Monday, May 20, 2013

Because it is empty

In Page One Economics at the St. Louis Fed... the March 2013 issue... Scott A. Wolla writes:

If the low inflation rate of 2 percent is good, why not have an even lower rate of zero? When the inflation rate is less than 2 percent, the danger of deflation exists. Falling prices might sound appealing, but falling prices would likely lead to falling wages as well—and deflation is associated with very weak economic conditions (Board of Governors of the Federal Reserve System, 2013).

Makes it sound like prices might fall by accident and, once falling, continue to fall in some kind of bizarre death spiral.

Perhaps this is a reasonable evaluation of our economy since 2008 or so. But it is NOT a reasonable evaluation of our economy for the 60 years prior to 2008. It is not a reasonable evaluation of what we used to think of as a normal economy... of what we still think of as a normal economy.

The next paragraph in the same article refers to things Bernanke said:

An inflation rate greater than zero maintains an “inflation buffer,” which reduces the chances of deflation should the economy start to weaken (Bernanke, 2010). On the other side of the Fed’s dual mandate (maximum employment), it is generally agreed that economic growth and employment are enhanced when inflation is low and stable (Bernanke, 2006).

"An inflation rate greater than zero maintains an 'inflation buffer'".

You could be six years old and understand that notion, not because the idea is simple, but because it is empty.

An inflation buffer "reduces the chances of deflation should the economy start to weaken (Bernanke, 2010)."

Good golly. If we imagine the economy weakens only enough that inflation falls by 2% and no more, then we're imagining a weak economic weakness.

That's an awful weak imagination. And awful, awful economics.

You know, it used to be normal for prices to go up and down some. Before my time. Before the Fed's time. It was okay, you know? Of course, there wasn't as much debt then as we have today.

Yeah, prices (and incomes) going down in a debt-heavy economic environment make debt even more of a burden.

Is that the reason we dare not risk even a moment of falling prices? Get serious! The problem, obviously, is not risk of deflation. The problem is excessive debt.

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