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July 15, 2010

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Is the ghost of Andrew Mellon stalking Washington DC to possess the souls of the living? Because I am seriously having a hard time seeing why anyone is even responding to the monumental chutzpah of the GOP's new-found deficit hawkery with anything other than utter contempt.

OTOH, if the Bush tax cuts are actually allowed to expire out of all of this, it might do some medium- to long-range good.

Sorry Andrew. The GOP platform is that we need to cut unemployment benefits and keep the tax cuts.

The Democrats have refused to go after them for this. Not sure why.

"But I am very dismayed that the President said this. Bad economics, bad politics, bad for America."

Which part? (And I'm not being facetious. We may not agree on all of it, but I'm interested to see what you view as most troublesome.)

Well, Scott, my hope is that the GOP saying, "We need to reduce the deficit! By cutting taxes!" will be seen by the electorate for what it is, viz., shoelace-eating lunacy.

Bernard: “At a time when so many families are tightening their belts, he’s going to make sure that the government continues to tighten its own.”

Very strange neo-Hooverism, particularly when unemployment is nudging double-digits and the bond markets are utterly utterly untroubled.

Hard to understand. Not as hard as the House’s failure to pass a budget, but pretty close.

As for the part on financial reform, I do agree with the statement “It will prevent a financial crisis like this from happening again.” Last wars, horses and barns, that sort of stuff.

RE Obama, it seems as though he always performs worse in the summer. It's like October for Bonds or A-rod (at least until last year). In 07, if I remember correctly, at his point everyone was disappointed by his irritability and lack of charm on the campaign trail, and Hillary was looking at a romp to the nomination. In 2008, August was when McCain started to pull even (or very close), before McCain went nuts with the suspension of his campaign. Last August was when HCR was at its low point, with Baucus basically holding up the entire process. He's always better after labor day.

"Is the ghost of Andrew Mellon stalking Washington DC to possess the souls of the living?"

Let me propose an alternative theory. The deficit hawks' attitudes make more sense if you assume they have ideas something like this:

1. Growth in the American and European economies has stalled long-term, and the Atlantic countries and Japan are in rapid long-term decline against the developing world.

2. For the past decade or so, easy money from Greenspan's Fed and the Chinese (and the rest of Bretton Woods II) has covered up the symptoms of the decline. However, it didn't help the big problem, and now the Old Rich Countries* have appalling debt burdens to deal with on top of everything else.

3. The only way for the Old Rich Countries to be competitive is an "internal devaluation" like some of the Eastern European countries have gone through. (China's yuan peg and the Euro make normal devaluation impractical.)

4. Of course, it would be political suicide to spell this out. Nobody wants to think that their country is going the way of the (Blank) Empire. We have to talk around it, focusing on the bits that the average person can relate to. And budget deficits are something everyone can relate to.

[Speaker drinks a single-malt Scotch.]

I've put this hypothetical position together from things posted on conservative and financial blogs, and from comments posted other places. It isn't my position, but I'd have a hard time refuting it.

The key question is when and how normal growth will resume in the Old Rich Countries, and this is something that stimulus backers tend to slide over. If anyone wants to strike a blow for Your Side, you can do so by filling in the gap.

Best, etc.


*Germany is not an Old Rich Country for this discussion.

There's an easy hole to punch in that one, David. Do the people espousing it favor raising the Fed's inflation target to 4%? It would make an internal devaluation far easier vis-a-vis everybody but China, since the exchange rate floats.

As for China, if one really believes that the fixed exchange rate makes it impossible for the U.S. to reflate (something I'm not sure of, since China would import our inflation pretty fast) then one should support imposing tariffs on them until they agree to revalue.

I'm not sure that the proponents of the position you lay out above accept either proposal. But they should, if they really believe their own arguments.

Unless they think inflation and tariffs are just wrong, period. In which case we're back to the ghost of Mellon. (Well, not for tariffs, but you know what I mean.)

"Unless they think inflation and tariffs are just wrong, period."

