Skip to comments.Fed Reserve Officials: Americans Are Saving Too Much Money, We Need To Purposely Generate Inflation
Posted on 10/08/2010 9:45:50 AM PDT by WebFocus
Some top Federal Reserve officials have come up with a really bizarre proposal for stimulating the U.S. economy. As unbelievable as it sounds, what they actually propose to do is to purposely raise the rate of inflation so that Americans will stop saving so much money and will start spending wildly again.
The idea behind it is that if inflation rises a couple of percentage points, but consumers are only earning half a percent (or less) on their savings accounts, then there will be an incentive for consumers to spend that money as the value of it deteriorates sitting in the bank. Yes, that is how bizarre things have gotten. It is not as if U.S. consumers are even saving that much money. Several decades ago, Americans typically saved between 8 and 12 percent of their incomes, but over this past decade the personal saving rate got down near zero a number of times as Americans were living far beyond their means. Once the recession hit, Americans very wisely started saving more money, and so now the personal saving rate has been hovering around the 5 to 7 percent range. This is well below historical levels, but the folks at the Fed apparently are eager for Americans to pull that money out and start spending it again.
In an article entitled "Fed Officials Mull Inflation as a Fix", Wall Street Journal columnist Sudeep Reddy described this bizarre new economic approach that some over at the Federal Reserve are now advocating....
"But as the U.S. economy struggles and flirts with the prospect of deflation, some central bank officials are publicly broaching a controversial idea: lifting inflation above the Fed's informal target."
Does increasing inflation as a way to stimulate the economy sound like a good idea to any of you?
These are supposed to be some of the brightest economic minds that our nation has produced.
Unfortunately, it is becoming increasingly apparent that the folks running the Federal Reserve do not have a clue about sound economic policy.
Anyone who lived through the "stagflation" days of the 1970s should know that inflation does not spur economic growth.
But now some of the most prominent Fed officials are publicly proposing that we should purposely generate more inflation so that "real interest rates" (interest rates with inflation factored in) will go down.
For example, during a recent interview the president of the Federal Reserve Bank of Chicago, Charles Evans, made the following statement....
"It seems to me if we could somehow get lower real interest rates so that the amount of excess savings that is taking place relative to investment needs is lowered, that would be one channel for stimulating the economy."
If you truly grasp what Evans is proposing here, your jaw should be dropping.
He is basically coming right out and saying, "Hey, let's go out and crank up the inflation rate so that American consumers will start recklessly spending their money again."
So are Americans really saving too much money?
Of course not.
Just take a look at the chart below.
Americans are actually still saving far, far less than they used to. As you can see from the chart, in the 1960s and 1970s Americans would usually save somewhere between 8 to 12 percent of their incomes.
Today, we are still well below that level. But we have made some progress from the reckless days of five to ten years ago when Americans were living far, far, far beyond their means and basically saving next to nothing....
So now some top Fed officials want to undo all that. They apparently want Americans to grab their credit cards and to run out to the stores and spend wildly like they did a few years ago.
But spending recklessly is not going to repair our economy. In order to have a healthy, balanced economy you need to have a healthy personal saving rate. Encouraging Americans to spend every last nickel they have may boost economic figures in the short-term, but it will make our long-term problems even worse.
But it is not just Federal Reserve officials that are advocating this kind of nonsense. Just a few months ago, IMF chief economist Olivier Blanchard suggested that it might be a good thing if western nations doubled their inflation targets from two percent to four percent.
It seems like almost everyone is in an inflationary mood these days.
The Federal Reserve keep dropping hints that it is ready to print lots more money and unleash another huge round of quantitative easing.
Just this past week, the Bank of Japan shocked world financial markets by cutting interest rates even closer to zero and by setting up a 5 trillion yen quantitative easing fund.
In fact, nations all over the world have become increasingly eager to devalue their national currencies in an attempt to gain an edge in international trade.
So after years of relatively low inflation, it looks like our leaders are almost eager to tangle with the inflation tiger once again.
