Paul Krugman: A Return of That '70s Show?

Paul Krugman says that, contrary to the emerging consensus, there's no need to raise interest rates to avoid a 1970s-style inflation problem:

A Return of That ’70s Show?, by Paul Krugman, Commentary, NY Times: ...Ben Bernanke and his colleagues at the Federal Reserve did what their predecessors failed to do during the banking crisis of 1930-31: they acted forcefully to avert a collapse of the financial system. And their efforts seem, provisionally, to have worked. ...

You might think, then, that everyone would be congratulating Mr. Bernanke and company... But at an economic conference I recently attended, many of the participants ... seemed to be bashing the Bernanke Fed. ...

The emerging conventional wisdom, if what I heard is any indication, is that Mr. Bernanke has been fighting the wrong enemy all along: inflation, not financial collapse, is the real threat. And to head off that threat, the critics say, the Fed has to reverse course and raise interest rates — never mind the risks of recession.

So this seems like a good time to declare that the new conventional wisdom is all wrong. ...

It’s true that the soaring prices of oil and other raw materials have led to public anguish over the rising cost of living. But ... there’s no sign whatsoever of the wage-price spiral that, in the 1970s, turned a temporary shock from higher oil prices into a persistently high rate of inflation.

Here’s an example of the way things used to be: In May 1981, the United Mine Workers signed a contract ... locking in wage increases averaging 11 percent a year over the next three years. ...

At the time,... many workers were getting comparable contracts. Workers and employers were, in effect, engaged in a game of leapfrog: workers would demand big wage increases to keep up with inflation, corporations would pass these higher wages on in prices, rising prices would lead to another round of wage demands, and so on.

Once that sort of self-sustaining inflationary process gets under way, it’s very hard to stop. In fact, it took a very severe recession, the worst slump since the 1930s, to get rid of the inflationary legacy of the 1970s.

But as I said, this time around there’s no wage-price spiral in sight.

The inflation hawks point out that consumers are, for the first time in decades, telling pollsters that they expect a sharp rise in prices over the next year. Fair enough.

But where are the unions...? ... Consumers are worried about inflation, but you have to search far and wide to find workers demanding ... higher wages, let alone employers willing to accept those demands. In fact, wage growth actually seems to be slowing, thanks to the weakness of the job market.

And since there isn’t a wage-price spiral, we don’t need higher interest rates to get inflation under control. When the surge in commodity prices levels off — and it will; the laws of supply and demand haven’t been repealed — inflation will subside on its own.

Still, why not raise interest rates a bit, as extra insurance against inflation?

Part of the answer is that the financial crisis, which seems to be in remission..., could flare up again if money gets more expensive. And even if the financial crisis doesn’t come back, higher rates would further weaken an already weak real economy. ...

The bottom line is that while expensive gas and food are inflicting real harm on American families, they aren’t setting off a ’70s-type inflationary spiral. The only thing we have to fear on that front is inflation fear itself, which could lead to policies that make a bad economic situation worse.

Comments

[Joe]

Exactly. The parameters under which the Phillips Curve was conceived have changed. At the time, before containerized cargo, labor was a limited factor of production and therefore had bargaining power. Can't have a wage price spiral when labor has no power to demand higher wages.

[We Have Nothing to Fear but Fear Itself]

"When the surge in commodity prices levels off — and it will..."

Commodity prices will certainly level off in terms of the Euro, Yen, and such. This does not guarantee that they will level off in terms of dollars, if people lose confidence in the dollar. The danger this time is more than just workers wanting COLAs, it is foreign savers abandoning all hope of maintaining purchasing power (with respect to their native currency exchange rates) with dollar denominated debt instruments. We have become utterly dependent upon foreign savings, since we have lacked domestic savings for some time now.

[Winslow R.]

Just because we don't have wage increases in the U.S. doesn't mean we don't have wage increases in the rest of the world.

We can still have a international wage, u.s. price spiral until the fall in living standards of U.S. voters becomes so bad that U.S. voters on fixed incomes, retirees and jobsters alike ...... i don't really know.

1) Bankruptcy of U.S. voters continues with various Fed/Government 'bailouts' of the financial sector as they continue to absorb losses. This can be inflationary, by the way, if deficit spending on bailouts is increased faster than savings desires. The question becomes, does the blunt instrument optimally target the Humvee class?

2) Tax policy shifts making the U.S. wealthy pay for their own bailout, this would limit the inflationary impact of bailouts.

3) U.S. Gov/Fed policy shifts to investing in the future, lifting U.S. wages and tying retirement benefits to the CPI, allowing U.S. workers to sustain what is left of their 'extravagant' lifestyles while the dollar tanks but the economy flourishes.

4) International banks engineer a world-wide slow down by increasing interest rates in tandem world wide, as Mr. Taylor suggests, possibly leading to a global depression and a Grand New World Order unencumbered by democracy.

The international bankers better get to work quickly, time is running out. I really don't think there is much they can offer except pain and suffering.

[Winslow R.]

"We have become utterly dependent upon foreign savings, since we have lacked domestic savings for some time now."

Not true. Lending (short or long term) is not savings constrained if you have access to the lender of last resort or a loose regulatory structure that doesn't monitor capital requirements.

[We Have Nothing to Fear but Fear Itself]

Er, well yes. However, we would have to create enough new money to expand the money supply several fold to meet domestic demand for credit. Um, you know Zimbabwe style hyper inflation. Try convincing workers not to ask for COLAs that embed inflation under those circumstances.

[Lafayette]

Article: Once that sort of self-sustaining inflationary process gets under way, it’s very hard to stop. In fact, it took a very severe recession, the worst slump since the 1930s, to get rid of the inflationary legacy of the 1970s.

May I ask the question, unanswered in this article, why didn't it happen again?

I don't think that Krugman gives sufficient credit to productivity enhancements in subsequent periods. The 1970s saw the advent of high-performance computing in large companies. Throughout the following three decades, Information Technology (which is computing plus telecoms) brought about a sea-change in work methods from which ensued the productivity enhancements that permitted higher salaries across the board. Whole companies were re-engineered along totally different operational lines, which proved more efficient.

Of course, it was not mining that necessarily benefited, but the salary leapfrogging that Krugman remarks upon most certainly was more easily assimilated by the economy without provoking serious inflation.

Can that happen again? Yes, it can, but never again of the same magnitude. The use of computers has advanced wondrously, but future enhancement from here will bring likely only marginal productivity improvements. The work-methods of 1970s provided a much lower base for improvement than exists nowadays. Methinks.

Nostaglia-aint-what-it-used-to-be: I saw a rerun lately of "The Apartment" (Jack Lemmon). Whatever happened to those rows upon rows of typists ..... ? They are now Information Workers, each in their own tiny cubicles.

[Oupoot]

IMHO, the US imported deflation in the 1990s and early 2000s through globalisation, as did the rest of the world. This limited the extent of total US inflation over this period. However, there is a growing international inflaiton-wage spiral developing. (Just see recent articles in the Economist). While PK may be correct in saying that there is not yet a inflation-wage spiral developing in the US, the US are now more open to imported inflation than ever before.

