liquidity trap – The Radford Free Press

Peter Radford / Economics / deflation, inflation, inflation expectations, interest rates, liquidity trap, monetary policy /

Inflation: Not!

June 17, 2009

I don’t want to spend much time on this, but we should take a quick look at the inflation figures that came out this morning. Inflation doesn’t exist. The Consumer Price Index rose a paltry 0.1% in May after having been flat in April. Over the past year prices have actually declined 1.3%. That’s not inflation, that’s deflation. Duh. While I admit that the entire decline is due to the 27.3% drop in energy prices, even if we back that effect out inflation is only 1.8% for the last year. Let me repeat: inflation is not a problem.

Consider this: the Federal Reserve Board is currently targeting inflation to stay in the 1.5% – 2.0% range. So the 1.8%, ex-energy, since last May is right in line with where we want to be.

Also: the spread between inflation adjusted and non-inflation adjusted yields on government bonds is currently running at around … 1.8%. That means the market is anticipating the Fed’s ability to keep inflation within it’s desired range.

So all the recent blather about the ‘potentially devastating’ inflationary impact of all that government debt we are printing in order to save ourselves from slipping into depression is just that. Blather.

Yes bond rates have risen. They are now back closer to a more normal range. They were previously in an extraordinarily dire and unsustainably low range. Getting back to ‘normal’ is a good thing. We should reserve our panic mode for when they rattle on up. If they do. Which, given the extremely depressed nature of demand in the economy, I highly doubt we’ll see this year. I feel that I am compelled to repeat myself: pumping gobs of money into an economy operating miles from capacity, as is the case with the US circa 2008/2009 does not automatically translate into inflation. I realize that standard macroeconomic text books warn otherwise. But they are wrong. You can pump the monetary base from here to the moon and back and inflation won’t budge. We are stuck in a liquidity trap. The folks getting agitated about the inflationary consequences of current monetary and fiscal policy are totally off-base. These are not normal times. I wish they were, but they are not.

Did I make that clear?

And we should keep our critical powder dry for the big things. Like lambasting half hearted and lame bank reform.

I’ll get to that later today.