Jeffrey Frankel on QE2, Inflation Hysteria and Actual Facts

Recalling President Reagan’s statement, “Facts are stupid things”, it’s no surprise that the disinformation campaign arguing that the Fed has been pressured into engineering a bout of high inflation continues. Jeffrey Frankel helps bring some facts to the table. From “The pot again calls the kettle red: Republicans, Democrats, the Fed and QE2″.

If the National Journal and Wall Street Journal are right that the Republicans are trying to stake out a position that Democrats are pursuing inflationary monetary policy, they are on very shaky ground. I will leave it to others to make the important point of substance: how low is the risk of excessive inflation now compared to the risk of alarming Japan-style deflation, with the economy having only begun to recover from its nadir of early 2009. Or to acknowledge that QE2 — the Fed’s new round of monetary easing — is only a second best policy response to high unemployment. (Fiscal policy would be much more likely to succeed at this task, if it were not for the constraints in Congress.)


I will, rather, respond to the partisan content of the National Journal’s question by pointing out some insufficiently understood history:


  1. Republican President Nixon successfully pushed Fed Chairman Arthur Burns into an excessively easy monetary policy in the early 1970s — leading to high inflation which the White House tried to address with wage-price controls. Nixon, of course, also devalued the dollar, and took it off gold, thereby ending the Bretton Woods system.

  2. Republican Presidents Ronald Reagan and George H.W. Bush repeatedly tried to push Fed Chairmen Paul Volcker and Alan Greenspan into easier monetary policy. This is documented in Bob Woodward’s 2000 book Maestro. The White House succeeded in making life unpleasant enough for inflation-slayer Volcker that he eventually asked not to be reappointed, prompting James Baker to exult “We got the son of a bitch!” (p.24).
  3. Democratic Presidents Jimmy Carter and Bill Clinton are the two presidents who have refrained from pushing their Fed Chairmen (Volcker and Greenspan, respectively) into inflationary monetary policy.
  4. Under Republican President G.W.Bush, monetary policy once again became excessively easy, during 2003-06, contributing substantially to the housing bubble and subsequent crash.

The entire post is here.


My previous post regarding actual inflation expectations data is here. The Philadelphia Fed Survey of Professional Forecasters reports today:

Forecasters Reduce Projections for Inflation, but See Little Risk of Deflation


The current outlook for the headline and core measures of CPI and PCE inflation during the next two years is lower than it was in the last survey. Over the next 10 years, 2010 to 2019, the forecasters expect headline CPI inflation to average 2.3 percent at an annual rate, down from 2.4 percent in the last survey. The 10-year outlook for PCE inflation of 2.11 percent is slightly lower than that of the last survey.

Regarding the open letter to Bernanke published in the WSJ (here), advocating a cease and desist of QE2, RTE is careful to note that not all of the signers have degrees (either graduate or even undergraduate) in economics or finance; this is not so clear in this WSJ article.


Update1: From RTE, the truth comes out:


Rep. Mike Pence of Indiana, a top House Republican, said he plans to introduce legislation Tuesday to end the Federal Reserve’s dual mandate, which requires the central bank to balance both employment and inflation concerns in its monetary policy.

Update2, 5:45pm Pacific 11/15/2010


Here is an update on inflation expectations. From the gap between the nominal and TIPS yields:


inflfear1a.gif

Figure 1: Difference between 10 year constant maturity Treasury yields and corresponding TIPS yields (blue), and difference at 5 year constant maturity (red), daily frequency. Source: FRED II, and author’s calculations.

And here is the just-released survey based measures from the Philadelphia Fed:


inflfear2a.gif

Figure 2: Median expected 10 year CPI inflation (blue) and 1 year CPI inflation (red). recession dates shaded gray. Quarterly observations pertain to mid-quarter month. Source Philadelphia Fed Survey of Professional Forecasters, NBER, and author’s calculations.

Ten year average expected inflation is 2.2!


