- Reaction score
- 35
- Points
- 560
Devaluing the US currency seems to be the only goal this policy has in mind, but the secondary effects of inflation and Hayekian credit bubbles will wreak havoc on the American economy for years to come. Of course, since many metrics coming from the US are suspect anyway (consider the constant use of the BLS unemployment statistics, rather than the more accurate and inclusive U3 figure) the "targets" that are being aimed for are little more than mirages.
The other problem is this is simply more fun with Keynesian economics. Back when I was learning the IS/LM theory of trading inflation for unemployment I was forces to wonder why Stagflation existed outside the classroom window (something totally impossible under the Keynesian model), or how the Reagan revolution was crushing inflation and generating huge inceases in empoyment despite the vehement assertation of my instructors and leading pundits that this could not be happening. Years of "stimulus", low interest rates and flooding the economy with "liquidity" has failed to move unemployment or economic growth much, so suggesting that supercharging the process will work so much better is madness:
http://opinion.financialpost.com/2012/12/12/terence-corcoran-bernake-steers-feds-monetary-machine-into-uncharted-waters/
The other problem is this is simply more fun with Keynesian economics. Back when I was learning the IS/LM theory of trading inflation for unemployment I was forces to wonder why Stagflation existed outside the classroom window (something totally impossible under the Keynesian model), or how the Reagan revolution was crushing inflation and generating huge inceases in empoyment despite the vehement assertation of my instructors and leading pundits that this could not be happening. Years of "stimulus", low interest rates and flooding the economy with "liquidity" has failed to move unemployment or economic growth much, so suggesting that supercharging the process will work so much better is madness:
http://opinion.financialpost.com/2012/12/12/terence-corcoran-bernake-steers-feds-monetary-machine-into-uncharted-waters/
Terence Corcoran: Bernanke steers Fed’s monetary machine into uncharted waters
Terence Corcoran | Dec 12, 2012 8:34 PM ET | Last Updated: Dec 13, 2012 11:41 AM ET
More from Terence Corcoran | @terencecorcoran
The problem with the policy is that the cause-and-effect link between zero interest rates and the unemployment rate does not exist
In a stunning and history-making policy departure that challenges some basic tenets of economic theory, Ben Bernanke is taking the U.S. Federal Reserve’s monetary machine where it has never been before. It may even be where no central banker has ever been before.
Using the printing presses and control over interest rates, Mr. Bernanke’s Fed said Wednesday it will hold interest rates at near zero and continue to buy up to $1-trillion a year in bond and mortgage securities at a rate of $85-billion a month until the cows come home.
Targets imply that rock-bottom interest rates will prevail through to 2015 and beyond
In this case, the cows are measured by the U.S. unemployment rate and inflation. Specifically, the Fed’s Federal Open Market Committee (FOMC) said it will remain in super-stimulist mode “at least as long” as the unemployment rate remains above 6.5% and inflation is projected to be below 2.5%.
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The targets imply — for Americans and likely Canadians as well — that rock-bottom interest rates will prevail through to 2015 and beyond.
The appearance of a specific unemployment rate objective — well below the current rate of 7.5%— is a radical departure in economic and monetary theory. The idea, however, has been high on the agenda of monetary liberals for some time and is not a total surprise.
When Chicago Fed president Charles Evans delivered a keynote lecture to the C.D. Howe Institute in Toronto two weeks ago, he outlined the rationale for the jobless target. With inflation low, he said, “a number of macro-model simulations … indicate that we can keep the funds rate near zero until the unemployment rate hits at least 6.5% and still generate only minimal inflation risks.”
Joblessness is determined by a range of economic and policy forces, all of which are beyond the reach of monetary policy
Mr. Evans implied that his Fed colleagues were mostly in agreement. An even lower unemployment target might be doable. “Even a 6% threshold doesn’t look threatening in many of these [macro-model] scenarios. But for now, I am ready to say that 6.5% looks like a better unemployment marker than the 7% rate I had called for earlier.”
And so 6.5% it is, as of Wednesday announcement. The policy — already widely referred to as “the Evans rule”— is an easy sell to politicians, the public, interventionist economists and unions. Use fast money and zero interest rates to create jobs and reduce the high-profile unemployment rate. Of course! Simple, graspable, clear.
The problem with the policy is that the cause-and-effect link between zero interest rates and the unemployment rate does not exist. Joblessness is determined by a range of economic and policy forces, all of which are beyond the reach of monetary policy.
http://financialpostopinion.files.wordpress.com/2012/12/ben-bernanke.jpg?w=620
The $1-trillion-a-year U.S. fiscal mess, for example, creates the threat of massive tax increases, spending disruptions and uncertainty that kills growth and investment. New financial regulations and government policies disrupt and distort economic behaviour. If unemployment stays high due to bad policies and economic change, no amount of monetary stimulus can bring down the rate.
It could, however, create inflation. The Fed claims to reject the idea of using inflation to boost job creation, although more than a few economists think that tradeoff is worth the risk. Mr. Evans once thought 3% inflation might be acceptable. On Wednesday, the Fed sawed it off at 2.5%, above its official target of 2% but below a possible 3%.
The idea that central banks can target the narrow statistic of unemployment, rather than stick to inflation while keeping an eye on some broader measure of economic performance, is relatively new. So is the companion idea that the Fed and other central banks should begin broadcasting the fact that they will continue to stimulate the economy even after economic recovery has set in.
To again quote Mr. Evans, the new approach is to “make it clear that the highly accommodative stance of monetary policy would remain in place for a considerable time after the economic recovery strengthens,” which the Fed has said will take it to 2015.
So the question, asked by Mr. Evans: “Why should policy remain accommodative even after we have a stronger recovery? The delay is a feature of what modern macroeconomic theory tells us is the optimal policy response to the extraordinary circumstances we have faced over the past four years.”
Another way of reading the central bank policy shifts, however, is as outright admissions that the past four years of unprecedented monetary expansionism and experimentation have been a failure.
In America, Canada and around the world, central banks have taken risky bets on their new interventions — now estimated to include nearly $15-trillion in asset purchases along with zero interest rates over almost five years. But still there are no signs of real sustained recovery. Instead, there are widespread predictions of fresh recessions.
As for the “modern macroeconomic theory” Mr. Evens refers to, it turns out to be a couple of papers by other economists, including one by Michael Woodford at Columbia University delivered to the annual meeting of central bankers in Wyoming in August. Mr. Woodford, over about 100 pages, attempts to figure out what should be done when economies are still stagnant and interest rates have been at zero for years.
His answer: Central banks should use “forward guidance” to announce how long they intend to keep rates low. If the Fed can’t lower interest rates to below zero, then maybe it can generate growth by telling people it will keep rates low until the cows come home.
Finn Poschmann, vice-president, research, at the C.D.Howe Institute, says the Woodford paper is essentially a concession. “Roughly,” he said, Mr. Woodford has concluded that “it’s not working, so we have to promise to do it for a really long time and, not only that, promise to keep doing it long after.”
Mr. Woodford credits Bank of Canada Governor Mark Carney with having been a bit of a pioneer in the forward-guidance business. In a speech this week, Mr. Carney — clearly anticipating the FOMC action Wednesday — warned however that “this forward guidance is never a promise.” Actual policy will always “respond to the economic and financial outlook as it evolves. Expectations of policy should do the same.” Mr. Carney also said central banks should adopt precise numerical “thresholds” for inflation and unemployment. He didn’t set any thresholds for Canada, but maybe Canada is next in the great global central banking experiment/gamble/big bet that monetary policy can save us all.