Saturday, July 31, 2010

Why Isn't the Fed Doing More?

This article yesterday has gotten a lot of play on econ blogs, as it reveals Bullard's shift (15 months late, but hey, it's progress). Here's the money quote:
“I think the fear of deflation in and of itself is probably overblown,” Charles I. Plosser, president of the Philadelphia Fed, said last week. He said that inflation expectations were “well anchored” and noted that $1 trillion in bank reserves was sitting at the Fed. “It’s hard to imagine with that much money sitting around, you would have a prolonged period of deflation,” he said. And Richard W. Fisher, president of the Dallas Fed, said this week, “Reasonable people can argue that there’s a risk of deflation, but we haven’t seen it in the numbers yet.”
I've always been wondering what the argument is for not doing more. In the back of my mind, of course, has always been some creeping doubt that maybe these people have some argument for not doing more that I hadn't considered. This quote shows that this isn't the case. “It’s hard to imagine with that much money sitting around, you would have a prolonged period of deflation” may be the single dumbest quote by any economist since Mellon's "liquidationist" quote during the Great Depression. It's like a gambling addict at the roulette table thinking "well, it's landed on black twice in a row, hard to imagine we'd have black again" -- is roughly the equivalent logic. When you've got high unemployment and a depressed economy, banks sit on cash. That's what's been happening the past 19 months already, that's what's happened the last 17 years in Japan, and that's what happened during the Great Depression.

Fisher's quote is just as stupid for two reasons. First, whether or not we slip into actual deflation is not the basis for doing more. Having inflation and expected inflation less than 2% should be necessary condition for doing more, which is satisfied. Secondly, the CPI for June was -.1%. The Producer Price Index is at -.9% the past three monthss... On the year so far the CPI has been -.1%. That's deflation. Of course the core cpi, which is more important, is still positive, but it's not as if there is "no sign" of deflation...

No comments:

Post a Comment