US quietly defaulting on its debts

[CPL.Luke]

http://online.wsj.com/article/SB121936581501662161.html?mod=opinion_main_commentaries

 

personally I would've ignored this article except for the fact it showed up in the wall street journal. its kind of interesting, except it ignores that immediatly following WW2 the US had 120% of its GDP in debt and got out of it mainly through the post-war boom, although the 1970's certainly helped.

[swansont]

I think it ignores more than that. It ignores that the economic grown of a few years back was also fueled by the low interest rates of the fed, which allowed everyone who cared to to refinance their mortgage and pull equity out, and then spend, spend, spend. It also ignores that the inflationary pressure today includes high oil prices coupled with a weak dollar.

[CPL.Luke]

swansont remember that according to Milton Friedman inflation is always a monetary phenomenon, and while the government running a deficit will not always result in large inflation, one of the things the government talks about. A large deficit will eventually cause deficit.

 

for instance without the Feds 2001 easy money policy people wouldn't have been able to buy homes the way they did which drove of the price, and people who already owned their homes wouldn't have been able to refinance to get cash out like they did in order to spend it. If the fed had used the 1970's measure of inflation we would have seen inflation rates of 10% or more for the past several years (although by the same token today we would be most likely seeing deflation)

 

the main difference I'm talking about is that in the 1970's the fed used home ownership to measure the cost of housing, today we use "rental equivalent" which is somewhat of a vaccuous measure as it can be taken to mean different things.

 

Similarly the Fed focuses on core inflation meaning inflation sans food and energy. there is good reason for this however it causes them to miss certain warnings, like the fact that commodity prices across the board were sky-rocketing with or without speculation markets (at the time oil was at its height iron ore had also gone up 40% since the beginning of the year and iron ore doesn't have a speculation market), which is a clear sign of inflation, because if the total supply of money in an economy is constant, and the GDP is constant, and unemployment is constant, prices cannot rise across the board, as say the price of energy increases peoples disposable income dissapears causing them to spend less on descretionary items, either reducing demand for that item and lowering its price such that the net increase in cpi is 0 or causing unemployment to rise, as people are layed off from companies whose customers are being reduced (although normally these people would be incorporated into the energy industry which is in need of more employees).

 

Since currently our government claims that unemployment is relatively constant, and that our GDP is virtually stagnant something is causing inflation.

 

^note its possible through a series of arguments milton friedman used to show that inflation can only be caused by changes in the supply and demand for money.

 

 

inflation expectations are important as the government can effectively cheat and pursuing a highly inflationary monetary policy and fix certain aspects of their economy while doing that, as long as people don't expect inflation to be that high any bits of inflation that show up will be short lived. Although once people expect that inflation will be high they start demanding that their employers pay them more maintaining an inflationary enviroment.

[swansont]

If constant GDP, money supply and employment should result in no inflation, I have to wonder what conditions are being assumed. I'm not an economist, but it seems to me (a physicist) that you aren't looking at a closed system, though the assumption is that you are.

 

Or, if the model is right, the measurements are not accurate.

[CPL.Luke]

I'm no economist either, but over the past 6 months or so I've been getting a bit more into it after the whole mess were in sparked my interest. It didn't hurt that my roommate was an accounting major either (I'm a physics major).

 

however I believe the problem is mainly in the measurements, the "quantity theory of money" page on wikipedia, states that its mainly bleieved that if the statistics could be known accurately that policy prescriptions could be made very quickly.

 

in looking for data on the effect of the money supply on inflation I ended up reading the full monetarism article on wikipedia which include a number of empirical counter arguments to the idea that the money supply is the sole cause of inflation.

 

From what I can gather the mainstream view is that while the money supply is well known the demand for money is much harder to quantify, and as such policies that are aimed as to provide exact fiscal policy in response to a given situation is doomed ot failure.

 

I would highlly recommend the wikipedia articles on monetarism and keynesianism. There both pretty straight forward and cover the main views of economists for the past 100 years

 

back to the original point though, it does seem logical that large inflation can't occur unless the money supply is increased, as the GDP caps the amount of money that can be consumed at a given time, but if the government allows banks to lend out more money, then people will spend more, pushing the demand for goods up across the board and triggering inflation. (assuming that growth doesn't coincide with this policy)

 

similarly if the government borrows money from over seas and spends it at home, then they are using that money to pay workers driving up wages and then in turn driving up the cost of goods. (again assuming economic growth doesn't coincide)

 

bah I wish I knew more about the math that goes into economics, it would make determining bunk so much easier. then again I also wish that the math that goes into economic theories produced meaningful falsifiable results.