by Jerry O'Driscoll* The U.S. economy has been growing slowly but steadily since the trough of the Great Recession in June 2009. Deep recessions are typically followed sharp recoveries. Not so this time. More recently, there is the mystery of low inflation. The Fed’s preferred inflation measure, the core PCE index, has consistently fallen short … Continue reading Fed Policy and Velocity’s Dance
by Gunther Schnabl* The European Central Bank (ECB) continues buying securities. By the end of 2017, the balance sheet is expected to have further grown by about 800 billion euros. This corresponds to a growth rate of 20 percent per year, while real growth of the euro area is expected to be only 1.5 percent. … Continue reading Inflation Is Not Measured Correctly
by Gerald P. O’Driscoll, Jr. I have been reading Central Bank Governance & Oversight Reform, edited by John H. Cochrane and John B. Taylor. It is a conference volume of unusually high quality with all the discussions of presentations included. I plan to write more about the book later, but to highlight one chapter here. … Continue reading The Fed’s Institutional Design
by Mario Rizzo ThinkMarkets blogger, Cato Senior Scholar, and former VP of the Federal Reserve Bank of Dallas, Gerald P. O'Driscoll, Jr., speaks on the Fox Business channel about the problems of deliberate inflation as a policy to reduce unemployment and spur growth. See the video here: Gerald O'Driscoll on Inflation
by Mario Rizzo The Fed has become desperate, not because the American economy is currently falling apart, but because the economy has stubbornly failed to respond well to the policies of the “best and the brightest.” And now, as if to welcome the impending chairmanship of Janet Yellen, stories are surfacing in various places about … Continue reading The Return of Inflationism?
by Andreas Hoffmann (University of Leipzig) In a recent piece Jesus Huerta de Soto (2012) argues that the euro is a proxy for the gold standard. He draws several analogies between the euro and the classical gold standard (1880-1912). Like when "going on gold" European governments gave up monetary sovereignty by introducing the euro. Like … Continue reading The Euro: a Step Toward the Gold Standard?
by Chidem Kurdas A nice thing about Paul Krugman, he does not mince his words. Thus his new book, End This Depression Now!, repeats as boldly as possible the central point he’s repeatedly made in his New York Times columns and blogs for years. Namely, governments have to spend a lot more. They have to … Continue reading Krugman Redistribution or Ponzi Scheme
by Chidem Kurdas Early in his career, long before he became a Nobel prizewinner and the household name for free market economist, Milton Friedman worked for the US Treasury. The following anecdote is from his 1998 memoir with his wife Rose, Two Lucky People. This revealing example of how public officials operate illustrates, in Friedman’s words, … Continue reading M. Friedman Goes to Washington
by Andreas Hoffmann and Gunther Schnabl It came as a surprise to many: the Swiss National Bank announced an exchange rate target. Accordingly, the Swiss franc will be held above the level of 1.20 francs per euro. Switzerland gives up a part of its sovereignty, when the ECB makes bad press in buying trash-rated euro … Continue reading No Way to Escape for the Swiss National Bank
by Andreas Hoffmann This is good news for inflationists. I am shocked that Jürgen Stark quit his job at the European Central Bank. Usually it is a good thing when central bankers quit their job - or at least it does not make a difference. But Jürgen Stark is known as an inflation hawk. Jürgen Stark - … Continue reading Stark quits ECB
by Jerry O’Driscoll The monetary analysis of the housing bubble focuses on the impact of low – even negative – real rates of interest on housing demand. That theory suggests the Fed must be inflating new bubbles with its continued policy of a near-zero federal funds rate. Skeptics ask where are the bubbles? In today’s … Continue reading Where is the Bubble?
by Andreas Hoffmann In a recent article in the WSJ, David Wessel sees a “fundamental problem” in the euro zone's one-size-fits-all policy. We know from Mundell (1961) that a one-size-fits-all monetary policy cannot guarantee low inflation and unemployment in all members of a heterogeneous currency area, given e.g. labor markets are not fully flexible as … Continue reading Does one size fit all?
