Economic policymakers are at sea on inflation
Here, let me fix that for you, "Economic policymakers are adrift on a sea of stupid." Better!
"Imagine that in a brief period, inflation expectations around the industrial world, as inferred from the indexed bond market or the inflation swaps market, rose by nearly 50 basis points to a level well above the 2 percent target, with larger increases foreseen at longer horizons. Imagine that at the same time, survey measures of inflation expectations such as those calculated by the University of Michigan and New York Fed in the United States were rising sharply. Imagine also that commodity prices were soaring and that the dollar experienced a once-every-15-years decline. Imagine that the market anticipated future monetary policy in the United States that was far tighter than the Fed’s own policy projections. Imagine that measures of gross domestic product growth were accelerating, with increasing signs of a worldwide boom. Imagine also that no serious efforts were underway to reduce budget deficits. Finally, suppose that policymakers were comfortable with current policy settings based on the argument that Phillips curve models predicted that inflation would revert over time to target due to the supposed relationship between unemployment and price increases.
I think it is fair to assert that in this hypothetical circumstance, there would be pervasive concern that policy was behind the curve — that much was at risk as inflation expectations were becoming unanchored and that a substantial set of policy adjustments were appropriate. The key point would be that allowing not just a temporary increase in inflation but also a shift to above target inflation expectations could be very costly.
We are living in a world that is the mirror image of the hypothetical one I just described. Market measures of inflation expectations have been collapsing and, on the Fed’s preferred inflation measure, are now in the range of 1 to 1.25 percent over the next decade. Inflation expectations are even lower in Europe and Japan. Survey measures have shown sharp declines in recent months. Commodity prices are at multi-decade lows, and the dollar has only risen as rapidly as it has in the past 18 months twice during the past 40 years when the value of the dollar has fluctuated freely. The Fed’s most recent forecasts call for short-term interest rates to rise almost 2 percent in the next two years, while the market foresees an increase of only about 0.5 percent. Consensus forecasts are for U.S. GDP growth of only about 1.5 percent for the six months from October to this month. And the Fed is forecasting a return to its 2 percent inflation target on the basis of models that are not convincing to most outside observers."
It's enough to give a Keynesian economist the vapors! And Larry is nothing, if not a card carrying Keynesian. The proposed solutions to all of our problems from these people is always the same, more debt, more government expenditure, more monetary pumping, and more Keynes. After decades of easy money, Keynesian policies, progressive governance, and fiscal irresponsibility, these yammerheads cannot believe their policies have failed. So, they double, or triple down. The last doubling down gave us the slowest recovery in US history. Do we really need another go at slow?
It is time to take economists like Summers unseriously, for they are unserious. It is time to return to sane, rational monetary policy, responsible fiscal policies, and frugal governance. But I expect none of this, instead, I expect more foolishness. The nation is being run by a clown college of fools, elected by us.
We truly get the government we richly deserve.