High Inflation at the Gates?

The Federal Reserve needs to raise interest rates to stave off inflation, says Rep. Paul Ryan, R-Wis. “I’m worried they’re not going to pre-empt inflation,” the House Budget Committee Chairman tells CNBC.

“I’m worried they’re going to see it too late and we’re going to have a problem.”

That’s a quote from February 2011. It’s useful, I think, to consider what has happened since then (or since October 2009). Figure 1 depicts three measures of three month annualized inflation, while Figure 2 depicts three measures of corresponding core inflation.


hysteria1corrected.gif

Figure 1: Three month annualized inflation, measured by CPI (blue), chained CPI (red) [corrected 7/18, 2:18pm], and personal consumption expenditure deflator (green). CPI chained measure is calculated using the nsa measure, logged and seasonally adjusted using additive factors over 1999M12-2012M06 period by author, then re-exponentiated to obtain levels, from which the inflation rate is calculated. NBER defined recession dates shaded gray. Source: BLS and BEA via FRED, NBER and author’s calculations.

hysteria2.gif

Figure 2: Three month annualized core inflation, measured by CPI less food and energy (blue), chained CPI less food and energy (red), and personal consumption expenditure deflator less food and energy (green). CPI chained measure is calculated using the nsa measure, logged and seasonally adjusted using additive factors over 1999M12-2012M06 period by author, then re-exponentiated to obtain levels, from which the inflation rate is calculated. NBER defined recession dates shaded gray. Source: BLS and BEA via FRED, NBER and author’s calculations.

Note that three month headline inflation is negative, while m/m is zero. Three month core rates are slightly higher, although there is some dispersion.


While current inflation is moderate, one could argue — as Representative Ryan has — that future inflation is the concern. Survey based measures indicate little movement.


01infpri-1.gif

Figure from M. Pasaogullari, “Survey measures of inflation expectations,” Economic Trends, July 2, 2012.

The five and ten year expected inflation rates are similarly unbudged. Finally, the Cleveland Fed’s measure of expected ten year inflation is near all-time lows.


All of this is just further confirmation of The Curious Persistence Of Inflationary Obsession.


More at Calculated Risk.

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42 thoughts on “High Inflation at the Gates?

  1. jonathan

    It is mind blowing, isn’t it? When I was in high school, we learned that one form of inflation is too much money chasing too few goods. (We learned this because we were being hit by the OPEC oil embargo so there was a lesson about cost-driven inflation.) It seems weird to me that people equate the existence of money with inflation; without the act of chasing, meaning demand exceeds the supply of those goods, there isn’t a cost increase. The low inflation we have is terrific evidence of a lack of demand – as is stuff like the vast pile of cash companies have in the bank.

  2. MacCruiskeen

    I do find it somewhat amusing that some of the people who are saying that the Fed’s QE programs are not creating inflation are at the same time saying that the Fed should create some inflation with more QE. So they are saying (yes, I’m looking at you, PK) that the inflationistas are wrong, but they want them to be right. I think one could make the argument, though, that at least the first round of QE was inflationary–to the extent that without it _deflation_ would have been much worse. Maybe Ryan & Co. would have wanted that.
    But the fundamental demand problem is that the QE isn’t getting any spendable money into the hands of the people who need it most.

  3. W.C. Varones

    Zimbabwe Ben must see something you don’t, because he’s awfully reluctant to launch QE3 even with 8% unemployment and sub-2% official inflation.
    Maybe he’s noticed that QE does a lot more for food and energy prices than it does for wages or employment.

  4. Rick Stryker

    Paul Ryan’s comments are taken somewhat out of context here. At the time, he was reacting to what looked like an improved economic outlook and was recommending that the Fed begin the process of hiking interest rates. Ryan wasn’t making an inflation prediction. Ryan also said at the time:
    “My fear is they’re going to try to mop up all this excess money after the cow is out of the barn, after the inflation expectations have been formed.”
    “Credibility and perception is everything when it comes to monetary policy, and my fear is sound money is secondary toward short-term employment growth. The irony of this is sound money is a necessary precondition toward sustainable economic growth.”
    Ryan was not alone in his view. Richmond Fed President Jeffrey Lacker was quoted at the same time as saying of QE:
    “The distinct improvement in the economic outlook since the program was initiated suggests taking that re-evaluation quite seriously.”
    “That re-evaluation will be challenging, because inflation is capable of accelerating, even if the level of economic activity has not yet returned to pre-recession trend.”
    Neither was making an inflation prediction.
    However, if you want to see a true inflation prediction gone seriously wrong, here’s a trivia question for you. Which two well known economists while at the Reagan Administration wrote a memo to Martin Feldstein in 1982 and predicted that inflation as measured by consumer prices would go up by 5 percentage points? Of course, we know what happened instead.
    Not sure? Here’s a hint: they are both stimulus advocates and one of them thinks the other’s stimulus was much too small. Still don’t know? Then follow this link:
    http://www.pkarchive.org/economy/KrugmanSummersCEAInflation1983Recovery090982.pdf

