As noted by Bruce Bartlett, in his Economix column in today’s NY Times, Economists are somewhat like Generals–always fighting either the last Recession, or the last War. He provides a bit of a historical comparison, from the Great Recession and World War II onward, http://economix.blogs.nytimes.com/2013/07/09/inflationphobia-part-i/?ref=economy&pagewanted=print.
Like all great technicians at their craft, Economists and Generalls sometimes fail to see the need for changing direction (Retreat, hell!) or making modifications along the way. In the early days of Vietnam, for instance, our Military sent tanks which could not function in a jungle environment. Likewise, many economists espoused theories that had not kept up with Reality. Now, let’s fast forward to more recent Recessions and Wars.
Nobel Laureate Paul Krugman’s recent column, “Not Enough Inflation”, in the NY Times, points out the fact that sometimes some Inflation is Necessary, http://www.nytimes.com/2013/05/03/opinion/krugman-not-enough-inflation.html?.ref=paulkrugman&pagewanted=print. Like Bartlett, Professor Krugman also points-out that some very learned Men and Women, in Academics, Business and Congress have failed to understand the New Realities.
Now, let me separate War from Economics, and take-up the focus on Inflation. The two Wars in Iraq and Afghanistan have basically ended, although not for those who lost loved ones, were maimed or disfigured and the devastation–in both casualties and destruction–that we brought to those countries. America will still have to contend with the Fragile Balance of Power that still exists in the Middle East, as well as Worldwide Terrorism. But, Warfare will now shift more to the Pacific Rim–and we will be waging it more on the Water–rather than on Land. That’ll be the Navy’s first big push since WWII.
As Mr. Krugman pointed-out, we were lucky to have had Ben Bernanke at the Helm of the FED, when we approached the Great Recession (2007-2009). Mr. Bernanke just happened to pick-up a thorough understanding of the Great Recession when he researched his Doctoral Dissertation. Besides, he is an extremely intelligent, and creative, Economist. It also helped that Mr. Bernanke was very thick-skinned in deali ng with the many nay-sayers regarding his methods of saving the Country from going much deeper into recession than it had. Too bad there was not more cooperation.
As Professor Krugman points-out, generally expanding the Money Supply results in Inflation; however, that is not always the case. When interest rates are very low, individuals don’t want to spend, businesses lower prices; however, that really doesn’t always encourage sales. And banks hoard cash, rather than lend it. Certainly, everyone has heard that over the last several years. That’s the “Liquidity Trap!”, that Professor Krugman referred to.
Generally, the FED’s Inflation Target is 2.0%; however, for the last several years, it has centered around 1.0%. Many people talk about the low interest rates that they are getting on bank deposits and CD’s, which certainls many Senior Citizens.
Remember that the GDP, basically the measure of Economic Activity, drops when money is being hoarded. As people spend money, however, they make it possible for (generally small) businesses to hire more people or increase hours, which results in those people paying taxes and spending, and so forth. The more active this “Multiplier-Effect” is, all the better. Generally, that economic activity causes Interest Rates to go up. And, then it is up to the FED to fine-tune, both the Money Supply and Interest Rates. Not too hot, not too cold! Chairman Bernanke’s target is 2.0%.