I would like to able to report this morning that US economic leadership has reached a rapprochement. That both Treasury and the Federal Reserve have agreed a new round of stimulus measures that aim specifically to create US jobs and reverse the decline of its middle class through a sensible balance of medium term spending, longer term consolidation and innovative monetary support.
But I can’t. Instead I must report that the damaging argy bargy goes on across monetary and fiscal domains. How anyone can say gold has run its course in this environment is beyond me.
Let’s begin with monetary policy. FOMC member, Charles Evans reckoned last night that:
The Fed’s current commitment to record-low interest rates should be made contingent on pushing the unemployment rate to around 7 percent or 7.5 percent, as long as inflation stays below 3 percent in the medium term, the 53-year-old regional bank chief said today in a speech in London.
“Given how truly badly we are doing in meeting our employment mandate, I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation,” he said. “Such further policy accommodation does increase the risk that inflation could rise temporarily above our long-term goal of 2 percent.”
The speech places the Chicago Fed president among the “few” members of the Federal Open Market Committee who, according to minutes of the FOMC’s gathering in August, favor a “more substantial move” beyond the central bank’s pledge to hold rates low for about two years. Evans, among the FOMC’s most outspoken advocates of easing since last year, voted for the FOMC’s Aug. 9 commitment to keep the overnight lending rate between banks near zero through at least mid-2013.
His support for a new trigger to be added to the central bank’s statement goes beyond the easing publicly supported by most Fed officials, and is an acknowledgment of the weakness of the world’s largest economy almost a year after the Fed committed to a second round of bond purchases to spur growth.
There’s a certain inevitability to this. Trashing the dollar and raising inflation is one sure fire way to correct the US balance sheet problem through greater competitiveness in the external sector and rising wages relative to existing debt. It’s probably a surprise that such calls haven’t happened sooner.
That the inflation is likely to first leak offshore via commodity prices seems to me an added advantage in that it helps correct global imbalances. It pumps up Chinese demand and prices through the currency peg, at once raising consumption and making their external sector less competitive.
And, given the surplus of labour resources in the US, the inflation can probably be reversed later without too much pain. The underlying structure for the US is, after all, deflationary.
As a policy for the US it has a lot to recommend it. Of course, according to the nutters it’s treasonous so it probably won’t happen. And, Tim Duy reckons the FOMC Chairman is himself against it, which is odd given Helicopter Ben’s history. Then again, the nutters are kind of scary.
It would also be pretty awful for Australia. Dollar at $1.20+. Rising interest rates. Falling house prices and rampant Dutch disease. But at least the stock market would rise along with the Wall St party.
I’ve been unable to determine if the Fed could do it unilaterally or would need an act of law. Any input on that front from readers is welcome.
The other reason that the secret tax of inflationism is a way forward is that the fiscal deadlock looks as tight as a drum. In spite of recent rumblings of a grand undertaking by Obama, the mail overnight was anything but. Rather, what was mooted was paltry:
President Barack Obama plans to propose sparking job growth by injecting more than $300 billion into the economy next year, mostly through tax cuts, infrastructure spending and direct aid to state and local governments.
Obama will call on Congress to offset the cost of the short-term jobs measures by raising tax revenue in later years. This would be part of a long-term deficit reduction package, including spending and entitlement cuts as well as revenue increases, that he will present next week to the congressional panel charged with finding ways to reduce the nation’s debt.
Almost half the stimulus would come from tax cuts, which include an extension of a two-percentage-point reduction in the payroll tax paid by workers due to expire Dec. 31 and a new decrease in the portion of the tax paid by employers.
As the WSJ rather obviously pointed out, cutting the costs of hiring isn’t going to do squat when the problem is a shortage of demand. Perhaps the leak is a ruse.
Not that it matters. The nutters in the Congress already declared the plan a non-starter. From The Hill (h/t Zero Hedge):
Sessions read one press report on the Senate floor that said Obama could propose as much as $300 billion in new spending in his Thursday night address to a joint session of Congress. According to that report, Obama is expected to propose extending payroll tax cuts for another year, and extending expiring jobless benefits. Those two measures combined will cost $170 billion.
He may also propose a tax credit for companies to hire unemployed workers, costing $30 billion, and a public works program that is expected to cost at least $50 billion for such items as school construction.
Other reports say Obama’s total proposals could total less than $300 billion, with some putting the number at $200 billion.
…Regardless, Sessions indicated Republicans will oppose any new spending plan that is not offset by spending cuts. The senator noted that while Obama has talked about the need to reduce federal spending, Obama is not expected to describe how to pay for these new programs in his Thursday speech.
So, Obama is allowed to have misdirected tax cuts if, and only if, he cuts back spending elsewhere, which will probably detract further from weak aggregate demand, the real problem.
Goooooo GOP!
