Even more on inflation

Via The New Republic, Goldman economists make argument against view that Federal Reserve actions will lead to inflation:

Part of the argument is that, as Paul Krugman has pointed out, an increase in the money supply isn't inflationary when banks aren't lending out the extra money. Goldman says that, even before the Fed expanded the money supply (i.e., create extra reserves that the banks could use to increase lending), the banks weren't lending as much as they theoretically could. But if their capacity to lend wasn't a binding constraint, you wouldn't expect them to increase lending just because that capacity increased. And they haven't.

Some wedding pictures 4/26/09

More notes on inflation

Via Paul Krugman's blog, "we are in a liquidity trap...and in such circumstances a rise in the monetary base does not lead to inflation." Krugman illustrates this with a couple of charts:

Japan, from 1997 through 2007:

And the United States in the 1930s:

As can be clearly seen from the above charts, a rise in the monetary base (i.e. the quantity of liquidity pumped into the economy by the efforts of the Federal Reserve) does not lead directly to increasing prices, as banks and other financial institutions are reluctant to lend (i.e. capital is hoarded). Why is this? We are up against the "zero bound" of monetary policy, where super low interest rates (approaching 0%) are effectively not low enough to entice banks to lend money to investors, since the risk of doing so outweighs the relatively cheap access to capital. Despite a nominal interest rate very close to 0%, the real interest rate may actually be several points higher, for instance if inflation is negative. Spending, particularly investment spending, turns negative, resulting in a contracted economy. What is needed when traditional monetary policy reaches its limits? Fiscal stimulus, with the goal of increasing aggregate demand and facilitating expectations of positive inflation.

And although we may or may not be stuck in a true liquidity trap currently, the present conditions are, nevertheless, not very conducive to inflationary pressures.

Controversial DHS report vindicated

Amid outcries from conservatives back in April, a leaked Department of Homeland Security (DHS) report, detailing how the current political and economic climate was facilitating an increase in right-wing extremism and terrorism, was rescinded. Secretary of Homeland Security, Janet Napolitano even went as far as to apologize for the report, which was conducted under the auspices of the Bush administration (and was accompanied by a report on left-wing extremism).

Now after a murdered abortion doctor and a domestic terrorist attack on the Holocaust Museum in Washington, DC, by a white supremist, the report suddenly has an errily prescient quality. It should be noted that the last time a Democratic president took office, in 1993, there was a similar increase in right-wing extremist activity, culminating in the Oklahoma City bombing, perpetrated by the "lone wolf" Timothy McVeigh.

At a closer look, there's no question why many (not all) conservative media figures called foul when the DHS report was leaked. As Paul Krugman points out, these are the very individuals, on telivision and talk radio, who are fueling the flames of extremism. And they are doing this in such a way that is outside the established borders of legitimate and healthy democratic debate and deliberation--faciliting paranoia and dangerous conspiracy theories.

Is this what socialism looks like?

If you haven't paid much attention to the right-wing noise machine over the past few months, well, more power to you. But if you have had the displeasure of keeping tabs of the paranoid, reactionary wing of the American political spectrum (tea baggers I'm thinking of you!), you would be hard pressed to not believe we have reached some sort of tipping point, from which there is no return. What am I referring to? Why, the great transformation of the United States into a great socialist nation. The numbers speak for themselves:

The above pie chart is from the Atlantic online and is demonstrative of the unsubstantiated criticisms of the Obama Administration. You see, movement conservatives, through the megaphone of Faux News and talk radio, have attempted to paint a picture of the new administration as far-left, radical, socialist, elitist, racist (oh the irony!), and fascist. What these folks fail to realize (or choose to ignore) are the following two points:

(1) The Obama administration, both in its policy objectives and rhetoric, has been, and will likely continue to be, largely moderate, much to the consternation of the left.

(2) To the extent that the Federal Government has taken a larger role (0.21% of total assets) in previously private corporations and banks, it is only due to the absolute necessity of doing so, as dictated by the current economic situation and the prospects of a further deteriorated economy in the near future.

Two more points I would like to make: (1) Liberals are far more pragmatic, and less doctrinaire, than conservatives, when faced with a problem to solve. (2) Liberalism, in both its classical form and its modern form (I hope to elaborate a bit on the absence of a distinction between the two, sometime in the near future), tends, by its very nature, towards moderation and pragmatism. This is clearly evident in the Obama administration thus far.

Who's to blame?

The question is regarding the current economic meltdown. The answer is anything but straightforward, owing to many complex variables, some of which were beyond anyone's direct control. That being said, there were conscious, deliberate policy choices over the past three decades that have enabled the environment in which the seeds of the economic crisis were sown.

Some commentators, such as Paul Krugman, point directly to the policy choices pursued by, and enacted during, the Reagan Administration in the early 1980s:

There’s plenty of blame to go around these days. But the prime villains behind the mess we’re in were Reagan and his circle of advisers — men who forgot the lessons of America’s last great financial crisis, and condemned the rest of us to repeat it.

Krugman concedes that the "proximate causes" of the crisis can be attributed to the past several years:

Now, the proximate causes of today’s economic crisis lie in events that took place long after Reagan left office — in the global savings glut created by surpluses in China and elsewhere, and in the giant housing bubble that savings glut helped inflate.

Robert Scheer at "The Nation" places the culpability on Clinton-era policies to deregulate financial markets, which had large bipartisan support:

Ronald Reagan's signing off on legislation easing mortgage requirements back in 1982 pales in comparison to the damage wrought fifteen years later by a cabal of powerful Democrats and Republicans who enabled the wave of newfangled financial gimmicks that resulted in the economic collapse. Reagan didn't do it, but Clinton-era Treasury Secretaries Robert Rubin and Lawrence Summers, now a top economic adviser in the Obama White House, did. They, along with then-Fed Chairman Alan Greenspan and Republican congressional leaders James Leach and Phil Gramm, blocked any effective regulation of the over-the-counter derivatives that turned into the toxic assets now being paid for with tax dollars.

In reality, Scheer is probably correct in citing the Clinton-era policies as directly enabling the current crisis. But what Scheer fails to consider is the way in which Reagan-era rhetoric and ideology laid the groundwork for a political environment in which the late 1990s legislation could be possible in the first place.

Should we be worried about inflation?

In the midst of an economic downturn, in which consumer prices have fallen over the past year, and deflation remains a worry of many top economists, inflation, oddly enough, is being talked about (loudly sometimes) by many people of all political stripes. These worries, writes Nobel Laureate Paul Krugman, are premature and fail to take into account the deflationary pressures still prevalent in the economy:

First things first. It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.

So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which mustbe inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.

The first story is just wrong. The second could be right, but isn’t.

Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.

But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.

Krugman goes on to conclude that all the hoopla surrounding the "inflationary threat" may simply be good old fashioned political posturing:

But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.