Well, I personally have been an advocate of inflation for some time, so I'll cop to sometimes owning half of the argument David puts out. I'd tend to agree that the yuan peg is actually a non-issue, so only half.

Were I to posit why inflation is not more broadly popular on the Right, I'd say that the argument you make runs headlong into self-interest. The more cash and cash-like assets you hold, the less palatable an "internal devaluation" via inflation looks, and those cash-rich folk are GOP stalwarts.

The "single malt Scotch" line is awesome, David.

Bernard, that makes sense to me. Although it is a bit harder to understand why they would then be against stimulus, when the market is clamoring for more low-risk federal debt and weak demand threatens the value of their investments. You need to have a fear that the bond vigilantes will strike out of nowhere, which I don't quite understand.

Sorry. Let me be more specific. You'd have conservatives taking a self-interested line on inflation, but a selfless line on the issuance of federal debt. I'm having trouble reconciling those two.

Obviously, as a proponent of moderate inflation, that quandry doesn't apply to your position.

Three comments:

Re whiners: It is the financial crowd who scream the loudest and most colorfully about inflation, and I suspect that the percentage of their portfolios in bonds has a lot to do with it. However, one doesn't have to have money in bonds, here; having your administration say that all salaries are frozen until 2013 at the earliest does a very good attitude adjustment too.

(Yes, I have some cheese with my whine already.)

Re currency depreciation by inflation: the problem is that this is a game any number can play. If the Fed, the BoE, the ECB, and the Bank of Japan are all trying to create inflation, who wins (besides the Canadians)?

Re stimulating growth by inflation generally. This is one of those things that seem generally accepted but which never made sense to me.

The basic logic is supposed to be that if inflation is low, there is very little cost to keeping money in savings accounts or other cash equivalents, and a real benefit of safety. However, if the central bank manages to convince everyone that there is a real possibility of inflation in the near future, the cost-benefit analysis changes: banks are more eager to loan out excess reserves, businesses are readier to invest, and households are willing to increase their leverage. (Am I right?)

The problem is that inflation isn't something that happens to everyone and everything at the same rate; it's inconsistent, erratic, and generates winners and losers, and only those who see themselves as winners will be investing and levering up. For everyone else, cash balances slowly losing value are better than money lost to bad loans or bad investments, and this housholder is not going to want to take on any more debt until there's a raise in my near future.

This turns out to be a digression; if everybody else thinks this is how it should work it will probably work that way whether I understand it or not. However, I think a real austeritist would say something "If inflation at 4% results in real growth at 3% or more, wonderful - for a while. However, even if the central bank is perfectly able to indentify the sweet spot of minimum inflation/maximum growth and push inflation to exactly that point and no further, sooner or later the inflationary boost will wear off and inflation will have to come down again. How much will that cost - especially since the central bank has just deliberately destroyed most of its inflation-fighting credibility? You should consider that cost too, since you are committing to it now with an inflation strategy as surely as you commit to debt service if you borrow money for your stimulus. If you don't count that into your cost-benefit analysis, you aren't really doing one."

Like I said above, the question is if and when good real growth resumes, and if your answer is "Years, maybe never" then austerity makes painful sense.

Like I also said above, this isn't my position. The people who are yelling "Wolf" the loudest now are generally those who've made a career out of it and all the wolves I've seen actually come out of the woods have turned and run rather than killed and ravaged.

But stopped clocks and all. So if anyone has reason to look for something beyond minimal real growth in the near future, I'm all ears.

Best, etc.

I think it makes sense if you assume (not implausibly) that rates remain low because of a "fear bid" or a flight to relative quality. As long as the "bond vigilantes" aren't sure who is going to implode next, they gravitate towards borrowers with effectively no formal default risk. i.e. Japan, U.S. and others who borrow in their own currency. Fear of inflation will only return once fear of sovereign default elsewhere abates. The thing is, if you buy the above, rates will remain low until one day they decide not to be. You could well have dug yourself too deeply into the hole to get out by the time the market decides to pull away the ladder.

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