Update, 2:15pm Pacific, 11/17: Reader Steve writes:

Do any of you folks use the grocery store? Is anybody looking at the price of the raw commodities that go into goods that will be produced? The working class is already experiencing inflation at at 4-5% rate, probably will peak out at 12-14% for 2 years. …

My answer is, yes, I go to the grocery store. And here is the inflation for the food and beverage CPI component.


foodbev0.gif

Figure 3: 12 month inflation for food and beverage component of CPI (blue) and month-on-month inflation, annualized (red), both seasonally adjusted. Source: FRED II

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44 thoughts on “Jeffrey Frankel on QE2, Inflation Hysteria and Actual Facts

  1. Steven Kopits

    Yes, I think Frankel correctly summarizes the situation, and also provides insight into why independents deserted Bush–not because they thought the system wrong, but because they felt it was poorly run (AIG, Lehman, Iraq, subprime mess, interest rates, etc.).
    I believe the Obama administration incorrectly interpreted disatisfaction with execution with dissatisfaction with the system as a whole. Independents just wanted basic competence, not socialism. Hence the rebuke.
    Further, if you want to blame Bush II, are you not primarily blaming the head of the Fed at the time, ie, from June 2005, Ben Bernanke? Are you not suggesting that Bernanke was unable to hold a hard line that was visibly necessary at the time? And if so, are we convinced of his resolve now, or do earlier biases remain? Does the Fed still have the easy money bias which materially contributed to the financial crisis?

  2. Phil Rothman

    I think Jeffrey Frankel’s point #4 (‘Under Republican President G.W.Bush, monetary policy once again became excessively easy, during 2003-06, contributing substantially to the housing bubble and subsequent crash’) is gratuitous. Let’s assume that, during 2003-2006, US monetary policy was indeed ‘excessively easy.’ Does Prof. Frankel truly believe that Pres. G.W.B. had anything to do with that? I seriously doubt it.

  3. flow5

    Chinn, your right, its dis-information, i.e., propaganda. I.e., we live in a predatory world.
    Take for example, as of 11/11/10, China’s central bank has let m2 explode at a 19.3% y-o-y rate, m1 at a 22.1% annual rate, & currency at a 16.6% annual rate. So this is much much greater than anything that will ever come from the U.S’s QE2.

  4. David Pearson

    I have little admiration for some of the WSJ letter’s signatories, even one with an economics degree (“Dow 36,000″ comes to mind). Probably many of them supported the “extended period” of low rates in 2003-2004.
    Notwithstanding the above, I looked for signs of “inflation hysteria” in the letter. Unfortunately, I was not able to find these. Perhaps someone who is concerned that the Fed’s actions “will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy,” is automatically in need of a calming substance.

  5. rayllove

    Steven,
    You are so close to finding another piece of the puzzle. Bernanke is the kid with great hands who tries too damn hard and thus tends to drop the ball; but, you as the coach know that he has a gift so in the big moment you call his play. We are at that point in the game that we do not know if he will catch the ball, or not? He is our guy though, no question about that. Obama and the others are just blocking, rather poorly, but the ball is in the air.
    (See previous post to find out how the game ends).
    (Some premature ejaculation involved with this post).( But then who is actually paying any attention to the conversation?)

  6. don

    I think we may well have been better off if the Fed has been charged all along with only price stability. At present, though, there is no inconsistency between the two goals, as we face both deflationary pressures and high unemployment. So Pence’s legislation would seem unnecessary. Unless the risk of sudden high inflation were real. But does anyone see this as even remotely likely?
    Japan never had very high unemplyment (if I recall correctly, it reached only half our current level). I would settle for their experience, even with their ‘alarming’ deflation.

  7. Bob_in_MA

    “Rep. Mike Pence of Indiana, a top House Republican, said he plans to introduce legislation Tuesday to end the Federal Reserve’s dual mandate…”
    How truly bizarre. If someone told you in 2007, unemployment would be 9.6% three years from now and a prominent member of EITHER party would be calling to end the dual mandate, wouldn’t you have laughed in their face?

  8. Bruce McCullough

    Frankel notes: “Democratic Presidents Jimmy Carter and Bill Clinton are the two presidents who have refrained from pushing their Fed Chairmen (Volcker and Greenspan, respectively) into inflationary monetary policy.”
    This is selective reporting or a conveniently poor memory – remember the first Fed chairman who served under Carter: G. William Miller. Carter had no need to push for an inflationary policy, because Miller had already provided one, under which interest rates hit all-time highs.

