Friday, May 28, 2010
How the Federal Reserve actions impact the economy
LOOKING AHEAD by Wally Dobelis
Is the recession/depression recovering, or turning into an inflation, or deflation, or stagflation? Are the bailouts and stimulus effective? Has the stock market recovered? As to the latter, Michael M. Thomas in The Observer has found that the stocks rise led by banks claiming modest 1st quarter gains was fueled by Goldman, JPMorgan, Citicorp and such, stuffing risk free funds (now under by FDIC expanded coverage) and bailout money into treasury notes and bonds, sold by the US Treasury to provide bailout, sort of circular action (why didn’t the Fed give the funds directly to the Treasury Department? Why pay the interest to banks? Actually, it is part of the Fed’s tricky way of strengthening the economy.)
As to inflation etc, in a NYTimes early May issue, two op-ed articles on the same page contradicted each other. Allan H. Meltzer, who teaches economics at Carnegie Mellon, a historian of Federal Reserve, claims that the Fed always does too little or too much. In the 1970s when real estate bombed an the OPEC blackmailed us into huge oil prices, Chairman Volcker stopped the Carter age money presses and tightened interest, with double-digit inflation and 10% unemployment in 1981, then inflation naturally dropping to 4% and full employment arriving by 1983. He sees stimulus supporting social actions – health, roads, bridges, infrastructure, state budgets – not adding much to productivity, while green environment- clean energy, cap and trade for carbon exchange – add taxes and costs. Productive investment is slowed, as is industry’s growth rate, while inflation rises. The 1st quarter gross domestic product deflator rose 2.9% a sure sign of inflation. He states that, for eventual recovery the Fed must regain its independence. Inflation is coming, and the Fed cannot neglect it.
The NYTimes own Nobelist, Princeton’s Paul Krugman, sees deflation as the big danger. The paradox of thrift, or saving as a virtue, is lowering demand. Reducing your debt and cleaning up the balance sheet is creating a financial crisis. Lowering prices does not work if everyone is doing it, and cutting wages to accomplish this is putting less money into the economy. The example is Japan, where an annual wage decrease of 1% from 1997 to 2003 was an object lesson in how wage deflation can result in economic stagnation. Krugman sees the vicious circle still growing, although some indicators are showing that the plunge is leveling off... While the National Bureau of Economic Research may declare later this year that the recession is over, the jobs plunge is continuing. To break out of the vicious circle, he sees the need for more – more stimulus, more decisive action on the banks, more job creation. He finds that President Obama and his advisors have steered the economy away from the abyss, but there’s the risk that the US will become another Japan, with years of deflation and stagnation.
Nearly two weeks later Princeton’s Allan Blinder, and a former vice chairman of Federal Reserve, reminded us of the errors of the Fed earlier, during the Great Depression. Herbert Hoover’s laissez-faire Fed ignored the depression, until the FDR Fed managed a spectacular GDP climb, 11% per year in 1933-36, until the large volume of excess reserves created scared them into fears of inflation, and in 1937 they tightened the reserves, President Roosevelt tried to reduce the federal budget deficits, going from a deficit of 3.8% of GDP in 1936 to a surplus of 0.2% in 1937. The consequences were tragic, and the so-called recession within a depression by 1938 dropped the GDP by 3.4%, ending in mid 1938 with even larger losses. Changing courses can be very dangerous. As of now, the Fed reserves are up to $775B, worrying the critics into fears of inflation, just like what goaded the Fed into action in 1936. Fortunately Chairman Bernanke is a close student of the Great Depression, and will not allow the Fed repeat the errors. The budget hawks are showing their talons, but they should not be allowed to have their day, not just yet. President Obama must stay the course, and not be influenced into addressing the Federal budget deficits until the results of stimulus are palpable.
What does all this mean to us, the ordinary citizens who will pay for all of the expenses through taxes? It seems the spenders have strong evidence that President Obama must stay the course to rescue the economy. He says that, for instance, green industry will create five million jobs in 10 years. Some outside facts may help. It seems Germany wants to make its green sector grow, by 2020 surpassing its Mercedes-Benz and Volkswagen-led auto industry. They have already created 250,000 green jobs in five years, including 50,000 in the wind power industry. The new technology generates exports, and already creates $240B in annual revenues.
One of the US bailout/stimulus results is that the mortgage rescue plan has finally taken off the ground. While Moody’s estimates that 2.1M homeowners will be foreclosed in 2009, administration is confident that 3-4M will be helped by the program, Let us move on.
