Friday, March 20, 2009
Dr. James Hamilton at Econbrowser comments on the Fed's recent policy announcement and recommends that the central bank buy more Treasury Inflation-Protected Securities.
The Fed has accordingly finally settled on an alternative way of framing its quantitative strategy in terms of specific quantitative expansions it intends to implement.With the understanding that the Federal Reserve is the only group that has it in their power to "create" inflation, something that, according to official statistics, they haven't been doing a very good job of lately, wouldn't central bank purchases of inflation "protected" securities be akin to the Mafia buying "protection" from themselves?
This is what I have been urging the Fed to do. Personally I would have focused more on purchasing long-term Treasuries (particularly TIPS) rather than the agency issues, but this should get the job done. And the job, in my mind, is to make sure that the Fed prevents deflation.
Let me be very clear that I am using the term "deflation" here in a very specific and narrow way. I am defining deflation (as do most academic economists) as an increase in the real purchasing power of each dollar bill outstanding, as measured by a decrease in the level of a broad price index such as the CPI or PCE deflator. I think that deflation is an important condition for the Fed to avoid because deflation magnifies and aggravates the real burdens of debtors (dollar sums owed become an even bigger real burden), which would drive us even deeper into our current problems.
Obviously, in this analogy, it is not clear how "deflation" fits in. Anyone?