Fed chief warned on inflation target

[SSmith]

Re: Fed chief warned on inflation target

Alfred Eckes devotes an entire chapter to defending the Smoot-Hawley Tariff in his book, "Opening America's Market: U.S. Foreign Trade Policy Since 1776." If I remember correctly, Eckes argues that it was in some ways a tariff reduction, but that, in any case, it had little to do with causing or worsening the Great Depression. As the quote from Shiller suggests, the U.S. had significant tariff protection for its industry in the late 19th and early 20th centuries.

[Finster]

Re: Fed chief warned on inflation target

Want import prices to rise? Tax them. It's not as if the government isn't running deficits. Even if it wasn't, you could use the revenue to cut taxes on domestic production (income taxes) and make trade freer right here at home where we need it most. This would allow you to keep employment strong without cutting wages, and even increase after tax pay, making the American worker better off, not worse. Domestic production would increase, since the rewards for producing would increase. The cost of consuming foreign production would increase, helping to balance the current account deficits that threaten our economic future. You'd also decrease dependence on foreign oil. You'd decrease dependence on foreign funding for our deficits. As our deficits have gotten progressively worse, it’s the policy option that we haven’t tried.?

didn't we try this once? let me see.... smoot-hawley?

Not to address the mess we have now. In fact we've tried it for most of the history of the republic. It's only been in the past decade or two that we've been increasingly substituting import tax revenue for domestic production tax revenue. Not incoincidentally, it's been in the past decade of two that our currency account deficit has gone past the red line and we've gone from being a creditor nation to a debtor nation.

Smoot-Hawley is the same tripe that gets trotted out every time someone questions the globalist agenda promoted by the Wall-Washington Axis of Profit. It did NOT cause the Great Depression. According to Alan Greenspan (yes, the same one who ran the Fed for nearly twenty years), it was the Fed. He wrote in 1966 (http://www.321gold.com/fed/greenspan/1966.html):

... When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's...

Yale University professor of economics Robert Shiller has specifically addressed the putative connection between Smoot-Hawley and the Great Depression and totally debunked it. From Irrational Exuberance, pages 84-85:

... It is conceivable that the Smoot-Hawley tariff might have been expected to hurt the outlook for U.S. corporate profits. One could have thought that it might have been expected to benefit corporations, many of whom actively sought the tariff … other economists, including Rudgier Dornbusch and Stanley Fischer, pointed out that exports were only 7% of the gross national product (GNP) in 1929 and that between 1929 and 1931 they fell by only 1.5% of 1929 GNP. This hardly seems like the cause of the Great Depression. Moreover, they pointed out that it is not clear that the Smoot-Hawley tariff was responsible for the decline in exports. The depression itself might be held responsible for part of the decline. Dornbusch and Fischer showed that the 1922 Fordney-McCumber tariff increased tariff rates as much as the Smoot-Hawley tariff, and the Fordney-McCumber tariff was of course followed by no such recession...

[Tet]

Re: Fed chief warned on inflation target

In the hypothetical event the US attacks Iran, would there be a net flight to the dollar, or away from it? Where would gold be the next day? Would the Fed react overnight?

Pick another similar major event where the US gains international condemnation for its actions if you think Iran is completely impossible.

Simply announce that OPEC will start accepting Euro's for oil, that would be quite confusing for everyone until they figured out what happens when the Euro needs to create more currency to support oil sales. The Federal Reserve has accomplished it's goal, they've chased everyone who is no one out of the d0llar already. The bag has been officially passed and since the Federal Reserve is the one holding the d0llar bag, what the rest of the world is holding goes down and the d0llar heads higher. That's how the game is played. Uncle Buck had his heart attack and crashed well over a year ago. I started betting against Uncle Buck when he was at 110. The money has already been made on the short side, now it's the long sides turn. Until I can start printing my own money, I'm not betting against the Fed and the Fed certainly looks right now like they've just about got everybody betting the wrong direction, which is what they do best.

[WDCRob]

Re: Fed chief warned on inflation target

In the hypothetical event the US attacks Iran, would there be a net flight to the dollar, or away from it? Where would gold be the next day? Would the Fed react overnight?

Pick another similar major event where the US gains international condemnation for its actions if you think Iran is completely impossible.

[Tet]

Re: Fed chief warned on inflation target

I'm curious about whether the collective wisdom of iTulip thinks an all out attack by the US on Iran would trigger this panic?

