My graduate professor of international economics, George N. Halm, used to illustrate the phenomenon of runaway inflation (hyperinflation) by telling what life was like when he was a teenager in Germany after World War I.
Professor Halm's mother, a widow, lived on a government pension. Each category of pension was paid on a different day of the week, with widows coming on Friday. By Friday, the value of the pension, which was set on Monday, had dropped out of sight. Even so, he hopped on his bicycle, collected his mother's pension at the pension office and raced around town buying as many household necessities as he could before the value of the money dropped too much farther. The operative principal was to spend the money before it disappeared.
How could shopkeepers know how much to charge? They created an informal price index system. For example, the price of a haircut was indexed to the price of breakfast rolls each morning.
Clearly it was impossible to live that way, and understandably Germans remain paranoid about inflation.
Still, they overdo it. A modest amount of inflation allows price adjustments without triggering deflation. Because of the way the Euro zone was established, the interest rate for the zone is set by the European Central Bank, which is essentially the German Central Bank. They are about to raise the interest rate in the Euro Zone to make sure there is zero inflation in Germany, despite the high probability that this will destroy economic activity in several smaller countries.
It will also place added pressure on the US economy by, among other things, driving up the international price of oil.
Friday, April 8, 2011
Thursday, April 7, 2011
Shutdown?
As of today (April 7, 2011), it looks like we are bound to have a government shutdown.
According to the polls, most Americans recognize that it is the Republicans in the House of Representatives, many of whom have never served in public office before at any level of government, who are driving toward this train wreck.
My concern is not just the adverse effect of a shutdown on my personal situation (my US Navy retirement check is likely to be delayed, and possibly my Social Security check), but more importantly the damage it will do to the economy.
In fact, I am disappointed that no one is explaining that any reduction in government spending is likely to bring our weak recovery to a halt and might even start another downward spiral.
The reason is that we are in a liquidity trap. I have explained this phenomenon before.
If I were of a mind to believe in conspiracies rather than mere incompetence, I would suspect the Republicans in Congress intend to wreck the economy and blame the president.
According to the polls, most Americans recognize that it is the Republicans in the House of Representatives, many of whom have never served in public office before at any level of government, who are driving toward this train wreck.
My concern is not just the adverse effect of a shutdown on my personal situation (my US Navy retirement check is likely to be delayed, and possibly my Social Security check), but more importantly the damage it will do to the economy.
In fact, I am disappointed that no one is explaining that any reduction in government spending is likely to bring our weak recovery to a halt and might even start another downward spiral.
The reason is that we are in a liquidity trap. I have explained this phenomenon before.
If I were of a mind to believe in conspiracies rather than mere incompetence, I would suspect the Republicans in Congress intend to wreck the economy and blame the president.
Tuesday, April 5, 2011
Cheney: "Reagan Proved Deficits Don't Matter"
How soon we forget.
Seven years ago, conservative think tanks and Vice President Cheney were arguing that deficits have no adverse effects on the economy.
Their arguments are summarized here in a 2004 Washington Post article.
What has changed?
For one thing, the real estate bubble collapsed in 2007, nearly bringing the economy to its knees.
For another, we now have a Democrat in the White House for Republicans to blame.
Seven years ago, conservative think tanks and Vice President Cheney were arguing that deficits have no adverse effects on the economy.
Their arguments are summarized here in a 2004 Washington Post article.
What has changed?
For one thing, the real estate bubble collapsed in 2007, nearly bringing the economy to its knees.
For another, we now have a Democrat in the White House for Republicans to blame.
Why the Government Must Increase Spending
Managing the Federal Budget is not like managing a household budget.
Managing a state, municipal or county budget is more like managing a household budget, but none of these entities has either the responsibility or the capability of controlling the national economy.
The bottom line: given our current state of the economy, reducing federal expenditures will reduce jobs and bring the present weak recovery to a screeching halt.
Why is this so?
The federal government has two principal means of managing the economy:
a. Monetary policy, which is the responsibility of the Federal Reserve System (the Fed) and;
b. Fiscal policy, which is the purview of the elected political leadership.
It is the Fed that controls the level of economic activity by managing the money supply, mostly through indirect controls of short term interest rates and open market operations. If they are concerned about inflation, they work to contract the money supply by increasing interest rates. If the economy is weak, they attempt to stimulate economic activity by decreasing short-term interest rates, which have the greatest influence on commercial activity.
It has been the case for some time that short term interest rates have been essentially zero. That means the Fed is out of ammunition. When the short-term interest rate is zero, it cannot be lowered. Further increases in the money supply will be ineffective in stimulating economic activity.
