Why the Economy’s Still Depressed

Brad Delong breaks it down:

Of course running a bigger deficit, as the bond markets are telling us to do, would fix the slumping government purchases problem. As for residential investment, we need an ironclad promise from the Fed not to kill the housing market recovery by raising rates earlier than 2014-2015, even if that means tolerating +/-4% inflation for a few years.

Comments

  1. John says:

    A couple of things:

    The bond market isn’t telling you anything of the sort. Long term rates are low in large part because of massive Fed Reserve intervention. If left to their own devices, they’d be higher (otherwise the Fed would not have had to intervene).

    4% inflation and low long term rates don’t go together without continued massive intervention – that type of intervention would set up taxpayers for trillions in losses on fed bond holdings, destroying its credibility and potentially destroying the US dollar. I’m not overreacting – no one is stupid enough to recommend 4% inflation and bond market intervention to keep long rates low.

  2. Jon Geeting says:

    Low interest rates are a sign that money has been tight. Massive intervention doesn’t mean anything. Relative to the size of the problem, they’ve done far too little.

    Is Paul Volcker stupid? Inflation never fell below 4% for the entire Reagan recovery. It’s perfectly possible for the Fed to target 4% inflation without expectations becoming unanchored. They’ve shown that they can target a 2% ceiling, and they could just as easily target 4% CPI. It would be better to level-target 5% nominal GDP.

    Check out this podcast at AEI. http://ricochet.com/main-feed/Ricochet-s-Money-Politics-Podcast-with-Jim-Pethokoukis-Scott-Sumner

  3. John says:

    Volcker is brilliant, I wish Obama was smart enough to listen to him (and the Simpson/Bowles Committee).

    You’re forgetting the key point though – LT rates under Volcker were a hell of alot higher than they are now. You can’t accomplish what you want (4% inflation and 4% mortgage rates) without crippling the country.

    • Jon Geeting says:

      The Fed doesn’t have the option of reducing short-term rates because they can’t go lower than zero. They can only work through long term rates. If rates were at 3%, and unemployment was at 8%, is there any doubt they’d lower rates? It’s the same thing. This is the only way to do it when nominal rates are 0.

  4. Constance M Tomlin says:

    This economy is depresssed because politicians and financial institutions are providing dubious and erroneous projections, participating in a feeding frenzy in the present and when it is time for the profits to show up, there aren’t any. Only the need to use present and future revenues to keep the myth going.

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