But it might not be so easy to tame the next time.
Once a really bad inflation spiral gets going it is really hard to stop.
But in the end, it is not going to be Barack Obama or the U.S. Congress that is going to decide if we pursue these inflationary policies or not.
Ultimately, these decisions are in the hands of the unelected, unaccountable Federal Reserve.
If you don't like it, too bad. When was the last time a U.S. president or the U.S. Congress really stood up to the Federal Reserve? It just doesn't seem to happen.
The Federal Reserve is going to do what the Federal Reserve wants to do, and the rest of us are going to have to live with it.
Of course we could all try to elect candidates who would demand more accountability from the Federal Reserve this fall, but unfortunately those kind of candidates are few and far between.
The sad reality is that at this point, the Federal Reserve is pretty much completely and totally out of control. The U.S. dollar has already lost over 95 percent of its value since 1913, and now the Federal Reserve is giving every indication that inflation is going to get even worse in the years to come.
But flooding the system with more paper money is not going to solve anything. Instead, it is just going to make it even harder for average American families to buy milk and bread and to put gas in the car.
Inflation is a hidden tax on every single dollar that we already own. It is a destroyer of wealth and a wrecker of currencies.
But now some of the top officials at the Fed see inflation as a key tool in creating "economic growth".
With such a clueless collection of idiots running our economy (and the Federal Reserve does run our economy) do any of you actually believe that there is hope for the U.S. economic system in the long run?
Inflation is the hidden tax that will eat up your savings. Hello, Zimbabwe. Deliberate inflation by the government is outright THEFT!!!
My boat is leaking. Hand me that axe — I’m going to punch some holes in the bottom and let the water drain out.
What is the punishment if captured?
It worked so well for Zimbabwe
This tells what the regime intends to do with people who’re buying tons of gold! Soros and their cronies will be waived, of course!
Eventually, it’ll be confiscated. Think Roosevelt!
Spending would go up right away if interest rate went to at least 4% for a long-term CD. Why? A real lot of financially responsible people would spend every penny of that interest. It's probably the best way to get money to people who would spend every penny of it, and that would stimulate the economy.
I have a family member that thinks Obama is god. He is a highly educated financial specialist.
He says we need to generate inflation, because deflation is the enemy. He’s also in massive personal debt.
I know this is coming. This is what irresponsible governments do when they’ve spent too much of the people’s money. So you penalize the people who have done it right.
For these types, there is no virtue in living frugally or being responsible. It’s all a game to them. People who live an old fashioned traditional life are just patsies.
C'mon, you want FReepers banned and/or arrested? LOL!
The Fed is the main pillar of Progressive Gov’t. Without it, there is no way to finance bailouts, $1.3 Trillion deficits, Gov’t takeovers and massive, long-term entitlements.
Maybe we can all help out by making a run on the banks.
That way they won’t see any of that money sitting there.
Inflation is easily confused with rising prosperity.
As inflation forges ahead, all prices rise. The media, being fundamentally ignorant, see the rising Dow and crow that the economy is improving.
Inflation is the marxist’s best friend. It reduces the value of savings and investments to essentially zero, thus making all equally poor and dependent on the government. No one has ever thought of a better way to make everyone “equal” (except for the liberal elite which votes itself higher salaries and pensions to keep up with rising inflation)
FUfed... FUbo... FUdims.
The feds have a clue. They know exactly what they are doing. Inflation destroys the savings that you worked all your life to make. That is their intention.
So now we’ve gone from “There’s too much consoooomin’ goin’ on out there.” to “There’s too much saaaavin’ goin’ on out there.”
Gold/Silver/Commodities bitchez!! ;-)
there they go again. First the crush the banks by forcing them to make loans to people who can’t afford them. Now they will crush the banks again by letting those who could afford them pay them off with inflated dollars.
Who hires these nimrods? They never look beyond the desired outcome to see the unintended consequences.