  9. ppcm

    Economics may never be coming close to a science but just social gathering,if continuously entangled in politics.
    It may not be useful to escape the facts and data.
    The facts are legislators, have addressed the separation of duties and powers.The facts are, legislators have ascribed responsibilities to central banks.
    The facts are Central Banks did not comply with their obligations.Central banks are given the duty to supervise the banking industry and they did not.
    In Europe the case is straightforward the ECB has a mandate the inflation that is price stability.The domestic national banks have a duty to supervise their domestic banking system.The sum of the parts must converge towards the preservation of the payment system.The rest is for the forensic experts to conclude.

  10. rayllove

    As for this:
    ‘Regarding the open letter to Bernanke published in the WSJ (here), advocating a cease and desist of QE2, RTE is careful to note that not all of the signers have degrees (either graduate or even undergraduate) in economics or finance; this is not so clear in this WSJ article.”
    I find this passage very confusing. The geniuses ‘with’ degrees are more responsible for the mess we are in than any other group by leaps and bounds. So are “signers” without degrees a positive or a negitive?
    Or, is a ‘signer’ someone who makes signs?

  11. Jan

    Pence’s legislation is what we’ve come to call “politics.”
    It is obvious from their public rhetoric, and even more so from their private conversations (if you are so lucky), that nearly all contemporary Republican politicians, and way too many Democrats, don’t much care about the quality of public policy. They’re consumed by their status contest. In this contest the principal status markers are elected office and private consumption. To rise to higher status, the politicians must practice long and hard strutting before the voters and fawning before the money. The genius of Pence’s legislation is that it is strutting and fawning both.

  12. fresno dan

    Speaking of actual facts, I agree with raylove – one thing I can’t stand about economists is in a system of thousands, if not millions of variables, they take one to make some kind of pointless point. Japan has had less unemployment over the last 20 years compared to the US in every year save one. The Japanese live longer, have less crime, great health care, and a high standard of living.
    Yet it is SUPPOSEDLY liberal economists who constantly bitch and moan about Japan’s “lost” decade – a mindless, ridiculous obsession with GDP not only going up, but going up by some completely arbitrary amount. By what criteria do economists think Japan is worse off than the US???

  13. Ted K

    I look at 3 major factors:
    ONE) A huge percentage of individual investors have exited the market, even closed their 401k’s.
    TWO) It seems from my little knowledge of it, a lot of the “QE” stays in the bank reserves and never gets lent out.
    THREE) On top of this you have 10.5% inflation at the very best. Looking at high teens with a better measure.
    Assuming we don’t have price shocks coming out of the Middle East I’d like to know where in the hell this inflation is going to come from??? I agree with Menzie. Not because I am as good with numbers and graphs and as highly intelligent as Professor Chinn is, but I think a certain amount of common sense can tell us this (I’m not saying that the economic analysis isn’t useful, I think the information and analysis above is highly useful. Just saying I think some common sense supports that view).
    This is an outstanding outstanding post Professor Chinn, one of your better ones. I also like the Frankel link. Great stuff. You keep this up I won’t even be popping into Krugman anymore. Hope you’ll keep us vigilantly updated on the inflation picture when you’re not busy with teaching duties.

  14. Ted K

    I obviously meant to say (I hope it was obvious) 10.5% unemployment in my above comment, not inflation. I would guess a flat 2% inflation to the end of 2012, but that’s just a wild guess.

  15. rayllove

    The Frankel piece is yet another example of how our national debate has become so delusional that the analysis is surreal. This for example:
    “Under Republican President G.W.Bush, monetary policy once again became excessively easy, during 2003-06, contributing substantially to the housing bubble and subsequent crash.”
    Now don’t get me wrong here, I see G.W. for the idiot that he is, but how does an entire article about interest-rates during this period not include the influence of foreign inflows and leverage ratios? The whole dem/repug blame-game is seemingly a contest to see who is better at misleading the pubic with half-truths and nonsense.
    And always a touch of hypocrisy:
    “Perhaps such accusations will strike some who don’t pay close attention as superficially plausible, even after all these years”
    In an article referencing the ‘pot and the kettle’, “superficially plausible”, in an article that ignores the central role of recycled dollars and reserve currency hegemony and the attached global capital-formation objectives. As if the US agenda through this period had no concerns outside of its borders when in fact the US role has everything to do with global objectives regarding capital formation and global allocations. Surreal.

