Topic: Economics
On the Fed Maintaining Rates Why the Fed should keep rates low as long as they need to!by Christopher Espinal
(Conservative)
Thursday, June 26, 2008
We all know that inflation will continue to soar. We all know that the economy reached a point where firms and households will expect inflation to eat away at the value of the dollar. If the theory of Rational Expectations finally holds true, why does the Federal Reserve continue to pump more money into the economy? If we know, just as Ben Bernanke knows, that stimulus efforts of inflation will not actually stimulate the economy, what the hell is the point?
This question continues to mind boggle plenty of people, including economists all over the country. However, the answer is right under our noses.
When the Federal Reserve began raising interest rates after months of rate cuts, everyone forgot that our economy actually has much deeper connections to monetary policy. The supply of "Loanable Funds" contracted as the Fed made it marginally expensive for commercial banks to borrow. Since adjustable rate mortgages adjust to market conditions, interest rates for sub-primers rose all over the country. This action caused millions to fall behind on payments that almost doubled.
Before I began thinking deeper into the Fed's position on keeping the targeted federal funds rate at around 2%, I wrote this column advocating price stability. However, since the market tied itself up in complex derivatives, it's unclear what rate increases will distort besides market prices. In other words, we need to be more patient and let the Federal Reserve figure out what is the right move.
These series of events only prove that the Federal Reserve has a tough job, one that is no longer as simple as maintaining prices.
Will inflationary government get huge as anarcho-capitalists continue to complain? Not according to this research.
I will continue to argue that a new ideology has a hold over Fed Reserve policy. Government grows not because of inflation, but because of what the "inflation tax" can actually produce. If there's only inflation, which means it just dilutes the value of the dollar, there's no additional spending that can happen.
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2008 Christopher Espinal, all rights reserved.
Published: Thursday, June 26, 2008
Last modified: Thursday, June 26, 2008
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"If there's only inflation, which means it just dilutes the value of the dollar, there's no additional spending that can happen."
So, let's completely ignore the fact that there was never any money to begin with, yet for the last 8 years we've managed to finance both the war and an expansion of federal programs that would make FDR blush.
Your statement isn't just patently false, it is as misleading as the news reports that state that high gas prices cause inflation. This isn't difficult: they print money out of thin air to fund the programs, and we end up paying for it by having all our money not be worth as much. It's theft.
Government is already huge. They made it huge and now we're paying for it after the fact. And they have to keep rates low because if everyone lost his house and the gov't didn't step in and save the day, they might be a little more critical of the policies of the last decade - critical less in the verbal sense, and more in the pitchforks-and-torches sense.
Posted By: Christopher Espinal
Date: 2008-06-27 09:37:41
If people expect inflation to thrive, they will not accept additional dollars as actual money - it will only cause prices to rise.
The war in iraq is not funded by inflation otherwise we would be like Zimbabwe. We fund programs by borrowing from China and Taxation, with maybe a negligible amount of "money from thin air" that people consider an additional increase in wealth. But now that people are expecting inflation - that doesn't necessarily happen.
It's efficient taxation (or efficient usage of that money out of thin air) that will cause an increase in wealth for government spending and expansion, otherwise our incomes will adjust to those inflationary figures.
I think you should stop reading the conspiracy garbage that everyone else reads on this site and take a real class!
So you're comparing the US to a country which goes out of its way to destroy property rights and dismantle its infrastructure? Is there no connection between property rights, statism, and monetary policy then?
If the money isn't getting printed out of thin air, why is the dollar slipping first against commodities, then against international currencies, then finally against domestic goods?
I think you should stop assuming who has and has not taken economics classes. No, I don't have a picture of John Maynard next to my monitor, and I'm not an economist. What I am is a computer programmer.
Computer programmers don't have the luxury of being able to point in every direction of the compass while the whole system overheats and shuts itself down. If there's a serious problem we have to quickly troubleshoot it, and fix it. It's not acceptable for us to expect all the users to just deal with serious inconveniences or to have to buy their way out of a problem that was completely avoidable. And it's particularly unacceptable for us to fix a problem temporarily, only to have it occur again later.
So please understand that we're a little annoyed now that we've read a much more plausable explanation of the problem and a potential permanent fix, and yet we're still counseled to wait, deal with inconveniences, buy our way out of the problem, and expect it to happen again later.
Posted By: Christopher Espinal
Date: 2008-06-27 21:13:41
"So you're comparing the US to a country which goes out of its way to destroy property rights and dismantle its infrastructure? Is there no connection between property rights, statism, and monetary policy then? "
The empirical evidence doesn't show this. However, even the statistical analyses are quite difficult to follow - even for me. Bad monetary policy, on the scale of Zimbabwe, is a different story because of very odd and inefficient pricing situations.
"If the money isn't getting printed out of thin air, why is the dollar slipping first against commodities, then against international currencies, then finally against domestic goods?"
I never claimed that money doesn't get printed out of thin air, sir. I claimed that the efficiency of taxes is what determines the growth of government - including the efficiency of the inflation tax that you hate so much (and I do too to some extent). Just because money is printed doesn't mean that the economy will accept it as an additional increase in wealth. That is where rational expectations comes in. If the economy rationally expects inflation, it will only adjust initial prices to higher prices to compensate for inflationary pressures. Thus, no increase in government spending occurs. This doesn't happen all of the time - sometimes inflationary taxes can be efficient enough to actually be accepted as additional wealth. However, it's unclear whether our current market conditions allow for such a thing to happen.
I'm only trying to get people here interested in a different point of view - not tell them they are wrong. Economics is interesting for what it is - not for the ideological premise of individuals. That's why you should take a class. Had you taken a class - you would know of the varying theories available to analyze monetary policy. I can tell you don't.
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2008 Christopher Espinal, all rights reserved.