  5. Robert

    Rick–Menzie take a quote out of context to make a political point? You’re kidding. But then, ole Menzie does try to shill for Dems in musch the same way as the hack Krugman….

  6. 2slugbaits

    Rick Stryker Paul Ryan’s comments are taken somewhat out of context here. At the time, he was reacting to what looked like an improved economic outlook and was recommending that the Fed begin the process of hiking interest rates.
    I’m sorry, but that just won’t fly. GDP growth in the first quarter of 2011 was 0.4 percent. Now I’ll grant you that in Feb 2011 Rep. Ryan had no way of knowing that it would be only 0.4 percent, but 2010Q3 and 2010Q4 were both pretty weak as the stimulus started to fade. So just what was supposed to drive all this inflation?
    Ryan wasn’t making an inflation prediction
    If by that you mean he wasn’t giving us a definite number, then I suppose you’re right. But that’s trivial point. The language that he used was clearly intended as a warning of what would happen if the Fed didn’t “mop up” all of the excess liquidity. That sounds like a prediction to me. Well, the Fed didn’t mop up excess liquidity and we still don’t have inflation.
    Sure sounds like Krugman & Summers missed that call in 1982. Of course, so did a lot of folks. That’s exactly when all of the monetary aggregate relationships started to fall apart and the Fed switched regimes. Friedman’s favorite monetary aggregate M2 was growing at almost 13% throughout 1983. What would Rep. Ryan had said about that?

  7. Qin

    We need to be more like China then, right? Gigantic central or local government Keynesian stimulus economies. Yes, spendable money in the hands of. Like of California High Speed Rail. California High Speed Rail: It’s our ticket to the future!

  8. ppcm

    “It is common place today for monetary policy analysis, both in theory and practice, to be conducted without reference to the monetary base or other monetary aggregates” Fed St Louis
    There is no evidence of inflation in the Euro area 2.4 % official records and a confident reliance on the ECB, when it comes to the “inflation expectation” Please see the ECB monthly bulletin P 66.
    http://www.ecb.int/pub/pdf/mobu/mb201207en.pdf
    Pending the day inflation, will be granted with an accurate domain of definition, one may have to navigate between intellectual gyrations and data.
    Should inflation be triggered by excessive credit and loans, excessive money supply by independent central banks, then Please go to ECB Statistical Data Warehouse, (Money Banking and Financial Markets then MFI loans deposits loans and security by sector, then governments, then balance sheets items euro area, then monthly, then loans)
    The outcome will not deny the switch from Private GDP to a larger Public GDP (Econbrowser Fiscal stimulus, Pr Ramey paper Government Spending and Private Activity).Is it a confiscation of the private economies or a recognition of ill fated parameters or wrong calibrated parameters?
    The input prices, although not universally admitted in the domain of definition of inflation deserve a reference, please see denominated in SDR the IMF Primary Commodity Prices.
    http://www.imf.org/external/np/res/commod/Table1.pdf

  9. Ricardo

    Keynes told us, “In the long-run we are all dead.” What he didn’t tell us is that this is true because his short-run economic thinking was going to destroy us all in the long-run. In the short-run Keynes eats the seed corn. In the long-run we starve from lack of production.
    Inflation can be inconsequential or it can be devastating. The inflation after WWII was benign because policies were put into place to generate sufficient production to absorb the inflation. Inflation in the Weimar Republic was a disaster because the government continued to feed the beast as it consumed wealth and value.
    Ryan looks at our current economic environment and he sees the seeds of the Weimar Republic not American prosperity.
    There are few if any economists who do not believe that at some point the increases in the money supply engineered by the FED will lead to inflation. If not why are so may like Dr. Hamilton and Paul Krugman calling for more QE to create a level of inflation?
    Rather than criticize Paul Ryan it would be more productive to explain why with all the QE that has happened in the past 15 years the FED can’t achieve a 2% inflation as Dr. Hamilton desires.
    The truth is that Ludwig von Mises assessment of the Quantity Theory of Money was correct but modern monetary theory is trapped in a QTM-Milton Friedman mindset.

