My forecast is:

Higher wages (inflation)
Lower prices (deflation)

It's the perfect storm for growing an International Middle Class.
But that sounds to me a little like saying "what we need is some austerity" because as inflation rises, the value of our money declines, buying less for more. And while it spreads the pain, it falls much more heavily on the poor.
@2 The pain doesn't fall more heavily on the poor, it falls more heavily on people holding money and fixed-income assets (like bonds), hence Goldy's reference to generational warfare. People who owe money will generally benefit, and working people will generally benefit. This grinding recession, with its unprecedented levels of long-term unemployment, is what is crushing the poor. Defending the purchasing power of their liquid assets is not doing them any favors.
@3 Uh, I hardly think people with money, any money, are going to feel the pain of food prices rising, rents going up, education costs and healthcare costs all rising faster as people with no extra money of any kind. And while I sympathize with retirees on fixed incomes, if they have money in the bank or investments, they are not children whose parents have to decide between milk and heat.
@4 I don't think you are grasping my point. Inflation is an erosion in the value of money. It affects people who have money. By money I don't mean wealth - you are largely indifferent to inflation as the owner of stocks or a house - I mean assets that produce a fixed flow of cash and therefore are worth less when that cash decreases in value.

The proposal here is for inflation to increase to the 3-4% range. If that happened, we could expect accelerating employment and increased tax revenues, as well as a drop in the real amount of outstanding debt, both public and private. If you regard that as being, on net, bad for poor people, then by all means you should hope that the Fed retains its current 2% inflation target, or even lowers it. But most of use would rather watch our fixed-income assets dwindle by an extra 1-2% per year, if that is the cost of robust employment growth and a return to ordinary economic conditions. (I admit, I am speaking as someone with relatively few fixed-income assets, but then, that is true of almost all poor people as well.)
Inflation only impacts the lower classes.

Rich people own assets that are invested, so they don't really care that much about inflation.

And if you have most of your money in treasuries or savings, you'll wish you didn't.
@4 At least historically, wages tend to be pretty responsive to inflation, since the increased prices for goods enable employers to pay more from their greater cash flow, benefiting workers over non-workers.

In our brave new world of excessive automation and high un- and under-employment, it remains to be seen if wages will still couple as closely to inflation as in the past, unfortunately.
If inflation rises, interest rates will rise. Period. Goldy doesn't remember the 1970s and the aftermath in the 1980s. He wants a repetition of this?
Inflation rose in the 1970s (gas shocks, anyone?), but interest rates did not rise until Paul Volcker INTENTIONALLY drove them sky high (like 20%) to try to break the wage-price spiral.

But the situation we're in now has nothing at all to do with that, nor does a proposal for the Fed to declare that it would tolerate UP TO 4% inflation without raising interest rates.

We would see a period of accelerated growth and investment as companies that are stiting on HUGE pools of cash would instead build/buy something, and people whose debts would be less of a burden would likewise buy, stimulating growth.
I couldn't agree more with this overall assessment - and @3 has it right: inflation robs savers and gives to debtors. This sounds like a bad thing, especially when you use those Ben-Franklin-y nice words: savers and debtors.

What you have to understand is that "Savers' is really another way of saying the 1% who've captured all the "real estate" of capital - all of the money supply - and are really nothing but Rentiers who extract a bit of vig (like mobsters) out of the rest of us just as a tax on participation in the system. In the modern economy, rightly or wrongly, it's impossible to participate without:

- student loans
- housing loans
- transportation loans
- bank accounts
- communications

We don't have the Libertarian option of opting out altogether if we feel the game is rigged (it absolutely is) and we must mortgage - like indentured servants (only a half step above slaves) a percentage of our own future earnings as a precondition for joining the economy.

Sure, you can go all the way off the grid, live in an old school bus somewhere in the middle of nowhere and live off of your own garden, but...yeah, no.

What inflation does is devalue the worth of all those billions the top 1% have hoarded and puts new money in circulation for the rest of us to use - and by increasing the money supply, lowers the cost of renting the money (interest). Inflation is just a measure of the money supply.

Helicopter Ben deserves the Presidential Medal of Freedom for successfully pumping money into the system to prevent Great-Depression style deflation without inducing much PCE inflation - consumer prices really are mostly flat.
Speaking of scary-sounding economic terms, who's in favor of a weaker dollar, too?
@8 Goldy remembers the 1970s. Goldy also remembers the 9 percent rate he paid on his student loans thanks to Volker's interest rate shock treatment.

