Posted on 10/29/2011 3:00:10 PM PDT by reaganaut1
...
Today, inflation is still low, but unemployment is stuck at a painfully high level. And, as in 1979, the methods the Fed has used so far aren’t solving the problem.
...
It would work like this: The Fed would start from some normal year — like 2007 — and say that nominal G.D.P. should have grown at 4 1/2 percent annually since then, and should keep growing at that pace. Because of the recession and the unusually low inflation in 2009 and 2010, nominal G.D.P. today is about 10 percent below that path. Adopting nominal G.D.P. targeting commits the Fed to eliminating this gap.
HOW would this help to heal the economy? Like the Volcker money target, it would be a powerful communication tool. By pledging to do whatever it takes to return nominal G.D.P. to its pre-crisis trajectory, the Fed could improve confidence and expectations of future growth.
Such expectations could increase spending and growth today: Consumers who are more certain that they’ll have a job next year would be less hesitant to spend, and companies that believe sales will be rising would be more likely to invest.
Another possible effect is a temporary climb in inflation expectations. Ordinarily, this would be undesirable. But in the current situation, where nominal interest rates are constrained because they can’t go below zero, a small increase in expected inflation could be helpful. It would lower real borrowing costs, and encourage spending on big-ticket items like cars, homes and business equipment.
(Excerpt) Read more at nytimes.com ...
Ben Bernanke is a Keynesian nowadays, and there is a chance he would go for this. "Central bank independence" is not an absolute, and if the Fed is steering us toward inflation, if not hyperinflation, the Republicans should call for the Fed governors to resign. Rick Perry's rhetoric was over-the-top, but he was on to something.
Is that like being bad but good?...
Is there even ONE economist in America today, who actually considers the impact of our huge, one-way, constant, ongoing manufacturing trade deficit with the Peoples Republic of China?
Even one?
I have several friends who are business owners doing between 100,000 and 2,000,000 in sales per year.
They all agree: the problem is not GDP or the Fed or inflation or even recession.
They are sitting on the sidelines waiting for the taxing, health care and onerous regulations to settle down. They literally fear for their business.
Any positive effects are very very temporary and are far smaller than the permanent and long lasting damage this would do.
High inflation is a means of stealing from savers. It is an abomination. These people can rot in hell.
Romer may have been alluding to that with her comment on exchange rates/
More likely, everyone and his brother would be headed for protection of a few shiny metals. People will be digging up graveyards to get rings and fillings.
That is precisely why it is being proposed. The income tax is meeting resistance; wealth taxes are too obvious; that leave inflation--which is a more subtle wealth tax. It tends to hit the middle class very hard, because their savings don't include much in the way of real assets (such as stocks) compared to the wealthy.
This is standard economic fare. Figure 2-12: http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_fy2011outlook.pdf
The assumption if that there is a equilibrium or normal economy. Liberals don’t think they damage that with their policies. It’s that basic assumption that causes so many government problems.
Yes, it liquidates debts, and punishes those who save.
But inflation is the answer for economies mired in debt - in the UK the govt is trying to increase inflation - although officially they deny it.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.