Beware the dollar hawks

Thank you for the sanity – it was disturbing to see the chiron on TV yesterday: ‘Fed contracts balance sheet last 2 weeks’. No one is afraid of inflation or too much liquidity except bankers whose pay packages are protected by ‘the sanctity of contracts’.

Kudos to President Obama for being a mensch and announcing he will donate his Nobel Prize to charity; this makes him one of Reagan’s ‘thousand points of light’ n’est-ce pa ?

This is another example of irrationality. Here the dollar is seen more as a national totem and not a currency.

Tightening now will doom the bottom third of wage earners for a decade and throttle any export increases. To strengthen the fiscal position I vote for a tax hike and freeze on spending, perhaps in 2013 and not before.

Professor Krugman, not sure if you ever read Yves Smith’s blog (naked capitalism) but was wondering how you felt about her post that cross-border capital controls are likely in the near future?
//www.nakedcapitalism.com/2009/10/warning-capital-controls-are-in-your-future.html

The negative year-over-year negative inflation numbers for 2009 are artifacts, a result of the blip in 2007-8 because of oil and grain prices. Since early 2009, month/month inflation has been about at target rate. Not that this is itself a reason for panic, but the year/year numbers will inevitably climb and go positive by the end of the year.

If lots of money causes inflation, if the Fed holds federal funds near zero, and if there are large deficits (not really an if) there will almost surely be higher inflation next year (unless the economy tanks again). If you believe Bernanke when he says he will not monetize the deficit, this means he will raise rates. Of course if you believe that then you should not believe him when he says rates will be held low indefinitely.

We all agree that the Fed set interest rates too low for years. So why does your Taylor rule chart follow the Fed’s rates so closely? Shouldn’t it have diverged when the Fed went low?

I think some of these Fed Presidents need to be placed on the unemployment roles. Maybe the reason they wish to tighten is not an economic policy difference but a political policy difference. Has a scorched earth political policy been turned into a scorched earth economic policy?

Well, it is anyone’s guess, but I bet that this is a repeat of 1965-1980. Then, the US was fighting a war, creating new entitlement programs, passing environmental protection laws that encouraged production industries to move overseas, paying with (what was then a large amount) borrowed money, and seeking to solve the problems that arose by “bold, persistent experimentation” that disrupted markets. Richard Nixon said:”We are all Keynesians”, Jimmy Carter created “stimulus” spending that approximates the Obama stimulus (after adjusting for inflation, recognizing that only part of the Obama stimulus has been spent). The result: Stagflation and 10% unemployment; the price of a barrel of oil went from $3 to $30, and some 90% of dollar denominated savings were lost. Now it is Afghanistan, not Vietnam. Instead of creating the unsustainably expensive Medicare, we are now trying to make our entire health care system as unsustainable as Medicare through health care “reform’. We are not doing the “Clean Air Act”, which was scientifically justified if economically a nuisance; now it is scientifically unjustified cap-and-trade with enormous cost. The “bold persistent expectation” is not wage price controls, but rather taxpayer money going to Wall Street favorites who are “too big to fail”, discarding the rule of law in bankruptcies, and taking over auto, banking, and health care markets.
The collapse of the dollar in the 1970’s was the symptom of bad economic policies. Nixon had no choice but to default on American debt by closing the gold window. Now, there are many fewer Keynesians; most (but not all, as readers of this blog know) recognize that government spending borrowed money while promising anyone who hires someone will be punished by tens of thousands of dollars in new taxes does not create jobs.
Obama will be forced to default. He will have no choice. Each American must deliver $200,000 in services to Medicare patients before he/she can begin to pay for the next round of new government entitlements, programs, fines, taxes, and permits. We just cannot do it, and pay off a deficit of $1.4 trillion a year.
Prof. Krugman and I agree. There will be a general economic collapse. We disagree only on the “Why?” I say that it is because we implemented the policies that Prof. Krugman advocated. He will say the collapse is because we did not implement his policies more. What an experiment!

I could deal with a repeat of 1937 if we could also get a repeat of 1938-44.

I suspect they know very well what they are doing. Drive interest rates up then blame Obama and the Democrats for the resulting economic disaster.

El Cid, do you remember what happened between 1938-1944?! I’d just as soon forgo the world war, genocides and war-time economic controls, thank you very much.

I think of butchers — who price cuts of meat based on demand, and, as a result, end up selling the whole cow. Their goal is to price so that they sell the whole cow. In doing so, they actually create demand for less popular cuts of meat.

Why aren’t we able to do the same with our “excess capacity”/underemployment?

I don’t see a limit on the potential work that could be done — in every category. (science, arts, trades, …) So, like the butcher, some cuts would be subsidized by the butcher’s profit, some sold at cost, and some sold for premium prices.

Is it possible to create a “butcher” that would work? I can’t even imagine how such system would work. I hope better minds than mine are working on such questions.