Why more debt solves our debt problem faster

[ilia25]

Monetary policy too slow? That's ridiculous.

We had this argument before, and I explained to you what "too slow" means in this context -- Fed not willing to help beyond lowering the nominal rates to zero, which is not enough to keep up with deleveraging.

We have? I don't remember that...

Here you go
http://www.usmessageboard.com/econo...ion-to-end-this-depression-5.html#post5455601

So the Fed is too hawkish to ease further. They're also very close to their explicit inflation target of 2% PCE. Why do we assume that fiscal expansion won't be offset with tighter money to keep inflation on target?

Because the inflation will not take off until the economy reaches the state of full employment. And we won't need any more stimulus once that happens.

 

[ilia25]

...we need the government to slow down the deleveraging...

I'm sorry but did you just imply that the US is slowing down it's spending and borrowing?

Not really -- deleveraging means "paying off the debt". Hence slowing down deleveraging means accelerating spending and borrowing.

 

[ilia25]

Monetary policy too slow? That's ridiculous.

We had this argument before, and I explained to you what "too slow" means in this context -- Fed not willing to help beyond lowering the nominal rates to zero, which is not enough to keep up with deleveraging.

Also, even then, why on earth would we be pushing for fiscal stimulus? If congress is to do anything it should be to create repercussions for the Fed if it fails to fulfil its mandate. The solution to a malfeasant Fed isn't to have congress do their job for them. Are we to expect congress to take up the slack and pass stimulus in a timely manner every recession in the future where the Fed is laying down on the job, or should we only need to rely on congress to act once in making the Fed accountable?

By all means, let's make Fed rising its inflation target, or target to NGDP (I prefer former because this way we have stable inflation). But we both know that this is not politically feasible.

 

[DSGE]

We had this argument before, and I explained to you what "too slow" means in this context -- Fed not willing to help beyond lowering the nominal rates to zero, which is not enough to keep up with deleveraging.

We have? I don't remember that...

Here you go
http://www.usmessageboard.com/econo...ion-to-end-this-depression-5.html#post5455601

Oooohhh. I remember. Cool.

So the Fed is too hawkish to ease further. They're also very close to their explicit inflation target of 2% PCE. Why do we assume that fiscal expansion won't be offset with tighter money to keep inflation on target?

Because the inflation will not take off until the economy reaches the state of full employment. And we won't need any more stimulus once that happens.

Well that's not true. That's a very very old theory which has no empirical basis. Yes, some prices are sticky and that's why money can be non-neutral in the short run. But not all are and the ones that are are not completely rigid. The short run aggregate supply curve isn't completely horizontal.

If it were, we wouldn't have experienced any deflation in the initial downturn; the fall in nominal spending would have been fully absorbed by a fall in real output. That wasn't the case. The fall in nominal spending got split between a fall in real output (largely) and a fall in prices. Increasing nominal spending will largely raise real output, but it'll also raise prices. We can't assume the Fed is willing to let that happen.

 

[DSGE]

We had this argument before, and I explained to you what "too slow" means in this context -- Fed not willing to help beyond lowering the nominal rates to zero, which is not enough to keep up with deleveraging.

Also, even then, why on earth would we be pushing for fiscal stimulus? If congress is to do anything it should be to create repercussions for the Fed if it fails to fulfil its mandate. The solution to a malfeasant Fed isn't to have congress do their job for them. Are we to expect congress to take up the slack and pass stimulus in a timely manner every recession in the future where the Fed is laying down on the job, or should we only need to rely on congress to act once in making the Fed accountable?

By all means, let's make Fed rising its inflation target, or target to NGDP (I prefer former because this way we have stable inflation).

You get stable long term inflation under NGDP targeting. Real output growth trends at 3% in the US, so long run inflation will be anchored at Target - 3%. So a 5% NGDP target gives you 2% long run inflation.

You may be interested in this: Worthwhile Canadian Initiative: An NGDPLP Target vs a higher Inflation Target as insurance against the ZLB

But we both know that this is not politically feasible.

But stimulus is? You don't even really have to switch to higher inflation/NGDP targeting. The idea of flexible inflation targeting is that you allow more inflation when output is low and allow less inflation when output is high. The explicit target is a long run average. That's not being achieved. They're sitting on their long run target when they should be allowing more inflation since unemployment is so high. We just need to pressure them to do their job, not necessarily instate sweeping reforms.