I think the chances that Uncle Ben will slip up and say the market is a scam are higher than there being a tiny attack, a medium attack, a large attack or an all out attack on Iran.

[jk]

Re: Fed chief warned on inflation target

Depreciating the currency decreases real wages and makes labor cheaper. But just for the workers being paid in that currency. Foreigners' real wages are unaffected, so the depreciating currency appears to domestic consumers as "rising import prices".

In the run, it's a self-destructive policy. First of all, it's dishonest,

well, then the fed would never stand for it.:rolleyes:

since it relies on the Keynesian ruse of trying to fool people into thinking their wages are holding up when they're being cut. Second, it penalizes saving because the saver's dollars depreciate, and penalizing saving is not exactly what our consumption-heavy economy needs.

but it's exactly what our debt-heavy economy needs

Third, the amount of currency depreciation to rectify global imbalances is enormous, and the amount of inflation that would be required to deal with them with currency as the only tool would be catastrophic for the middle class.

:eek: - tell ben!

Want import prices to rise? Tax them. It's not as if the government isn't running deficits. Even if it wasn't, you could use the revenue to cut taxes on domestic production (income taxes) and make trade freer right here at home where we need it most. This would allow you to keep employment strong without cutting wages, and even increase after tax pay, making the American worker better off, not worse. Domestic production would increase, since the rewards for producing would increase. The cost of consuming foreign production would increase, helping to balance the current account deficits that threaten our economic future. You'd also decrease dependence on foreign oil. You'd decrease dependence on foreign funding for our deficits. As our deficits have gotten progressively worse, it’s the policy option that we haven’t tried.

didn't we try this once? let me see.... smoot-hawley?

[WDCRob]

Re: Fed chief warned on inflation target

"Ka" is happening in the housing sector of the finance economy. However, until a finance market "event" occurs that starts a selling panic in one of the many leveraged asset markets, we will not see a classic "Ka" asset deflation event, nor a dramatic Fed response.

I'm curious about whether the collective wisdom of iTulip thinks an all out attack by the US on Iran would trigger this panic?

[Finster]

Re: Fed chief warned on inflation target

That's the area which I was trying to address. If the dollar dropped 20%+, it would make little overall difference except in a very few segments.

It could be used for expectation control though, and I suspect that's what EJ is driving at... but I'm not at all certain.

Not only that, but the Fed may have to hike rates just to maintain the status quo in the dollar. Looked at the other way, we could get a sizable drop in the dollar if the Fed does nothing on rates. Imagine what may transpire if the Fed actually cuts!

Turning to another line of inquiry, can someone please address why we should be hoping for a "soft landing" in the first place? How did we leave terra firma to begin with?

[bart]

Re: Fed chief warned on inflation target

Third, the amount of currency depreciation to rectify global imbalances is enormous, and the amount of inflation that would be required to deal with them with currency as the only tool would be catastrophic for the middle class.

That's the area which I was trying to address. If the dollar dropped 20%+, it would make little overall difference except in a very few segments.

It could be used for expectation control though, and I suspect that's what EJ is driving at... but I'm not at all certain.

[Finster]

Re: Fed chief warned on inflation target

Can you develop the part about "limit unemployment growth by allowing import prices to rise via dollar depreciation" further? Why would generally rising import prices limit overall unemployment?

Depreciating the currency decreases real wages and makes labor cheaper. But just for the workers being paid in that currency. Foreigners' real wages are unaffected, so the depreciating currency appears to domestic consumers as "rising import prices".

In the run, it's a self-destructive policy. First of all, it's dishonest, since it relies on the Keynesian ruse of trying to fool people into thinking their wages are holding up when they're being cut. Second, it penalizes saving because the saver's dollars depreciate, and penalizing saving is not exactly what our consumption-heavy economy needs. Third, the amount of currency depreciation to rectify global imbalances is enormous, and the amount of inflation that would be required to deal with them with currency as the only tool would be catastrophic for the middle class.

Want import prices to rise? Tax them. It's not as if the government isn't running deficits. Even if it wasn't, you could use the revenue to cut taxes on domestic production (income taxes) and make trade freer right here at home where we need it most. This would allow you to keep employment strong without cutting wages, and even increase after tax pay, making the American worker better off, not worse. Domestic production would increase, since the rewards for producing would increase. The cost of consuming foreign production would increase, helping to balance the current account deficits that threaten our economic future. You'd also decrease dependence on foreign oil. You'd decrease dependence on foreign funding for our deficits. As our deficits have gotten progressively worse, it’s the policy option that we haven’t tried.