  10. ReturnFreeRisk

    This talk of impending inflation is hogwash. The economy is stuck in the mud. Unemployment is double digits (including those who have given up). Wages have not gone up in years. What inflation? I see inflation in political rhetoric, yes.

  11. jonathan

    I don’t see a reason to defend Paul Krugman: he’s an economist and an opinion writer not the leader of any political party or a spokesman for a group. He certainly doesn’t speak for me and I have often disagreed with him about what needs to be done. But I have a mind open enough to see that he’s been right about this crisis.
    As I remember, he’s said he was wrong about inflation in the 80′s and was wrong about what Japan should do. He revised his views, admitted his mistakes and moved on. I don’t see that happening with others who have been wrong. Inflation is always “just around the corner”, in an unintended echo of Hoover’s “prosperity is just around the corner.”
    In this case, I’ll admit to a bias against what Ryan says because his “plan” is not a plan in the same way that Romney’s tax plan is not a plan. He just says income tax receipts will stay the same but won’t say how. Romney goes further: he says he’ll close “loopholes” so not only will income tax receipts stay the same but they’ll remain the same across the economic spectrum. It’s total bullcrap. That this kind of utter garbage is being passed off as a plan by the party I’ve so often voted for makes me physically ill.
    So when Paul Ryan talks about inflation, I hear his dishonesty ring in my head. He was wrong about inflation. I’ve never heard him admit he’s wrong. That would raise my estimation of him.

  12. Dr. Morbius

    This is just another in a very long line of inaccurate predictions by Ryan. Ryan, by most accounts a legend in his own mind, has stated:
    That “repeated rate reduction” by the Fed “threatens to unleash inflationary problems that could hamper the economy for a very long time.” Wall State Journal, May 1, 2008.
    That “interest rate cuts have persisted in the face of rising prices.” Press release May 1, 2008.
    That “dramatic rate cuts since last fall have pushed oil prices to new highs and stoked inflation.” Milwaukee Journal May 4, 2008.
    That “inflation. . .represents the key risk to the economy over the medium and long term.” The Journal Times, October 16, 2009.
    That “as the Fed pushes money out the door,” that “the longer term effect may be inflationary.” Wall St. Journal, Nov. 20, 2010.
    That quantitative easing “risks higher inflation and a depreciated currency.” joint article with John Taylor , Investors, Nov. 30, 2010
    In short, being dead wrong about inflation, the value of the dollar and the effects of Fed actions, is something of a profession for Rep. Ryan. He was, is, and will continue to be an utterly worthless fraud and charlatan.

  13. DWT

    We should be asking how can we do better than Japan. It took 5 years after their housing bubble pop before deflation set in and now 18 years later they have the same problem.

  14. Ricardo

    jonathan wrote:
    The low inflation we have is terrific evidence of a lack of demand – as is stuff like the vast pile of cash companies have in the bank.
    Okay, but the question that must be answered, one that is usually not even asked, is why is there a lack of demand? Keynes doesn’t even address this question. He jumps right to taking money out of the productive economy and replacing the lack of demand with government spending.
    But if you don’t answer the question of why, how do you know the government is spending on the right things? This is another question Keynes doesn’t answer – or better – he answers it as “it dosn’t matter.” It can be digging holes then filling them up again for that matter.
    But common sense tells us mindless spending is wasted spending. Keynesians are the only ones I know who believe that mindless spending is a benefit.

  15. joe

    Ricardo,
    Keynes certainly does address the cause of a liquidity trap (money piling up in spite of low interest rates).
    Keynesians certainly do distinguish productive use of tax payer’s dollars from wasteful use of tax payer’s dollars.

  16. ppcm

    The “non financial” corporate savings should be put in perspective:
    The Fed St Louis non financial corporate savings and non financial corporate debts
    The Fed Cleveland corporate debts “Is Debt Overhang Causing Firms to Underinvest”
    Ft Alphaville may as well provide for a perspective on the break down of the corporate cash,not a random walk. “A US corporate cash update”
    Same information for European companies not so easily available but ECB warehouse data may help.

