Currently there is a clog in the process. Business and banks are sitting on piles of money right now and are not spending or lending, repectively. Consumers are hesitant to spend because of an uncertain economy and, to a lesser extent, deflation (one puts off buying today in anticipation of lower prices in the future). All these things contribute to a stagnant economy.
The worry that DEFLATION is the problem of the day. We need to induce a little inflation (by increasing the money supply) AND have the Federal Reserve publicly TELEGRAPH that they are pursuing a moderate (3%?) inflationary policy. The thinking is this will prompt consumers to do just what I illustrated at the beginning of this post, but on an economy-wide basis. Anticipation of higher prices of homes, cars, other consumer goods will incentivize people to go buy today. Consumers and businesses will want to spend dollars that are worth more TODAY than they will be worth in the future.The result will be an increase in the aggregate level of demand for goods/services, a movement to Full-Employment ("FE RGDP") and an increase in the price level, as one would expect. See graph below.
There is lots of controversy about this in the economic blogosphere, and since I am just a simple-minded high school teacher, this is as easy an explanation as I can make. Hey, it gets me through the day...What do you think---Inflation, deflation, leave alone?? Would love to hear from you...
Hello again, Gene. (Thanks for your kind words earlier!) Hey, I don't want to dominate your blog with my comments, but I'm tired of waiting for one of your over-grown rug-rats to have a thought. So...
ReplyDeleteI bought a house back in the mid-1970s. Then with the inflation we had, my paycheck just went up and up. The mortgage payment seemed smaller and smaller until it was more of a joke than a burden. So I know that inflation is a kindness for debtors.
But the inflation of those years was blamed on a "wage-price spiral." It seems that in the years since that time, wages have not increased enough to even keep up with inflation, no less drive it.
Paul Krugman and others call for inflation, as a device by which we may reduce the burden of existing debt. I appreciate that. But if prices go up and wages don't, it sure won't do me any good!
Druthers: I would want a stable dollar and stable prices.
Art.
No problem with the comments...I "share" my blog postings on my Facebook page so they usually comment there. We have lively exchanges at times, but it does leave my comment section here rather barren...I get hung up on the inflation versus wages situation. I emphasize to students that what gives a dollar its value is what it can buy. When you look at it from that perspective it seems to change a bit...Even if wages are not increasing with inflation, it seems the "average folk" have a tremendous amount of stuff (are ONLY rich people renting storage facilities to store all their surplus stuff??). So does this mean that even with inflation and stagnant wages our standard of living (measure by the quantity and quality of goods and services available?) is actually increasing? When we analyze the CPI I point out to students that the items that have triple digit increases are the things with HEAVY govt involvment (education and healtcare the most prominent)--A case of too much blind money chasing too few goods?? Are people just expecting the govt to pick up the tab for those things and making a choice to buy other things instead? As a "fair and balanced" teacher, I could counter my own argument and say that it is because people have borrowed the money to buy all that stuff in the storage facility, so it is just all leveraged stuff and meaningless measure of the standard of living. Bottomline for me---I agree with you, a stable dollar is the preferred choice...I do get nervous when the powers that be believe they can "fine tune" the economy. As I said--I am just a high school teacher issuing restroom passes,taking up cell phones AND attempting to teach a little economics in there somewhere...Thanks again. Please continue to comment---it helps me think through the issues..
ReplyDeleteArt---if you see this, coincidently Mark Perry today puts it more elegantly and certainly more academic, the point I was trying to make about real weath vs inflation...Worth a look...http://mjperry.blogspot.com/2010/09/rising-income-inequality-has-been.html
ReplyDeleteFrom Perry's excerpt:
ReplyDelete"This paper uncovers a new fact: non-durable inflation for poorer households has been substantially lower than for richer households."
But isn't that simply your "money chasing goods" thing? More money in richer households leading to more inflation for the things they buy...
It is unpleasant, splitting people up into John Edwards' "two economies." And... it just doesn't seem the macro way.
Your point (that the money directed specifically at education or healthcare must be driving up prices in the target sectors) makes perfect sense to me... But with healthcare in particular, it seems to me that this is an area where people are most unwilling to cut corners. So I think healthcare cost in some sense give a more accurate measure of inflation.
If people can no longer afford filet mignon, but start eating cheaper alternatives instead, and if the CPI fails to show the rising price of the expensive stuff, then we have a lowball estimate of inflation. In healthcare, everybody wants the filet mignon.
"Please continue to comment---it helps me think through the issues."
It helps me, too. Thanks.