  16. Ricardo

    In light of our recent discussion on gold let’s look at mercantilist Frankel’s comments.
    1. Republican President Nixon successfully pushed Fed Chairman Arthur Burns into an excessively easy monetary policy in the early 1970s — leading to high inflation which the White House tried to address with wage-price controls. Nixon, of course, also devalued the dollar, and took it off gold, thereby ending the Bretton Woods system.
    Basically true but insufficient since the excessive money creation by the UK under the Bretton Woods system was exposed by Charles de Gaulle years before Nixon. Of couse Nixon was a fool to close the gold window and then try to resist the results with wage and price controls.
    2. Republican Presidents Ronald Reagan and George H.W. Bush repeatedly tried to push Fed Chairmen Paul Volcker and Alan Greenspan into easier monetary policy. This is documented in Bob Woodward’s 2000 book Maestro. The White House succeeded in making life unpleasant enough for inflation-slayer Volcker that he eventually asked not to be reappointed, prompting James Baker to exult “We got the son of a bitch!” (p.24).
    The economic conditions during Reagan’s administration and that of Bush were totally different. Frankel appears to believe that the mercantilist solution should be the same regardless of conditions.
    Reagan introduced the largest tax reduction in our nation’s history. The result was that the price of gold fell from above $800/oz in 1980 to below $400/oz in 1981. That was a clear message that the reduction in the money supply needed to be reversed. But Volker was following the “Ms” rather than the price of gold so he believed that tight monetary policy was needed. The result was recession. Not until Volker was forced to abandon the Ms during the Mexican peso crisis did the economy and the dollar become stable.
    G.H.W. Bush, also a mercantilist, believed that Quantitative Easing would bring prosperity. The price of gold under Greenspan was relatively stable and Greenspan at that point knew that his monetary policy was correct. Bush pushed him to inject money to pump the economy for his reelection campaign. Greenspan correctly held the currency stable against gold.
    3. Democratic Presidents Jimmy Carter and Bill Clinton are the two presidents who have refrained from pushing their Fed Chairmen (Volcker and Greenspan, respectively) into inflationary monetary policy.
    Carter used inflationist FED chairman Miller in an attempt to use QE to cure the economic stagnation of the late 1970s. Against his wishes he was forced into putting monetarist Volker in as FED chairman. Volker changed from an inflationist policy and interest rate methodology to a monetarist “M” supply methodology. Volker held to a tight monetary policy against the wishes of Carter and the result was a decline in inflation and decline in the price of gold. see 2 above.
    Clinton attempted to push Greenspan into quantitative easing but Greenspan have been too successful and held too much power so Clinton backed off. This was smart because the stable price of gold during the early 1990s allowed the economy to boom.
    4. Under Republican President G.W.Bush, monetary policy once again became excessively easy, during 2003-06, contributing substantially to the housing bubble and subsequent crash.
    Bush second tax cut generated positive economic activity and countered much of the quantative easing of the Bush/Greenspan era. In 2006 all restraint broke down as the Republicans were rightfully thrown out of congress, but the Democrats made an absolute mess of things and mercantilist Bush destroyed the economy by allowing Henry Paulson to throw $800 billion into a contracting economy. That precipitated the economic decline that we still have not crawled out of.

  17. Menzie Chinn

    Matt: Thanks, link fixed.

    Phil Rothman: I think Professor Frankel’s point was that if one were to criticize the Democrats as pressuring the Fed toward easy money, then the evidence is in favor of easy money regimes occurring during Republican presidencies.

    David Pearson: The second line of the letter reads: “The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.” I find this a remarkable statement when unemployment is nearly 10 percent, long term unemployment is at record levels, and the output gap is, by the CBO’s estimate, in excess of 6 percentage points of GDP.

