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Like the Mafia buying "protection"?

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.

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.
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?

Obviously, in this analogy, it is not clear how "deflation" fits in. Anyone?

5 comments:

Anonymous said...

But the Fed is not against just deflation, it also is against simply allowing the dollar to stay at the same value. Instead the Fed has always been at war with dollar holders and rewarded debtors. Just look at how little a dollar in 2009 will buy compared to what it bought in 1913.

And today they no longer just rig the system in favor of debtors, they are now shoveling taxpayer money into the hands of the biggest debtors in the world, namely the big international banks. And the reason why these big banks are the biggest debtors is that that is how they got to be the biggest banks, they leveraged huge amounts of debts and liabilities to become big. They are so deep in debt that today without the Treasury and FED these banks would have collapsed into debt hole they themselves created

DJF

albrt said...

"You've got a very nice army base 'ere Colonel. We wouldn't want anything to happen to it."

Andreas said...

Another idiot opens his mouth. He needs to distinguish between price deflation and wage deflation - price deflation without wage deflation does not pose the problem he posits. On the other hand, price inflation without wage inflation DOES pose the problem he posits - and that is exactly what the Fed's actions will do. We cannot have wage inflation b/c the government's globalist policies will equalize wealth across the working classes worldwide, which means the BRIC and other countries will have richer workers, and the US will have poorer workers. No amount of inflation or deflation will affect this - the standard of living in the US is going to collapse. Period.

Now even if the Fed action causes wage inflation (again - VERY unlikely, due to competitive pressures from BRIC country labor), it would still have to exceed real-world inflation (food, energy, etc.) to avoid a loss of standard of living. Won't happen.

Bonds at 4% in a currency being inflated? What idiot buys that? Only those without any options, and the Fed. The Fed won't be the lender of last resort - it will be the lender of only resort.

It amazes me what idiots we have for economists.

Tim said...

It just struck me how unholy the idea of the Fed buying TIPS really is. The difference between regular U.S. bonds and inflation-protected U.S. bonds is (along with the consumer sentiment/confidence surveys) one of two primary measures of "inflation expectations" used by the Fed to conduct monetary policy. For them to be buyers and sellers in the TIPS market allows them to directly impact these "expectations". Not that these "expectations" are worth much anyway - more than anything else, people judge inflation by changes in the price of gasoline.

dearieme said...

If the Fed buys enough TIPS it will be even easier to default on US Treasury debts by inflation.

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