Skip to comments.Yellen's Low-flation Nonsense
Posted on 04/12/2014 9:22:34 AM PDT by Kaslin
Will somebody please explain to me how rising inflation is somehow going to extricate us from the tepid economic recovery? I don't get it.
It used to be hypothesized that low inflation was the key to high economic growth. For everybody in the economy, low inflation was a tax cut. Conversely, rapidly rising prices were thought to penalize the economy by placing a tax-hike effect on investors, businesses, and families. It was this logic that spurred Paul Volcker (especially) and then Alan Greenspan to labor mightily in the 1980s and 1990s to bring inflation down.
The Fed's favorite inflation measure -- the personal consumption deflator -- has risen about 1 percent over the past year, as has the consumer price index. When I grew up professionally in the 1970s, first as a New York Fed staffer and then as a Wall Street economist, no one -- and I mean no one in their right mind -- would ever have dreamed that double-digit inflation could be brought down to 1 percent. But Janet Yellen is now telling us that low inflation is a sign, and perhaps even a cause, of the weak economy.
The Wall Street Journal headline last week was "Fed Shows Growing Worry about Low Inflation." As the narrative unfolds, both the Federal Reserve and the IMF blame low inflation for small wage gains, excess business capacity, and soft global demand.
Not for one nanosecond should anybody believe this nonsense.
In the best piece he's written in years, David Stockman, my former Reagan OMB boss, blasts Christine Lagarde and the IMF for asserting "that a new jabberwocky expression called 'low-flation' is the main obstacle to higher economic growth . . . and that it can be cured with more central bank money printing."
Stockman, who is a sound-money man, goes on to say, "There is not a shred of credible evidence that prolonged low CPI inflation causes workers to produce less, businesses to invest less, or entrepreneurs to invent less."
Stockman reminds us that falling prices for flat-screen TVs, iPads, and iPhones has caused soaring demand for these products. He also points to Wal-Mart driving down the price of furniture, toasters, and house paint for years while its revenue growth has continued to rise.
Consider this: If today's 1 percent inflation rate continued for 25 years, you'd have a 28 percent inflationary hike. But if you move to a 2 percent yearly inflation rate, which is what some Fed people seem to be targeting, wage earners and all the rest of us would experience a 64.1 percent compounded, cumulative inflation rise over 25 years. At 2.5 percent inflation, which is what some other Fed folks are saying, we would experience an 85.4 percent inflation gain over the next quarter century.
Is that what we really want? Is the central bank willing to take that risk? Don't they know that historically a little more inflation turns into a lot more inflation, which then goes out of control?
As brilliant and well-schooled as she may be, Janet Yellen is using the wrong model. She believes that rising inflation will lead to lower unemployment. That's called the Phillips curve. But what we've learned over the past decades is just the reverse: Lower inflation leads to lower unemployment. They move together over the medium- and long-term.
The good news is that inflation is not accelerating. It's been hovering around 2 percent or slightly less for the last five or so years. Forward-looking market-price signals, such as gold, commodities, the Treasury yield curve, and the dollar exchange rate are recently showing a tiny bit of inflation risk, but not very much. These are the indicators the Fed should watch -- not the unemployment rate or a basket of other labor indicators.
And if you do want faster growth and higher employment, slash the business tax rate. Move to a flat tax for individuals. Lighten the regulatory burden. Most especially, get rid of Obamacare. That will incentivize everyone in the economy and open the door for faster growth.
And while we're at it, let's keep the dollar sound. In fact, I'd like to see King Dollar appreciate by 10 to 15 percent. That will hold down inflation while supply-side reforms reignite the economy. (By the way, oil prices would probable drop to $75 a barrel, pulling the rug out from under the evil Vladimir Putin.)
Get rid of QE3, move to the 1.5 percent Taylor rule fed funds rate, and institute pro-growth economic reforms. This policy package will keep inflation low and drive economic growth higher. It worked in the '80s and '90s. But it's been forgotten in recent years.
Some will call it the old-time religion. But to that I say amen.