  18. Menzie Chinn

    Ricardo: In your last statement:

    Bush second tax cut generated positive economic activity and countered much of the quantative easing of the Bush/Greenspan era. In 2006 all restraint broke down as the Republicans were rightfully thrown out of congress, but the Democrats made an absolute mess of things and mercantilist Bush destroyed the economy by allowing Henry Paulson to throw $800 billion into a contracting economy. That precipitated the economic decline that we still have not crawled out of.

    Absolutely nothing makes sense to me. What quantitative easying under Bush/Greenspan era? What $800 billion did Hank Paulson throw at the economy. Are you confusing TARP with ARRA (TARP was only $700 billion, and not all disbursed even by the end of the Bush Administration). You really should consult some data. You might also wish to consult a dictionary that provides a definition of quantitative easing — I suspect you might be using an (incredibly) idiosyncratic definition.

  19. Rich Berger

    I was curious about your sly reference to a Reagan speech, and found the text in question:
    “Before we came to Washington, Americans had just suffered the two worst back-to-back years of inflation in 60 years. Those are the facts, and as John Adams said, “Facts are stubborn things.” Interest rates had jumped to over 21 percent, the highest in 120 years, more than doubling the average monthly mortgage payments for working families — our families. When they sat around the kitchen table, it was not to plan summer vacations, it was to plan economic survival. Facts are stubborn things.”
    I would be curious to know if Reagan said “stupid” twice, once or not at all – does an audiotape exist? I think that the listeners to the speech would understand what he said, given the context. When you quote it in isolation, you make it seem like Reagan was just being stupid. Reagan was actually a very astute man, as anyone who has taken the time to read his diaries and radio scripts would know.
    I wonder if they still make those t-shirts with Reagan’s likeness on them and the motto “I remember when we had a real president”. I’m fixin’ to buy one, y’all.

  20. David Pearson

    Menzie,
    Apparently anyone who believes inflation is possible under an output gap has taken leave of their senses.

  21. Menzie Chinn

    Rich Berger: I don’t need an audiotape, as I am old enough to remember when it happened, and when it was reported on the news. I regret that I do not have time right now to hunt up the elctronic resource so that you can verify for yourself.

    David Pearson: Sure, you can have inflation at the same time as a negative output gap if expected inflation is high enough (perhaps due to lagged inflation, as in the adaptive expectations hypothesis), or if there is a supply shock (as in oil prices jumping). The handout laying out the algebra is here if you care to read it. What is required is (i) either Z is large (perhaps due high energy intensity of the production sector), or the energy inflation rate is high, or both; or (ii) the output gap is fairly small in absolute value terms, and (iii) the f(.) function assumes a low high response to the output gap.

    Note that even if Z > 0, then if the output gap is sufficiently negative, then inflation can still be muted, or even negative.

    I agree if for instance the Straits of Hormuz were closed off, then it would be possible to get rapid inflation, even with a large negative output gap. Is that your premise. If so, I would venture to say that inflation at that juncture might be the least of our problems.

  22. Menzie Chinn

    David Pearson: And what was world real GDP doing in mid-2008? What was the output gap in the advanced economies in mid-2008? Oil prices are partly endogenous. With China and the US going full tilt, I kind of expect oil prices to go that high. With the US undergoing lackluster growth and China trying to restrain GDP growth…well, I’m looking for an exogenous shock to push Z to the requisite levels.

  23. David Pearson

    Menzie,
    As far as I know the static level of an output gap does not affect commodity price changes. Otherwise, of course, we would not have been able to generate inflation in 1934.
    The irony, of course, is that the Fed wants to raise inflation expectations in the presence of a large output gap. The argument is not whether inflation will rise despite high unemployment — the argument is by how much. Apparently it is rational to expect inflation expectations to rise “some”, but hysterical to expect them to rise “a lot”. Those hysterics probably expect the bulk of the rise in expectations to come from commodity and import prices, at which point the Fed will do nothing to stop a headline inflation overshoot.

