I'm incredibly interested in how this new Fed chair's policies will affect the economy. From all the buzz surrounding him, I gather he's not all that different from Greenspan in terms of philosophy, but incredibly different in terms of style. Interestingly, this Time article seems to hint that in his position as head the Bush's economic advisory team Bernanke was the main pusher for Bush's tax rebates, in order to generate inflation and help out the overall economic situation.
Now, I'm not exactly well-versed in macroeconomics, but from what I've studied (yes I do actually mean studied, not just "what I've read on the intarweb") inflation is not nearly the boogie-man that politicians love to make it out to be, but rather a critical facet of markets, and skillful management thereof is key for successful economic policy. Maybe Birds would like to chime in?
New Fed Chairman
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I've studied economics in a limited form as well... Inflation, while inevitably leading to the eventual destruction of a form of currency, will take a *LONG* time to get there if it is controlled.
Germany's currency collapsed due to overinflation in the post-WWI era--it was cheaper to wallpaper a room with cash than wallpaper. However, Germany was forced into this over-inflation by the need to pay trillions of marks to the Allies in war reparations. By the time it took a wheelbarrow full of cash to buy a loaf of bread, the mark had completely collapsed and a new currency was needed.
What we can learn from this is that inflation, when used to pay large debts, does not work. However, inflation, when used strategically and properly, stimulates a market and keeps it running well.
Germany's currency collapsed due to overinflation in the post-WWI era--it was cheaper to wallpaper a room with cash than wallpaper. However, Germany was forced into this over-inflation by the need to pay trillions of marks to the Allies in war reparations. By the time it took a wheelbarrow full of cash to buy a loaf of bread, the mark had completely collapsed and a new currency was needed.
What we can learn from this is that inflation, when used to pay large debts, does not work. However, inflation, when used strategically and properly, stimulates a market and keeps it running well.
LOL Greenspanisms (from the article) -
"Since becoming a central banker I have learned to mumble with great incoherence"
"If I seem unduly clear to you, you must have misunderstood what I said."
I've found it pretty hilarious to listen to the talking heads railing about inflation getting up to 3 or 4 or 5 %. Was going to be the end of thwe world. Of course in recent memory, inflation was up around 14-15% - think Jimmy Carter years.
"Since becoming a central banker I have learned to mumble with great incoherence"
"If I seem unduly clear to you, you must have misunderstood what I said."
I've found it pretty hilarious to listen to the talking heads railing about inflation getting up to 3 or 4 or 5 %. Was going to be the end of thwe world. Of course in recent memory, inflation was up around 14-15% - think Jimmy Carter years.
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Mobius
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DCrazy, inflation is bad. It predominatly hurts "the little guy" because he has no way of overcoming the efffect of inflation on his fixed wages.
Fat bastards with loads of money like it of course, because it increases interest rates, which puts more money in their pockets, not less. Plus they also win on fixed lending rates: the 200 Million they borrowed at 4% fixed-rate actually reduces in value by a large amount when paying precisely nothing on the loan when inflation is at 8%
The tax cuts were NOT designed to drive inflation: no government wants to stimulate inflation beyond a critical value of around 3-4%, which then starts to eat into domestic growth, and dampens business confidence, as well as eroding the buying power of consumers.
The tax cuts were, most likely, an attempt by the Republicans to starve the government of funds in the future. This is how it works: Increase spending dramatically, while reducing the tax take. It's a fallacy that reducing tax increases tax take in the long term. (While some revenues go up due to increased ability to retain extra earners, it doesn't make up for the much larger loss in revenue elsewhere).
This strategy results in a simply huge spend up over an 8 year period (War in Afghanistan, war in Iraq, 500 Billion on top of that for the Pentagon) followed by a government which has no choice but to raise taxes and dramatically cut government services.
This is the intention of Republicans: to starve the government of funds, and reduce its size, by forcing it into a situation where another administration has no choice in the matter.
You simply can't go out and get elected on a platform of slashing government spending and reduced services - so this is the back-door to that goal.
Please note: I have not said the Republicans are wrong for doing this.
Fat bastards with loads of money like it of course, because it increases interest rates, which puts more money in their pockets, not less. Plus they also win on fixed lending rates: the 200 Million they borrowed at 4% fixed-rate actually reduces in value by a large amount when paying precisely nothing on the loan when inflation is at 8%
The tax cuts were NOT designed to drive inflation: no government wants to stimulate inflation beyond a critical value of around 3-4%, which then starts to eat into domestic growth, and dampens business confidence, as well as eroding the buying power of consumers.
The tax cuts were, most likely, an attempt by the Republicans to starve the government of funds in the future. This is how it works: Increase spending dramatically, while reducing the tax take. It's a fallacy that reducing tax increases tax take in the long term. (While some revenues go up due to increased ability to retain extra earners, it doesn't make up for the much larger loss in revenue elsewhere).