  17. Joseph

    Once again The World’s Greatest Moral Monster, Ben Bernanke, has testified before congress that yes, the Fed is undershooting both of its mandates, and yes, the unemployment situation is bad, and yes, the Fed has the tools at its disposal to improve the unemployment situation, but no, he will not use those tools because of a slight risk that it might harm the interests of his rich friends.
    Millions of lives are being permanently destroyed, but it is of little concern to Bernanke because those aren’t his people. His friends are doing just fine and that is all that really matters.

  18. endorendil

    Awesome. If I just didn’t need gas, healthcare or education for my kids, there would be no inflation. So if my pay actually rose, I’ld be better off.
    Avec des ci, on mettrait Paris dans une bouteille…

  19. Menzie Chinn

    Robert: How is the quote out of context. Rep. Ryan was worried about high inflation. He apparently continues to worry, regardless of the amount of slack in the economy. Please be more explicit in terms of your reasoning, as opposed to ad hominem attacks, if that is possible for you.

    Qin: I do not seem to recall prescribing the US government direct banks to increase private credit by 50%, as China did in 2009. Would you care to provide a slightly less hyperbolic, and more relevant, comment?

    Ricardo: Yes, inflation will result, just like the Japanese QE of the early 2000′s. Oh, oops, not quite…

  20. Dr. Morbius

    endorendil:
    I will give you credit for bringing in education and health care since generally opinions, such as you express, limit themselves to gasoline and food.
    However, you are wrong. According to the BLS statement just released gasoline is down 4.3% over the last year, Medical care is up 4.3% over last year, and Education is up 4.2% but because of the relative size of energy the increases net out to near zero.

  21. Jim Glass

    Being afraid of inflation in today’s economy is like being terrified of drowning in the middle of the Sahara Desert.

  22. 2slugbaits

    Ricardo Keynes doesn’t even address this question. He jumps right to taking money out of the productive economy and replacing the lack of demand with government spending.
    Huh? Excuse me, but one fof the reasons Keynes wanted the government to jump right in was precisely because money wasn’t being put to productive use. Income was leaking out of the economy and puddling in mattresses. Once again you’ve assumed away the problem. The problem isn’t that the government is putting money to unproductive uses, it’s that too many people want to save (e.g., in order to repair balance sheets), which drives down the interest rate. Once the interest rate hits the zero lower bound, and once banks start charging you a fee to deposit money, then people start “saving” money in vaults and mattresses. The income represented by those green pieces of paper leaks from the income and production flow.

  23. Ricardo

    Joe wrote:
    Keynesians certainly do distinguish productive use of tax payer’s dollars from wasteful use of tax payer’s dollars.
    Okay, so you agree with Keynes that digging holes then filling them back up is productive work. I can’t argue with that.

  24. Ricardo

    Slug,
    Great demand theory answer. The government always knows that saving is an unproductive use of money and the government always spends money better than the people who actually earn it. Why would we ever think the government would actually waste our money?
    Let me paraphrase your idea to make sure I have it right. When the economy crashes people have no reason whatsoever to save. The only reason they are not out there spending like maniacs is because they are stupid, and because they are stupid and because the people elected to a position in government are suddenly transformed into brilliant consumers, these brilliant government people must step in and take the savings of the stupid people, then pay people to dig holes then pay more people to fill them back up. Or better give the money to “green” energy companies so they can the political donors can make big salaries right before the company goes bankrupt.
    Now what in the world could be wrong with that?

  25. jonathan

    2slug, I don’t bother responding to the inaptly named Ricardo – unless it’s a reference to Ricky Ricardo (Babalu!!) – but to add to your point, we see a huge dumping of money into mattresses now. The amount of money held by corporations, per the WSJ is:
    “Nonfinancial companies held more than $2 trillion in cash and other liquid assets at the end of June, the Federal Reserve reported Friday, up more than $88 billion from the end of March. Cash accounted for 7.1% of all company assets, everything from buildings to bonds, the highest level since 1963.” 9/17/2011. This is money held in the US.
    A more recent Fed Funds survey shows somewhere north of $1.7T in liquid assets on hand in the US. Reuters says that if you look at what US companies have worldwide, it’s about $5T.
    Why? Lack of reason to invest, lack of reason to hire, lack of reason to spend, so they pile up money. Lack of demand feeds lack of supply.