But as @9 points out this is not the 1970s. Nor is it Weimar Germany. Nobody is advocating double-digit inflation. But 3.5 percent would likely do much more good than harm.

All I'm saying is that rather than putting the brakes on a fragile, slow-job-growth economy simply out of fear of surpassing the Fed's bullshit 2 percent inflation target, the vast majority of Americans would be better off by shifting the focus from inflation to jobs.

Financial asset "inflation" is the real cause of global inequality.

Here's the real deal: We're not hitting our inflation target, which the Fed would like to be around 2% annually. The best economic growth, lowest unemployment, and largest expansions of the middle class have taken place when our national inflation was between 2% and 3%.

Where we are now: We're sinking. Once the inflation rate drops below 0%, it kicks off a spiral of diminished expectations, dropping property values, and increased loan defaults. Along with that goes worse unemployment.

What the Fed is doing: Everything to bail out this leaky boat. They lowered short term interest rates to nothing. That helped, but not enough. They started buying up long term debt to both increase the money supply and lower long-term interest rates. That also helped. But we're barely staying afloat.

If they stop now, we're pretty much doomed. Why would anyone buy anything today if they know it will be cheaper tomorrow? Economic activity would screech to a stop.

Congress has to act, with real stimulus. Siphon some money off the idle moneyed classes and multinational corporations (who just hoard the stuff) and plough it into projects that hire people. Build things. Increase aid to poor people so they can spend more and stimulate the economy. Until the economy has enough heat to run itself, you have to build a little fire under it.

The Fed's actions are just a last-ditch effort to push economic activity by throwing money into it. It can't do the job by itself.
@13 nope.

Changing the mix from 50 pct labor 50 pct capital for increases in wealth is what causes inequality. Right now all new GDP increases go to about 90 pct capital and only 10 pct labor, making the disparity greater.

Change that.

And let banking CEOs and CFOs serve jail terms and allow banks to fail when they make bad loans, resetting finance to its historical 5 pct of total GDP from the outright insane 20 pct of total GDP for what amounts to legalized gambling (what economists call "futures" and "options" and "hedges").
@15 Republicans just voted to repeal Dodd-Frank's Act limitations on executive pay.

I'm going to say no, they won't. Employers aren't keeping up with existing inflation as it is.
The Federal Reserve doesn't control interest rates other than the overnight lending rate. It can influence the other rates temporarily, which it has done brilliantly since 2009 by buying long-term bonds and the bad mortgages held by Fannie and Freddie.

Those were emergency measures taken to hold off a second great depression. For all kinds of reasons, they cannot be the basis for long-term monetary policy. As for the 1970s, Volcker drove up short-term rates by slamming the brakes on monetary expansion. However, and this is vital to understand, interest rates had already been rising before the Fed took that step.

The U.S. was on the brink of hyperinflation at the time. Rates were already double what they'd been in the 1960s. After Volcker's shock treatment, it took almost 20 years to wring the exaggerated inflation expectations out of American interest rates.

Those who desire inflation, like Goldy, don't understand financial markets or the people who make the decisions in those markets. They tend to move slowly, this or that crash notwithstanding. It's especially true of the bond side of things. You inflate away bond returns, and it'll be a very long time getting them back to earth.

Bond yields are a combination of an intrinsic return that averages 1% over time, plus inflation expectations, plus perceived default risk. The last two terms of the equation do NOT change quickly in either direction. One of Bernanke's brilliant moves, distasteful as it was, was to buy up the busted Fannie and Freddie mortgage backs. Had he (and his Fed) not done so, mortgage rates would have had an enormous default risk premium for decades to come.

Having dodged that bullet (no, more like howitzer shell with a nuclear tip), now Goldy wants to let loose the dragon of inflation and inflation expectations on the absolutely bullshit theory that only the old people in Magnolia (who Goldy hates, probably because he can't afford to live there) will be hurt.

Thank God, he's just some idiot not-savant who writes to a bunch of hipster fakers who don't know the first thing about how the Federal Reserve works.
It's a fallacy that inflation over 2% would benefit workers. This would happen only if the following conditions applied:

1. Businesses could pass along price increases and thereby retain profits.

2. Employers passed the benefits through to their workers.

The first condition would be uneven, depending on competitive conditions. The second condition would depend on the degree of slack in labor markets. In the '70s, there were still enough unionized workers with contractual COLA provisions to force pass-throughs to a degree that they wound up making their way through large segments of the economy.

