“No way out”

Binyamin Appelbaum writes at the NYT:

At the meeting of the Fed’s policy-making committee last week, none of the 12 voting members supported stronger action to increase inflation or growth. One member voted in opposition to continuing the existing efforts.

“They are doing $85 billion a month in purchases. Well, there’s a number that’s twice as large as 85 and twice as large as that,” said Professor Wolfers. “It’s clear that they can do more. But they keep saying one thing and doing another.”

That reluctance ultimately reflects the enduring conviction of many Fed officials that their most important responsibility is maintaining stable inflation in the long run.

What the evidence shows is that their most important responsibility is maintaining NOMINAL SPENDING STABILITY!

No way out_1

No way out_2

Note that during the Great Moderation, despite sizeable shocks to prices, nominal spending stability kept sticky price inflation and real growth stable.

But James Stock, the just appointed CEA member will have none of that. To him:

The results of this exercise are mixed, in large part because the instruments produce estimates of purportedly different shocks that are correlated. In particular, the uncertainty shocks and the shocks to liquidity and financial risk are highly correlated, which makes their separate interpretation problematic. Despite these drawbacks, the structural analysis is consistent with the recession being caused by initial oil price shocks followed by large financial and uncertainty shocks.

Third, focusing on the recovery following the 2009Q2 trough, we estimate that slightly less than half of the difference between the recovery in employment since 2009Q2 and the average for recoveries between 1960 and 1982 is attributable to cyclical factors (the shocks, or factors, during the recession). Instead, most of the slowness of the recovery is attributable to a long-term slowdown in trend employment growth.

People, relax, it´s no one´s fault, especially not the Fed´s. Paraphrasing James Tobin´s 1971 “Living with Inflation”, we now have to “learn to live with low growth and employment opportunities”! But rejoice, there will be no inflation either!

What a waste!

3 thoughts on ““No way out”

  1. Excellent post.

    Egads, what is one to do.

    Even if—and I don’t—but even if one accepted that inflation is the end-all, be-all, are these guys aware that six of the last eight CPI readings have been down?

    Fighting inflation has become a religion, and ossified worship of money the norm in central banker circles.

    This can be seen in the 30-year long decline in sovereign bond yields of major nations. The central banks have beaten inflation. They have won the war.

    But now, like Japan, they take glee in watching the rubble bounce.

  2. Mr. Stock is very close to the real answer though. As I read the through the quote you have I was thinking he was nailing the Fed, saying it was the oil price shock that started it all and the sluggishness of recovery in employment is cyclical. Those are true. But then he follows up with a non sequitur – decline in labor force – which is baloney in itself. You are correct that providing cover isn’t a good sign that there will be anyone to stop the maleficence.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.