While the public sector in the states are undergoing a belt tightening thatis long overdue ( especially pensions) the ideology that the the a broad cut of public sectorexpenditures is essential is short sighted. Education is extremely importantto the continued success of this country. The firing of teachers is probably the most naive and destructive item that is coming outof this crisis. We as a country will pay a greater price if our education system suffers.
I just can't swallow the Fed saved the day in 2008 pill. IMHO, it goes back to why the market gyrated in the first place and this inevitably leads back to the Fed and monetary policy.So to say they did the right thing leaves out the fact that they were a hug reason for the problem in the first place.Without an honest discussion about the latter, we will most assuredly find ourselves hailing for the Fed to save us from themselves again.
Scott,The strong correlation between commodities and monetary policy leaves less room for the argument that the commodity boom is growth driven. Baa - Aaa spreads are consistent with sub 3% growth. Stagflation, here we come.
brodero: There are many non-destructive ways to cut public spending. Start with pension reform. Then privatize public education (vouchers, charter schools).
Public: you are very right. The Fed needs to follow a rules-based policy instead of flying by the seat of the pants.
REW: The U.S. is not growing strongly yet, but a lot of other countries are. Commodities are a global market. You can't rule out or minimize growth as a factor.
"The Fed should target nominal GDP..."Scott, could please explain this some. Maybe you did but it did not sink in. Thanks.
Cut public spending?I think we can eliminate HUD, Dep't of Labor, Education, Commerce, USDA and cut defense spending by three-quarters.Does anyone really believe life is better as a result of money spent on these agencies?Federal agencies tend to become coprolitic over time. Private-sector companies continually do more with less. Public agencies continually do less with more. They have to be sunsetted every 10 years, including the Pentagon. Scott has been talking about commodities for a long time. However, commodities are becoming a smaller and smaller part of the total economy, and prices are not set in America anymore. We cannot risk tightening our money supply, and doing a Japan repeat, just because India and China and buying commodities and gold. The Bank of Japan tried putting the monetary noose around the neck of their economy. It is an abject failure, hurtful to all involved. Moderate inflation we can live with--the 1990s were great. Too low inflation (where we are now) or deflation will ruin us. See Japan.
BTW-I find Scott Sumner to also be an engaging blogger. He favors a stimulative QE policy at this time.Well, making predictions is hard, especially about the future, but we will see how this QE works out. I have high hopes.
BTW, Krugman is running a chart, showing the US dollar collapsed in Reagan's second term (84-88). Why did the dollar collapse in Reagan's secon term? Yet inflation continue to fall in the 1990s, and we had one of our best decades ever. Why so?
Buddy: re nominal GDP targeting. I don't pretend to understand this fully, but Sumner does a pretty good job of explaining it here:http://www.nationalreview.com/articles/255093/money-rules-scott-sumner
Re: the dollar's collapse in Reagan's second term. Trashing the dollar was one of the biggest mistakes that the Reagan admistration made. They were persuaded that the dollar was "too strong" and they capitulated with the Plaza Accord. Volcker pitched in, and the dollar collapsed, helping to trigger the disastrous equity market collapse of Oct. 1987. Inflation subsequently rose to almost 6% by 1990.
Yeah I remember that odd session in Oct. 1987 when the market fell by 20+ percent in one day. Still, the 1990s were a terrific decade, low inflation, federal surpluses, huge rallies on Wall Street, good property markets, rising worker incomes. I'll take the 1990s any day.
Oil and its impact on economies.http://goo.gl/m4YdZWith the current Fed regime at the helm, oil will keep heading north until this baby busts all over again. Then what?
BTW, over at Scott Sumner's he posted a link to a 2005 FOMC meeting in which members seemingly all agreed the CPI overstates inflation by about one percent. If that is true, we are actually in deflation now and have been for about a year or two.Surely, given deflation and unemployment near 10 percent, one cannot accuse the Fed of being "too stimulative."
Scott, thanks for the article on trageting nominal GDP.
"The Boardâ??s staff estimates that the CPI overstates changes in the cost of living nearly 1 percentage point per year and that the change in PCE [personal consumption expenditures] prices is biased upward about 1â?2 percentage point per year. In framing your objective in terms of a published index, you will want to take this bias into account. "From 2005 FOMC board meeting. Sheesh, we are in deflation now, if this is correct. I am about as worried about inflation as I am about getting beaten up by Liberace.
I do agree vouchers keep schoolsystems but you have cuts comingthat preclude even that idea ( basically the voucher idea would be underfunded thereby creatinga defacto cut)...As an adjunct since there is interest in politicalmatters on this blog. There are events occuring now in Texas whichwill have long term ramifications for the national Republican Party.Texas is in the clock...and if the Hispanic community feels it is getting shortchanged in matters of education amd immigration....look out...the 2 minute warning will be in 2016 and the game over in 2020if they shortchange that voting bloc ( and they are more monolithicthan you think...its just they don't vote as much)
Brodero,I think the majority of the US population is going to feel undercut in the next several years. Lookout below...
BTW, another rally on the Dow today. Rally, rally, rally.I think the stars are aligned for a secular bull market. Could last for years. I have predicted 13k on the Dow for 2011, which is rapidly looking like a namby-pamby prediction.
terrific post
Interesting stuff. As the US becomes a smaller and smaller share of global commodity demand, I would wonder how explanatory some of those variables will be in the future performance of our economy. I still think deflation is a huge risk until home prices and wages start to rise consistently. Most folks' biggest financial assets are their careers and their homes. Until we see some appreciation in those measures (wages, house prices) it will be really difficult to turn the corner and declare victory.
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