"Wes" wrote in message
...
"Ed Huntress" wrote:
So are you predicting the out of control spending going on isn't going
to
wipe out my
savings by inflating our currency?
It may, it may not. So far, not. The key will be judging the rates of
growth
and the velocity of money as we come out of the slump, and cutting back on
the money supply expansion at a rate that allows GDP to grow without
causing
high inflation.
Right now inflation is running at 1.6%, despite all of the money in
circulation. The thing is, it isn't circulating. So cutting back now
*would*
wipe out your savings, by leading to a serious decline in demand and a
soon-to-follow devaluation of the dollar. You'd still have the dollars,
but
they wouldn't be worth jack ****. And their low value would lead to a big
increase in the debt-service cost of the national debt, as well as all
other
interest rates.
Inflation at my level sure isn't at 1.6% though. I suspect you are citing
the core
inflation rate that excludes a number of things. I think we need a Joe
Six Pack inflation
rate statistic.
Not if you want to know where the economy is going. The metrics for monetary
control are tuned to use CPI (as one factor), not the "Joe Six Pack"
inflation rate.
You could create such a statistic, but then you'd need 20 or 30 years to
tune monetary policy to deal with it.
This is an economic highwire act of the highest order. One misstep, and
we're in trouble. Anything else -- too much tax cutting, too much
money-printing, too little deficit spending or too many banks allowed to
fail -- and we're screwed for a long time. Of all the risks, the lowest
one
is printing too much money. We know how to recover from that. It's
painful,
but it's fairly reliable, as Paul Volcker demonstrated 1979 - 1983.
I'm simplistic on this sort of thing. To me, printing money is inflating
our currency.
Tax cutting, well this might sound strange coming from me but we got bills
we can't pay
now. I'd like to see more Americans paying taxes.
Printing money doesn't directly cause inflation. Right now the banking
sector of the economy is awash in money but inflation is extremely low --
almost dangerously so, but not quite.
Inflation, of course, means rising prices -- higher costs for goods:
http://www.economist.com/research/Ec...uery=inflation
What causes inflation is too much demand for the rate of supply. The thing
that many people don't recognize is that increasing money supply, right now,
is not having a strong effect on demand. Retail business owners could tell
you all about it. Normally it does, but we're operating in a period of
recession economics, not a normal one. If you want to look at inflation from
the money-supply angle, you have to include the velocity factor, which is a
multiplier on the quantity of money based on how quickly it's changing
hands -- a key measure of economic activity. That factor is extremely low
right now, at deep recession levels, which makes the economy respond as if
there was a lot less money around than there really is. Thus, inflation is
low, GDP growth is low, and recovery of jobs is going to be very slow. You
can't make those things go away with a magic wand. That's all just
fundamental economics and it's all interrelated.
There is less connection between inflation and money supply, historically,
than simplistic theories suggest. The _Economist_ entry above gives a more
meaninful, although too brief, explanation.
There is no other plan than the one we're following that any competent and
honest economics expert would propose. Even John McCain's chief economic
advisor said so, after Obama was in office and the $700 billion stimulus
was
proposed.
Ed, I hope you are right.
Just recognize that there is not, and there never has been, a sure cure for
recession. If everything worked according to textbooks it would be
different. But this is a pretty exceptional recession -- not for its depth,
but because it was triggered by an enormous financial failure, rather than
by some little negative feedback loop resulting from a policy error or an
unfortunate event in the fundamental economics, like the recession that was
started in the late '70s by wild inflation in oil prices. We can withstand
those shocks a lot better today. But now, some of the key tools for getting
out of a recession, such as a responsive source of credit, are broken and
are hobbling along. The administration was handed a half-empty box of tools,
and they're doing exactly what standard economics says they have to do.
Nobody is winging it here. This is more or less a textbook response to a
very bad hand, which has worked in the past but never with such a mess
triggering it. In some ways this is a worse set of problems than we faced in
1929 - 31. Fortunately, we already had in place some protections (like FDIC)
that kept it from spiraling into a depression.
--
Ed Huntress