These people working for the Federal Reserve Board must be on drugs.Saving too much,We’re working like hell and scraping for every last dime hoping that our towns don’t steal our homes out from under us by increasing our property tax burden.
Then there is the Tax burden imposed by the Federal Government and the state of Connecticut.
All of the branches of government need to undergo some serious spending reductions.
It is all intentional and all communist plans lain in place decades ago. We will defeat them. It will take years to regain prosperity but we will return America to what it was and was intended to be.
Hey Nov, I’d like your take on this. My (simplified) take is that it is insane and will lead to the worst of both worlds: Hyperinflation of necessities, and because nobody will have much money left over (besides gov’t connnected uber rich), deflation of non-necessities. The latter will lead to collapse of industries, massive unemployment, etc. IOW, a full on Depression.
What’s your take? What am I missing?
Those who want financial independence and plan well to stay out of debt always end up getting punished ! The tax on houses under ObamaDeathCare is aimed at those who have equity in their houses !
When you are in debt, you are enslaved to the whims of those in charge whether it is the gov’t, your employer or anyone else.
Take my previous employer, my manager had knowledge that I didn’t have a mortgage. It really p*sssed him off since he tried to get me do some questionable things and I could with good conscious say no ! Of course if there was an investigation, I would be the one holding the bag, not him. He told me that someone at my age (late 30’s at the time) should not have my house paid off since society expected people in my age range to be in debt. Of course he is a liberal democrat.
I studied econ in the ‘80’s. They taught us that there is a correlation between inflation and unemployment, so that inflation can lead to more employment. This was being taught even after the late 1970’s demonstrated that the correlation wasn’t there at all. The Fed guys will have studied the same thing, probably in the 70’s or 60’s.
The Fed has allegedly pursued a policy of price stability for decades. They now seem to be saying they will no longer do that, but will instead focus on employment and jobs using the money supply. Inflation is good, it will create jobs.
I’ve read here on FR that the corporations have been holding onto trillions of dollars. So that’s where the real savings in this economy are. If they release that money, ‘velocity’ of money increases, so inflation is a real probability. I have no confidence the Fed can manage it.
I haven’t studied hyperinflations. Gold, silver, land and food are good investments to weather that type of storm if you aren’t paycheck to paycheck and have some money to invest. Investing in assets of countries that aren’t inflationary are also good because currency markets will efficiently devalue an inflating dollar if the country doesn’t peg it’s currency to ours. If you are paycheck to paycheck, necessities will go up and up and your pay will get adjusted annually, so you are screwed.
I personally think that the Austrian school’s analysis (cut spending, let the free market adjust to new conditions) is the best way out of recessions and depressions. This monetary policy easing nonsense is an experiment with our lives and livelyhoods — and one that has been conducted before. I know of no historical example of an economic depression being ended with monetary policy but plenty of examples of hyperinflation.
Yeah, I’m saving frantically, so I can pay my property taxes!
The Federal Reserve is a bank operated for the benefit of its member banks.
Those member banks own a large amount of distressed mortgages and real estate, and can only be saved from insolvency by a general inflation that will raise the dollar price of real estate along with everything else.
So look for the dollar to lose at least half its value in the next two years. It could get much worse than that.
Thanks. I agree with the Austrian school of thought, too. Problem with it is that it doesn’t increase government power over people, quite the opposite in fact, so the political class doesn’t like it. Until we deal with that issue, namely by dumping big govt type politicians across the board, we won’t see it implemented. (I’m sure you knew that, just wanted to voice it.)
I've read folks here on FR saying that it's pushing on a string. If the corporations hold the cash you don't get inflation or investment, the money just piles up unlent by banks and invested in government bonds, or held in accounts by the corporations, or spent on mergers, instead of new plant or hiring. Then the money is released and begins circulating more when the businesses get a little confidence and that's when you've got the inflation problem. Stagflation definitely happened but the libs in academia were so wedded to Keynsianism that it wasn't thought through rigorously. I have no idea if the shear volume of money will eventually overwhelm the low velocity of money in a recession.
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