But even then, there were big gaps. Goldy might recall that real wages peaked in 1973, just before the first oil shock, and the Fed's decision to accommodate it by raising the money supply caused inflation to start taking off. That didn't work out so well. We had "stagflation," in which many incomes seemed to keep up for a while, amid rising unemployment.

Still, in real terms, incomes began eroding because the unionized share of the workforce declined. Manufacturers passed inflation through, but they put the pedal to the metal on automation and manufacturing employment cratered and has never recovered. The rest of the workforce fell behind faster, and discontent rose throughout the decade.

Government was a victim, especially state and local governments that depend on tax receipts. They found rising resistance to pass-throughs from voters, which led directly to California's Prop. 13 and similar provisions nationwide.

How did people cope? One big way was that America sent its women into the workforce. Look at the numbers and you'll see it. There was a gigantic rise in female workforce participation. Feminists welcomed it, for good reason, but that's not the main reason it occurred. Women, especially those who'd been housewives, went to work because they had to work so their families could make ends meet.

Unions failed to cope with the changes. In the private sector, they were inextricably linked to manufacturing, where employment was declining. (Automation wasn't the only reason. Foreign competition was at least as important, especially in the unglamorous sectors like meat packing and textiles, where workers were replaced by illegal immigrant slaves and foreign slaves.)

Retailers reacted by doing nothing. They simply passed the costs through. Then along came Wal-Mart, which combined subsistence wages with unprecedented distribution efficiency. Think Microsoft was the first new-era high tech company? Think again. It was Wal-Mart. They forced the standardization of distribution, and shared the gains not with employees but with customers. (I'm not a Wal-Mart fan. Far from it. But what I just wrote is undeniable.)

I could go on, but I don't want to let details bury my point, which is that inflation was a big killer of the American standard of living between the early '70s and the mid-'90s. Yes, there were other factors. But inflation was a big, big, big problem. To cast inflation as the friend of the working man and woman is bullshit.

As for the investor class, look, they will adapt. They always have. They made out like bandits from inflation. If you sold real estate, you loved inflation. If you held bonds in the late '70s you hated it, but if you were smart enough to shift into stocks (especially small-caps) you loved it.

Inflation really fucked up the banking system, and had pervasive negative effects in that part of finance that directly impacted Main Street. Again, I've written a lot, and details will only diminish any value of this comment from here on out. The point is that inflation is not something we want. Low inflation of about 2% is actually beneficial (more details, maybe later), but once you get above that then it only benefits the shell-game artists.

Goldy, go back to school, if in fact you ever went.

I'm especially amused by them calling it "unsustainable". First of all, that shows that they have no idea how the Fed operates, and second, it doesn't need to be sustainable in perpetuity, it only needs to be sustained long enough for the economy to recover. And it will be sustained that long, easily.
@20, very few things in the economy are "sustainable." Fluctuation is the nature of all things, including economies.

There's no question that the Fed's purchases of bad mortgages and long Treasurys have kept interest rates, especially for mortgages, a lot lower than they'd have otherwise been. It was messy, but necessary under the circumstances and in fact (at least in my opinion) brilliant. In any case, it's a very sharp contrast to the tight money policy that pitched the U.S. down the drain between 1929 and 1933.

But, in case anyone hasn't been watching, the economy is now recovering. Residential real estate prices are up by double digits, and you've got all kinds of speculative commercial projects underway because the cost of that money has been so low.

The price of Goldy's suggestion would be not just inflation, but the re-blowing of the last property bubble. Which got blown to begin with when the Fed dumped credit into the economy after 9/11 and didn't taper it off.

One other thing, and this is something almost everyone misses about the Fed. By its very nature, the Fed doesn't really "create money." When the Fed buys government securities from banks and pays for them with money it "made" at a keystroke, the Fed creates bank balances that are then lent out. In other words, credit.

The Fed does not create the ability to service the loans. We learned, or at least should have learned, this from the 2007-2009 crash. The last credit created after 9/11 got lent out alright, but the borrowers could not service their debts.

Now Goldy wants the Fed to go on another credit creation spree. Forget about "sustainability" and ask whether this will help anyone. The banks would love it, especially the CEOs who'd get bonuses based on the "profits" from new loans that are booked (according to GAAP) when the loans are made. So would the real estate pukes and their assorted remorrah fish. But everyone else? Not quite so much.

All of which is to say: Be careful what you wish for, especially when you are Goldy and you don't know what the fuck you are talking about.

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