I would acknowledge that growth in the US economy will remain pretty weak in the foreseable future as the economy tries to reestablishes its health. Financial flows that would have gone to the US are now diverted to the rest of the world due to riskier US markets and lower returns. This increases the financial/economic pressure on the rest of the world as other countries adopt policies to absorb these inflows. Countries could allow currencies to appreciate, but this weakens their exports and increase imports, placing pressure on their own economic health (Dutch disease). Currently happening in the Euro area and mineral rich countries with flexible exchange rates. Alternatively, countries absorb the inflow through increasing their foreign reserves to keep their currencies from appreciating. However, this leads to greater local inflation. Currently happening in parts of Mid-East and other countries with fixed exchange rates. Some countries try to do both, such as China.

Yes, keep US interest rates relatively low for the next 6-9 months in order to restore the health in the US economy somewhat, but ideally the US should raise interest rates gradually by say 1% point over the next 12-24 months and 2% points over the next 3-4 years. This will increase the rate of return for US investments and will relieve some of the pressure on the economies in the rest of the world coming from flexible portfolio investments.

The US must realise the impact their decisions are having on the rest of the world, but at the same time, the rest of the world must acknowledge that a healthy US economy is critical for the world economy and that the first priority of US monetary policy is the US economy.

[anne]

http://krugman.blogs.nytimes.com/2008/06/02/wages-and-inflation/

June 2, 2008

Wages and inflation
By Paul Krugman

The story in today’s column * about the United Mine Workers comes from an old paper by John Taylor, Union wage settlements during a disinflation. ** What I really like about that paper is the concreteness: economists often talk about how expectations of inflation get embedded in price- and wage-setting, but don’t offer direct evidence that this is happening. Taylor, however, had the goods: you can actually see the wage settlements, and you can even see the difference between settlements with and without escalator clauses.

* http://www.nytimes.com/2008/06/02/opinion/02krugman.html

** http://papers.nber.org/papers/w0985

[ndd]

...Ben Bernanke and his colleagues at the Federal Reserve did what their predecessors failed to do during the banking crisis of 1930-31: they acted forcefully to avert a collapse of the financial system

I have been mulling over a completely out-of-the-box thought: Whenever the above subject comes up, people like Prof. Krugman and our gracious host immediately opine that "the Fed had to prevent a catastrophic meltdown of the entire financial system." Genuflection, QED, no further discussion necessary.
But suppose we entertain the thought that maybe, just maybe, "a catastrophic meltdown of the entire financial system" would be (dare I use the word) "contained" to the financial industry. Suppose every single Wall Street I-bank went belly up. Every fly by night mortgage lender and payday loan center shuttered its doors. Suppose Wall Street finance shut down.
Would it kill Main Street? Would it kill corporations who have been sitting on huge balance sheets for the last decade? Or has the financialization of the economy become sufficiently divorced from the "real" economy that its "catastrophic meltdown" would leave the rest of the economy largely unscathed -- like a neutron bomb detonated over Wall Street?
I'm not so sure we should take it as a given that Armageddon on Wall Street would lead to the four horsemen of general economic destruction on Main Street.
Is there anybody else willing to entertain thinking outside of the box?

says...

Your comments: "have led to public anguish over the rising cost of living"

You could not be more wrong. High gas and food prices have cause more than anguish to people. Retired citizens, savers and people on fixed incomes have seen their standard of living drop. Moreover, you celebrate the fact that there has been no increases on salaries and therefore all is good. So basically your attitude is: "no bread? let them eat cake".

[hari]

ECB is celeberating 10 years anniversary of inception of Euro. FinMins are also meeeting and complaining about headline inflation based on commodity prices including oil.

When can we expect some serious control on commodity price bubble? CFTC is expected to officially report on its year-long investigation on *apparent* oil price bubble - taking place among *insiders*, I presume.

Ethically this may be a serious CFTC annoucement when it finally reports. Mercantile Exchange is also being investigated on its commodity pricing methodology....

Evidence is still hard to comeby on the commodity bubble argument, and we may never get to know the real truth....

[hari]

Paul may be right...but we need lot more evidence to backup his argument against 1970 style price inflation.

What will he say when Fed finally decides its *inflation* stupid we've to deal with...thus more or less echoing ECB argument... why rates must be held at current level or may be move up.

[bullbust]

http://www.nakedcapitalism.com/2008/06/fed-on-hold-till-fall-despite-calls-to.html

While I have no idea of how representative his view was, Willem Buiter was unabashedly critical of the US monetary authority at this gathering, and he evidently had company. From the abstract of the paper he presented:

.....since the excesses were confined mainly to the financial sector and, in the US and some European countries, the household sector, it should have been possible to limit the spillovers over from the crisis beyond the financial sector and the housing sector without macroeconomic heroics. Measures directly targeted at the liquidity crunch should have been sufficient. The macroeconomic response of the Fed to the crisis - 325 basis point worth of cuts between September 2007 and May 2008 and a 75 basis point cut in the discount window penalty – therefore seem excessive and create doubt about the Fed’s commitment to price stability.The liquidity-enhancing policies of the Fed, and its bailout of the investment bank Bear Stearns, were effective in dealing with the immediate crisis. They also were, quite unnecessarily, structured so as to maximise moral hazard by distorting private incentives in favour of excessively risky future borrowing and lending. The cuts in the discount rate penalty, the extraordinary arrangements for pricing the collateral offered to the Fed by the primary dealers through the TSLF and the PDCF, the proposals for bringing forward the payment of interest on bank reserves, the terms of the Bear Stearns bail out and the ‘Greenspan-Bernanke put’ rate cut on January 21/22 2008, 75 bps at an unscheduled meeting and out of normal hours, are most easily rationalised as excess sensitivity of the Fed to Wall Street concerns, reflecting (cognitive) regulatory capture of the Fed by Wall Street.

The evidence that Bernanke & Co. may have endured a bit of criticism is that Paul Krugman issued a defense in his New York Times column today (a buddy who saw Krugman speak at a conference of political bloggers felt that Krugman was unduly protective of his Princeton colleague Bernanke):

[a]

"You might think, then, that everyone would be congratulating Mr. Bernanke and company... "

Nah, only old Princeton pals are...

' "Whenever the above subject comes up, people like Prof. Krugman and our gracious host immediately opine that "the Fed had to prevent a catastrophic meltdown of the entire financial system." Genuflection, QED, no further discussion necessary. etc.'

Well said!

Anyway, what do interest rate cuts have to do with saving the financial system? That's just a bait and switch. The interest rate cuts were originally put in place to stop recession. Oh whoops, but now we're in a recession in any case, so those interest rates didn't work. But being an economist means never having to say you're sorry (or wrong). (And indeed, why should he or she? An economist can never be proved wrong in any case, because how can you argue against, "Well things would have in any case been worse had you not done what I suggested"?)