  26. 2slugbaits

    Ricardo No, you have not correctly summarized my argument. Try again. But first let me help you out. First, stuffing green pieces of paper in a vault or mattress is not “saving” in any meaningful sense of the word. If you take $10 and spend $9 on an airport beer that leaves you with $1 (and if you haven’t traveled lately, that’s pretty much the going rate). If I then take that $1 and put it in the bank, and the bank then lends that $1 to somebody who wants to expand a brewery, then my $1 has truly been “saved.” But if I stuff the $1 bill in my coat pocket and forget about it for a year, then as far as the economy is concerned I haven’t exactly saved $1. Sure, a year later I have another dollar, but in terms of the economic flow model it’s no different from burning that $1 bill and then a year later creating a perfect counterfeit. Money stashed in a vault or a mattress or my coat pocket earns a zero percent return. That’s what happens to the marginal dollar in a liquidity trap. Worse yet, people are eagerly lining up to earn a negative real return on 10 year Treasuries. Even a government project that earns a 0.00001% return is still better than one with a negative return. And Keynes never recommended that we pay people to dig holes and fill them up; he simply pointed out that it was less wasteful than allowing money to leak out of the income flow.
    And as I pointed out to Bruce Hall yesterday, private investors should be risk averse, but the government should adopt a risk neutral stance with respect to public goods investments.

  27. Rick Stryker

    2slugbaits and Menzie (since you disputed with Robert, who agreed with me that this Ryan article is out of context),
    Paul Ryan was not predicting that inflation is around the corner or will necessarily follow given current monetary policy. Instead,
    he was making some rather sophisticated arguments that you don’t usually here from a politician, arguments the nuances of which were lost in the summary article Menzie posted. The quotes from the article were taken from a discussion with Paul Ryan when he co-hosted Squawk Box on CNBC on Feb 08, 2011. You can watch the full video here:
    http://paulryan.house.gov/Multimedia/?VideoID=iWrjFJCj924
    Ryan was saying that he worries that given the enormous increase in excess reserves that have resulted from the Fed’s quantitative easing
    programs, when the economy does recover there is a great potential for the Fed to make mistakes during the unwind of the excess reserves, thus sparking inflation.
    Ryan calls for a normalization of monetary policy with some increases in interest rates, although in Ryan’s view monetary policy should still be very accomodative.
    Ryan makes the same arguments as Thomas Hoenig here:
    http://www.kansascityfed.org/speechbio/hoenigpdf/nabe-hoenig-10-12-10.pdf
    and even mentions that he agrees with Hoenig during the discussion. Ryan’s views in this discussion also echo what he wrote a few months earlier with John Taylor in this IBD article:
    http://news.investors.com/article/555234/201011301909/refocus-the-fed-on-price-stability-instead-of-bailing-out-fiscal-policy.htm?p=full
    Thus, to point that inflation has not accelerated over the last year or that expectations of future inflation have remained stable does not show that Ryan’s point is wrong. Ryan’s views imply
    that inflation could materialize if the economy recovers and if the Fed mismanages the excess reserve unwind. Ryan wants to reduce that risk. It’s true that market expectations suggest a common belief that the risk of this Fed mistake is small. However, that may reflect the credibility the Fed has built up over many years, a credibility that Ryan, Taylor, and others worry could be shattered if the Fed errs in dealing with an unprecedented situation.
    Nowhere in that video does Ryan predict that inflation will definitely occur however.
    Now let’s get back to Krugman, who is held up as being the rational observer who is pointing out the folly of the false inflation prophets such as Ryan.
    Krugman himself is a false inflation prophet.
    Jonathan claims that Krugman acknowledged his inflation error made in the early 80s. But that is false. Krugman wrote a blog post on his two big professional mistakes, which can be seen here: http://krugman.blogs.nytimes.com/2010/09/01/mistakes/
    Krugman did not mention his forecast that inflation would accelerate 5 percentage points as one of the two mistakes he confessed to. Moreover, just about a month ago Krugman pretended that Keynesians like himself always expected inflation to collapse in the early 80s, since that’s a prediction of the simple Keynesian model he believes in.You can read about it in this blog post: http://krugman.blogs.nytimes.com/2012/06/16/reagan-and-inflation/

  28. Menzie Chinn

    Rick Stryker: But implicit in Rep. Ryan’s concern is that recovery is incipient. That is, it’s a composite forecast. And it has proven wrong (in 2009, in 2011).