One striking example is the RIDICULOUS retired state employee pensions.
You have people sitting at home @ 58 years old raking in $20, $25, $30, $35 or more dollars an hour to walk out to the mailbox twice a month for the next 20-30 years.
THAT'S why the call for a $10 an hour minimum wage is out there.
Deflation is here, but it can't force down those public sector wages & pensions.
Oceania has always been at war with Eastasia.
Larry makes a pretty good argument here.
I'm glad Larry picked the least manipulated markets as price signals. /S
The fiscal policy being pursued by the FED is an attempt to walk a tightrope between inflation and deflation, turning what would be a brutal depression into about 12 years of Euro-style stagnation.
Which would be preferable is a matter of debate.
The result is a perfect storm, assets are in deflation while many consumables are inflatiing. This leads to much confusion for the public. the problem will last until about 2022, though things should start improving by 2017 or so.
It is simply a way to transfer wealth from savers to borrowers who get to pay back their debt with devalued dollars.
Inflationist logic is that high inflation and more money printing means ppl have more money in their pockets to spend
Nice summary from Kudlow.
IMHO, the USA is counting on inflation to pay down its foreign debt. This would not work, except that the U.S. dollar is the world’s reserve currency. U.S. debt is denominated in U.S. dollars. Use inflation to make the dollar a lot less valuable; then pay the debts with the cheaper dollars. That way, you stick it to your creditors.
Of course, as a foreigner, I fully support this strategy — because, the world owes Americans a living. (You might detect a tinge of sarcasm here.)
I agree that our political/regulator class Americans feel that the world owes them a living through recirculating foreign debt. The U.S. trade deficit with Canada in 2013 was $31,731,000,000.
So we should lower the U.S. dollar for more of a free international market, manufacture our fair share of products and sell them to Canadians. In return, we’ll buy more Canadian lumber, oil (traded in loonies), metals and unique products made from those vast natural resources. It would make Canadians in the West happy, but they’re not bound so much to desks in eastern services.
In return, we’ll stop the “chemtrails” and admit that Canadians are different from us. ;-)
--sure if you're into making a religion out of monetary policy. The thing is that while religious orthodoxy is appropriate and necessary for addressing ultimate issues ("we shall oppose needless human suffering"), it doesn't work in developing effective monetary policy ("I'd like to see King Dollar appreciate by 10 to 15 percent... ...Amen"). In fact, it's flat out crazy.
I mean, just what in the ever-loving hell does Kudlow think he's talking about with his Almighty King Dollar worship? He wants what, purchasing power meaning 10-15% deflation? If he means foreign exchange rates then which currencies are we supposed to devalue?
Perhaps maybe he's coming down with WPS (warped pundit syndrome) that's been going around, like we've been seeing in Krugman and PC Roberts.
Yellen was picked because she is biased in favor of inflation. That’s her job. Ours is to make our politicians feel the heat for every uptick in inflation. Then, they must make Yellen so miserable that she begs them to take away the dual mandate of low inflation and low unemployment and just leave her to low/no inflation.
Great comment. One of the absolutely unreported stories of this down cycle is government’s inability to adjust costs down. It is the cost of government that is killing jobs and the middle-class.
If government could adjust its spending and payroll quickly downward, a la the 1920-21 depression, we’d be on the path to 5% real growth yoy.
Look at how they punished the prudent already.
No it isn’t. It’s that the price of assets rises. I know several very “smart” investors wishing for asset inflation.
$360 Billion, just in the U.S.
It’s more than that. Keep in mind that when asset prices fall because of profligacy, the prudent should use their cash to snap up those assets. That didn’t happen. So the wealth transfer that would occur naturally from the profligate to the thrifty/prudent didn’t occur.
Per usual, government stepped in and rewarded profligacy. You see, government is profligate and cannot tolerate thrift. Thrift must be punished. Mothers were driven out of homes by a policy that discouraged the non-economic activities of motherhood and rewarded working moms. Now that it’s worked, they pull a switcheroo and make work harder.
Government is the problem.