Maybe it is a local thing. In the past 4 years, my rent (part of a large complex) has gone up 22%.
Real estate prices in Las Vegas took a massive hit, but nobody was talking about massive deflation.
It’s always a local thing for individuals, but, the overall US economy hasn’t seen much inflation.
Temporary cash infusions mean nothing.
Temporary cash infusions mean nothing.
Temporary cash infusions mean nothing.
If a genie shows up and gives you a trillion dollar bill, but then promises to make the bill disappear the moment before you try to spend it, then exactly jack shit has changed as far as your purchasing power goes. Those excess reserves? They are completely meaningless until the genie promises that the money will be able to be spent. That money can disappear nearly overnight if the Fed wants it to. Our Fed genie has made a promise to destroy the money before it can be used.
What we need is for the Fed to promise to let the money to be used, to allow nominal GDP to increase, that is to increase the effective money supply, the total face amount of dollars exchanged for new goods and services. Until the Fed says it’s going to allow higher NGDP, the excess reserves won’t have a meaningful effect on the economy.
This is, by the way, the same reason why we don’t have to worry about any dam breaking and inflation breaking forth (absent a catastrophic default situation). The key variable to track is not the monetary base or excess reserves, nor the M1, M2, M3 or M-anything. The key money variable is NGDP. And our NGDP is still far below trend.
It sounds like you’re saying the monetary stimulus has been ineffective precisely because it hasn’t been allowed to be inflationary. Is that correct?
Meanwhile, since I think you’re the Board’s expert economist, I’d ask your opinion of my contention: The proper way out of this recession is for government to spend money on useful goods and services, e.g. infrastructure repair.
You could say that. I’d prefer to say that monetary stimulus has been ineffective precisely because it hasn’t been allowed to increase NGDP… part of which would have to lead to a bit higher prices.
I don’t like talking about inflation as if it were a “goal” because it’s obviously not, in itself, a desirable thing. More output is a desirable thing. But returning to more output would, yes, lead to higher prices. Since the Fed has a cap on how high it wants inflation to go, they have a cap on recovery.
It could work if the cards fall down right. I just don’t see it as the cheapest, fastest, most efficient option.
This is especially true because the Fed could pull back on any attempted expansion from spending. Government spending would have the same effect of expanding NGDP if the Fed allowed that to happen. The people who are claiming spending can help have a very specific idea of how they think the Fed will respond: They think the Fed simply doesn’t have the stones to do what it takes on their own, so the government should spend. For some reason they believe that when the government spends, the Fed will allow the effect of this spending to do what they ought to have done anyway.
Is that really sensible? They’re not doing what they ought to, but when the government tries to step up and take their place, they’ll allow it happen? They could just as easily hit the brakes early, and cut off whatever recovery the government was trying to implement. If inflation is already where they want it to be, then why would they allow higher NGDP from government spending if they’re not going to allow it from new money? Spending to lead to recovery is a bigger gamble than people generally think it is, because these guys have their foot on the brake and they don’t seem unwilling to step down hard.
Add to that another wrinkle: spending has its own costs and benefits. I mean, hell, infrastructure repair is something we should be doing anyway. Good government investment is good government investment, whether we’re in a boom or in the ditch. I’d prefer spending decisions to be made with a clear eye on the costs and benefits, not on the business cycle, which the Fed influences much much more directly. Macro demand issues are ultimately about money, and I’d personally prefer those issues to be settled with the people in charge of money. I’d guess 95% of all economists would’ve agreed with that sort of policy before the Great Recession. It’s only when we hit 0% interest that people started to become vocal about more spending.
But there is nothing about 0% that actually limits the Fed. They have other tools. The unwillingness here is purely political, and not at all economic. And their resistance to inflation could, potentially, stifle recovery no matter how much money the government spends.
The Fed is the problem.
If they make it clear that they want to push for higher NGDP, getting closer to our pre-crisis trend line, then we’ll have a swifter recovery. If they continue to pretend they can’t do anything about the situation, we’ll have a hard slog. And that could be true, potentially, no matter how much money the government spends.