  24. Phil Rothman

    Menzie: While I would welcome contrary evidence, I think Prof. Frankel would be hard-pressed to demonstrate that, whatever other items might be on his list of sins of omission and commission, the G.W.B. administrations pressured the Fed to run an easy monetary policy (as the record clearly shows both the Nixon and Reagan administrations did); indeed, my non-specialist’s knowledge of the historical record leads me to think Prof. Frankel should have included G.W.B. in his item #3. We are well familiar with the distinction between correlation and causation, and if some believe it’s useful to point out the positive correlation between G.W.B. being in office and monetary policy during the 2003-2006 period, ok; but I’m not really sure how this helps out epistemologically. Ted Truman’s 11/15/10 NATIONAL JOURNAL ‘The Debate is Off Key’ entry strikes me as being on target.

  25. Menzie Chinn

    Phil Rothman: Professor Frankel’s point 4 did not state that G.W. Bush pressured the Fed. All he stated was that monetary policy was easy during this particular Republican regime. The key insight is that easy money does not seem to have occurred during Democratic administrations (contrary to some recent assertions) — no more, no less.

  26. Menzie Chinn

    David Pearson: Sure, if you calculate annual year-on-year changes relative to the nadir of the price level, you get that number (although the 1.5% 12 month inflation figure is correct). Note the annual rate of inflation, year-on-year, in 1931, 1932, and 1933 was -8.9%, -10.3%, and -5.2%. Given that annual industrial production rose 18% in 1933 (year-on-year), I’m not surprised that prices actually rose in 1934.

  27. Steve Verdon

    Recalling President Reagan’s statement, “Facts are stupid things”….

    From your link:

    Reagan was quoting John Adams’ well-known quotation, facts are stubborn things. He certainly knew the correct words–it was a simple misstatement–but it makes a funny quote in its own right. [note by Michael Moncur, November 30, 2004]

    Maybe you should not put in such links lest your own credibility be damaged Prof. Chinn.

  28. Menzie Chinn

    Steve Verdon: I link the sources because I think full disclosure is important — something that not all people adhere to. I’d read that text, and I suspect this point was too subtle for you too understand — I kew it was a mis-statement, but I was trying to note the fact that this was probably a Freudian slip. This is, after all, the man who believed that trees created more pollution than human activity.

    So I don’t count my credibility as damaged; rather I have a revised assessment of your ability to understand subtext.

  29. Phil Rothman

    Menzie: With all due respect, my inference from what Prof. Frankel wrote is not that ‘easy money does not seem to have occurred during Democratic administrations (contrary to some recent assertions) — no more, no less’; and such an assertion would not be consistent with, e.g., G. William Miller’s 1978-79 tenure as chair of the Fed (for what it’s worth, from my reading of the record, I do not think the Carter administration was responsible in any way for the easy monetary policy of that period) and the mid-1960s Martin Fed period (Johnson administration pressuring of the Fed ‘while our boys are dying in Viet Nam’ is well known). Indeed, nowhere in his piece does he mention that easy money has not been a feature of Democratic administrations.

    But back to his point #3: the emphasis appears to be (as direction quotation suggests) that ‘Democratic Presidents Jimmy Carter and Bill Clinton are the two presidents who refrained scrupulously from pushing their Fed Chairmen (Volcker and Greenspan, respectively) into easier monetary policy’; please note that he wrote ‘THE TWO presidents’ (my emphasis), which arguably implies that no other president is a member of this set. In a piece titled ‘The Pot Again Calls the Kettle Black,’ my sense is that it’s reasonable to take note of the explicit absence of Pres. G.W.B. in point #3 and ask: In exactly what sense was the G.W.B. administration being hypocritical (as the title and absence of G.W.B. in #3 would appear to insinuate) in this respect? Is this absence incidental or more explicit? Perhaps Prof. Frankel simply erred wrt G.W.B. and inadvertently made a mistake? Or something else?

    Presidents of both parties have made what, by modern standards, can readily be identified as egregious attempts to pressure the Fed. Prof. Frankel’s point #3 does not, IMO, sufficiently make the point that, over the past 18 years, both Democratic and Republican administrations have ceased doing so. To assert otherwise would seem to, as Prof. Frankel writes, ‘fly in the face of history.’