  29. Philip George

    comment about jonathan at July 17, 2012 03:37 PM
    I am glad you pointed out that the Austrian and Keynesian views on the linkage between money and inflation are actually identical.
    Where they differ is whether at present there is monetary expansion or contraction or nearly flat growth.

  30. Ricardo

    Slug wrote:
    Money stashed in a vault or a mattress or my coat pocket earns a zero percent return. That’s what happens to the marginal dollar in a liquidity trap.
    Once again I do love your comment. Yes, you do a good job of describing the concept of the Keynesian liquidity trap, but it is totally illogical. Money stashed in a vault, mattress or coat pocket is out of the money economy; the government cannot track it so the government cannot touch it. Money is stashed away specifically so that it will be out of the reach of the government.
    What supply theory teaches with the Laffer curve is that one of the reasons high taxes are destructive to an economy is that they force labor and money out of the money economy. Producers still produce but hidden from the view of the tax collectors. Money is exchanged under the table or labor is used in barter to avoid confiscation by government. Tax cuts generate more tax revenue because reasonable taxes make the monetary economy more profitable than the barter economy. Confiscatory taxes make the barter economy more profitable than the money economy.
    The Keynesian idea of taxing funds away from producers then redistributing it to hole diggers only reduces resources available to producers hindering production and deepening the economic crisis.
    The illogic of this Keynesian contraption of taking from producers to give to government to spend is that it does nothing to prevent the liquidity trap, actually exacerbating the problem.
    The error with the liquidity trap is not that it does not exist. The error is misdiagnosis of what it is. The liquidity trap is caused by the bust of malinvestment, the inability of lenders to find qualified borrowers and of borrowers to afford additional debt. Once the bust comes attempts at monetary fixes are useless.

  31. Ricardo

    jonathan wrote:
    …we see a huge dumping of money into mattresses now. The amount of money held by corporations, per the WSJ is:
    “Nonfinancial companies held more than $2 trillion in cash and other liquid assets at the end of June, the Federal Reserve reported Friday, up more than $88 billion from the end of March. Cash accounted for 7.1% of all company assets, everything from buildings to bonds, the highest level since 1963.” 9/17/2011. This is money held in the US.
    jonathan,
    You have got to be kidding. Do you really equate “buildings and bonds” to mattresses? You really need to talk to Slug on this. He understands that money invested is productive. See his earlier post. You really need to think deeper.

  32. Ricardo

    Menzie wrote:
    Ricardo: Yes, inflation will result, just like the Japanese QE of the early 2000′s. Oh, oops, not quite…
    Menzie,
    Do you not understand that the Japanese problem beginning in the late 1980s was actually a deflationary problem? The price of gold in yen simply crashed through the 1990s while the Japanese attempting to correct their slump by raising taxes and austerity. They have forgotten their own history and what allowed their amazing success in the 1950s (after WWII) when they dramatically reduced taxes year after year.
    The Japanese economic problem is totally different from the current US credit crisis. The Japanese have persisted in their Great Depression because their economists are following the policies that the US followed during our Great Depression. TheJapanese have proven that such policies can create an economic slump that will last for decades.

  33. Rick Stryker

    Menzie,
    I’d rather say that implicit in Ryan’s view is that the recovery is likely enough to be incipient. The Ryan/Lasker/Hoenig concern is that it’s very difficult for the Fed or anyone else to know just what the state of the economy is in real time and easy for inflationary pressures to build before they are apparent. As long as there is a reasonably good case that we are in the midst of a moderate recovery, Ryan wants to make a small incremental move towards normalizing monetary policy.
    If it turns out that the economy is weaker than expected, the costs are limited since policy is still very accomodative. But Ryan is much more concerned about the other mistake: waiting too long to normalize policy.
    On the day following the CNBC co-hosting, Ryan questioned Bernanke before his committee. Ryan pointed to the recent steepening of the yield curve and asked if that indicated building inflationary pressures. Bernanke answered that the steepening was more an indication of market expectations of growth, since the steepening was caused by real rate increases. But Bernanke was not willing based on that evidence and the better growth over 2010 to say it was time to begin normalizing policy.
    As you point out, given that growth subsequently sputtered, Bernanke’s judgment seems prudent and it would have been premature to follow Ryan’s prescription. But I think Ryan feels that the cost that would have been incurred would have been relatively minor. He’d rather risk making the mistake that he did in fact make rather than risk inflation accelerating. (Of course, you may well disagree that this cost would have been minor, but that’s another question)
    I agree that it’s a composite forecast but it’s more than that too. Where you come down on this question also depends on how you assess the relative costs and benefits of making either mistake –tightening too soon or waiting until it’s too late–and also where you come down on the larger issue of the Fed’s proper role.