Saving Bear Stearns and swapping Treasuries for junk - now *those* were the remedies to save the financial system. Only guess what? Now, because of its heroic efforts to save the American banking system, the Fed needs to sell lots and lots of Treasuries! As Naked Capitalism reports:

"The Fed is selling Treasury bills at the fastest pace since it was founded in 1913 to support bank-lending programs meant to boost confidence in financial markets. The Fed owns $34.3 billion of the securities, down from $267 billion, or 27 percent of the market, in December."

So interest rates are going up, because of the Fed's rescue efforts. Save the financial system, but in doing so destroy the real economy, so the financial system is destroyed in the end anyway! Great idea!

[paine]

"where are the unions "

indeed
but then again
on the two posed battle fronts

do we have an adequate model of
non organized job markets' " wage setting processes "

and do we really know
what we're doing
when we increase the "price of money "

on the former
reigns the "everywhere and no where"
sources
of the spontaneous
bubble froth and pop

unlike say the oli vs oli of
one union vs big three
monopolistic comp is a bitch to model

[paine]

krug holds tightly to the main contradiction
the very extensive and fairly large
adjustments underway in relative prices
(stripped naked ...barter ratios)

all this coming not from inside the product pricing system
so dominated by wage costs and not from
excessive flows of credit into the system
but from a few outside
but basic and pervasive surging commodity prices
and their " cost of everything else "effects
as they feed thru "the production matrix "

obviously if prices change
their rate of adjustment speed sluggishly
in either direction
and in particular sluggishly downwards
add a trend rate that is slow and
you have a dilemma

to minimze real output effects
credit policy needs to accomodate
the adjustments by allowing
rising aggregate prices to temporarily accelerate
to allow the non raging product prices
to adjust without declining
while giving the raging commodity prices room enough
to soar "relatively"

clear as mud eh ??

[bakho]

The key is the wage-price spiral.

How much of the successful attack on the wage price spiral was due to the Fed? and how much was due to the significant drop in demand for oil (20 %) between 1978 and 1983? No doubt the Fed recession had some effect on oil demand, BUT oil demand in the US only returned to 1978 levels in the year 2000. One might ask how the high interest rates affected the investment needed to increase energy efficiency?

How much was due to the union busting by Reagan? How much was due to the massive layoffs of union workers in the early 1980s? How much reduction in price pressure was due to the increases in energy efficiency?

Is there a more narrow range where Fed policy can be effective, but a outside that range it is ineffective? How much additional effect did moving the Fed rate from 10% to 15% have?

[Mother Teresa]

"Suppose every single Wall Street I-bank went belly up. Every fly by night mortgage lender and payday loan center shuttered its doors. Suppose Wall Street finance shut down.
Would it kill Main Street?"

It is not about I-banks and "fly by night mortgage lenders". It is all about the GSEs. Foreign central banks hold almost one third of all agency paper. Just before the $200 million TAF ploy and the Fed's famous JP Morgan/Bear Stearns maneuver, the FCBs were dumping agencies and buying treasures. Had that been allowed to continue, the USD could have become the US peso. Since private wholesale mortgage buying has all but disappeared, the GSEs account for over 85% of today's mortgages. If the GSEs implode, so does America.

Low rates forced pension funds and insurance companies to look for yield in all the wrong places. "Enhanced" money market funds turned out to be SIV financial asbestos. Rates need to be restored, if for no other reason, to give American individuals and institutions a reason to save money. Since the SIV implosion, the current fad for pension funds is to pour capital into commodities futures markets. This will not end well. The strong chance that a crash could occur after a commodities boom goes bust would not be without historical precedent.

http://www.columbia.edu/~ad245/theberge.pdf

[Mother Teresa]

Krugman's economic compass has lost its magnetism.

[paine]

" We have become utterly dependent upon foreign savings "
we ???

who among us
made this profligate decision ??

please call a spade a spade

when production exchanged
thru cross border markets
is out off balance
some one's sovereign credit
makes up the difference
in our case uncle sam's credit
is our ultimate means of purchase
is this activity
"dis savings " ??
not in any sense beyond the metaphorical

is it an analogy ??
no

the words saving /dis saving
properly used refer to
the activity of households not nations
in my estimation
its a serious miss use of the word's
deeper subjective associations
of homely virtue and vice ....

households have no money mine
and the dollar will be held
by sovereign outfits
for other reasons then rate of return

the real point

is an optimal reserve currency
the slowest expanding of the worlds currencies ???

i sugest to the contrary it oughta be a fast enough expander

silver vs gold comes to mind
when dollar and euro are compared

until we have
a world money
the dollar best serves and most likely will keep serving if its value secularly falls
against all other trade weighted currencies

back our national dis-savings

how dare any one use " we "
when the bottom half of real wages are stagnating
and in part because foreign currency values are manipulated to creat an unfair competitive advantage
and a chronic industrial trade gap

in fact
to use savings dis savings
about a trade gap that is as much
a product of currency manipulation
as anything else
is a groos injustice to most of us that make up your "we"

and these manipulations
necessary eating of excess trade dollars ....
is in fact a system approved aided and abetted by wall streettycoons
and the various "inside owners and runners"
of the n giant cross border
laputa corporations
larry summers calls
"our stateless elites "

i won't belabor the point any further

but polonian suasions
piss me off

[reason]

Paine...
why don't you just say you need some inflation because of the combination of sticky nominal prices and dramatic relative price changes (particularly commodity prices). That is surely a well known story for anybody familiar with Keynesian analysis.

[paine]

"rates need to be restored, if for no other reason, to give American individuals and institutions a reason to save money"

criminal idiocy

[anne]

"It is all about the GSEs. Foreign central banks hold almost one third of all agency paper. Just before the $200 million TAF ploy and the Fed's famous JP Morgan/Bear Stearns maneuver, the FCBs were dumping agencies and buying treasures. Had that been allowed to continue, the USD could have become the US peso."

GSE - TAF - FCB - USD; blah, blah, blah, phooey.

[anne]

"Rates need to be restored, if for no other reason, to give American individuals and institutions a reason to save money."

Me, I'm saving up a storm. Tra, la.

[tinbox]

ndd,
you are right on target. PK's only columns/post referencing the Bear Stearns episode were to praise heroic Bernanke. Many of his posts since then seek to explain commodity prices as driven by something/anything not to be called inflation or to be blamed on the Fed. Grain prices-blame the Chinese middle class. Energy-blame peak oil.

What exactly is the difference between "averting the collapse of the financial system" and crony capitalism keeping favored institutions afloat on an unregulated sea of easy money and credit?

PK cannot be trusted on a topic where Bernanke is involved. I don't think he even realized Bernanke was a Republican until around 2003.

[reason]

Paine...
money is not just a means of exchange, (sometimes unfortunately given the clear conflict) it is also a store of value. It is in the latter role, that the disfunctional international financial system is creating massive problems that will eventually dethrone the USD.

[reason]

As for the savings problems of the USA - I agree the aggregate is not the way to look at this. But ask Liz Warren what is happening on the individual level.