A possible way to stimulate economic activity is to increase exports. That would likely require a substantial depreciation in the value of the dollar against major trading currencies. The Fed's only tool to affect the exchange rate would be to lower the interest rate. With a zero interest rate, that won't work, either. The other factor inhibiting exports is that our major trading partners are in the same boat as we are.
That leaves monetary policy. In other words, federal expenditures. We have no choice, unless the object is to further wreck the American economy. The only thing that has kept the economy from falling into a death spiral leading to another Great Depression is the safety net put in place in the aftermath of that catastrophe.
Unemployment insurance, for example, is not just of benefit to the recently unemployed - it makes sure laid off workers can continue to purchase the necessities of life. It is a subsidy to WalMart, Food Lion, Sears, and countless property owners who continue to be paid rent.
Food stamps, Medicaid, Medicare and other "entitlements" fall in the same category.
We would have more options for dealing with the situation had we not quadrupled our national debt under Reagan and Bush I and further increased it under Bush II.
We can't put that toothpaste back in the tube, but we need to foresee the consequences of doing what the Congress seems hell-bent on doing.
There is a name for the situation we are in. Economists call it a "liquidity trap."
Liquidity traps are rare. The first one we encountered was during the Great Depression. Recently, in the 1990's, Japan experienced a liquidity trap.
Gauti Eggertsson, an economist with the New York Federal Reserve Bank, has written a recent research paper reviewing the modern understanding of a liquidity trap. The paper (here) is highly technical. It even uses calculus formulas to make several points.
Don't be put off by the calculus. It is still worth reading.
Managing a state, municipal or county budget is more like managing a household budget, but none of these entities has either the responsibility or the capability of controlling the national economy.
The bottom line: given our current state of the economy, reducing federal expenditures will reduce jobs and bring the present weak recovery to a screeching halt.
Why is this so?
The federal government has two principal means of managing the economy:
a. Monetary policy, which is the responsibility of the Federal Reserve System (the Fed) and;
b. Fiscal policy, which is the purview of the elected political leadership.
It is the Fed that controls the level of economic activity by managing the money supply, mostly through indirect controls of short term interest rates and open market operations. If they are concerned about inflation, they work to contract the money supply by increasing interest rates. If the economy is weak, they attempt to stimulate economic activity by decreasing short-term interest rates, which have the greatest influence on commercial activity.
It has been the case for some time that short term interest rates have been essentially zero. That means the Fed is out of ammunition. When the short-term interest rate is zero, it cannot be lowered. Further increases in the money supply will be ineffective in stimulating economic activity.
A possible way to stimulate economic activity is to increase exports. That would likely require a substantial depreciation in the value of the dollar against major trading currencies. The Fed's only tool to affect the exchange rate would be to lower the interest rate. With a zero interest rate, that won't work, either. The other factor inhibiting exports is that our major trading partners are in the same boat as we are.
That leaves monetary policy. In other words, federal expenditures. We have no choice, unless the object is to further wreck the American economy. The only thing that has kept the economy from falling into a death spiral leading to another Great Depression is the safety net put in place in the aftermath of that catastrophe.
Unemployment insurance, for example, is not just of benefit to the recently unemployed - it makes sure laid off workers can continue to purchase the necessities of life. It is a subsidy to WalMart, Food Lion, Sears, and countless property owners who continue to be paid rent.
Food stamps, Medicaid, Medicare and other "entitlements" fall in the same category.
We would have more options for dealing with the situation had we not quadrupled our national debt under Reagan and Bush I and further increased it under Bush II.
We can't put that toothpaste back in the tube, but we need to foresee the consequences of doing what the Congress seems hell-bent on doing.
There is a name for the situation we are in. Economists call it a "liquidity trap."
Liquidity traps are rare. The first one we encountered was during the Great Depression. Recently, in the 1990's, Japan experienced a liquidity trap.
Gauti Eggertsson, an economist with the New York Federal Reserve Bank, has written a recent research paper reviewing the modern understanding of a liquidity trap. The paper (here) is highly technical. It even uses calculus formulas to make several points.
Don't be put off by the calculus. It is still worth reading.
Sunday, April 3, 2011
Spring Has Sprung
Spring has finally arrived. How do I know for sure? Last Friday I watched the opening day game between the Washington Nationals and the Atlanta Braves.
Opening Day of Major League Baseball is a better guide to Spring than the vernal equinox.
Opening Day of Major League Baseball is a better guide to Spring than the vernal equinox.