  34. Dr. Morbius

    To Rick Stryker:
    The problem is not that comments from one article by Paul Ryan about incipient inflation may have been taken out of context; the problem is that Paul Ryan has, as I have shown above, repeatedly warned of the near-, middle-, and late-term threat of severe inflation, higher interest rates, and the decline in the value of the dollar relative to its trading partners since early 2008. The examples I quoted were drawn from Ryan’s own website! There are many more. There was even one instance where he warned against U.S. Treasury bond purchases (about the time of the ill-fated decision by Bill Gross to exit Treasuries). It’s been four years–where is the inflation, where are the higher interest rates, where is the decline of the dollar? Ryan has been wrong, wrong and wrong. But that doesn’t stop him. He keeps warning that inflation is a’coming, just you wait. Just how wrong do you have to be, just how poor do your predictions need to be before you admit he’s wrong and has a history of being so? Krugman’s analysis has guided my investment decisions for the past five years and let me tell you I’ll match my returns to the Ryan Portfolio anyday.

  35. 2slugbaits

    aaron If you put a dollar in the bank, the bank buys more treasuries.
    In other words, the market is signaling demand for more Treasuries. The 10 yr is bringing a negative real return. That’s because the supply of Treasuries is not large enough for the demand. Banks and investors bid up the price of Treasuries, which lowers the yield…all the way into negative territory. People and businesses are looking for safe assets in order to repair balance sheets, but there aren’t enough safe assets available. This is exactly what I mean when I point out that running larger deficits would provide people and businesses with the kinds of safe assets they need in order to repair balance sheets. Buying assets with a negative real return is not exactly saving; it’s more like dissaving.

  36. Rick Stryker

    Dr. Morbius,
    Your quotes are not forecasts from Ryan. Ryan is not a market pundit. He is a policy wonk. Ryan is a consistent opponent of activist monetary policy and an inflation hawk. So, given the unprecedented actions taken by the Fed, he spends a lot of time worrying about the potential risks and talking about them since activist monetary policy could, and I emphasize COULD, in his view lead to an acceleration of inflation.
    If you read what Ryan has written and watch his interviews, you’ll see that he’s not just some naive inflation doomsday prophet. He understands that the level of excess reserves could be an inflation risk at some point and he’s concerned that the Fed develop a credible and transparent unwind policy so it doesn’t happen. If you’ve watched his hearings, you’ll see that emphasized, with questions to Bernanke about whether the Fed has stress tested QE unwind scenarios. Ryan wants to change the Fed’s dual mandate to focus on inflation only and to transition to a more rule-based monetary policy.
    Ryan has not spent the last few years forecasting a big inflation that never came. Instead, he has been advocating for less activist monetary policy that will in his mind reduce the risk of inflation acceleration.

  37. aaron

    Banks have moved from investment to savings as a business model.
    As you pointed out, banks are buying negative value treasuries. An investment in government spending which does not produce value.
    They are simply avoiding losses.
    They borrow money cheap and lend money to the government that will be spent on negative present value projects, knowing that they will pay regardless of outcome.

  38. aaron

    I should have wrote “avoiding risk and minimizing losses”.
    Avoiding risk might not be quite right, otherwise they would be refinancing bubble mortgages.

  39. Brett Dunbar

    The closest thing to digging a hole and filling it in again is warfare. I don’t think anyone would deny the the Second World War had a massive stimulatory effect, even though the main use of the spending was actually destructive. The stimulus effect of putting money in the hands of people with a high marginal propensity to spend is independent of whether the activity you are paying them for is productive or not, you just get greater benefit if the spending is on something productive.

  40. Robert Weiler

    I don’t think there is any more danger of increased inflation of Paul Ryan’s mind than there is in the US economy. They both seem to be stuck at roughly the current size.

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