[jk]

Re: Fed chief warned on inflation target

Don't worry about it: dollar depreciation is accompanied by increased generation of credit which finances asset bubbles. This is almost inevitable today...I nominate commodities and tangibles as the next "Great Asset Inflation" pick.

commodities, tangibles and FOREIGN ASSETS. mutual fund flows last year were heavily weighted to overseas investments. if the fed lowers rates enough we can get a dollar-carry trade, borrowing in dollars and investing overseas for the income, the capital gains and the currency profits as the dollar continues to trend down.

[grapejelly]

Re: Fed chief warned on inflation target

Don't worry about it: dollar depreciation is accompanied by increased generation of credit which finances asset bubbles. This is almost inevitable today...I nominate commodities and tangibles as the next "Great Asset Inflation" pick.

[EJ]

Re: Fed chief warned on inflation target

eric,

I might have missed it in a previous post but in your opinion do you think the "ka" phase has already begun or has yet to ?

The way I look at it, while inflation indexes (either CPI as doctored by BLS or "true" CPI computed by the likes of ShadowStats) haven't shown much sign of disinflation, it has been happening in various asset classes (housing prices and most commodities have been falling since last yr ; bond prices even earlier since 03)

it seems to me that the "ka" phase has already started happening. I think when the last major asset class (stocks) starts to fall, the "ka" phase would end (or beginning to end), that would probably have a sizable psychological impact on consumers (as it did in 2000/2001); next consumers close their wallets and as the signs of a potential recession show, and the FEDs once again turn on the spigot, the "poom" phase will begin.

when the FEDs reinflate in 2001, commodities/housing/bonds responded almost immediately and stocks also but with an almost 2 yr delay; the big question is what would be the asset class that will benefit the most ?

Lewman

"Ka" is happening in the housing sector of the finance economy. However, until a finance market "event" occurs that starts a selling panic in one of the many leveraged asset markets, we will not see a classic "Ka" asset deflation event, nor a dramatic Fed response. In the current inflationary environment–characterized by high commodity prices, especially energy–Fed can only cut rates after a clear and present danger has appeared to justify it to the bond markets. A crash sometime this year, followed by the three 1/4 point rate cuts that Goldman is predicting, is plausible.

[EJ]

Re: Fed chief warned on inflation target



Recall that our CPI is a blend of slow inflating traded goods–low cost due to low cost foreign labor and Asian currency pegs–and rapidly inflating non-traded goods and services, especially tuition, medical care, and insurance. If a "compression" of these could be achieved, CPI inflation will remain more or less the same, without radical reconstitution of the indexes.

Dollar depreciation allows the industrial economy to expand, by increasing import costs and the relative cost-competitiveness of domestically produced goods, and by making domestically produced goods more price competitive on foreign markets. This comes at the expense of the finance economy, due to rising interest rates, as foreign lenders demand compensation for the higher dollar inflation premia.

Jobs lost in the finance economy could be compensated for by job growth in the industrial economy.

A lower trade deficit reduces the need for new borrowing to fund it.

Existing debt can be paid off quickly with depreciated dollars.

Problem: The finance economy is now significantly larger than the "real" economy. Job creation in the industrial economy won't be enough to generate sufficient surplus to pay the interest on the debt we already owe, never mind the new debt we need to take on to fund continued fiscal deficits. We need a new asset bubble.

[lewman]

Re: Fed chief warned on inflation target

eric,

I might have missed it in a previous post but in your opinion do you think the "ka" phase has already begun or has yet to ?

The way I look at it, while inflation indexes (either CPI as doctored by BLS or "true" CPI computed by the likes of ShadowStats) haven't shown much sign of disinflation, it has been happening in various asset classes (housing prices and most commodities have been falling since last yr ; bond prices even earlier since 03)

it seems to me that the "ka" phase has already started happening. I think when the last major asset class (stocks) starts to fall, the "ka" phase would end (or beginning to end), that would probably have a sizable psychological impact on consumers (as it did in 2000/2001); next consumers close their wallets and as the signs of a potential recession show, and the FEDs once again turn on the spigot, the "poom" phase will begin.

when the FEDs reinflate in 2001, commodities/housing/bonds responded almost immediately and stocks also but with an almost 2 yr delay; the big question is what would be the asset class that will benefit the most ?

Lewman