Friday, July 30, 2010

Japanese style deflation in the US?

I was wondering about the today...afterall the key indicators still show too much spare capacity, inventory already built up and wages still being depressed. Add to that the fact that the Fed has created US$ 1 trillion in reserves and has a a balance sheet size of nearly US$ 2.3 trillion

Krugman had argued that a pattern of falling prices and wages were indicative of a deflationary danger in 2009. With unemployment stubbornly near 10% and with the aforementioned indicators showing no marked improvement, St Louis Fed's Bullard rightly is worried about low interest rates.

He says in his paper “Under current policy in the U.S., the reaction to a negative shock is perceived to be a promise to stay low for longer, which may be counterproductive because it may encourage a permanent, low nominal interest rate outcome,” he said in a paper released by the St. Louis Fed.

Well the thing is as of now, the belief is that recovery will ensure that inflation rises again and the Fed goes back to contractionary monetary policy...but Bullard's fear is very real in the event that a negative shock hits the global economy. In that sense his call for buying treasuries aggressively to ease seems a valid one. The 5 yr TIPS indication of inflation expectation suggests that folks like Yellen and Bullard may be right about extended period of low rates' dangers.....

Unrelated tailpiece: The odd part is that small businesses many of which have been certified or are known to be credit worthy have been denied access to credit by banks that themselves have gained help from taxes paid by these very businesses....

too sleepy to continue the tailpiece...goodnight

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