    Apologies for beating a possibly dead horse.

  30. Menzie Chinn

    Phil Rothman: Well, Greenspan says in his book that G.W. Bush did not interfere. Of course, he also says a lot of other stuff as well. In any case, Professor Frankel’s reasoning is in the linked-to Cato article; perhaps you can ask Professor Frankel if he’s got additional information on the subject.

  31. Steve

    Poster child for Menzie here:
    Do any of you folks use the grocery store? Is anybody looking at the price of the raw commodities that go into goods that will be produced? The working class is already experiencing inflation at at 4-5% rate, probably will peak out at 12-14% for 2 years. The local power company here just got an 11% rate increase approved. The dollar is down 11% since June.
    Hello! Anybody home?
    What a specious argument to blame different presidents for monetary policy. The problem is long term, so the solution is going to be long term. It starts with products people want being produced here, by workers who get paid to make the product.
    Alternative to the above is the California deal. Have the productive elements leave due to taxes, welfare, illegal immigration, corrupt judges, corrupt lawmakers and bloated Bureaucracies, then collapse in a socialist uptopia. I call it pass the joint economics! Now where is the fridge? (Fridge is defined here as the printing press.)
    Folks we need to fess up to the damage done and get the U.S. back in running shape!

  32. Menzie Chinn

    Steve: Why, yes, I do go to the grocery store. I am thankful you continue to read Econbrowser, and provide your very useful comments — you remain my poster child. See Figure 3 added to the post, which includes a time series plot of the food and beverage component of the CPI. It hardly looks like the numbers you are throwing around.Perhaps your consumption basket is more intensive in certain high inflation items. Perhaps it’s more loaded on beef than mine. Well, it is true that retail beef prices in October are 447.3, which is up relative to 413.7 one year ago — but then it is barely above what it was nearly two years ago (November 2008), at 443.3.

  33. aaron

    Sorry to beat a dead horse, but what about relative prices. Are prices down at Whole Foods and Trader Joes but up at Aldi etc?
    I suspect that there’s not a big difference. I expect the high end market prices to be stickier, as income inequality makes higher income households less sensitive to prices.

  34. Steve

    No I’m more of a fish, fruits and vegetables person. I have been putting in one new garden bed each year, goal of 6 producing beds) plus fruit trees and berry byushes. Perhaps it is only the cost of good food that is rising. We in the northern part of the state are tryin to survive without going to the stores because of, you guessed it, rising costs.

  35. westslope

    A single price stability or inflation targeting mandate would be an enormous step forward. As I believe don pointed out, radical monetary easing is still possible under such a regime. Bernanke and most Fed economists are all favourable from what I understand.

    Over on the fiscal side of things, a radical hike in gasoline excise taxes would be even more helpful at this point. Too many pundits are targeting OPEC as the ‘enemy’. It suggests that Americans are experiencing enormous difficulty understanding oil markets. It might be sectarian stupidity but it is still stupidity with all kinds of economic, security and environmental consequences.

  36. dave

    Reagan allowed Volcker to do his thing throughout the early 1980s, something that easily could have cost him re-election. I hardly think we can call him pro inflation.
    Carter ran very expansionary monetary policy leading up to the Volcker appointment at the end of his term. The majority of his term was a disaster on the inflation end and he had no choice but to fight it once in double digits.
    Bill Clinton passed laws that let the shadow banking system spawn, and let the Fed engage in bailouts like LTCM to help it grow. That’s an expansionary policy.
    LBJ got inflation rolling to help fund Vietnam.

  37. Menzie Chinn

    dave: Carter ran monetary policy? New one on me. Did Carter also run OPEC? Bill Clinton “passed” laws. I thought Congress did that. Finally, Reagan “allowed” Volcker to do his thing? You really have an interesting interpretation of economic history.