Is the recession/depression recovering, or turning into an inflation, or deflation, or stagflation? Are the bailouts and stimulus effective? Has the stock market recovered? As to the latter, Michael M. Thomas in The Observer has found that the stocks rise led by banks claiming modest 1st quarter gains was fueled by Goldman, JPMorgan, Citicorp and such, stuffing risk free funds (now under by FDIC expanded coverage) and bailout money into treasury notes and bonds, sold by the US Treasury to provide bailout, sort of circular action (why didn’t the Fed give the funds directly to the Treasury Department? Why pay the interest to banks? Actually, it is part of the Fed’s tricky way of strengthening the economy.)
As to inflation etc, in a NYTimes early May issue, two op-ed articles on the same page contradicted each other. Allan H. Meltzer, who teaches economics at Carnegie Mellon, a historian of Federal Reserve, claims that the Fed always does too little or too much. In the 1970s when real estate bombed an the OPEC blackmailed us into huge oil prices, Chairman Volcker stopped the Carter age money presses and tightened interest, with double-digit inflation and 10% unemployment in 1981, then inflation naturally dropping to 4% and full employment arriving by 1983. He sees stimulus supporting social actions – health, roads, bridges, infrastructure, state budgets – not adding much to productivity, while green environment- clean energy, cap and trade for carbon exchange – add taxes and costs. Productive investment is slowed, as is industry’s growth rate, while inflation rises. The 1st quarter gross domestic product deflator rose 2.9% a sure sign of inflation. He states that, for eventual recovery the Fed must regain its independence. Inflation is coming, and the Fed cannot neglect it.
The NYTimes own Nobelist, Princeton’s Paul Krugman, sees deflation as the big danger. The paradox of thrift, or saving as a virtue, is lowering demand. Reducing your debt and cleaning up the balance sheet is creating a financial crisis. Lowering prices does not work if everyone is doing it, and cutting wages to accomplish this is putting less money into the economy. The example is Japan, where an annual wage decrease of 1% from 1997 to 2003 was an object lesson in how wage deflation can result in economic stagnation. Krugman sees the vicious circle still growing, although some indicators are showing that the plunge is leveling off... While the National Bureau of Economic Research may declare later this year that the recession is over, the jobs plunge is continuing. To break out of the vicious circle, he sees the need for more – more stimulus, more decisive action on the banks, more job creation. He finds that President Obama and his advisors have steered the economy away from the abyss, but there’s the risk that the US will become another Japan, with years of deflation and stagnation.
Nearly two weeks later Princeton’s Allan Blinder, and a former vice chairman of Federal Reserve, reminded us of the errors of the Fed earlier, during the Great Depression. Herbert Hoover’s laissez-faire Fed ignored the depression, until the FDR Fed managed a spectacular GDP climb, 11% per year in 1933-36, until the large volume of excess reserves created scared them into fears of inflation, and in 1937 they tightened the reserves, President Roosevelt tried to reduce the federal budget deficits, going from a deficit of 3.8% of GDP in 1936 to a surplus of 0.2% in 1937. The consequences were tragic, and the so-called recession within a depression by 1938 dropped the GDP by 3.4%, ending in mid 1938 with even larger losses. Changing courses can be very dangerous. As of now, the Fed reserves are up to $775B, worrying the critics into fears of inflation, just like what goaded the Fed into action in 1936. Fortunately Chairman Bernanke is a close student of the Great Depression, and will not allow the Fed repeat the errors. The budget hawks are showing their talons, but they should not be allowed to have their day, not just yet. President Obama must stay the course, and not be influenced into addressing the Federal budget deficits until the results of stimulus are palpable.
What does all this mean to us, the ordinary citizens who will pay for all of the expenses through taxes? It seems the spenders have strong evidence that President Obama must stay the course to rescue the economy. He says that, for instance, green industry will create five million jobs in 10 years. Some outside facts may help. It seems Germany wants to make its green sector grow, by 2020 surpassing its Mercedes-Benz and Volkswagen-led auto industry. They have already created 250,000 green jobs in five years, including 50,000 in the wind power industry. The new technology generates exports, and already creates $240B in annual revenues.
One of the US bailout/stimulus results is that the mortgage rescue plan has finally taken off the ground. While Moody’s estimates that 2.1M homeowners will be foreclosed in 2009, administration is confident that 3-4M will be helped by the program, Let us move on.
# posted by Wally Dobelis @ 11:30 AM 
