PeakTrader.com

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PeakTrader said...

Obviously, there remains inflation bias from those who assume inflation is understated.

You can show them a circle 360 ways and they'll still tell you it's a square (and even say something about "circular thought").

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Krugman also stated on March 28, 2011 (Billion Price Preview):

"Funny how all the people screaming about runaway inflation after a few months of rising commodity prices didn’t scream about runaway deflation when those prices were falling."

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And there's deflation for seniors too:

Drug prices will fall sharply as patents expire
July 25, 2011

"The cost of prescription medicines used by millions of people is about to plummet.

The next 14 months will bring generic versions of seven of the world’s 20 best-selling drugs, including the top two: cholesterol fighter Lipitor and blood thinner Plavix.

The magnitude of this wave of expiring drug patents is unprecedented.

Generic competition will decimate sales of the brand-name drugs and slash the cost to patients and companies that provide health benefits.

The new generics will slice copayments of those with insurance. For the uninsured, who have been paying full price, the savings will be much bigger."

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Blockbuster-drug prices to drop as patents expire
July 25, 2011
LA Times

"In the next two years, six of the 10 top-selling drugs will lose their patents, meaning other companies can make the medications and sell them at a huge discount, perhaps up to 80% off."

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A lot of people oversimplify a large, diversified, and dynamic macroeconomy.

Even economists can't figure out the economy.

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However, there are similarities between the current expansion and the expansion from 1933-37.

The current expansion is still on life support from higher spending and lower taxes from government.

And I doubt there will be enough pent-up demand to generate a self-sustaining recovery anytime soon.

Given both fiscal and monetary policies are constrained (by budget deficits and inflation), there may be a double-dip in 2012 or 2013, much like the Roosevelt recession in 1937-38 (particularly, with a weak E.U.).

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W.C. Varones, the Fed has a dual mandate, price stability and maximum employment (not the same as full employment).

Without price stability, inflation and inflation expectations will feed on each other to accelerate inflation.

The result will be stagflation initially, when inflation is accelerating, and then a severe recession, to slow the inflation rate.

"The monetary response" is about spent. Fiscal policy needs to deregulate, cut spending, and cut taxes to spur real economic growth.

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W.C. Varones, and the article continues:

"...The Fed will start a new program of 'nominal GDP targeting' without stated limits in size of activity."

My comment:

Targeting nominal GDP assumes the Fed hasn't done enough, even after lowering the Fed Funds Rate to zero and two rounds of quantitative easing.

I think, targeting nominal GDP growth will lead to more inflation and higher interest rates, along with instability and uncertainty.

It's amazing some people want to fix what works, i.e. monetary policy, and ignore what's broken, i.e. fiscal policy.

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KPres says: "Stimulus isn't effective if it's truly applied in a countercyclical way, because people will realize that the deficits now will be paid back in a few short years, and increase their savings to compensate...The only way stimulus can be effective is if it's inflated away, because inflation discourges those very same savings."

Keynesian economics is used to smooth-out business cycles. So, income, consumption, and saving would be higher than they'd otherwise be (since sustainable growth is optimal growth).

If people believe prices will be higher in the next period, they'll stock-up in the current period; and in the next period, if they believe prices will rise even more, they'll buy even more.

However, at some point prices won't rise or they'll fall and consumers will compensate for the overconsumption by underconsuming. Then what?

And, you're not going to get rid of a deficit or a debt by tying it to a balloon and sending it away (e.g. to another dimension, perhaps where your socks go after you wash them).

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VangelV says: "While anything is better than Keynes' muddled thinking in The General Theory the Keynesians did not advance anything."

I wouldn't say Keynes thinking was "muddled" and his 1936 book certainly advanced economics:

"Keynes concluded that classical economics rested on a fundamental error.

It assumed, mistakenly, that the balance between supply and demand would ensure full employment.

On the contrary, in Keynes's view, the economy was chronically unstable and subject to fluctuations, and supply and demand could well balance out at an equilibrium that did not deliver full employment.

The reasons were inadequate investment and over-saving, both rooted in the psychology of uncertainty."

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I think people forget that the 19th century economic booms and busts, or feasts and famines (like the Irish Potato Famine), were brutal:

The Long Depression of the 1870s

"For 65 straight months, the U.S. economy shrank — the longest such stretch in U.S. history. America’s industrial base ground to a near halt: By 1876, half of the nation’s railroads had declared bankruptcy, almost half of the country’s iron furnaces were shut and coal production collapsed. Until the 1930s, it would be known as the Great Depression.

In the face of economic calamity and skyrocketing unemployment, the government did, well, nothing. No federal unemployment insurance eased families’ suffering and kept a floor on demand. No central bank existed to fight deflation. Large-scale government stimulus was a thing of the distant future.

With laissez-faire ideas dominant and the political system in stasis, economic decline persisted."

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Juandos, there's a lot of misinformation about Keynesian economics, as your first link shows.

For example, Keynes proved mathematically that a liquidity trap can take place, which was also proven empirically by Japan a half century later.

However, Keynesian economics has been hijacked by the NeoKeynesians and some politicians to promote big government.

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Keynesian economics:

"As a corollary (to deficit spending in recession), the government would cut back its spending during times of recovery and expansion. This last precept, however, was all too often forgotten or overlooked."

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Ron and VangelV, here's the first "refutation" I checked by Hazlitt (who is wrong).

Keynes:

An act of individual saving means—so to speak—a decision not to have dinner today. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing today's dinner without stimulating the business of making ready for some future act of consumption. It is not a substitution of future consumption demand for present consumption demand,—it is a net diminution of such demand.

Hazlitt response:

The truth is that an act of individual saving means, for the overwhelming majority of savers, merely a decision not to have two dinners today. It is much more sensible all around to put aside enough to make sure that one also has a dinner tomorrow . . . On the basis of Keynes's own formal definitions of saving and investment earlier in the General Theory, according to which "they are necessarily equal in amount, being, for the community as a whole, merely different aspects of the same thing" (p. 74), this whole passage is nonsensical and self-contradictory. We can make sense of it only if we re-define saving merely as non-spending of money. . . . But in the modern economic-world, an act of saving, if it is not followed within a month or so by an equivalent spending, is almost invariably accompanied or followed by an act of investment. This is merely a way of saying that people in a modern economic community do not simply hoard money in a sock or under the mattress. Even if they merely deposit it in a checking account, the great bulk of it is immediately loaned out by the bank. If they deposit it in a savings account the whole of it is invested for them.

My comment: Hazlitt assumes that U.S. corporations saving or hoarding $2 trillion in cash and U.S. banks being very cautious in lending (even with accommodative monetary policy) is normal.

Hazlitt also doesn't understand that although saving = investment, the type of saving and investment aren't always the same.

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