[anne]

"PK cannot be trusted on a topic where Bernanke is involved."

Trust me, Bernanke has been terrific through the crisis.

[anne]

Reason:

"As for the savings problems of the USA - I agree the aggregate is not the way to look at this. But ask Liz Warren what is happening on the individual level."

Right.

[Mother Teresa]

Term Auction Facility (TAF),government sponsored enterprises (GSEs, Fannie Mae and Freddie Mac), foreign Central Banks (FCB), United States Dollar (USD), and structured investment vehicle (SIV); I hope that helps, Anne.

Structured investment vehicles, you know, like CDOs (collateralized debt obligations) made up of MBSs (mortgage backed securties)AKA (also known as) tranches of subprime mortgages mixed with higher quality mortgages that are bringing down the IBs (investment banks) and the monolines (Ambac and MBIA). These were the asset classes du jour before investors moved to commodity futures speculation, which actually might have something to do with today's cost-push inflation that Krugman seems to have so little concern about.

Now, Anne, please enlighten me. "Blah, blah, blah" is an acronym for what?

[reason]

Mother Teresa,
what was happening with oil and other commodity prices BEFORE the CDO market got the wobbles? I do not doubt there is some short term speculation component in commodity prices, but ultimately these markets are tied to reality through spot markets as Krugman with his usual clarity and insight pointed out. Krugman has an awfully good track record of having been proved right in hindsight. I would be careful assuming you know better.

[Mother Teresa]

"Trust me, Bernanke has been terrific through the crisis."

I don't trust you, Anne, other than to defend anything Krugman has to say. So please, explain to me how the American taxpayer is better off because of Bernanke's maneuvers. Have his wages gone up? Has his cost of living gone down? Will he be forced to pay for any shortfalls arising when the Bear Stearns collateral taken in by the Fed can't be marked to market without being sold at liquidation prices?

[paine]

reason
"why don't you just say you need some inflation because of the combination of sticky nominal prices and dramatic relative price changes "

i agree it amounts to a make room
burst of price level rise

i guess i was trying to emphasize
he 60-70's update to keynes

that "there is no "natural " trend rate
in "spontaneous " price level change

the trend rate can be any positive rate

so long as policy accomodates
this trend rate
the system will settle towards
a "natural " out put rate

i think this model
is dangerously mis leading

there's nothing "natural" about any of it
let alone optimal

abba lerner
as far back as the late 40's
realized
the go slow policy required to avoid wage push
in a oli type set of markets
was not a feature but a god damn bug

he devised his MAP system
to sublate this "natural"
systemic secular performance limitation

the state of the job market as a feed back mechanism
is a blight

imagine the forgone output all put toward
supporting additional r and d
or
accelerated automation of production

after fifty years the two possible worlds
could show a comparative diff
huge enough to convince the AEI

[Mother Teresa]

Reason, oil was selling for less than $60 a barrel less than two years ago. Grains weren't even an issue.

[reason]

MT...
Wrong derivative. RATE of CHANGE please.

[paine]

"money...is also a store of value"

can be
even for foreign sovereign holders
who can print all they want of their own kind

but t'ain't the purpose for the asian aces

their accumulations lately
are largely
a biproduct of their dollar peg forex fiddles

now do they estimate the annual loss in stored value ??

prolly

but it hardly equals the long run value
of their technical aquisitions
their hu cap development etc etc
their product quality made world class ...
u add the rest of the benes

all this is gleened from
participation in world markets
along side their trans nat
limited liability co-e-laborators

which in the final accounting
is all made possible
only by the much belower relative wages
the forex fiddle induces

belower
enough to give the fiddlers
a premium social return on
the cost in declining value
they get on their
"investment "
in an over sized dollar horde

while also providing
their trans nat partners
super profits along the way

the fierce merciless and savage
penetration of north industrial markets
made possible by this ever growing
ever declining in value
sovereign dollar reserve
are they willing to seek higher returns in various dollar based asset markets??

of course
up to a point
pure sterilization is not necessary

but to demand higher returns
can't come at the cost
of eventual hyper inflationary disruptions
of those markets

[paine]

mother t

knows too much about trees not enough about forests

[paine]

who ever liz warren is

i'm guessing she's
a household debt level alarmist

bottom half household debt
is as much
the product of thirty years
of too low wages
as ten years of too high credit lines

[paine]

putting aside the god damn
lot value elvis plate gig

[Mother Teresa]

Ah, paine, so much more noetic than poetic or prophetic

[paine]

brother t

"explain to me how the American taxpayer is better off because of Bernanke's maneuvers. Have his wages gone up? Has his cost of living gone down?"

refer yourself to any half decent
intro macro text
of new keynesian conventional wisdom tilt

btw

why conflate tax payer with wage earner ???

indeed pay roll taxes are king hell 'round here
but other sources are still taxed
in this case to service borrowings by uncle to cover
his losses from bad bail out investments

or
are u already forseeing the era
of zero capital income taxation ???

anne and blah blah blah don't mix in my book

[paine]

mt
be careful
these are grease filled waters
u may mistake trhe grip of your words

happy pre emptive
noetic noel

[Mother Teresa]

"but ultimately these markets are tied to reality through spot markets as Krugman with his usual clarity and insight pointed out."

Reason, I'd like to see your proof of this "reality". Show me how, in the last 10 years, the spot prices of oil and other commodities have been indexed to world supply and demand requirements.

[Mother Teresa]

Paine, you've got President Harry thrashing about in his grave. Let him rest. Let him rest.

[paine]

"ultimately these markets are tied to reality through spot markets"

reason

spot markets can't drift below futures markets plus carrying cost

krug tried to find inventory build up
but in the extreme perfectly in-elastic demand
leaves no inventory build up

if out put is maintained at
supply filling levels
u end up with higher producer surplus and lower consumer surplus
a straight transfer

the real question
what then determines the crude price 24/7 /365

obviuosly something "willed " and intentional
something not always into
short run rent max
even if collective and partly hap-hazard

[Mother Teresa]

Paine, Harry is once again at rest.

[paine]

tm

reason is a very thoughtful sharp
noetically gifted commenter
like anne

btw
your
" Show me how, in the last 10 years, the spot prices of oil and other commodities have been indexed to world supply and demand requirements."

seems a tad petulent
since no one really makes sense of the numbers
at least with any model i know of
enlighten me as to the source of your convictions ???

[Mother Teresa]

"krug tried to find inventory build up
but in the extreme perfectly in-elastic demand
leaves no inventory build up"

If he is looking only at sweet crude, perhaps.

"According to PetroLogics Ltd., a company that tracks oil-carrying vessels, Iran is now storing crude oil in 20 tankers in the Persian Gulf; this is up from an estimate of ten earlier this month. These tankers are capable of holding up to 40 million barrels of oil, or approximately ten days' worth of production. According to Alaric Nightingale of Bloomberg.com, Iran is leasing the tankers from a variety of international suppliers."

