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Japan Still in Economic Study Hall and US banning itself there also...
WANBLI1 - Sat, Jul 31, 2010 - 01:10 PM
Are the US and current Bernanke FED interest rate and inflation fighting policies pushing the US economy closer to an unintended, protracted and unstable state of the economy mirroring a Japanese-style deflationary outcome?
Has the FED’s extended period of low interest rate and low inflation rate policies (now approaching 0 and being promised to be extended into the indefinite future) become captive to the financial sector demands of low interest rates and low inflation expectations that are far removed from the Fisher steady and stable equilibrium TARGETs of interest rates and inflation rates hovering around in the TARGET RANGES of 2.8 and 2.3 respectively?
Are US non-financial sectors coming to expect a protracted period of deflation rates consistent with the low end of the Fisher curve – the Japanese monetary predicament? The low-end Fisher curve corresponds to low or even negative real rates on safe assets and low or even negative inflation (or deflation) rates.
The FED’s current interest rate policy (lower end of the Fisher curve) is having little to no policy response – keeping low interest rates is having no effect on the US economic recovery – FED cannot induce a new round of desired inflation nor is its policies gaining economic recovery traction. But the FED promises to do more of the current low interest rate action. Why?
Should the public sector apply more pressure on the financial sector by threatening more financial sector insolvencies (rather than decreasing the pressure with bailouts) if the private financial sector continues to hold forcefully to expectations of low bank borrowing rates? Why should the private financial sector be immunized from more insolvency while staunchly refusing to modify past period contract rates? Why should the private financial sector be vaccinated against higher borrowing costs while the remaining non-financial sectors carry greater financial burdens? How much pressure is the private financial sector exerting on the FED to keep interest rates low (hoping to forestall more insolvencies) while the public sector desires moving from current low inflation and low interest rates, to the more long run Fisher steady state of interest rates and inflation? How would the private financial sector respond if confronted with a governmental threat to move the economy back to the Fisher stable rate regimes, likely initiating more private financial sector insolvencies? If the government pushed the teetering private financial sector into more insolvency, would this be a acceptable way to combat getting US stymied for the next 10 year in a Japanese deflationary abyss?
At what point will the FED begin moving toward the Fisher steady state region to prevent stagnating the US economy in the lower end of the Fisher curve and precipitate trapping the US in a protracted and unstable low interest rate equilibrium.
Japan, embarked on an aggressive fiscal expansion and the debt-to-GDP ratio there is now approaching 200 percent. Still, there does not appear to be any sign that a Japanese economy is about to leave the low nominal interest rate steady state, and Japanese monetary policymakers are worried about new reactions to their situation.
The U.S., U.K., and recently the EU, have seemingly enjoyed more success with low Fisher rates policies than Japan, perhaps because private financial sector actors are more enamored with the idea that the FED, U.K and now EU monetary policies will keep them from the bait hooks of insolvency – because they expect the policy makers WILL DO WHATEVER IT TAKES TO AVOID UNPLEASANT OUTCOME FOR THEIR SECTORs of the ECONOMY.
The U.S. is closer to a Japanese-style outcome today than at any time in recent history. In part, this uncomfortably close circumstance is due to the interest rate AND inflation policy being pursued by the FED. That policy is to keep the current policy rate close to zero, but in addition to promise to maintain the near-zero interest rate policy for an extended period. But it is even more than that, because the reaction to a negative shock in the current environment is to extend an already extended period even further and delay the day of normalization of the policy rate farther into the future.
Promising to remain at zero for a long time is a double-edged sword. The policy is consistent with the idea that inflation and inflation expectations should rise in response to the promise, and that this will eventually lead the economy back toward the targeted Fisher equilibrium But the policy is also consistent with the idea that inflation and inflation expectations will instead fall, and that the economy will settle in the neighborhood of the unintended lower Fisher steady state, as Japan has in the most recent 15 recent years.
Extracted from source: James Bullard, Preprint Federal Reserve Bank of St. Louis Review, 29 July, 2010.
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Japan Still in Economic Study Hall and US banning itself there also...
WANBLI1 - Sat, Jul 31, 2010 - 01:10 PM
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