[Winstonm]

First, let me state two things: 1) I am not an economist but find the subject endlessly fascinatiing. 2) I am not nearly as bright as many of you so if you get too deep and technical in this discussion I won't be able to keep up.

Here goes - Today's GDP report showed a dramatic slowdown in the U.S. economy for the last quarter, 2.5% verses previous 5+%; however, core inflation figures showed a substantial increase.

Chairman Bernanke seems to think that inflation can be contained by the softening economy rather than Fed intervention with Fed Fund rate increases. But at the same time, monetarists I have read believe this actually has no bearing, that the real problem is that the central banks do no grasp globalism and left interest rates too low too long, thus creating a global oversupply of money that Fed rate hikes cannot overcome without dramatic actions. Instead of too few dollars chasing too few goods they argue that it is too many dollars that is the true cause of inflation.

If Bernanke is right and can engeneer a soft landing, all will be well; but if the monetarists are right, then the economy is like an rudderless aircraft carrier plowing straight for an iceberg and the Fed's action is like charging the sailors a quarter more for the ride.

Which reacts first, usually, GDP growth numbers or core inflation numbers?

Is stagflation a genuine risk? What do you estimate chances of a "soft" landing?

Which group do you believe, keynesians or monetarists?

Thanks to all.

[luke warm]

i can barely spell 'economist', so my views should be discounted accordingly.. having said that, are you sure the monetarists want fed intervention? my hazy recollection is that the friedman school (if that's who you're labeling monetarists) wanted less, or even no, gov't interference... of course, maybe you mean that they simply want to undo changes already made, in order to get back to their view

fwiw, a quick look at google showed me that over half of the nobel prize winners in economics were monetarists (unless i've confused the terms)

[hrothgar]

Winstonm, on Jul 29 2006, 05:34 AM, said:

First, let me state two things: 1) I am not an economist but find the subject endlessly fascinatiing. 2) I am not nearly as bright as many of you so if you get too deep and technical in this discussion I won't be able to keep up.

Here goes - Today's GDP report showed a dramatic slowdown in the U.S. economy for the last quarter, 2.5% verses previous 5+%; however, core inflation figures showed a substantial increase.

Chairman Bernanke seems to think that inflation can be contained by the softening economy rather than Fed intervention with Fed Fund rate increases. But at the same time, monetarists I have read believe this actually has no bearing, that the real problem is that the central banks do no grasp globalism and left interest rates too low too long, thus creating a global oversupply of money that Fed rate hikes cannot overcome without dramatic actions. Instead of too few dollars chasing too few goods they argue that it is too many dollars that is the true cause of inflation.

If Bernanke is right and can engeneer a soft landing, all will be well; but if the monetarists are right, then the economy is like an rudderless aircraft carrier plowing straight for an iceberg and the Fed's action is like charging the sailors a quarter more for the ride.

Which reacts first, usually, GDP growth numbers or core inflation numbers?

Is stagflation a genuine risk? What do you estimate chances of a "soft" landing?

Which group do you believe, keynesians or monetarists?

Thanks to all.

Serious monetarists oppose believe in tying the government's hand.

They argue that stimulus packages of any kind rarely work. "Rational expections" decreases the effectiveness of fiscal policy. Information lags mean that policies can't be applied at the "right" time. Friedman and the like typically argue that the government should commit to increasing the monetary supply at a fixed rate each and every year.

It should be noted that the expression "stagflation" entered the economists lexicon back in the 1970s when a serious of exogenous oils shocks significantly increases costs without any real changes in the money.

Luckily, the members of this forum have demonstrated that we will never run out of oil so we have nothing to fear from price shocks...

[helene_t]

luke warm, on Jul 29 2006, 04:53 PM, said:

having said that, are you sure the monetarists want fed intervention? my hazy recollection is that the friedman school (if that's who you're labeling monetarists) wanted less, or even no, gov't interference...

Yes, the term "monetarist" litterally means "believer in monetary policy". As opposed to Keynesians who believe in fiscal policy. Since fiscal policy is felt more directly by citicens (most people are more concerned about taxes than about the money supply), people who oppose government intervention probably tend to have more sympathy for monetary policy than for fiscal policy.

But in principle, there ought to be no connection between the preference for more (or less) governement intervention and believe in the the factual statement that fiscal (or monetary) policy is more efficient.

[Winstonm]

This is part of an article that raised these questions Summation of article by Bank for International Settlements:

[QUOTE]Economists who focus on the money supply -- known as monetarists -- have an explanation for what happened in the 1970s. An expansion of the money supply can cause inflation just by itself, even if demand isn't strong enough to push up prices. When the supply of money is larger than the demand for money, monetarists argue, inflation is the result. "Inflation is always and everywhere a monetary phenomenon," argued Milton Friedman in "Monetary History of the United States," the book he co-authored with Anna Jacobson Schwartz.

Intervention in the currency markets by national governments kept the prices of overseas goods from rising as well. Most obviously, the refusal of the Chinese government to let the yuan freely rise in value to reflect China's huge trade surpluses kept the price of Chinese goods low and forced other overseas manufacturing nations to intervene in the currency markets, as well, in order to prevent their own goods from being priced out of the world market.