 

[eflatminor]

...we need the government to slow down the deleveraging...

I'm sorry but did you just imply that the US is slowing down it's spending and borrowing?

Not really -- deleveraging means "paying off the debt". Hence slowing down deleveraging means accelerating spending and borrowing.

Right...allow me to restate. Did you just imply that the federal government is paying off it's debt? Please show me where we've paid off a penny of our debt.

 

[ilia25]

We have? I don't remember that...

Here you go
http://www.usmessageboard.com/econo...ion-to-end-this-depression-5.html#post5455601

Oooohhh. I remember. Cool.

So the Fed is too hawkish to ease further. They're also very close to their explicit inflation target of 2% PCE. Why do we assume that fiscal expansion won't be offset with tighter money to keep inflation on target?

Because the inflation will not take off until the economy reaches the state of full employment. And we won't need any more stimulus once that happens.

Well that's not true. That's a very very old theory which has no empirical basis. Yes, some prices are sticky and that's why money can be non-neutral in the short run. But not all are and the ones that are are not completely rigid. The short run aggregate supply curve isn't completely horizontal.

Keynesian supply curve is pretty much horizontal As for empirical evidence, we do not have too many examples of being in a liquidity trap.

If it were, we wouldn't have experienced any deflation in the initial downturn; the fall in nominal spending would have been fully absorbed by a fall in real output. That wasn't the case. The fall in nominal spending got split between a fall in real output (largely) and a fall in prices. Increasing nominal spending will largely raise real output, but it'll also raise prices. We can't assume the Fed is willing to let that happen.

I think you are looking at a wrong inflation measure. Fed decisions are based on core inflation, not CPI (and for a good reason too). And core inflation was remarkably stable when GDP was falling like rock in 2008/2009:

US Core Inflation Rate

 

[Oddball]

More economic savvy, from Theodoric of York.

 

[ilia25]

I'm sorry but did you just imply that the US is slowing down it's spending and borrowing?

Not really -- deleveraging means "paying off the debt". Hence slowing down deleveraging means accelerating spending and borrowing.

Right...allow me to restate. Did you just imply that the federal government is paying off it's debt?

No, I did not imply that either. In fact, I was not implying anything. Deleveraging in the phrase you have quoted refers to whole economy, although the federal government was not taking part in it. Thank God it wasn't, or we would have ended up as Greece.

 

[DSGE]

Keynesian supply curve is pretty much horizontal As for empirical evidence, we do not have too many examples of being in a liquidity trap.

We've got a few, but that doesn't matter. Why would the liquidity trap matter for the slope of the SRAS curve? The liquidity trap happens on the demand side; the slope of the SRAS curve is a structural thing.

I think you are looking at a wrong inflation measure. Fed decisions are based on core inflation, not CPI (and for a good reason too). And core inflation was remarkably stable when GDP was falling like rock in 2008/2009:

US Core Inflation Rate

Their target is actually headline PCE inflation, but even core PCE fell.

This idea of the SRAS curve being flat is just... ancient. It'd be like if you tried to argue that the original Phillips curve holds.

 

[Staidhup]

The word for today is legerdemain accounting along with baseless economic philosophy of an NT Times correspondent. Spending yourself out of recession is nothing more than playing financial and economic Russian roulette with a loaded gun.

 

[ilia25]

The word for today is legerdemain accounting along with baseless economic philosophy of an NT Times correspondent. Spending yourself out of recession is nothing more than playing financial and economic Russian roulette with a loaded gun.

Wow, yet another bot stumbled upon "krugman" keyword...

 

[ilia25]

Keynesian supply curve is pretty much horizontal As for empirical evidence, we do not have too many examples of being in a liquidity trap.

We've got a few, but that doesn't matter. Why would the liquidity trap matter for the slope of the SRAS curve?

Strictly speaking, it is not about liquidity trap, it is about unemployment. Quoting from wikipedia:
"The Keynesian case shows that the AS curve is horizontal implying that the firm will supply whatever amount of goods is demanded at a particular price level. The idea behind that is because there is unemployment; the firms can get as much labour as they want at that current wage. Their average costs of production therefore are assumed not to change as their output level change. They are thus willing to supply as much as is demanded at the existing price level."

