Saturday, June 20, 2009

Hot Air Ballooning

The Federal Reserve system may be running out of rationale for existence. This Post discusses some of it. The Fed has shown remarkable failure in Monetary policy; throwing in too much Cash in Boom times, and unable to get Cash to functioning Business and Consumer under Recession conditions. They express little effect on stopping the growth of Unemployment. They now want additional regulation to maintain Bank integrity. The Politics of this remains totally Special Interests, with absolutely no solution for Small Business, Homeowner, or Retail Consumer. I doubt that the Fed will be able even to aid Investors, and if so, it might necessitate a real revision of the Charter behind the Fed. Merkel suggests that regulation of the financial institutions will politicize the Fed; I would emphasize that the Fed policy is already far too political, and far beyond its original mandate to shift funds between Agriculture and Industry. Greenspan and Reagan turned the Fed into a political machine, and the Change has been a benefit for no one.

I differ from the majority of economists in thinking the real threat to the economy is Inflation, rather the standard view of Deflation. Read this Post to get somewhat of an overall view of the discussion with links. I know that Inflation’s normal operation is not gradual rise, but periodic Jerks presaged by Supply Shocks. I also know that the Fed has pumped vast sums of Cash into the economic system while there has been a downturn of Production. The Supply Shocks I worry about most is Gas reaching $4 a gallon, or the onset of Home Heating in October. The increase in Fuel Costs will raise Food Costs upwards to a potential 12%, while Home Heating Costs will double the current default rate on mortgages. All the above trends will increase Business Costs, increase the volume of Business Profits necessary for sustained operation, and increase the Cost of Operating funds for both Business and Consumer. It does not look Good!

Tim Harford wonders if Anyone can tell the difference between Governments being lucky, or that they are skilled. There is much evidence that it requires almost 30 months to turn around any economic trend which affects the entire economy. It is equally as obvious that Government cannot alter any economic trend, without a consistent program extending for a couple of years. No American Government has had a consistent policy since the early days of Bill Clinton; he waffling in later years to avoid alteration in his base support under the Impeachment process. The Rudder has not really being consistently grasped since that time. I am afraid that We are going to find that no Government is better than misguided Government, and that Keynesian policy has long since ran out of Gas, due to the sheer magnitude of the economy. You can blow up a balloon, but doubling the pressure in the Good Year Blimp might carry hazards. lgl

1 comment:

Matt Young said...

I agree with you. Supply shocks, Ballooning, low multipliers. Relative price changes are the thing. The inventory shock comes because government cannot get the economies of scale it needs to deliver more production. The government backlog of goods is eventually devalued. Government has operates about a relatively fixed velocity of money.

The URL is incorrect on the Alpha Blog link however..