It’s Nice That Someone’s Looking Out for Our Economy

The Federal Reserve announced significant monetary easing today that will continue until unemployment falls below 6.5% or inflation rises about 2.5%.

Not sure who is happier today, me or Paul Krugman, but this is excellent news for the economy.

 

Krugman Scolds the Deficit Scolds

From “Fighting Fiscal Phantoms,” Paul Krugman, NYT:

“But we’re not  Greece, and it’s almost impossible to see how this [a run on Treasuries, a spike in interest rates and a return to recession] could actually happen to a country in our situation.

“For we have our own currency — and almost all of our debt, both private and public, is denominated in dollars.  So our government, unlike the Greek government, literally can’t run out of money.  After all, it can print the stuff.

“But if the U. S. government prints money to pay its bills, won’t that lead to inflation?  No, not if the economy is still depressed.

“Still, haven’t crises like the one envisioned by deficit scolds happened in the past?  Actually, no.  As far as I can tell, every example supposedly illustrating the dangers of debt involves either a country that, like Greece today, lacked its own currency, or a country that, like Asian economies in the 1990s, had large debts in foreign currencies.

“For years, deficit scolds have held Washington in thrall with warnings of an imminent debt crisis, even though investors, who continue to buy U. S. bonds, clearly believe that such a crisis won’t happen; economic analysis says that such a crisis can’t happen; and the historical record shows no examples bearing any resemblance to our current situation in which such a crisis actually did happen.”

So Where Are the High Interest Rates?

From “Money For Nothing,” Paul Krugman, NYT:

“For years, allegedly serious people have been issuing dire warnings about the consequences of large budget deficits — deficits that are overwhelmingly the result of our ongoing economic crisis.

“But a funny thing happened on the way to the predicted fiscal crisis:  instead of soaring, U. S. borrowing costs have fallen to their lowest level in the nation’s history.  And it’s not just America.  At this point, every advanced country that borrows in its own currency is able to borrow very cheaply.

“The failure of deficits to produce the predicted rise in  interest rates is telling us something important about the nature of our economic troubles (and the wisdom, or lack thereof, of the self-appointed guardians of our fiscal virtue).
“Oh, and pay no attention to the warnings any day now we’ll turn into Greece, Greece I tell you.  Countries like Greece, and for that matter Spain, are suffering from their ill-advised decision to give up their own currencies for the euro, which has left them vulnerable in a way that America just isn’t.

“So what is going on?  The main answer is that this is what happens when you have a ‘deleveraging shock,’ in which everyone is trying to pay down debt at the same time.

“But it’s simply crazy to be laying off schoolteachers and canceling infrastructure projects at a time when investors are offering zero- or negative-interest financing.

“You don’t even have to make a Keynesian argument about jobs to see that.  All you have to do is note that when money is cheap, that’s a good time to invest.

“That said, you should be a Keynesian, too.  The experience of the past few years — above all, the spectacular failure of austerity policies in Europe — has been dramatic demonstration of Keynes’s basic point:  slashing spending in a depressed economy depresses that economy further.”

Fifty Shades of Sado-Monetarism

From “Another Bank Bailout,” Paul Krugman, NYT:

“Most notably, last week the European Central Bank declined to cut interest rates. This decision was widely expected, but that shouldn’t blind us to the fact that it was deeply bizarre. Unemployment in the euro area has soared, and all indications are that the Continent is entering a new recession. Meanwhile, inflation is slowing, and market expectations of future inflation have plunged. By any of the usual rules of monetary policy, the situation calls for aggressive rate cuts. But the central bank won’t move.

“And that doesn’t even take into account the growing risk of a euro crackup. For years Spain and other troubled European nations have been told that they can only recover through a combination of fiscal austerity and ‘internal devaluation,’ which basically means cutting wages. It’s now completely clear that this strategy can’t work unless there is strong growth and, yes, a moderate amount of inflation in the European ‘core,’ mainly Germany — which supplies an extra reason to keep interest rates low and print lots of money. But the central bank won’t move.

“Put all of this together and you get a picture of a European policy elite always ready to spring into action to defend the banks, but otherwise completely unwilling to admit that its policies are failing the people the economy is supposed to serve.

“Still, are we much better? America’s near-term outlook isn’t quite as dire as Europe’s, but the Federal Reserve’s own forecasts predict low inflation and very high unemployment for years to come — precisely the conditions under which the Fed should be leaping into action to boost the economy. But the Fed won’t move.