This strategy results in a simply huge spend up over an 8 year period (War in Afghanistan, war in Iraq, 500 Billion on top of that for the Pentagon) followed by a government which has no choice but to raise taxes and dramatically cut government services.
This is the intention of Republicans: to starve the government of funds, and reduce its size, by forcing it into a situation where another administration has no choice in the matter.
You simply can't go out and get elected on a platform of slashing government spending and reduced services - so this is the back-door to that goal.
Please note: I have not said the Republicans are wrong for doing this.
I'm confused. You're arguing that the greedy guys like inflation becuase they get to lend at higher interest rates (on a side note, I would say your reasoning is backwards; inflation is caused by interest rates among many other things, not the other way around). But then you're saying that borrowers love inflation too, because the value of that money is far less than before (I'm guessing you're assuming that the borrower immediately sunk the money into something with a constant value), and thus they got more bang for the buck.
But then why would the "fat bastards" care all that much if they have more dollars if each individual dollar is worth less? It seems to me that your two points are in conflict.
But then why would the "fat bastards" care all that much if they have more dollars if each individual dollar is worth less? It seems to me that your two points are in conflict.
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Lothar
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That's twice today I've agreed with Mobi. Heck, I've been saying this exact thing for almost 5 years now.Mobius wrote:The tax cuts were, most likely, an attempt by the Republicans to starve the government of funds in the future. This is how it works: Increase spending dramatically, while reducing the tax take.
Inflation is not a bad thing, though... as long as it's reasonably low. You need a little inflation to encourage savings and investment...
bah, inflation is really quite a very simple concept, a 4 year old can understand it
inflation is the ratio of dollars in circulation now compared to dollars in circulation in the past
as far as which is better, inflation or deflation, there are really only two points of view; the bankers and the consumers
inflation is good for bankers bad for consumers
deflation is good for consumers and bad for bankers
makes you wonder who really controls the world economy, eh?
inflation is the ratio of dollars in circulation now compared to dollars in circulation in the past
as far as which is better, inflation or deflation, there are really only two points of view; the bankers and the consumers
inflation is good for bankers bad for consumers
deflation is good for consumers and bad for bankers
makes you wonder who really controls the world economy, eh?
Dear God help us if ccb056 ever gets more than a nickel to his name, with that kind of logic he could wreak havoc on the world economy.
ccb056, inflation is great for American consumers who live on borrowed money, because it means they get to pay back their debts in dollars that are worth less than they were when they took out the loan.
ccb056, inflation is great for American consumers who live on borrowed money, because it means they get to pay back their debts in dollars that are worth less than they were when they took out the loan.
No, but at 6% interest, you're cheering when inflation soars because every little bit helps. You know you're never going to get a 0% rate, but that doesn't mean you wouldn't appreciate inflation taking a little bit (or even a lot) of the punch out of it.
Say you take out a 20-year loan of $1,000 at 6% interest (compounded monthly), and inflation remains a constant 2% throughout that time period. At the end of those 20 years, your Year 1 $1,000 will be equivalent to $1,456.81 in Year 20 dollars. The total amount you pay to reconcile the loan is $1,719.43. Would you rather 0% inflation or 2% inflation in this situation?
Say you take out a 20-year loan of $1,000 at 6% interest (compounded monthly), and inflation remains a constant 2% throughout that time period. At the end of those 20 years, your Year 1 $1,000 will be equivalent to $1,456.81 in Year 20 dollars. The total amount you pay to reconcile the loan is $1,719.43. Would you rather 0% inflation or 2% inflation in this situation?
http://en.wikipedia.org/wiki/Phillips_curve
http://www.frbsf.org/publications/econo ... 02-29.html
Some background reading on the most common inflation topic -- The Phillips Curve.
In terms of using supply-side economics to reduce inflation, he's sorely mistaken as a demand side cut would have the most economic impact proven by MPC (Marginal Pronpensity to Consume).
My take:
It makes sense to cut taxes for businesses to spur more business and development in the US. This usually benefits the rich the most but there is a "rising tide lifts all boats" effect of more jobs and the easier business climate.
It makes sense then to give the personal income tax relief to the poor both for rich americans and poor americans. Since the poor have a significantly higher MPC they keep the most basic things in the economy churning when you give them an extra dollar. The rich do well because inevitably when the poor spend a dollar a larger portion of the money returns to the rich who own the businesses.
I think that's the way taxes should be to spur the economy.
Luckily the Fed chairmen only makes economic reccomendations in terms of taxes. Even if he does reccomend tax cuts there is no way for him to force them to happen. Greenspan has also been warning about the national debt, and rightly so. I think the idea that Greenspan is the most powerful economic man is a bit over played considering the importance lobbyists have on congress to affect business climate. I would be shocked if he strays from basic Keynsian policies (yeah look Keynes up on Wikidpedia too). If he really sucks, you'll hear from me.
