Wednesday, August 31, 2011

Economy Need Inflation Rate 4-6% Boost Economy Prevent Deep Recession

Tags: Economy Improved Boost Inflation Magnus UBS Bank, Blanchard IMF Economist, Federal Reserve Role, Karl Marx Das Kapital Correct Path Capitalism

George Magnus of UBS Bank gave us today his analysis of what to do to prevent us from going into a deep recession. He wants Bernanke of the Federal Reserve to boost inflation at 4-6% a year level to boost our economy and prevent us from becoming another Japan who practiced largely what our ideological Republicans are trying to force us to do. He spoke on the EconoChat with Tom Keene and on his show on Bloomberg Television, … Surveillance, 12 Noon, ET.

The Federal Reserve’s primary role is to protect bond holders of the ultra wealthy families by preventing inflation. When inflation reaches 2%, he goes into a panic and largely starts to withhold his inflationary policies even though our economy is largely not growing enough to get business to provide jobs. Profits are still growing because workers now work about 60 hours for 40 hours of pay.

The large corporations are firing people instead of providing jobs. Only the smaller companies are providing jobs and government budgets have been cut so sharply that most of the unemployment is from needed government jobs to make it run.

Obama needs to find a way to get money to the smaller business which are large enough to provide jobs so their spending will help even smaller businesses. Cuidado or Beware: Republicans chart small companies by the number of owners such as Koch Enterprise which has two owners and 15,000 workers, but file as individuals to get better tax deals. Democrats call business small by the number of people working there. For example, Obama has tried to give tax credits to smaller companies with 50 employees and up.

George Magnus received many hate e-mails and tweets when he talked about his 4-6% inflation approach on Bloomberg Television today! Ideology dies hard!

Blanchard from MIT who is on loan to the IMF suggested over a year ago what we should do. The Europeans due to the conservative Germans who always worry about inflation due to their runaway inflation after World War I. The Republicans played the same role.

Tax cuts will not do it because people will pay off their credit cards and mortgages as they did with the $1,000 given to all the households by cutting the Social Security payments in half. Half of the 750 billion stimulus packaged with a “compromise” had half tax cuts.

Karl Marx whom Americans instinctively reject, what Capitalism will reap has largely been true as we have experienced, but the supporters of capitalism rarely admit this.

Jim Kawakami, August 31, 2011,

Give Karl Marx a Chance to Save the World Economy: George Magnus, (George Magnus is senior economic adviser at UBS and author of “Uprising: Will Emerging Markets Shape or Shake the World Economy?” The opinions expressed are his own.)

Policy makers struggling to understand the barrage of financial panics, protests and other ills afflicting the world would do well to study the works of a long-dead economist: Karl Marx. The sooner they recognize we’re facing a once-in-a-lifetime crisis of capitalism, the better equipped they will be to manage a way out of it.

The spirit of Marx, who is buried in a cemetery close to where I live in north London, has risen from the grave amid the financial crisis and subsequent economic slump. The wily philosopher’s analysis of capitalism had a lot of flaws, but today’s global economy bears some uncanny resemblances to the conditions he foresaw.

Consider, for example, Marx’s prediction of how the inherent conflict between capital and labor would manifest itself. As he wrote in “Das Kapital,” companies’ pursuit of profits and productivity would naturally lead them to need fewer and fewer workers, creating an “industrial reserve army” of the poor and unemployed: “Accumulation of wealth at one pole is, therefore, at the same time accumulation of misery.”

The process he describes is visible throughout the developed world, particularly in the U.S. Companies’ efforts to cut costs and avoid hiring have boosted U.S. corporate profits as a share of total economic output to the highest level in more than six decades, while the unemployment rate stands at 9.1 percent and real wages are stagnant.

U.S. income inequality, meanwhile, is by some measures close to its highest level since the 1920s. Before 2008, the income disparity was obscured by factors such as easy credit, which allowed poor households to enjoy a more affluent lifestyle. Now the problem is coming home to roost.

Over-Production Paradox

Marx also pointed out the paradox of over-production and under-consumption: The more people are relegated to poverty, the less they will be able to consume all the goods and services companies produce. When one company cuts costs to boost earnings, it’s smart, but when they all do, they undermine the income formation and effective demand on which they rely for revenues and profits.

This problem, too, is evident in today’s developed world. We have a substantial capacity to produce, but in the middle- and lower-income cohorts, we find widespread financial insecurity and low consumption rates. The result is visible in the U.S., where new housing construction and automobile sales remain about 75% and 30% below their 2006 peaks, respectively.

As Marx put it in Kapital: “The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses.”

Addressing the Crisis

So how do we address this crisis? To put Marx’s spirit back in the box, policy makers have to place jobs at the top of the economic agenda, and consider other unorthodox measures. The crisis isn’t temporary, and it certainly won’t be cured by the ideological passion for government austerity.

Here are five major planks of a strategy whose time, sadly, has not yet come.

First, we have to sustain aggregate demand and income growth, or else we could fall into a debt trap along with serious social consequences. Governments that don’t face an imminent debt crisis -- including the U.S., Germany and the U.K. -- must make employment creation the litmus test of policy. In the U.S., the employment-to-population ratio is now as low as in the 1980s. Measures of underemployment almost everywhere are at record highs. Cutting employer payroll taxes and creating fiscal incentives to encourage companies to hire people and invest would do for a start.