Low and falling global prices masked the effects of an expanding money supply in the developed world. Interest rates that fell as low as 0% in Japan and 1% in the United States provided a huge boost to the global money supply, especially as investment funds borrowed money at these rates to leverage their capital assets. The huge increase in the price of oil put massive numbers of U.S. dollars in the hands of oil producers, who then sought to recycle them by making investments in assets such as U.S. Treasury bonds and mortgage-backed securities, based on a booming U.S. real estate market.

Under other circumstances, an increase in money supply of these dimensions should have produced measurable global price inflation. But it didn't. Traditional measures of domestic inflation in the developed economies didn't show rising prices. With inflation measures showing inflation still contained, the Bank for International Settlements argues, the world's central banks kept the money supply spigots wide open for longer than they should have. That has built up considerable inflationary pressure around the world.

If the Bank for International Settlements is right, the global economy has built up significant inflationary momentum because global central banks, which did not see inflation in their usual measures, kept the money supply growing too fast for too long. That has created exactly the kind of inflationary situation described by monetarists in which too much money supply faces too little demand for money.[QUOTE]

[Winstonm]

Logic indicates to me the monetarist thinking is right.

As a basic model, suppose you had an economy of 10 people each with a total wealth of 1 dollar each and that total of 10 dollars could not expand by individual efforts. If the price of a non-necessity item within this group rose from 10 cents to 50 cents, the result would be a lowering of demand rather than sustained increase.

Take this a step further. Say that instead of 1 dollar bills, everone had 1/2 dollar in currency and 1/2 dollar in a commodity such as gold. The 1/2 dollar could be exchanged for the gold and vice versa. If someone within the group went into a mine and worked for a year and brought back with him an additional 1 dollar worth of gold, his productivity would have increased his wealth. This one person withing the group could afford the increased 50 cent non-necessity item and the price could sustain without affecting all other prices.

However, if non-gold backed capital were infused into this system so that everyone had 2 dollars intead of one, the added cost would no longer be prohibitive and the rise in price sustainable. And the gold miner would have no incentive and actually be prohibited from increasing personal wealth by productivity.

But over time, everyone in the group would see that higher prices were sustainable so would raise their prices as well. Eventually, you would reach the starting point where 2 dollars bought only what 1 dollar did before.

However, no one within this group can increase wealth by productivity, so the only way to increase wealth is by debt. So everyone in the group borrows 1 dollar, increasing money supply without increasing productivity. The incentive to borrow would not be to improve personal wealth but to keep from falling behind everyone else and having living standard deteriorate.

Although totally basic, isn't it sometimes best to look at the basic concept in order to eliminate the forest from the trees?

[hrothgar]

Winstonm, on Jul 30 2006, 01:37 AM, said:

Logic indicates to me the monetarist thinking is right.

As a basic model, suppose you had an economy of 10 people each with a total wealth of 1 dollar each and that total of 10 dollars did not expand.  If the price of a non-necessity item within this group rose from 10 cents to 50 cents, the result would be a lowering of demand rather than sustained increase.

However, if capital were infused into this system so that everyone had 2 dollars intead of one, the added cost would no longer be prohibitive and the rise price sustainable.

Although totally basic, isn't it sometimes best to look at the basic concept in order to eliminate the forest from the trees?

The two examples are actually very different

In the second example, you are doubling the amount of money that everyone holds without impactive the relative price of goods. Accordingly, one would expect the economy to respond with pure inflation. The price of all good would double. The status quo is restored.

The first example involves change the relative prices between goods. Traditionally, this requires calculating both an "income" effect and a "substitution" effect. The income effect measures the impact that an increase in the price of widgets has on utility. The substitution effect measures how individuals change their consumption patterns in respond to a change in relative prices.

[Winstonm]

hrothgar, on Jul 29 2006, 05:48 PM, said:

Winstonm, on Jul 30 2006, 01:37 AM, said:

Logic indicates to me the monetarist thinking is right.

As a basic model, suppose you had an economy of 10 people each with a total wealth of 1 dollar each and that total of 10 dollars did not expand.  If the price of a non-necessity item within this group rose from 10 cents to 50 cents, the result would be a lowering of demand rather than sustained increase.

However, if capital were infused into this system so that everyone had 2 dollars intead of one, the added cost would no longer be prohibitive and the rise price sustainable.

Although totally basic, isn't it sometimes best to look at the basic concept in order to eliminate the forest from the trees?

The two examples are actually very different

In the second example, you are doubling the amount of money that everyone holds without impactive the relative price of goods. Accordingly, one would expect the economy to respond with pure inflation. The price of all good would double. The status quo is restored.

The first example involves change the relative prices between goods. Traditionally, this requires calculating both an "income" effect and a "substitution" effect. The income effect measures the impact that an increase in widgets has on utility. The substitution effect measures how individuals change their consumption patterns in respond to a change in relative prices.

See, that's my problem. Being a non-economist I must break down to the most simple level in order to start a logic flow. In doing this, I'm sure I miss things.

That's why I appreciate your input and time doing so.

Let me ask something else, then. Economist deal with the actual economy which is so large and diversified and non-stagnant that simplicity of explantion is impossible. Might not it be possible that the basics above are true but over time and due to size, changing conditions, and the dynamics of consumption only 5-10% of the changes forecast in the small model might occur in the real economy?

In other words, the small model never completes a full cycle within the overall economy?