The argument here is where the happy equilibrium is. If you let inflation go it can help increase growth, but sometimes things overgrow or be overvalued, such as in the tech bomb. It's safer to do what Greenspan has been doing, sticking with a lower rate, but it may end up being better with the new guy if he let's inflation rise a bit. There isn't deep time with economic data, so we're still kinda wandering in the dark. If he lets it get really high or loses control of the rate, that will be bad. So this is risky, but it could be helpful.
http://www.frbsf.org/publications/econo ... 02-29.html
Some background reading on the most common inflation topic -- The Phillips Curve.
In terms of using supply-side economics to reduce inflation, he's sorely mistaken as a demand side cut would have the most economic impact proven by MPC (Marginal Pronpensity to Consume).
Poorer people have a high MPC.The marginal propensity to consume (MPC) refers to the increase in personal consumer spending (consumption) that occurs with an increase in disposable income (income after taxes and transfers). For example, if a household earns one extra dollar of disposable income, and the marginal propensity to consume is 0.65, then of that dollar, the family will spend 65 cents and save 35 cents.
Mathematically, the marginal propensity to consume (MPC) function is expressed as the derivative of the consumption (C) function with respect to disposable income (Y).
In other words, the marginal propensity to consume is measured as the ratio of the change in consumption to the change in income, thus giving us a figure between 0 and 1. One minus the MPC equals the marginal propensity to save.
My take:
It makes sense to cut taxes for businesses to spur more business and development in the US. This usually benefits the rich the most but there is a "rising tide lifts all boats" effect of more jobs and the easier business climate.
It makes sense then to give the personal income tax relief to the poor both for rich americans and poor americans. Since the poor have a significantly higher MPC they keep the most basic things in the economy churning when you give them an extra dollar. The rich do well because inevitably when the poor spend a dollar a larger portion of the money returns to the rich who own the businesses.
I think that's the way taxes should be to spur the economy.
Luckily the Fed chairmen only makes economic reccomendations in terms of taxes. Even if he does reccomend tax cuts there is no way for him to force them to happen. Greenspan has also been warning about the national debt, and rightly so. I think the idea that Greenspan is the most powerful economic man is a bit over played considering the importance lobbyists have on congress to affect business climate. I would be shocked if he strays from basic Keynsian policies (yeah look Keynes up on Wikidpedia too). If he really sucks, you'll hear from me.
The argument here is where the happy equilibrium is. If you let inflation go it can help increase growth, but sometimes things overgrow or be overvalued, such as in the tech bomb. It's safer to do what Greenspan has been doing, sticking with a lower rate, but it may end up being better with the new guy if he let's inflation rise a bit. There isn't deep time with economic data, so we're still kinda wandering in the dark. If he lets it get really high or loses control of the rate, that will be bad. So this is risky, but it could be helpful.
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Lothar
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Declaring victory less than 18 hours after you posted because nobody had responded yet? Heh.
Me and Mobi have brought up the "starve the beast" angle. Spurring the economy is nice, but the important thing is shrinking the government. The second most important thing is making the government less of a player in the economy in general -- meaning, bringing taxes closer to a fair level. Spurring the economy will always be a side effect.
Also, I don't buy the MPC argument. The poor are more likely to use their extra dollar to consume some product directly (likely something made in China), but the rich are more likely to invest their extra dollar (which may or may not lead to the creation of a new job.) Which is better for the economy? It really depends on which of those the economy needs more right now. Remember, dollars that are saved or invested don't disappear; they go into either a bank's pool of money to loan, or some company's pool of money to hire employees and buy new equipment. It's completely incorrect to say a dollar spent is always better for the economy than a dollar invested (as evidenced by the fact that a lot of Iraq monetary policy right now is geared toward encouraging new investment); which is better depends very much on the state of the economy.
Me and Mobi have brought up the "starve the beast" angle. Spurring the economy is nice, but the important thing is shrinking the government. The second most important thing is making the government less of a player in the economy in general -- meaning, bringing taxes closer to a fair level. Spurring the economy will always be a side effect.
Also, I don't buy the MPC argument. The poor are more likely to use their extra dollar to consume some product directly (likely something made in China), but the rich are more likely to invest their extra dollar (which may or may not lead to the creation of a new job.) Which is better for the economy? It really depends on which of those the economy needs more right now. Remember, dollars that are saved or invested don't disappear; they go into either a bank's pool of money to loan, or some company's pool of money to hire employees and buy new equipment. It's completely incorrect to say a dollar spent is always better for the economy than a dollar invested (as evidenced by the fact that a lot of Iraq monetary policy right now is geared toward encouraging new investment); which is better depends very much on the state of the economy.