Horizontal SRAS may look ancient, but only because the last time we have experienced it long enough to notice was in 30s.

I think you are looking at a wrong inflation measure. Fed decisions are based on core inflation, not CPI (and for a good reason too). And core inflation was remarkably stable when GDP was falling like rock in 2008/2009:

US Core Inflation Rate

Their target is actually headline PCE inflation, but even core PCE fell.

Yes, it fell by 1% for 5% drop in GDP. You think someone, including Fed, would not want to trade it back?

 

[DSGE]

Strictly speaking, it is not about liquidity trap, it is about unemployment. Quoting from wikipedia:
"The Keynesian case shows that the AS curve is horizontal implying that the firm will supply whatever amount of goods is demanded at a particular price level. The idea behind that is because there is unemployment; the firms can get as much labour as they want at that current wage. Their average costs of production therefore are assumed not to change as their output level change. They are thus willing to supply as much as is demanded at the existing price level."

Which would make sense if wages were perfectly rigid. Since that's not the case we can't take this extreme view that SRAS is horizontal. Also, we saw the price level fall in the downturn. If it were horizontal, prices wouldn't have fallen. All of the fall would have been in real output.

Horizontal SRAS may look ancient, but only because the last time we have experienced it long enough to notice was in 30s.

Except even then we didn't experience it. There was enormous deflation back in the 30s and the price level rose when the Fed eased. A perfectly horizontal SRAS curve was a theory, same as the original Phillips curve, which has not survived scrutiny. It's something you learn in History of Economic Thought.

Yes, it fell by 1% for 5% drop in GDP. You think someone, including Fed, would not want to trade it back?

If they wanted to then they'd ease more. It seems pretty clear that they only care about subduing inflation.

 

[ilia25]

Strictly speaking, it is not about liquidity trap, it is about unemployment. Quoting from wikipedia:
"The Keynesian case shows that the AS curve is horizontal implying that the firm will supply whatever amount of goods is demanded at a particular price level. The idea behind that is because there is unemployment; the firms can get as much labour as they want at that current wage. Their average costs of production therefore are assumed not to change as their output level change. They are thus willing to supply as much as is demanded at the existing price level."

Which would make sense if wages were perfectly rigid. Since that's not the case we can't take this extreme view that SRAS is horizontal.

Rigidity means wages do not fall when unemployment becomes high. But you are talking about rising wages when the unemployment is still high across the board. It does not make sense -- what would drive the wages up? The unemployed would demand a rise?

Also, we saw the price level fall in the downturn

Again, what prices? Core inflation was stable and above zero -- because wages were stable. And I'm pretty sure the same happened in 30s -- if you look at wages, not the general price level.

 

[ilia25]

Yes, it fell by 1% for 5% drop in GDP. You think someone, including Fed, would not want to trade it back?

If they wanted to then they'd ease more. It seems pretty clear that they only care about subduing inflation.

I think there is a substantial difference between abandoning the current inflation target and letting the core inflation rise to 3%.

 

[ilia25]

Here is the short version:
The problem is that the borrowers try to get rid of their debt way too fast for the monetary policy to counter. This result in falling incomes (depressed economy) and makes it harder to pay off the debt.

Hence, we need the government to slow down the deleveraging -- by taking more debt -- just enough for the monetary policy to catch up.

Really, how is putting millions people out of work helps them (or anyone else) to solve their financial problems?

Here is the link:
Deleveraging, Monetary Policy, and Fiscal Policy: A Further Note - NYTimes.com

Obama’s 2011 Budget Proposal: How It’s Spent

Obama?s 2011 Budget Proposal: How It?s Spent - Interactive Graphic - NYTimes.com

$3.69 trillon budget proposal

1. Social Security $738 20%

2.National Defense $738

3. Income Security $567

4. Medicare $498

5.Net Interest $251

6. Health $381

7. Education $122

8. Veteran’s Benefits $122

9. Transportation $91.55

10. International Affairs $67.39
$3,575.94

And who do you think will get those $250 billions of net interest payments? Probably only 1/3 of it goes to the foreigners. The lion share will go to US pension funds, Fed, local and state governments and so on.

So you have to divide that 250 billions by 3 and you get ~85 billions or whopping 0.5% of GDP.