[Mother Teresa]

"enlighten me as to the source of your convictions ???"

Paine, show me yours first.

[paine]

"I saw a rerun lately of "The Apartment" (Jack Lemmon). Whatever happened to those rows upon rows of typists ..... ?"

great movie laff

i have you down for the ray walston role
in my pending finance remake

bruce
has the next door doctor role

other casting remain sopen
to .... project investors

[Mother Teresa]

Oh, and Paine, what "convictions" might you be asking about?

[paine]

show me yours first

gladly

zip

see

karl marx is always bigger

[Mother Teresa]

I thought you might do a remake of "Damn Yankees", and cast yourself in that Ray Walston role.

Harry is thrasing again.

[Mother Teresa]

I thought you might do a remake of "Damn Yankees", and cast yourself in that Ray Walston role.

Harry is thrasing again.

[paine]

to answer laffs question
the diff between the pre volckerdammerung
low 70's and ever after

the radical openning of the domestic markets
to global comp

a force at work since the early 70's
but only able to take command
in reagan's master piece

"redawn of the profit zombies "

[Mother Teresa]

I thought you might do a remake of "Damn Yankees", and cast yourself in that Ray Walston role.

Harry is thrasing again.

[paine]

mt
i'm starting to grow fond of u

are you my "mother" ???

[Mother Teresa]

Are you calling me a dog?

[paine]

"crony capitalism keeping favored institutions afloat on an unregulated sea of easy money and credit?"

nice

[paine]

madame sir
enough of this tit for tat

mark
runs a serious highly respected blog here

not some common ....chat booth

[Larry]

paine and MT, please take your affair elsewhere.

If Krugman is happy that we don't have a spiral, and the big reasons that we don't have one are globalization and weak unions, then should he be advocating less globalization and stronger unions?

The US is exporting, not importing, inflation to dollar-linked countries like China and Ukraine.

The turning point about US indebtedness happens when it becomes cheaper and thus popular to borrow in foreign currencies than in greenbacks. We can't inflate those debts away as we can today's.

[Mother Teresa]

I graciously accept your surrender.

[paine]

oupoot

"keep US interest rates relatively low for the next 6-9 months in order to restore the health in the US economy somewhat, but ideally the US should raise interest rates gradually by say 1% point over the next 12-24 months and 2% points over the next 3-4 years"

your nearly precise numbers
for policy rate change and timing
imply
a vast econometric model

where resideth same ???
to me its beyond our existing
models and simulations
in the hands of clio

[Mother Teresa]

"The turning point about US indebtedness happens when it becomes cheaper and thus popular to borrow in foreign currencies than in greenbacks."

It has been cheaper to borrow in yen than in greenbacks for some time. Perhaps the turning point will actually arive when the USD becomes the preferred currency for the carry trade.

[reason]

World production is over 80 million barrels a day. This is (of course - how many oil tankers have people up their sleeves) chicken feed and too expensive to last for long. Please read actual information from theoildrum.com - there is a very good article today about net export issues. Now I happen to agree that Saudi Arabia may be holding back production a bit, but that is not speculation, that is resource management. Their current income is high enough and the oil is not getting cheaper (and there seems less competition than there was).

[paine]

"The turning point about US indebtedness happens when it becomes cheaper and thus popular to borrow in foreign currencies than in greenbacks. We can't inflate those debts away as we can today's."

who would need to inflate em away ??

larry you lost me here

are u talking about
a limit on borrowing in foreign currency by uncle

why would he face one ???

yes otherwise
his cost of funds
is zero
but are you suggesting
the exchange market for dollars might collapse

any other borrowing by domestics
is a private affair
not directly of policy concern
note ..directly

still and all
what are these privates borrowing for ...
obviously we might need to earn our way more or less
down the road
by balancing our trade
but are you suggesting a period of surplus trade
to pay back hard borrowings ??

only if u foresee a time
when uncle himself
can't buy other currency at some exchange rate
with his own dollars ....
would it be fair to speak
of a deep cataract ahead

[ndd]

If I may pick up on MT's comment and raise a matter of substance:

From Prof. Krugman's May 13, 2008 column:
http://krugman.blogs.nytimes.com/2008/05/13/more-on-oil-and-speculation/

So my challenge to people who say there’s an oil bubble is this: let’s get physical. Tell me where you think the excess supply of crude is going.

From John Maudlin on May 23, 2008:
http://www.frontlinethoughts.com/pdf/mwo052308.pdf

India's refiners are telling Iran they no longer want their oil, preferring the higher-quality stuff that's readily available in the area. So Iran has to decide whether to send it to China or "repackage" it so that it can end up in the US, while they try to get refiners in India to change their minds. Thus, they're leasing tankers to store the oil they're pumping.

I called George [Friedman of Stratfor] at about six this evening and asked him about the Iranian situation....

He told me, "John, it's more interesting than that. It is not just Iran. Today we started checking on how many tankers Iran had, and soon discovered that there is a serious tanker shortage. Lease prices have soared in the past few weeks. It is clear there are a lot of speculators betting that oil is going to rise to $150 or so and are willing to pay very high prices for keeping the oil on the seas waiting for higher prices. It is a speculative boom."

Does Maudlin give a fair answer to Prof. Krugman?

And directly on the substance of our gracious host's post:

The economic/financial community seems to be squabbling about whether we should refight the battle of the 1970s or the 1930s. Either way, they want us to re-fight an old battle. Whenever I hear that, I get that same feeling I always get when I leave the house and I'm not sure what I've forgotten, but I know it must be something .... To the point, seems to me we need to appreciate that this is not either of those old battles.

[paine]

ndd

"Whenever I hear that, I get that same feeling I always get when I leave the house and I'm not sure what I've forgotten, but I know it must be something .... To the point, seems to me we need to appreciate that this is not either of those old battles"

nice
but is it a new battle
because of the vast number of possible
recombination of elements endemic
in the system
or has the system norphed
...making the past
even as recent as the pre volckerdammerung 70's
no guide to the present

[Mother Teresa]

"even as recent as the pre volckerdammerung 70's
no guide to the present"

With derivatives at 7 times the economic output of the entire world, I agree. "This time it really is different."

[Bruce Wilder]

ndd: "The economic/financial community seems to be squabbling about whether we should refight the battle of the 1970s or the 1930s. ... To the point, seems to me we need to appreciate that this is not either of those old battles."

Indeed.

The fact that there is no common understanding of what those battles were about, generates a lot of back and forth, but none of the back and forth is actually about now.

I do think it would help if economists could coin some differential term to distinguish general monetary inflation from a rise in the relative price of key commodities. Call it "real inflation" maybe? Whenever someone starts talking about how productivity or globalization undercut inflation, or how peak oil will spark it, I get itchy.

