Tuesday, May 24, 2011

Congress, Krugman and the Fed

Interesting reading at The Agonist yesterday, in an essay by Numerian. It takes a while to read, but is worth the time because it is the clearest explanation I’ve read regarding the long term effects of the Fed’s injection of money into our economy, known as “Quantitative Easing.” It’s written for the laymen, and makes clear why that money injection was a move to “prop the economy up” and what happens when the Fed quits doing it. It’s not a prophecy of doom, but it’s not going to make you happy.

A couple of conclusions which I draw from his discussion seem to be confirmed by history. One is that the Fed engaged in Quantitative Easing in lieu of Congress acting in any positive manner to stimulate the economy. The “stimulus bill” passed in 2009 was far too timid, and most of it was tax cuts and social policy in any case, neither of which are simulative to the economy. Since that one move, Congress has done precisely nothing toward a more robust economy, other than stir the air with a lot of empty rhetoric. Whether the Fed action was in preference to Congressional action, or taken because of the lack of it I can’t say.

It’s worth noting the announcement of the June ending of QE by the Fed earlier this year and the coincident slowing of economic growth in the first two quarters of this year, which suggests that the effect of the Fed policy was a prop rather than a stimulus.

The other conclusion has to do with inflation, an issue upon which I have had disagreement with Paul Krugman for years. Krugman believes the government is quite correct to ignore the effect of food and energy on inflation, since those prices are “too volatile,” while I believe they have to be considered since they are what people must purchase to survive. Please note that another way of phrasing “volatile” is “rising like an effing skyrocket,” which is what food and energy prices are doing at this time.

Krugman lives in his ivory tower at Princeton and likes to deal with numbers that are nice and orderly. He doesn’t want them jumping around on his graphs and making ugly jagged lines, so he removes the “volatile elements” and just charts the items which people don’t really need to buy, like jewelry and yachts, and then his charts of “core inflation” have nice smooth lines that are pleasing to the eye.

Numerian looks at Bernanke’s assertion that “core inflation remains under control and inflation expectations are tame,” and responds that,

…it is not that it is untrue. The problem is the statement is irrelevant. People and businesses don’t deal with core inflation – they deal with real inflation, which is hurting almost everybody and appears to be out of control, or at least out of control until inflation so damages the real economy that prices peak and begin to fall (which may now be happening). [emphasis mine-Jayhawk]

Numerian, obviously, does not do his research work at Princeton University.

He finishes up by saying that he doesn’t know what is going to happen, and doesn’t know what would happen if the Fed resumed dumping money into the economy. That has the seemingly perverse effect of making everything he said earlier much more believable. He also suggests that Republicans may not be quite as stupid as Democrats and the liberal media think they are. I’ll let you read that from the horse’s mouth.

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