt increases, commodity prices increase - all of which are a drag on the economy.

No one is giving us a long term solution. The plan seems to be 'Let's get past this problem and we will deal with the future later'.

Quote:

Originally Posted by MichaelB No matter what, lots of folks are going to suffer.

... because, in the past we did not take our medicine; now we all think taking that medicine is too horrible to contemplate.

I think we all know the solution but are not willing to say it because it would mean it is not your father's America any more.

We in the USA would have to admit that for a couple of decades we would have to accept:
We can not grow ourselves out of this
High systemic unemployment (with a very small safety net)
Higher income taxes
VAT
Zero growth in Government spending (decline preferred) - from social programs to military spending

No other county, I know about has come back from the financial crisis and debt we are in (USA paying off WWII is not relevant).

[LARS]

For quite sometime, the translation of FED speak has been as close as you'll ever get to a Central Banker saying, "I got nothing..." Jawboning, and recklessly increasing balance sheets, are all the FED has left. Don't believe me, ask the Japanese.

[LARS]

Quote:

Originally Posted by MichaelB It's not clear to me if the Fed is worried about consumer price or asset price deflation. I have the feeling they are more concerned about asset prices - but also want to see some higher CPI. They must see a way for higher asset prices to stimulate aggregate demand. Either that, or they're not trying to stimulate demand, just keep asset prices high until real demand recovers. Could be a while, and I'm not sure if they can do it.

FED game appears at this point to have two objectives: i. elevate asset prices, which they are succeeding in the equity markets thus far, but failing in the housing markets (which is what they really want, but will continue to fail IMHO); and ii) depreciate the $ (QE is a fancy way of not saying "beggar thy neighbor").

[MichaelB]

Quote:

Originally Posted by dex There is no way to only affect one variable in the economic equation. If higher asset prices could stimulate spending and inflation then, the balance of trade deficit increases, interest payment on the debt increases, USA debt increases, commodity prices increase - all of which are a drag on the economy. No one is giving us a long term solution. The plan seems to be 'Let's get past this problem and we will deal with the future later'.

I’m not suggesting this is the correct course, just trying to imagine what may be the current intention. IMHO the Fed isn’t looking to solve, just buying time until the adults take charge again economy stabilizes.

Can’t see how that happens without housing or giant public works, and neither of these appear likely.

Quote:

Originally Posted by dex ... because, in the past we did not take our medicine; now we all think taking that medicine is too horrible to contemplate. I think we all know the solution but are not willing to say it because it would mean it is not your father's America any more. We in the USA would have to admit that for a couple of decades we would have to accept: We can not grow ourselves out of this High systemic unemployment (with a very small safety net) Higher income taxes VAT Zero growth in Government spending (decline preferred) - from social programs to military spending

The imbalances in the US economy will be be resolved by consuming less, saving more, funding our future commitments and paying down our deficit. There are many ways to get there but I think it can be accomplished. I agree in part with your list. Reconciliation and rationalization between Federal, State and Local Gov't could have a significant positive impact and be a powerful enabler.

Quote:

Originally Posted by dex No other county, I know about has come back from the financial crisis and debt we are in (USA paying off WWII is not relevant).

Not sure about that. The kind of medicine we need is the same type we commonly prescribed to others in the 70’s, 80’s and 90’s. Asia crisis, Mexico, Brazil – I think there are many examples. We only need two things- willing followers and capable leaders. And we have all except two.

[dex]

Quote:

Originally Posted by MichaelB I’m not suggesting this is the correct course, just trying to imagine what may be the current intention. IMHO the Fed isn’t looking to solve, just buying time until the adults take charge again economy stabilizes. Can’t see how that happens without housing or giant public works, and neither of these appear likely. The imbalances in the US economy will be be resolved by consuming less, saving more, funding our future commitments and paying down our deficit. There are many ways to get there but I think it can be accomplished. I agree in part with your list. Reconciliation and rationalization between Federal, State and Local Gov't could have a significant positive impact and be a powerful enabler. Not sure about that. The kind of medicine we need is the same type we commonly prescribed to others in the 70’s, 80’s and 90’s. Asia crisis, Mexico, Brazil – I think there are many examples. We only need two things- willing followers and capable leaders. And we have all except two.

Good points, especially the last one. I've never given that one much thought - the world getting together and saying; if you don't do this we will not lend you $.

[Pete]

Quote:

Originally Posted by MichaelB The imbalances in the US economy will be be resolved by consuming less, saving more, funding our future commitments and paying down our deficit. There are many ways to get there but I think it can be accomplished.

I wish I could be this positive. Just the federal debt is fastly approaching 200K per household and many of those households are in foreclosure. State debt, future obligations (social security and medicare for the boomers), personal debt, out of control healthcare costs, 2 wars and out of control military spending, 40 billion dollar monthly trade deficits totalling 7 trillion, peak oil, etc. are just more crap to add to it.

Most of the people I know can't afford the 200K.

I know there is a risk of being called a doom and gloomer by the boom and zoomers, but I just don't see the many ways to get there. Please enlighten me.

[MichaelB]

Quote:

Originally Posted by Pete I wish I could be this positive. Just the federal debt is fastly approaching 200K per household and many of those households are in foreclosure. State debt, future obligations (social security and medicare for the boomers), personal debt, out of control healthcare costs, 2 wars and out of control military spending, 40 billion dollar monthly trade deficits totalling 7 trillion, peak oil, etc. are just more crap to add to it. Most of the people I know can't afford the 200K. I know there is a risk of being called a doom and gloomer by the boom and zoomers, but I just don't see the many ways to get there. Please enlighten me.

Not sure if I can enlighten you - sounds like you’ve already made up your mind. In addition to

Quote:

consuming less, saving more

this number should be discounted by the value of US assets, and it will be paid – or at least carried – not by households but by economic activity. A more meaningful comparison would be debt to income. Still high but not tin foil hat territory.