Chillin' out till it needs to be funded
Though the markets continue to heigh ho the QE3 and runaway down to a Grecian tragedy at a minutes notice, the ensuing growth will easily buy them in to a higher inflation target met actively than just by maintaining Fed rates for the short term at 0.25%
Here’s Krugman on Europe
A couple of blog posts ago, Paul Krugman was ( and he’s my campcommenting on the choices left to the ECB between letting deflation run amok in the GIPSIs or letting inflation find a higher target. Countries like South Africa have taken cognizance of the Inflation argument, bu tin the Fed, there are at least 3 who do no tlike the argument.
Here is how Krugman very concisely describes the difference:
Well, one way or another we need to have German inflation 4 points higher than Spanish inflation over that period.
So consider two scenarios: in scenario A, we have 2 percent German inflation and 2 percent Spanish deflation. This implies an overall eurozone inflation rate of 1 percent. In scenario B, we have 4 percent German inflation and zero Spanish inflation, implying eurozone inflation of 3 percent.
In a frictionless world, it wouldn’t matter which scenario gets chosen. But in reality, scenario A, the low-inflation scenario, is vastly worse for Spain — for two reasons. First, it’s much, much harder to get actual deflation than simply to have stable prices, so scenario A means much higher unemployment. Second, because Spanish debt is in euros, scenario A implies a significantly worse debt burden.
So what we’re seeing is an ECB catering to German desires for low inflation, very much at the expense of making the problems of peripheral economies much less tractable.
I for one, would think its likely Germany’s way or the highway may be good for Germany. or for the US too if it is ok wih a deflationary orbit in which to kill its prey (global trading partners) Germany may need to put its foot down but cutting down the inflation and making high and expensive GDP cuts also brings back the Debt to GDP ratio for each Euro component to the brink , in a situation much worse than today if the GDP spirals on itself and for argument’s sake reduces to half, you’ll need probably four times the GDP in debt and your dozen economic / governance models wcould not fit the expense in ..even without welfare spending
Here’s how the US can do it..
A preference for catering to the conservative might be a survival skill but we should be able to jettison it for when it does not work. Out funding the economy, when you cannot bear the expense with a QE3 and only 3 weeks before another downgrade, leaves the Economy much wary and even too watchful of Greece and other wise small backburner issues . Europe is in for a semi permanent recession with the necessary expense cutting and bigger countries like Italy, Spain and France going down the tube with Debt ratios at 90% of GDP and the PMI indicating a recession not coming out at any time soon. Why US markets are still watching for interdependencies apart from the $400 bln global trade, is a little mysterious, much like the GSEs riding their balance sheets to $3 tln and not being at fault for the crisis.
We need specific emasures and the simplest point to start is to nudge inflation and bring short term rates higher to a healthy level. Here’s where I am looking for hints on how to nudge inflation upward..And to start printing more treasury notes remains a likely option with a quick bang for the budget but without keeping the credit rating up that may b something you had not bargained for..(According to @zerohedge, the plan is to increase Treasury borrowing by 35% this year to still less than a Trillion)
It’s not easy..
A larger QE bloats your debt conditioning and has not encouraged inflation as interest rates spiralled down o 2% from 3% just as the US
potential for the future seemed in a cloud. And that will happen yet as risks of deflation rise. So it’s not QE. Deficit spending similarily has already been overused in the US model and as I said, conservative thinking and history’s examples may be a very good start but you should know which measure is not working and slough it off too incl QE and excess domestic debt for the US and thus deficit spending.
The final answer to economic growth is thru Jobs, spending and especially reaffirmation and renewal of America’s infrastructure is the best answer too. Unfortunately, wee need to make a direct output relation here, and that effective Transmission mechanism converting Fed dollars into output and jobs i not an oernight even if it is really possible to a significant amount, which are two steps of the debate, policy makers at the Congress and Whitehouse must tackle
QE unfortunately brings back hyperinflation in Gold and Oil and you do not need that at the simplest level and at a very visible level they will hit US CDS spreads binding US to a recession and / or deflation cycle it needs to stay out of
What Bernanke therefore must do..
Ben Bernanke therefore will like to wait for good traction and measured spending on Jobs programs to prove spending aand economic growth and that will keep inflation running around the 2% mark as well. But for inflation to be created monetarily, the Fed must try using structural measure and Inflation based securities and returns ona larger level in the Economy. Its results will also be easy to measure. To a small extent it can also use Europe and its global term facilities to turn around and pace its currency down. Probably shorting US dollars to a more comfortable level is an answer it can sell to some of its constituents as it keeps a hegemony in cover to promote stability. Of course the Fed cannot get it head into the structural Finance options most of its favored SMEs/junk rated companies but it will be forced there once another couple of defaults strike it iby 2012 and it refuses to let go of the old
The Fed will probably try to lay the ground for this in more clear terms if there is debate and just keep interest rates low ( incl those on the Fed funds from the banks) and Obama Co with the Super committee will start the business of laying ther differences in public next. But that is democracy , right! And good September and POOctober resultsofn the Auto sales and PMI and retail spending alongwith the final turnaround of the mortgages market will be in time fror America to come back. Till then, more jobs, more spending, more debt writedowns..and more Carter bonds, but to keep the currency down as he Swiss did..