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I want to discuss the second to last paragraph or what the end game is going to be: Inflation or deflation? Here is the paragraph: "...More quantitative easin

I want to discuss the second to last paragraph or what the end game is going to be: Inflation or deflation? Here is the paragraph: "...More quantitative easing in Europe while America tightens monetary policy is a recipe for a stronger dollar. If the greenback rises far enough, that will hurt export earnings in America, which will eventually feed through to weaker investment and softer GDP growth. The Fed may thus find that even a gradual increase in interest rates will have to be cut short. ..." AFAIK, The FED is so far removed from the consumer that banks, credit card companies, and PayDay Loan store-fronts determine interest rates rather than the FED. With that in mind what are the consequences if the FED does one or the other? What is next, asset inflation or asset deflation? Thank you.

roymurdock 11y ago
> AFAIK, The FED is so far removed from the consumer that banks, credit card companies, and PayDay Loan store-fronts determine interest rates rather than the FED Fed sets short term interest rates in the entire market (including what the consumer sees) through FFR. That's why everyone is having such a fun time speculating when it will raise the FFR, thereby raising short-term interest rates for the entire economy. In a traditional economic model, raising the short-term interest rate deters spending in the real economy and encourages saving as it allows a return on low-risk activities - savings accounts and bonds. Clearly, having the interest rate at 0% has not spurred spending/consumption as the Fed had hoped post 2007. So they embarked on QE to push money into banks with the hope that these institutional gatekeepers would find good things to do with the trillions of newly minted dollars. Now banks are sitting on lots of money and have inflated the stock market and have most likely made an outsized number of dumb bets in the emerging country debt market, as well as the Chinese real estate market. In my opinion it makes no sense for the Fed to either raise or lower the interest rates. While this would spur the banks into action (lowering would make them take riskier bets, raising would allow them to put more into bonds) it would not fix the underlying deficit of aggregate demand. The Fed keeps pushing on the supply side. We need the government to push tax dollars efficiently into sectors that will spur aggregate demand. R&D, infrastructure, education, and war are all examples of long-term investments that will grow demand over decades rather than a few years before another bubble (as we're finding out now). I doubt we'll see either hyperinflation or hyperdeflation because the supply of money in the real economy is efficiently limited by the banks. Unless the Fed was to conduct a helicopter drop and start a round of QE that fed directly to the consumers, we won't see a meaningful change in the currency in circulation, which is what causes hyperinflation/deflation.
dageshi 11y ago
It seems to me we're in a period of low inflation with occasional deflation. I'm not sure we're going to swing to extremes in either direction. Neither serious inflation or serious deflation seems likely, instead just... sitting around neutral.
- lsc 11y ago
  So, observationally? I totally agree. this is what has happened - but for the last few years, both sides have been shouting scare-stories about either hyper-inflation or serious deflation, (and personally, I'd argue that the right, screaming about hyper-inflation has been more wrong than the left, talking in a much lower voice, and in a more academic way about deflation, but both sides have been saying that scary things will happen if we don't act... it's just that the left's worry is that we'd turn out "like Japan" - which seems fundamentally realistic, while the right talked about Zimbabwe, which doesn't.) But, the point is that what "seems likely" for the last few years, if you were to listen to the pundits, was movement in one direction or the other, not idling along in neutral like we've actually been doing. It's only been very recently, I think, that the right has given up on the idea that we're going to get massive inflation our of our borrowing and money-printing.
- toomuchtodo 11y ago
  So a steady state economy?

roymurdock 11y ago

> AFAIK, The FED is so far removed from the consumer that banks, credit card companies, and PayDay Loan store-fronts determine interest rates rather than the FED Fed sets short term interest rates in the entire market (including what the consumer sees) through FFR. That's why everyone is having such a fun time speculating when it will raise the FFR, thereby raising short-term interest rates for the entire economy. In a traditional economic model, raising the short-term interest rate deters spending in the real economy and encourages saving as it allows a return on low-risk activities - savings accounts and bonds. Clearly, having the interest rate at 0% has not spurred spending/consumption as the Fed had hoped post 2007. So they embarked on QE to push money into banks with the hope that these institutional gatekeepers would find good things to do with the trillions of newly minted dollars. Now banks are sitting on lots of money and have inflated the stock market and have most likely made an outsized number of dumb bets in the emerging country debt market, as well as the Chinese real estate market. In my opinion it makes no sense for the Fed to either raise or lower the interest rates. While this would spur the banks into action (lowering would make them take riskier bets, raising would allow them to put more into bonds) it would not fix the underlying deficit of aggregate demand. The Fed keeps pushing on the supply side. We need the government to push tax dollars efficiently into sectors that will spur aggregate demand. R&D, infrastructure, education, and war are all examples of long-term investments that will grow demand over decades rather than a few years before another bubble (as we're finding out now). I doubt we'll see either hyperinflation or hyperdeflation because the supply of money in the real economy is efficiently limited by the banks. Unless the Fed was to conduct a helicopter drop and start a round of QE that fed directly to the consumers, we won't see a meaningful change in the currency in circulation, which is what causes hyperinflation/deflation.

dageshi 11y ago

It seems to me we're in a period of low inflation with occasional deflation. I'm not sure we're going to swing to extremes in either direction. Neither serious inflation or serious deflation seems likely, instead just... sitting around neutral.

lsc 11y ago
So, observationally? I totally agree. this is what has happened - but for the last few years, both sides have been shouting scare-stories about either hyper-inflation or serious deflation, (and personally, I'd argue that the right, screaming about hyper-inflation has been more wrong than the left, talking in a much lower voice, and in a more academic way about deflation, but both sides have been saying that scary things will happen if we don't act... it's just that the left's worry is that we'd turn out "like Japan" - which seems fundamentally realistic, while the right talked about Zimbabwe, which doesn't.) But, the point is that what "seems likely" for the last few years, if you were to listen to the pundits, was movement in one direction or the other, not idling along in neutral like we've actually been doing. It's only been very recently, I think, that the right has given up on the idea that we're going to get massive inflation our of our borrowing and money-printing.
toomuchtodo 11y ago
So a steady state economy?