Mortimer B. Zuckerman
Is this the time to worry about inflation? We are, after all, awash in money with stagnant output.
In the past year, the Federal Reserve has increased our monetary base by about 120 percent, more than double the previous highest annual increase over the past 50 years. The Fed has made huge loans to private lenders and bought over
The mountain of reserves on bank balance sheets, which so scares the inflationary hawks, would normally encourage banks to lend and increase their profits. But while the Fed has been pumping money through the banks, little of it has entered the economic mainstream. Instead of boosting lending, the banks have just increased their reserves at the Fed by hundreds of billions of dollars.
The government may be borrowing more, but consumers and businesses are borrowing less. If anything, they are paying down their debts. Households will reduce their total debts by
Inflation typically results from "too much money chasing too few goods." Today, too much supply is chasing too little demand. That, coupled with consumers' need to save money to rebuild their finances, raises the risk of deflation, not inflation. As workers compete for scarce jobs and companies underbid one another for sales, both wages and prices will remain under pressure. We began this crisis with household debt at its highest levels since the 1930s. Knowing that monthly mortgage payments don't shrink even if your paycheck does, families are trying to deleverage and work down what they fear is their excessive debt. On top of that, households are suffering from substantial wealth losses tied to impaired equity portfolios and dropping home values. The combination of lower incomes and reduced wealth raises the likelihood that consumers will continue to boost their savings and pay down debt rather than spend more on consumption, which has put retail spending into one of its worst declines in decades. This is evidenced by retailers slashing inventories by record amounts, causing the percentage of capacity utilization in manufacturing to drop to the lowest reading in the 50-year history of the measure.
Demand growth would need to recover substantially to reverse the deflationary effects of low capacity utilization. For this, we would need a significant improvement in employment and hence spending. But the job market is even worse than the overall economy, and the prospect is that high levels of joblessness will persist beyond the end of the recession. Companies have cut the number of their employees and slashed other discretionary costs, such as advertising. This has significantly improved profit margins, even in the face of lower demand, but the higher profits are not coming from revenue growth but from lower costs, making it easier for companies to maintain or even cut prices rather than increase them.
Reduced spending by consumers and an extended high unemployment rate mean that we can look forward to a continuation of the output gap. This refers to the difference between the actual economic output and the most the economy could produce given the capital, know-how, and people available. That gap today is estimated to be between 8 and 10 percent, the largest on record. It makes for intense competition for scarce sales and jobs and results in continued downward pressure on prices.
It will take a long time to absorb the enormous slack of unused labor and production capacity created by the deepest recession since the 1930s--and it ain't really over yet. In the meantime, the labor market is showing a continuing decline in wages and in average hours worked per week (now down to 33 hours, the lowest in 60 years), suggesting it will be a long time before labor markets are strong enough to push up hourly wages and income.
Until employment grows enough to push wages, and income and production levels increase to more normal levels, the most pressing worry will be deflation, not inflation. This is evidenced by the financial markets. In 2007, according to
Despite worries that the government's huge deficit will create inflation and cause interest rates to spike, the bond market is signaling that its focus is on the dismal economy and the contraction of private-sector debt.
This does not mean we can forget about the long-term projected accumulation of debts and deficits. They can pose a danger. They can reignite inflation, especially if the quirky, unpredictably volatile "animal spirits" of entrepreneurs begin to break through. Foreigners may also become apprehensive about their purchases of too many dollar-denominated debt instruments, since they fear that the most politically acceptable way for
In any event, inflation is easier to put right than deflation. The Federal Reserve can suppress inflation by raising interest rates as high as required to squelch those animal spirits, and the Fed can do that very rapidly. But there is a limit to the Fed's ability to confront deflation, since it cannot cut nominal rates below zero in order to induce economic growth. Therefore, risking inflation is a better bet than erring on the side of deflation.
Above all, we must avoid a repetition of an adverse feedback loop that would run from the declining real economy into the financial sector. While banks are broadly stabilized, they have yet to begin to operate as adequate lenders to U.S. households and corporations. That is why premature monetary tightening could push our economy into an even deeper decline.
Of course, when the economy really turns, monetary authorities must have the will to reverse policy quickly, tightening instead of easing. It is not something politicians like doing. Hence, they have been prone to running up huge and long-term fiscal deficits--deficits that, at some point, risk the financial stability and economic strength of America.
We cannot afford to let political leaders fudge and muddle along. We must find a way to mandate the appointment of strongly independent budget monitors who would be charged with the obligation to pass public judgment on the fiscal condition of our nation, in both the short and long terms and program by program. The Congressional Budget Office should be expanded to provide these cost and budget estimates, as it did for the healthcare debate. The CBO must be made even more independent and nonpartisan, with a regular obligation to make public its assessments. This is critical to prevent politicians from digging a bigger and bigger fiscal hole through deficit spending and the excessive accumulation of national debt in order to promote their re-election. That is the real danger emerging out of our present discontents.
Beginning of a New World Epoch
Paul A. Samuelson
President Barack Obama's 2008 electoral landslide victory averted a global financial meltdown. Had Republican Sen. John McCain won that election, present U.S. GDP would have been even lower than it is now, by more than 15 percent! And similar losses in global productivity would also have taken place.
October Jobs Report: A True Witches' Brew
In what will no doubt boost skepticism over the Obama administration's message of stimulus success, the unemployment rate in October rocketed to 10.2 percent, a figure much higher than economists had expected and just 0.6 percentage points away from the post-World War II high seen in 1982. While unemployment snapped back down swiftly in the early-1980s recession, it is widely expected that job creation will be slow in this recovery.
Economy: Cities Where Jobs Recovery Will Be Slowest
While the nation's job market is awful overall -- thousands of Americans are exhausting their unemployment benefits daily -- it's clear that the true jobs picture is as varied as the nation's topography. With the promise of a recovery on the horizon, new data show that the employment upturn will be regional as well
Economy: Finding Opportunity in the Recession
Of all the industries devastated by the recession, the media has been one of the most notoriously affected. According to the Bureau of Labor Statistics, 65,000 media jobs were cut in 2008 -- nearly 4 percent of the industry's total. Newspapers are perhaps the biggest loser, with more than 9 percent of jobs eliminated in 2008. However, ...
When it comes to foreclosure, the problem isn't just the 7.2 million jobs that have been lost during this great recession. There are millions of Americans who took a huge pay cut to keep their companies going. Unpaid furloughs and 10 to 25 percent pay cuts mean tens of millions of Americans are having a much harder time paying their bills -- and their mortgages are at risk as well.
Latin American Economy Will Do Well, but Not Great
Latin American Current Events, News & Affairs - Andres Oppenheimer
The news that Brazil and Mexico have come out of the recession and are poised for solid growth in 2010 should be celebrated, and both countries' leaders should be given credit for their sound economic management. But in the global economic context, the two Latin American giants' recovery will be modest.
The Dollar and the Deficits
C. Fred Bergsten
The dollar is under attack on two fronts. Private investors are driving it lower in the foreign exchange markets. Monetary authorities are questioning its role as the world's key currency. There is an obvious linkage between the two attacks: expectations of further falls in the dollar's value will accelerate the prospect that foreign central banks will switch to euros
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