by Andreas Hoffmann and Gunther Schnabl While most advanced economies continue to suffer from high unemployment and record debt levels, monetary expansions in the advanced economies feed a tsunami of carry trades, hiking asset and raw material prices and accelerating growth rates in emerging markets from Brazil over the Middle East to China. While capital … Continue reading Easy Money, Emerging Market Miracles and the Revival of Industrial Policies
by Jerry O’Driscoll In today’s Wall Street Journal, David Wessel (“Capital” column, A5) revisits the question of whether current Fed policy is inflationary. He correctly states the Fed’s position is that inflation is caused by expectations. Inflation will stay low if people expect it to stay low. He quotes Fed Chairman Bernanke: “The state of … Continue reading Let Them Eat Chips
by Mario Rizzo Chairman Ben Bernanke says don’t blame the Fed for rapidly increasing commodity prices and probable bubbles forming in many investment markets throughout the world. I am just doing what is necessary for a recovery in the US and that is in the interests of the world. (See “Bernanke Defends US Policies” Wall … Continue reading Sand Castle Monetary Policy
by Andreas Hoffmann While the US, Japan and Europe slashed interest rates to unprecedented low levels, growth remains sluggish. Dealing with debt problems and supporting the recovery, the ECB provided money to quasi-finance the euro area problem children. Similarly the Federal Reserve is trying to jump start the economy and has been flooding markets with … Continue reading Trouble ahead? Easy money vs. Turkey 1:0
by Jerry O’Driscoll “Prices Soar on Crop Woes” reads the headline in today’s Wall Street Journal. Global output of key crops such as corn, soybeans and wheat is down, and their prices are up, respectively, 94%, 51% and 80% from June lows. Today’s PPI report has wholesale prices up 1.1% in December after rising 0.8% … Continue reading Inflation is Here
by Chidem Kurdas In two substantial New York Review of Books articles, Paul Krugman and Robin Wells offer their views on various explanations of the property bubble and ways to get out of the slump. On the latter front, they advocate aggressive deficit spending by the federal government and quantitative easing by the Federal Reserve— … Continue reading Taylor, Krugman and Quantitative Easing
by Bill Butos Federal Reserve Chairman Ben Bernanke is pushing for another significant round of “quantitative easing” – now dubbed “QE2” by Fed observers – on the grounds that the economy’s response to simulative macro policies since 2008 has been anemic. What the economy needs, this thinking goes, is some inflation. While much of the … Continue reading Up, Up and Away (Again)
by Andreas Hoffmann* The positions about economic policies could not have been more divided between Germany and the US during the latest G-20 summit. On the one side, Barack Obama pushed Keynesian arguments about the need for further stimulus and the danger of austerity measures for economic recovery. On the other side, Miss “No” is … Continue reading Austerity in Germany – A Keynesian Case
by Andreas Hoffmann* The European Central Bank (ECB) and the Fed differ in many aspects. First, the ECB is considered to be more hawkish on fighting inflationary tendencies. Its primary goal is price stability and it has continued to watch money growth. Output gaps below full-employment are only considered secondary as instrument to forecast inflation. … Continue reading The European Central Bank Turns into the Fed?
by Jerry O’Driscoll Today I reread F. A. Hayek’s Nobel Lecture, “The Pretence of Knowledge.” Hayek was awarded the Nobel Memorial Prize in 1974 and delivered his lecture on December 11, 1974. I was amazed at how modern it was, and appropriate once again for the times. The 1970s were terrible times: stop-go demand management … Continue reading Hayek after 35 Years
by Mario Rizzo There seems to be broad agreement among economists that the current recovery from the recession will be characterized by a slowly falling unemployment rate. This makes a good deal of sense since the problem that created the recession was a misdirection of resources into a number of sectors including housing construction and … Continue reading The Fed’s Coming Indiscretion?
by Andreas Hoffmann* The Wall Street Journal Online recently quoted an IMF paper (written by Oliver Blanchard), that a higher inflation may help to give leeway to monetary policy in times of crisis. What is this about? Blanchard argues that if inflation rates are targeted at 4 percent rather than 2 percent, this would not … Continue reading Inflation as a Solution?
by Jerry O'Driscoll Yesterday was Cato's annual monetary conference and Allan Meltzer gave the keynote address. Today at cato.org you can listen to a 7-minute Podcast of an interview with Meltzer summarizing his presentation. He has just completed the last 2 volumes of his history of the Fed. Meltzer delivers a tough message: no nation that is spending … Continue reading Inflation Alert