[paine]

as to the existence of rapidly rising
oil storage
as a necessary tell on the price rise source
forget is there enough storage availible
this would happen all on paper unless ...

i'll drop back
obviously with assured fast enough rising
spot prices those not able
to just keep it in the ground
would profit by holding back supply and letting
it accumulate making a profit above carrying cost
on sale of the stored supply
at the higher price on the 'morrow

but think this thru
how might it happen ??

is the spot price
rise
assured to continue at a sufficient rate ???

and more importantly
if you know prices are going to rise
who else knows ??
if enough do and just play the futures/spot market ...
poof your hord might as well get sold now
because the spot price contains the content of collective wisdom on futures prices
that spot price permium induced by arbitage
the futures price
amounts to virtual storage anyway
and its much more efficient and comprehensive
then the real thing
since the immediate impact on spot prices
ought to slow demand causing a build up
spontaneously as sales drop off
...oh ya in this case with elastcity so low
quantity demanded can't appreciably slow
in the short run

so what sets the upper bound here ??
the spec drives ahead on its own spirits
fulfilling itself so long as confidence
in the rise continues

sum up:

are the pull of futures markets
on spot markets so tight
no rational expectation of profit in storage
can long or reliably exist ??

oil is not like
availible electricity or availible man hours
it can be pumped and held
but is it ??

as to the morality play here

whast happens if the grifters
get caught at it ???

hording is a crime against humanity
if not society ...eh ???

sorry my thoughts are so scattered shot on this
and spread over several comment squares
even by my standards but ...

this is huge and krug et al
have got it wrong i think
as have those trying to analogize the mid to later 70's with now

[Bruce Wilder]

paine: "has the system norphed"

1.) the system is always morphing, so, yes, the system has morphed.
1. a.) Most innovation proves fatal.

2.) Fundamental circumstances have changed. (Note to fish: water is wet; also, swimming in air is not advised.)
2. a.) A secular rise in relative commodity prices is now a regular, periodic constraint on growth;
2. b.) the carrying capacity of the environment is now a constant constraint on economic growth;
3.) it is good to be king, but not so good to be soon no longer king. (A comment on the status of the U.S. as a world power.)

[paine]

is it worth pointing out

the oil in the ground is not owned
by the folks doing the processing and distribution

important
because of course the optimal spec
if you own the whole system from in the ground to in my gas tank
is to accumulate supply
at the least cost state
in this case that would be still in the ground
so yes if you own it all
there'd be nothing but less pumping
so long as you owned it all both vertically
and horizontally

if the industry was made up of a series of vertically integrated but independent producers
then maybe there'd be no spec storage down the line
either but ..
what if you can't pump it at a high enough rate
come price peak time
then you might want to store some too

would the one and all system parallel world
look different
obviously we are into the calculus of variations here
i now
leave that department to my daughter
the last living descipline of Hoteling ...

BACK TO THE INDEPENDENT
later stage owners

these folks might want to make windfalls on existing
inventory ...eh ??

but isn't all anticipateable rent
swallowed up at the first step
by crude producers

how and why ???

is spec storage down the line
dramatically more costly
above some normal level ....???

if you can't pump it at any rate you want
but only at a set rate
once you hit pumping capacity... ???

gadzzz zzzoooks

[Mother Teresa]

"I do think it would help if economists could coin some differential term to distinguish general monetary inflation from a rise in the relative price of key commodities. Call it "real inflation"

According to Stephen Roach, the CPI was more in line with the real world before Fed Chaiman Miller, not liking what he was seeing on the '70s inflation front, changed it to make the inflation numbers less incendiary. With no real funding for COLAs, I doubt Dr Bernanke wants to revisit a CPI that predates the Miller "core CPI" changes.

[paine]

"it is good to be king, but not so good to be soon no longer king. (A comment on the status of the U.S. as a world power.)"

i'd like to believe this

my preference
would be to look ahead
to a chastened
back home and back to basics
republican america
full of the new yeoman class
of independent hu caps
doing creative inventive work
turning out
"uniquery"
for an advance thanks to a grant
or for a time and materials fee
or even a sacrifie all to win a prize or something

but its beyond my imaginary horizon
to see this candy cotton cloud filled future
with pie in the sky
and multi colored memes
dazzling in their newness
sprouting from nearly ever american born head

[Larry]

MT - "It has been cheaper to borrow in yen than in greenbacks for some time. Perhaps the turning point will actually arive[sic] when the USD becomes the preferred currency for the carry trade."

Investors are still willing to take $ denominated paper. As long as that continues, it's a sign that our foreign debt is manageable.

paine - "who would need to inflate em away ??"

We have trillions of $ of foreign debt that worries people who claim that it makes us a hostage to other countries (see today's cartoon of a US diplomat apologizing to Chinese relief officials, saying "We'd send you some money, but you already have it all."

"are you suggesting a period of surplus trade
to pay back hard borrowings ??"

I doubt the balance will decline in nominal terms any time soon. It may decline in real terms, as the $ depreciates. It also may decline as a percentage of our economy.

[Winslow R.]

Yes fixed income retirees were one constituency hurt by the 70's but this time U.S. jobsters are tied to U.S. retirees as they both have fixed incomes. This constituency also has high debt and low savings.

All other constituencies seem to be the same. Substitute the Chinese and Indians for the Japanese.

Perhaps we should remember the 70's as good times for the Japanese middle class as the 00's are for the Chinese and Indians. I find little written on the subject except at the time Japan was taking over the small, fuel efficient car market.

An inflationary outcome will be determined by the ballot box (the last union?) rather than unions, this time around.

[Joe]

Please follow the chain of causation. The primary cause leads to secondary effects. A wage price spiral is were the primary and secondary effects feedback on each other. In 1973 and again in 1979 the price of oil increased 400%.

This could be called cost push inflation which led to added cost push inflation when labor had the power and demanded wage increases to keep up with the original cost increases. The wage price spiral!

For sure Volker dampen the whole mechanism by putting his foot on the throat of the economy; raising the federal funds rate into the 20% range.

Depending on at what level of capacity utilization the economy is at determines whether an increase in the money supply is expansionary or inflationary (demand pull inflation). In a globalized economy any approach toward full utilization of labor can be mitigated by offshoring. The wage part of the wage price spiral or in the 70's terminology, stagflation. Regardless of where the economy is at, decreasing the rate of growth in the money supply is always contractionary which in turn places downward pressure on prices. The parameters of the Phillips curve haven't been totally abrogated.

The financial system includes both commercial banks and investment banks. Now because of decrease in regulation they are becoming indistinguishable. NO you cannot let the commercial banks fail w/o affecting the real sector of the economy. I would be hesitant to criticize very intelligent people who spend their lives studying the economy, becoming Central Bank Chairman or Professors at the best universities in the world, when they tell you that banks can't be allowed to fail but then again I am very disgusted with the conceptions, perceptions and performance of Alan Greenspan and also Mankiw and his ilk.

[RW]

"...distinguish general monetary inflation from a rise in the relative price of key commodities."

Didn't this used to be called "cost-push inflation," that is before being demoted to "supply shock?" From previous comments I gather the demotion was part of a move toward theoretical frameworks favoring the influence of wages and/or money supply as inflationary factors but there is the additional implication that a 'supply shock' is an acute and largely independent event rather than a chronic and dependent factor.