Lighten the Burden

Second, to lighten the household debt burden, new steps should allow eligible households to restructure mortgage debt, or swap some debt forgiveness for future payments to lenders out of any home price appreciation.

Third, to improve the functionality of the credit system, well-capitalized and well-structured banks should be allowed some temporary capital adequacy relief to try to get new credit flowing to small companies, especially. Governments and central banks could engage in direct spending on or indirect financing of national investment or infrastructure programs.

Fourth, to ease the sovereign debt burden in the euro zone, European creditors have to extend the lower interest rates and longer payment terms recently proposed for Greece. If jointly guaranteed euro bonds are a bridge too far, Germany has to champion an urgent recapitalization of banks to help absorb inevitable losses through a vastly enlarged European Financial Stability Facility -- a sine qua non to solve the bond market crisis at least.

Build Defenses

Fifth, to build defenses against the risk of falling into deflation and stagnation, central banks should look beyond bond- buying programs, and instead target a growth rate of nominal economic output. This would allow a temporary period of moderately higher inflation that could push inflation-adjusted interest rates well below zero and facilitate a lowering of debt burdens.

We can’t know how these proposals might work out, or what their unintended consequences might be. But the policy status quo isn’t acceptable, either. It could turn the U.S. into a more unstable version of Japan, and fracture the euro zone with unknowable political consequences. By 2013, the crisis of Western capitalism could easily spill over to China, but that’s another subject.

(George Magnus is senior economic adviser at UBS and author of “Uprising: Will Emerging Markets Shape or Shake the World Economy?” The opinions expressed are his own.)

To contact the Bloomberg View editorial board:

Rethinking Macro Economic Policy, Vox, Olivier Blanchard, Giovanni Dell’Ariccia, Paolo Mauro, Feb 16, 2010,

When economic policies or analysis are contrary to the consensus, they are usually rejected long before a careful analysis is done to see if the speaker or writer makes sense. We all tend to experience Cognitive Dissonance when we see, hear, or read something that goes contrary to views we have long held, especially if we are on one ideological end or the other.

The global crisis forced economic policymakers to react in ways not anticipated by the pre-crisis consensus on how macroeconomic policy should be conducted. Here the IMF’s chief economist and colleagues (i) review the main elements of the pre-crisis consensus, (ii) identify the elements which turned out to be wrong, and (iii) take a tentative first pass at outlining the contours of a new macroeconomic policy framework.

Olivier Blanchard
Chief economist, IMF, on leave from MIT

What we have learned from the crisis

  • Macroeconomic fragilities may arise even when inflation is stable

Core inflation was stable in most advanced economies until the crisis started. Some have argued in retrospect that core inflation was not the right measure of inflation, and that the increase in oil or housing prices should have been taken into account.

But no single index will do the trick. Moreover, core inflation may be stable and the output gap may nevertheless vary, leading to a trade-off between the two. Or, as in the case of the pre-crisis 2000s, both inflation and the output gap may be stable, but the behaviour of some asset prices and credit aggregates, or the composition of output, may be undesirable.

  • Low inflation limits the scope of monetary policy in deflationary recessions

When the crisis started in earnest in 2008, and aggregate demand collapsed, most central banks quickly decreased their policy rate to close to zero. Had they been able to, they would have decreased the rate further. But the zero nominal interest rate bound prevented them from doing so. Had pre-crisis inflation (and consequently policy rates) been somewhat higher, the scope for reducing real interest rates would have been greater.

  • Financial intermediation matters

Markets are segmented, with specialized investors operating in specific markets. Most of the time, they are well linked through arbitrage. However, when some investors withdraw (because of losses in other activities, cuts in access to funds, or internal agency issues) the effect on prices can be very large. When this happens, rates are no longer linked through arbitrage, and the policy rate is no longer a sufficient instrument. Interventions, either through the acceptance of assets as collateral, or through their straight purchase by the central bank, can affect the rates on different classes of assets, for a given policy rate. In this sense, wholesale funding is not fundamentally different from demand deposits, and the demand for liquidity extends far beyond banks.

  • Countercyclical fiscal policy is an important tool

The crisis has returned fiscal policy to centre stage for two main reasons. First, monetary policy had reached its limits. Second, from its early stages, the recession was expected to be long lasting, so that it was clear that fiscal stimulus would have ample time to yield a beneficial impact despite implementation lags. The aggressive fiscal response has been warranted given the exceptional circumstances, but it has further exposed some drawbacks of discretionary fiscal policy for more “normal” fluctuations – in particular lags in formulating, enacting, and implementing appropriate fiscal measures. The crisis has also shown the importance of having “fiscal space,” as some economies that entered the crisis with high levels of government debt had limited ability to use fiscal policy.

  • Regulation is not macroeconomically neutral

Financial regulation contributed to the amplification that transformed the decrease in US housing prices into a major world economic crisis. The limited perimeter of regulation gave incentives for banks to create off-balance-sheet entities to avoid some prudential rules and increase leverage. Regulatory arbitrage allowed some financial institutions to play by different rules from other financial intermediaries. Once the crisis started, rules aimed at guaranteeing the soundness of individual institutions worked against the stability of the system. Mark-to-market rules, coupled with constant regulatory capital ratios, forced financial institutions into fire sales and deleveraging. …

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