  38. olde reb

    QE2 — A RATIONAL COURSE OF ACTION–REALLY ???
    Pundits are reacting with aghast at Bernanke’s QE2. The purpose of QE2 is not for the benefit of society; it is a desperate act of self-preservation by the Federal Reserve.
    If the market is left alone, the value of mortgages held by the banks will continue to fall. When the toxic mortgages eventually have to be written to value, the assets of the banks will rapidly de-leverage—and the banks are obviously bankrupt. When the banks fail, the riots start and Congress–to make a show for the public–will have to point fingers at someone (other than themselves) and that will be at the Fed. If the man behind the curtain is exposed to scrutiny or an audit, all hell will break loose. The Fed will be like BCCI on steroids.
    We have to appreciate how the Fed receives phenomenal gain from T-securities—and the transfer of wealth from the citizenry to the financiers.
    Let us make sure we agree on how the Fed and Congress create printing-press fiat money via deficit spending. Congress grants a T-security to the Fed (asset) and the Fed credits the Treasury’s account (Federal Reserve Notes) as a liability. The checks written by the Treasury on that credit will then be honored by the check clearing procedure of the Fed. (Congress recently gave $700 billion in T-securities as TARP funds. Congress spent the money. The Fed swapped the T-securities for toxic MBS.)
    [Granted, this is a vast simplification of the process. The basic accounting by the Fed can be reviewed at 2009 Annual Report to Congress by the Board of Governors, from page 448 http://www.federalreserve.gov/boarddocs/rptcongress/annual09/pdf/ar09.pdf . Treasury accounting breakdown is accessible at http://www.fms.treas.gov/mts/mts0610.pdf .]
    Congress gets to spend the fiat money so created and the Fed holds the security and receives interest. When the security matures, the Treasury must redeem the security. The value of fiat money initially created must then be paid to the Fed and becomes gain. The “loan” has been repaid. The Fed has the entire value of the security as profit.
    The Fed has an acceleration option used for virtually all securities–it will sell the security. Arrangements are made whereby the Treasury acts as auctioneer. Primary Dealers are required to submit bids and usually about 90 percent of each new issue is sold. The operation is touted as the public buying securities from the Treasury. Upon maturity the Treasury redeems the security from the holder. The Fed, as owner, receives the (bid) value of the security upon the sale.
    [The Fed’s receiving the bid value is disputed by Treasury statements. Ref. http://www.forexpros.com/news/general-news/analysis-angry-us-bankers-seek-curbs-on-direct-bidders-118760. Treasury financial statements also claim “borrowing from the public” finances government operations. Direct borrowing from the public cannot, in any way, expand the monetary system or result in the creation of fiat money; i.e., inflation. The label is deliberatively misleading.]
    By either of the two methods, the Fed has received the value of the security. The total value of all issued T-securities becomes a gain for the Fed. Good luck on trying to follow this sequence in the accounting records. Even Enron, World Com, and Bernie were able to cook the books—and they were audited.
    The method used by Congress to fund the redeeming of the security, and the interest incurred, is beyond the scope of this writing. THINK—more T-securities. The economic scheme imposed by the Federal Reserve is a self-destructive Ponzi scheme predestined to inherent national bankruptcy. Any Ponzi scheme, including the Fed, cannot survive downsizing (i.e., deflation).
    Ref: Rip-off by the Federal Reserve, http://www.scribd.com/doc/43482648/rip-off-by-the-FR ;
    QE2–A Rational Course of Action ?? , http://www.scribd.com/doc/43465593/QE2-Rational-Course-of-Action
    Postscript: It is said QE2 is not lawful. The law, and the public, be damned. We are seeing the essence of government—POWER. And the origin of that power is in New York—not in Washington. Congress sold out the public in 1913 and in repeated legislative acts since then. Congress has danced to the tune of deficit spending; the piper is now being paid. Unfortunately, it is the public paying the price.
    PPS: Numerous writers have written that the Fed is printing money. (The actual “printing” of what are labeled Federal Reserve Notes is by the U.S. mint and sold to the Fed for the cost of printing—about 4 or 5 cents per Note—whether it reads $1 or $100.) QE2 involves purchases by the Permanent Open Market Operation which put money into circulation. The purchase power the Fed is using has been created by the humongous deficit spending (giving T-securities to the Fed) by Congress. The Fed cannot create money by itself. Ref. Rip-off by the Federal Reserve, http://www.conspiracyarchive.com/Blog/?p=3908

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