Regardless this would all be fairly academic if it were not for the uneasy possibility that policy makers will be receiving advice from those who are still fighting past wars.

[Joe]

RW

Yes there is more then one cause for inflation. You identify "cost push inflation". Wages would fall into that catagory and can only occur when the labor market gets tight.

When commodities get scarce relative to demand and the price goes up this is also cost push.

When the economy is at or approaching full capacity utilization and the fed decreases short term interest rates and people borrow the money and buy stuff that causes demand pull inflation.

As to when you are the world's reserve currency and you abuse the privilege until the world loses faith in your worth, well be prepared because the world will increase the prices they charge you.

What's another word for the increase in prices? Well inflation of course.

[im1dc]

My less than two cents worth of perspective. Professor Thoma says:

"Paul Krugman says that, contrary to the emerging consensus, there's no need to raise interest rates to avoid a 1970s-style inflation problem:"

Well, yea, but saying that doesn't mean that lowering interest rates was the correct thing to do or that other actions taken by Bernanke & friends (Bear Sterns bailout) at the FED were economically sound.

In fact, both Thoma and Krugman Beg the question with their comments b/c they say that Bernanke & Co. have done a good job precisely b/c there is no wage inflation this cycle.

But, no wage inflation means people can't keep up with goods inflation.

So the '70's problem is handled by setting up conditions for Deflation.

And, to prevent Deflation they serve up Inflation.

Neither are not good outcomes for people or governments only well positioned corporations and for them only for a little while until demand slackens and deflates their top line.

All in all I am not satisfied with PK or Thoma's analysis or their support for Bernanke & Co.'s Policys on the US Economy.

Preventing Recession by making the problem more intractable later may be good economics but it is bad policy, imho.

Sitting by while Inflation cuts American GDP and the US $ deflates by > 50% is just as bad.

Whatever happened to putting people first?

Sorry, that's not Economics, that's Political Policy.

I accept that the actions of the Bernanke FED have accomplished what PK and Professor Thoma say, however the FEDs acts and failures to act have only pushed the clunker of a economy down the road, not corrected the problem.

The Wall Street Banks that made bad decisions should have been allowed to fail, the mortgage companies that made bad bets need to fail, home prices in some areas need to fall considerably, etc., etc. etc.

The economy needs viable self-sustaining growth while eliminating growth that does not require government accounting tricks, bailouts, tax cuts and special treatment.

Let capitalism work its wonders. Corrections are a part of capitalism.

IMO, the constant over-stimulus of low rates and high liquidity from Greenspan's FED, the multiple tax cuts aimed at the top % of earners by Bush, the newest round of tax rebates by Bush and the lowered rates and hugely increased liquidity by Bernanke's Fed to prop up Wall Street financial institutions are in fact doing more long term harm than good to the economy by propping up that which ought to fail b/c their business model is no longer viable.

That is to say, if the world is changing to permanently high and increasing energy costs, high and higher commodity prices, higher food prices AND wages in the USA are not going up apace, then the consumer -- by definition -- must consume less of other things in order to pay for the 'higher' things, unless he borrows to continue to consume.

But, borrowing is increasingly problematic this time around just like in the 1920's and 1930's. No home equity ATM anymore.

That is not comforting.

And, that perforce translates into a lower GDP, i.e., a permanently weaker US ecomomy as US consumers consume less (unless wages go up or prices come down).

Indeed, for the average American living is already increasingly expensive when the weaker US$ is factored into the equation by higher priced imported goods.

Here it is from PK's own fingertips:

"...Never mind whether we’re technically in a recession: it feels like a recession to most people, and higher interest rates would make it worse.

"The bottom line is that while expensive gas and food are inflicting real harm on American families, they aren’t setting off a ’70s-type inflationary spiral..."

To which I say PK ought to have added 'Yet'.

It's coming, probably starting later this year when the cash from the 2008 stimulus checks is consumed.

After all, high gas, food and commodity prices will still be with us b/c international demand will remain high all over the globe.

The USA has exported consumerism and capitalism and the result is rising global demand.

An aside, from CNBC the CEO's of each of the major US Chemical Corps have announced that they are raising rates on their products 20% or so starting June 1st, '08 and this is after a 10 - 12% increase early this year to pay for their increased commodity costs.

Inflationary trickle down is coming as prices of goods that receive these inputs go up to pay for the higher cost of manufacture and delivery of everything, literally.

[paine]

"Please follow the chain of causation"

are u claiming
the wage zoom of the mid 70's was caused by opec produced shocks .... hitting a pass thru to pricing system
that passed thru wage catch up increases
that got a momentum of their own
and kept going because accommodating credit flow policy by the fed failed to stop the knock on and on process of pass thru feeding on itself ??

well i think there's a few very serious missing links
you need to fill in
to get from plausible to causible

starting with
the price algorithm used by these firms
doing the pass thru
and how that algorithm
got changed by the volckerdammerung

how did recession lead to "no more pass thru "

-----------
"Depending on at what level of capacity utilization the economy is at determines whether an increase in the money supply is expansionary or inflationary... "

y==pq
now is it all q up to some point
and all p after some point
each point perhaps different from sector to sector ??

what if both p's and q's move all the time ... ??

then what
as you move towards tighter job markets
and or commodity markets
p's move faster and q's slower
and as you move toward ever looser job markets
q's move faster and p's slower

at some point these two changes might turn nearly pure
and even accelerate sharply

lerner drew such a dynamic slider
with price along the horizontal axis
and output along the vertical
the locus of possible points
looked like a set of cattle horns
with one horn twisted around and pointing straight down

his comment was to the effect

for the world to work
like milton friedman thought
there would have to be
no serious middle interval
just the two horns one pointed up
the other down
butted up against each other
the exact natural rate on a knarrow plateau
too much stimulus
and u set off a zooming up of prices
and too little stimulus and
u're plunging into depression
the economy procedding
like a man traversing a narrow corridor
by bouncing from wall to wall

whereas
he abba l magician of the macro margin
saw lots of middle ground and thus
lots of sub optimal output points along the way
-----

[paine]

imidc

your comment is quite a jumble

falling real wage rates is not deflation
the falling dollar stimulates exports and curbs imports
creating domestic jobs

are you suggesting that the financial system would have functioned adequately even if the fed pulled a hands off

like the cries of diet and exercise
do you think tight credit and lower house lot values
is good for us jobbler householders

do you think
the victims of inflation ...
the little guys are primarily
"those on small fixed income
not
job holders

or that such chitter is a plain dodge
like the appeal to stockholders
that are ...widows and orphans

says...

ps
with all this institutional house cleaning
and corporate culling
you really want to have
the outcome of a major correction
without the major correction

so would all of us but ...

[Joe]

Paine:

to your first point, Yes! I am claiming that. With the exception that I didn't say mid seventies, I said 73 and 79 oil price increases were the primary or first incident setting off the stagflation that took hold at that time.