Thursday, March 31, 2011
Wednesday, March 30, 2011
Is It a War or a Squirmish?
The former half-term governor of Alaska has apparently blessed us with another coined word.
Just as a reminder: the first United States military action against Tripoli began in 1801 and continued for the entire first term of Thomas Jefferson. We did not declare war, though Tripoli did. The only military forces we deployed in this First Barbary War were the Navy and Marine Corps.
Was that a war or a squirmish? For that matter, what do we call our two-year long conflict (1798 - 1800) with France under our second president, John Adams? Historians frequently refer to it as our "quasi-war" with France. Is a quasi war something like a squirmish? Both words have a "qu" in them.
From the beginning of our republic in 1788 until after World War II, we have often dispatched the Navy/Marine Corps team abroad to deal with crises, many times for extensive, protracted engagements. We never declared war in any such case.
March 8, 1965, my ship's guns (I was Weapons Officer of USS Higbee (DD-806)) stood by at Danang, Viet Nam, to provide gunfire support (if needed) for 3,500 Marines who went ashore there. These were our first combat forces, later reinforced by another 20,000 Marines.
Had our intervention remained at that level, using the Navy and Marine Corps, we would probably have been better off.
Twenty years later, using the Navy/Marine Corps team was no longer an option. Not that they couldn't have handled Panama and Grenada just fine, but the policy of the day required that it be a "joint" operation, whether needed or not. So the Pentagon jumped through hoops to find something for the Army and the Air Force to do.
Let's not go down that path in Libya.
Just as a reminder: the first United States military action against Tripoli began in 1801 and continued for the entire first term of Thomas Jefferson. We did not declare war, though Tripoli did. The only military forces we deployed in this First Barbary War were the Navy and Marine Corps.
Was that a war or a squirmish? For that matter, what do we call our two-year long conflict (1798 - 1800) with France under our second president, John Adams? Historians frequently refer to it as our "quasi-war" with France. Is a quasi war something like a squirmish? Both words have a "qu" in them.
From the beginning of our republic in 1788 until after World War II, we have often dispatched the Navy/Marine Corps team abroad to deal with crises, many times for extensive, protracted engagements. We never declared war in any such case.
March 8, 1965, my ship's guns (I was Weapons Officer of USS Higbee (DD-806)) stood by at Danang, Viet Nam, to provide gunfire support (if needed) for 3,500 Marines who went ashore there. These were our first combat forces, later reinforced by another 20,000 Marines.
Had our intervention remained at that level, using the Navy and Marine Corps, we would probably have been better off.
Twenty years later, using the Navy/Marine Corps team was no longer an option. Not that they couldn't have handled Panama and Grenada just fine, but the policy of the day required that it be a "joint" operation, whether needed or not. So the Pentagon jumped through hoops to find something for the Army and the Air Force to do.
Let's not go down that path in Libya.
Saturday, March 26, 2011
Inherently Safe Nuclear Reactors
A few days ago I mentioned that China is proceeding with an inherently safe nuclear reactor design called the "pebble bed" reactor.
Today's New York Times has an article with details and illustrations of the design here.
But China isn't putting all their energy pebbles in one basket. They are building more conventional reactor designs and moving ahead vigorously with other energy alternatives as well, including wind and solar.
A further benefit of the pebble bed reactor design is that it operates at much higher temperature than the boiling water reactors like the ones in Japan. The higher temperature is not only more efficient for generating electricity, it may also be used to produce vast quantities of hydrogen - sufficient for fueling automobiles. This could free the automobile from dependence on petroleum, while abolishing exhaust pollution. When you burn hydrogen, the only waste product is water.
Critics of each of the above approaches often complain that "[fill in the blank]" isn't the answer. China seems to say, "no problem - we'll just try them all."
Who do you suppose has the best chance of leading the way into the world's energy future?
Today's New York Times has an article with details and illustrations of the design here.
But China isn't putting all their energy pebbles in one basket. They are building more conventional reactor designs and moving ahead vigorously with other energy alternatives as well, including wind and solar.
A further benefit of the pebble bed reactor design is that it operates at much higher temperature than the boiling water reactors like the ones in Japan. The higher temperature is not only more efficient for generating electricity, it may also be used to produce vast quantities of hydrogen - sufficient for fueling automobiles. This could free the automobile from dependence on petroleum, while abolishing exhaust pollution. When you burn hydrogen, the only waste product is water.
Critics of each of the above approaches often complain that "[fill in the blank]" isn't the answer. China seems to say, "no problem - we'll just try them all."
Who do you suppose has the best chance of leading the way into the world's energy future?
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