“What explains this trans-Atlantic paralysis in the face of an ongoing human and economic disaster? Politics is surely part of it — whatever they may say, Fed officials are clearly intimidated by warnings that any expansionary policy will be seen as coming to the rescue of President Obama. So, too, is a mentality that sees economic pain as somehow redeeming, a mentality that a British journalist once dubbed ‘sado-monetarism.’

“Whatever the deep roots of this paralysis, it’s becoming increasingly clear that it will take utter catastrophe to get any real policy action that goes beyond bank bailouts. But don’t despair: at the rate things are going, especially in Europe, utter catastrophe may be just around the corner.”  Emphasis added.

And that utter catastrophe may put Mitt in the White House.  Catastrophe squared!

While the Storm Clouds Gather, Far Across the Sea…

Once again (see WWI, WWII), we will get dragged into Europe’s mishegas and suffer for it.  In a global economy, the Atlantic Ocean really is just a pond, or maybe just a puddle.

From “Europe’s Economic Suicide,” Paul Krugman, NYT:

“The question then was whether this brave and effective action [the European Central Bank’s making money available to banks late last fall] would be the start of a broader rethink, whether European leaders would use the breathing space the bank had created to reconsider the policies that brought matters to a head in the first place.

“But they didn’t.  Instead they doubled down on their failed policies and ideas.

“Consider the state of affairs in Spain, which is now the epicenter of the crisis.  Never mind talk of recession; Spain is in full-on depression, with the overall unemployment rate at 23.6 percent…, and the youth unemployment rate over 50 percent.  This can’t go on — and the realization that it can’t go on is what is sending Spanish borrowing costs ever higher.

“[T]he prescription coming from Berlin and Frankfurt is, you guessed it, even more fiscal austerity.

“This is, not to mince words, insane.  Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history told you would happen:  such programs push depressed economies even deeper into depression.  And because investors look at the state of a nation’s economy when assessing its ability to repay debt, austerity programs haven’t even worked as a way to reduce borrowing costs.

“The Continent needs more expansionary monetary policies, in the form of a willingness…on the part of the European Central Bank to accept somewhat higher inflation;  it needs more expansionary fiscal policies, in the form of budgets in Germany that offset austerity in Spain and other troubled nations around the Continent’s periphery, rather than reinforcing it.

“What we’re actually seeing, however, is complete inflexibility.

“Rather than admit that they’ve been wrong, European leaders seem determined to drive their economy — and their society — off a cliff.”  Emphasis added.

The lamps are going out all over Europe, and we shall not see them lit again in President Obama’s first term, which may make it his only term.  He’s not just facing Mitt, he’s facing Merkel.

The “Chicken Little” GOP Gets It Wrong on Inflation and Unemployment

The GOP keeps warning about inflation, but inflation is very low and expected to remain so for the next three years at least.  The Fed doesn’t expect inflation to exceed 2% annually between now and the end of 2014.

But unemployment is awful, and the Fed anticipate it will remain high.  Unemployment is expected to fall only slightly the rest of this year, from 8.5% to 8.2%, to be no lower than 7.4% by the end of next year, and no lower than 6.7% by the end of 2014.  Of course that doesn’t include those who give up looking for work and those who work part-time because they can’t find full-time work.  And it doesn’t include those with graduate degrees who find themselves working at Starbucks.  I expect the Fed’s numbers don’t factor in the economic deterioration in Europe that will inevitably impact us, possibly pushing us back into recession.

The Fed says its goal is to get unemployment below 6%, but it is not doing anywhere near enough to achieve that.  Instead, it appears intimidated by the GOP.

So we have a major political party stirring up irrational, Chicken Little hysteria about inflation, of having to fill your wheelbarrow with practically worthless dollars to buy a loaf of bread, while expressing too little concern for our bleak employment prospects.

 

 

 

Desperate Newt Pandering to Paultards

Newt the Desperate is trying to siphon votes from Ron Paul in South Carolina by saying he wants a commission to pursue getting us back on the gold standard, which is of course one of Ron Paul’s signature issues.

Ronald Reagan appointed such a commission and, of the 17 members, 15 ultimately rejected the idea.  Guess who was one of the two in favor?  Why Ron Paul, of course.

Newtie also bashed the Fed, saying it should abandon its dual mandate of fighting both inflation and unemployment and stick to the former.

Bonus fun fact — When Sarah Palin was chosen as McCain’s Veep, she thought “the Fed” referred to the federal government and didn’t know it meant the Federal Reserve.  That would make for some interesting Emily Litella moments.