And yes Volker did wring inflation out of the economy by clamping down on the money supply. He also broke up OPEC's consensus to boot.

How about that.

To your next point, I believe the equation which you were groping for is y=pq=mv. when you are close to or at full employment and m increases then mostly p increases. When you are at less then full employment then it is possible that increases in m will more result in increses in q then in p.

The big problem with monetarist theory is that full employment is assumed. Why would anyone start an economic model with that assumption??????

Money the universal commodity. Oil = energy. Don't lose sight of the forest by getting bogged down in analysing a particular tree.

[Mother Teresa]

"I do think it would help if economists could coin some differential term to distinguish general monetary inflation from a rise in the relative price of key commodities. Call it "real inflation"

According to Stephen Roach, the CPI was more in line with the real world before Fed Chaiman Miller, not liking what he was seeing on the '70s inflation front, changed it to make the inflation numbers less incendiary. With no real funding for COLAs, I doubt Dr Bernanke wants to revisit a CPI that predates the Miller "core CPI" changes.

[Mother Teresa]

Paine is right about inflation starting before the 1973 oil embargo. Who could ever forget Nixon's wage/price controls that preceded it.

[anne]

The discussion is interesting, but simply look to the bond market to know that investors as a whole agree with Krugman and Thoma and understand and approve Bernanke's policy moves so far. The 10 year Treasury yield tells me Federal Reserve policy has been proper and effective; I expect slow growth for quite a while but there may well be no worse than slow growth while investors are not taking general inflation as threatening.

That personal income growth is a problem is a matter of slow growth along with a remarkable absence of relative bargaining strength for workers in general.

[lonesome_moderate]

But where are the unions demanding 11-percent-a-year wage increases? (Where are the unions, period?) Consumers are worried about inflation, but you have to search far and wide to find workers demanding compensation in the form of higher wages, let alone employers willing to accept those demands. In fact, wage growth actually seems to be slowing, thanks to the weakness of the job market.

Quite a statement from someone who regularly prescribes stronger unions as the cure to much of what ails the USA currently.

[Mother Teresa]

Anne, the 10 year treasury note is up almost 70bps since Bernanke made his move. Why would that inspire your confidence? The Fed refuses to allow any transparency in reference to the investment bank collateral it's been holding. What is it about that, that inspires your confidence?

[IdahoSpud]

Let me see if I understand Prof Krugman's Thesis:

Prices are indeed rising, but since Americans cannot get wage increases to pay the rising prices, it's not really inflation. Meh.

[ndd]

Anne:
Your comment regarding the bond market is spot on and I have argued that exact point elsewhere. That being said, the last time we had an inflationary spike in the midst of generational low interest rates was in 1946 -- after which began the 34 year long climb in interest rates.
In that regard it is therefore interesting that even when people expected a global financial meltdown, the bond market failed to post new lows in 10 year or 30 year yields (the lowest since 1980 remain those of 2002-3).
So while the bond market approves, expecting neither a deep recession nor a generally inflationary expansion (at least looking ahead for the next 12 months or so), I nevertheless fear that an important turning point is not being appreciated.

[Joe]

Mother Teresa, Paine

My humble apology

I know I didn't read the whole thread and therefore missed Paine pointing out that stagflation started prior to 1973 which on second thought is to some extent correct.

The oil shocks were very significant; if I remember correctly 400% increases each time. Further I have seen other economist attribute the stagflation of the 70's to the oil shocks.

Though there was an uptick in inflation prior to the "cost push" oil shocks. If I may offer that that inflation may have been more so attributable to the "demand pull" inflation of the Vietnam war fiscal stimulus occurring at the time.

Both the fiscal stimulus and the oil shocks overlayed by the fact that union representation at the time was 30% of the labor force and also the fact that outsourcing and globalization were not yet significant factors in the economic caculations at the time.

regarding Krugman's assertions, my general point is that he will prove to be correct. as I said in the first post of this thread last night, there will be no self feeding wage price spiral because 1/2 of the conditions that existed in the 70's that produced stagflation no longer exist i.e. the labor situation that overlayed the Vietnam "demand pull" fiscal stimulus and the "cost push" oil shocks.

Krugman had a main point to his column which I am asserting is greatly explained by my general main point. I believe that the possibility that stagflation will not reoccur (Krugman's point) now is totally explained by changes to the the conditions in the American labor market.

I will audaciously assert any discussion outside of that observation is a waste of time and energy.

[anne]

Interesting; I am thinking.

[anne]

We still need to understand that much of Federal Reserve policy, as in 1990, was necessary to keep the commercial banking system healthy. Getting short term interest rates down below long term and allowing for credit extension was and is essential to building bank assets. Greenspan did the same from 1990 to the beginning of 1995; the need being for short term rates to remain below long term, while the small spread in this period made that trickier.

Bernanke wants profitable banks, which is the Fed mandate.

[Mother Teresa]

Anne, I think you may want to understand the difference between commercial banks and investment banks. Also note, that Greenspan's lowering of the Fed funds rate to 1% was the real beginning of the most reckless securitized lending in US history.

By denying investors historically appropriate yields, risky enhanced yield SIVs have left corporations, pension funds, investment and commercial banks and municipalities (I'm sure you remember the auction-rate security (ARS) collapse in January) on the verge of implosion. If the banks were forced to mark their level 3 mortgage backed securities to market, the world would see that they are busted.

The genesis of all this can be traced back to then Senator Phil Grahmm's bill, the Gramm-Leach-Bliley Act, that repealed the Glass-Steagall Act. Had the Glass-Steagall Act remained in force, this financial engineering that has brought our banks to their knees, could have never been this powerful.

Grahmm's wife was on the board of Enron, and most say that Grahmm, up until last week, when he was found neck deep in his UBS lobbying shenanigans, was the odds-on favorite to be McCain's Treasury Secretary. Greenspan, and then Treasury Secretary, Robert Rubin, backed Grahmm to the hilt on his bill. Bernanke has never voted against Greenspan.

[anne]

Well argued; I'm thinking.

[paine]

"the equation which you were groping for is y=pq=mv."

no it wasn't
the pq = mv
has pretensions
to an insight
beyond tautology
mine doesn't
it simply splits y into two
rather problematic components

after all y leaves one clear of all
real problems
by plucking out a q
they come roaring back at u
once q is broken into
its n independent commodity pieces
now re aggrgate
humpty dumpty apres his chute
type problems strikes

but thanx for the intention to enlighten

[Mother Teresa]

Anne, Bernanke has been on the Fed Board of Governors for six years. If his policies have been so good for the banks, then why would they result to this:

"Merrill Lynch & Co., Citigroup Inc. and four other U.S. financial companies have used an accounting rule adopted last year to book almost $12 billion of revenue after a decline in prices of their own bonds. The rule, intended to expand the 'mark-to- market' accounting that banks use to record profits or losses on trading assets, allows them to report gains when market prices for their liabilities fall."

[Mother Teresa]

"would they result to this", should have read; resort to this.