PeakTrader.com

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PeakTrader:

“So if loose monetary policy is good for the wealthy, then why support it?”

Monetary policy has been keeping the economy afloat. Fiscal policy and the economic policies out of Washington have been a monumental failure.

A stronger economy, although still weak, benefits the entire economy. The Fed deserves a lot of credit (pun intended) learning from the Great Depression and Japan’s liquidity trap.

The question suggests raising everyone’s living standards is much less important than taking down the rich to make themselves look better, even if it means a lower standard of living for everyone.

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Edward, your article is about monetary policy, not any other economic policy.

To assume accommodative monetary policy reduces aggregate demand makes absolutely no sense. That assumption isn’t supported by anything

Of course, if monetary policy is accommodative for too long, a more restrictive stance will eventually be needed to slow “out-of-control” inflation, which may cause a recession. At some point, raising nominal growth won’t raise real growth. It’ll just be inflationary. We’re nowhere near that point now.

You seem against accommodative monetary policy, just because it benefits the “rich,” and you seem willing to bring down the poor to bring down the rich.

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Edward, accommodative monetary policy stimulates aggregate demand through lower interest rates for households and firms, higher asset prices, e.g. for homeowners, 401 (k)s, IRAs, etc., and raising what Keynes called the “animal spirits” of men and women.

Monetary policy is a crude tool. It doesn’t micromanage the economy or helps only the rich. It has proven to be a most powerful tool in the past (and supported by mathematical models). You assume it’s ineffective or counterproductive, because you ignore the negative forces, or headwinds, outside of monetary policy.

For example, at the beginning of last year, a massive contraction in fiscal policy began, raising both federal tax revenue and reducing federal spending, substantially.

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An increase in aggregate demand generates employment and an increase in employment generates aggregate demand.

A self-sustaining cycle of consumption-employment can achieve full employment, to where demand is raised to meet supply, and the Fed can tighten the money supply to preempt or control inflation and maintain full employment.

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Also, I may add, accommodative monetary policy induces demand and reduces saving (see Keynes “paradox of thrift”).

An increase in demand raises output = GDP = income, and consumption + saving = income.

So, by reducing saving (through low interest rates), and inducing demand (including through more borrowing), saving rises through higher income.

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Edward, you, and some others, are still blaming the Fed for other failed economic policies, which include the massive fiscal expansion beginning in 2009, with tax cuts that were too small and too slow, followed by the massive fiscal contraction, of tax hikes and spending cuts, that began in 2013, more regulation on top of excessive regulation, which is regressive (and many states added more regulation and regressive taxes, fees, fines, fares, tolls, etc., to balance their budgets), massive household deleveraging after years of overconsumption, the housing market collapsing, the E.U. in recession, while in a deep depression., etc..

The Fed did what it had to do to prevent a liquidity trap and generate growth. It’s ridiculous to blame the Fed for massive problems, and ineffective and counterproductive solutions, caused by politicians/lawyers.

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Edward, you’re right. The Fed isn’t responsible for fiscal policy or tax policy. Monetary policy has been a powerful tool in smoothing-out business cycles, and accommodative monetary policy stimulates demand, directly and indirectly, which the economy needs.

Accommodative monetary policy stimulates demand, e.g. through lower interest rates for consumer borrowing (which reduces monthly payments and raises discretionary income), refinancing mortgages at lower rates, a lower cost of capital for businesses, including for business start-ups and expansions, higher home prices and more home equity, more money in retirement accounts (to reduce saving for retirement – both bond and stock prices rose substantially), etc.

Low interest rates and high asset prices cause people to save less, spend more, and borrow more, to stimulate demand, raise output = income, and therefore, raise income = consumption + saving.

The goal of quantitative easing was to generate a self-sustaining cycle of consumption-employment. Unfortunately, there were too many headwinds, over the past few years, for the virtuous cycle to take hold. That wasn’t the Fed’s fault. It wasn’t getting the help it, and the economy, needed. You can’t blame the Fed for doing what needed to be done.

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Steve, raising the Fed Funds Rate from zero to 3%, e.g. within a year, which requires removing quantitative easing, because the Fed sets the Fed Funds Rate through open market operations, would likely cause a severe recession.

Even with “QE-infinity,” the Fed didn’t reach its 2% inflation target. Inflation (the annual change in the price index for personal consumption expenditures) has been around 1.2%.

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Sorry, I misread. The Fed hasn’t achieved the 2% inflation target with QE-infinity. So, what will it take to achieve a 3% inflation target?

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Krugman’s statements, although both political and economic, are important:

“In short, the GOP is more and more a party that consistently, indeed reflexively, supports the interests of capital over those of labor. But why?”…“So what we’re seeing is that half the political spectrum now instinctively accords much more respect to capital than to labor, at a time when capital income is growing ever more concentrated in a few hands — and is surely on its way to being concentrated largely in the hands of people who inherited their wealth…“Curious, isn’t it?”

The U.S. needs more pro-growth policies, including more incentives to work (for both rich and poor), and fewer anti-growth policies. It should be easier for Americans to pursue the “American Dream,” not through inheritance or entitlements, through work.

I don’t know who’s worse. Do nothing Republicans, who can’t even recognize a problem, or do too much Democrats, who too often create more problems than they solve.

Can you imagine if your doctor was like these politicians?

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EMichael, only a “buffoon” believes lower interest rates on consumer purchases have no effect on raising discretionary income and increasing demand.

And, the summation of lower consumer interest rates raises aggregate income and aggregate demand.

Moreover, lower consumer interest rates is just one component of accommodative monetary policy.

Furthermore, you even said refinancing causes paperwork, which obviously raises someone else’s income.

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http://angrybearblog.com/2014/03/feeding-pikettys-capital-monster.html#comments

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