i only caught a few minutes of his testimony before i went out..
"why inflation was so tame"...
as i recall, one of AG's big concerns at the time when unemployment was at 4% was excess demand leading to an inflationary environment, that's when he started hiking rates...when the fact is, it was totally unnecessary to raise rates at the time...the was no inflation (except in the stock market)...we really are entering a new era with globalization that, imo, will continue to exert deflationary pressure as worldwide markets compete.
he can "accomodate" all he wants wrt interest rates and money supply, but it's doubtful he can accomodate jobs back into the u.s.
just how much "accomodation" is needed to offset for example, paying the average american software tech $60/hr as opposed to $20/hr. paid to workers in india?
i'm trying to envision the scenario when restructuring, downsizing, global competition, the microchip or the internet will no longer be a factor <g>
story.news.yahoo.com
Long Disinflation Trend Raises Deflation Fears In Soft Global Economy
Mon Jul 14,10:11 AM ET
By Jed Graham
In the roaring '90s, the Federal Reserve (news - web sites) had lots of help keeping inflation tame. Now policy-makers focusing on deflation find those same forces aligned against them.
While most economists expect the Fed to win this battle, some think it could be just the first round in a longer war.
On Friday, the Labor Department (news - web sites) reported that wholesale prices overall rose 0.5% in June from May. But core prices fell 0.1% from May and 0.3% from a year ago. Prices of autos, computers and appliances all declined.
Consumer prices of such durable goods have fallen even more, off 2.6% in May from a year ago.
The data are evidence of powerful economic changes the past two decades.
Back in the late '90s, with unemployment and GDP (news - web sites) growth both near 4%, economists scratched their heads to understand why inflation was so tame.
In July 1999, Dallas Fed President Bob McTeer gave his take on why the economy was "breaking a lot of the old rules.
"Monetary policy has been disinflationary, but so have peace, free trade, more competition, restructuring, downsizing . . . the microchip and the Internet," he said.
That's great when the economy is on fire, like it was in the late '90s. But it's less so when the U.S. and world are trying to recover.
Global Excess Capacity
Inflation trends lower when supply exceeds demand. And manufacturers have been grappling with this reality as foreign competition has grown and productivity gains have let them raise output.
An inability to raise prices pressures companies to become more efficient, cut costs or move offshore. While the economy thrived under those pressures in the '90s, weak global demand has intensified the forces of disinflation and prevented a job recovery.
"The economy has been in the jaws of secular disinflation for the last 20 years and will likely remain so for the next several years," wrote James Paulsen, chief investment strategist at Wells Capital Management. "We also believe, however, the economy is headed for a cyclical spurt in the next couple of years."
His reasoning for the seemingly contradictory forecasts lies in what he calls "secular undertow."
Until the early '80s, the U.S. was largely a closed economy. Overseas competition was negligible. Productivity growth was slowing. Union influence was on the rise. And a new culture of borrowing took root, letting demand outpace income and output growth.
These secular forces were inflationary, creating "chronic excess demand," Paulsen wrote.
The past two decades, those forces have given way to growing forces of disinflation that pull the economy toward "persistent excess supply," Paulsen wrote.
The end of the Cold War and increasing trade raised competition for U.S. factories, spurring consolidation and cost-cutting. The tech boom boosted productivity. Consumers, having loaded up on debt, became bargain hunters.
Just as Washington produced periods of falling inflation even in the inflationary '70s, Paulsen expects policy-makers again to prevail - "at least for a time."
The Fed cut its key lending rate from 6.5% to 1.75% in 2001, and another 75 basis points since November, when it went on heightened alert against deflation.
Some economists believe the risk of deflation is minimal, in part because the Fed recognizes the risk.
They argue the Fed kept interest rates too high in the late '90s because it was still fighting inflation.
The stronger dollar, gold at $250 an ounce and commodity prices at three-decade lows were evidence the Fed kept policy too tight and "strangled a growing economy," said Donald Luskin, chief investment officer at Trend Macrolytics.
Now gold trades near $350, commodity prices are up some 25% over 18 months and the dollar is down 20% against major currencies.
Those price swings show the Fed is now supplying the economy enough liquidity, Luskin says. "Now that the Fed has addressed the problem . . . that does give one confidence" that deflation isn't a threat.
Core consumer prices in May rose just 1.6% from a year ago. April's 1.5% gain was the smallest since '66.
But "in services there's not even a whiff of deflation," said Anirvan Banerji, research director at the Economic Cycle Research Institute. Service sector prices rose 3.4% from a year ago in May.
"It really takes back-to-back recessions to get deflation," Banerji said. But ECRI expects an OK recovery.
Falling import prices curbed inflation in the late 1990s, Banerji says. But core import prices have firmed, rising 1.1% from a year ago in June, thanks to the falling dollar.
Still, some economists see deflation as a real possibility.
The U.S. faced deflation in the late 1800s, when railroads and the industrial revolution opened up new trade routes and raised productivity, notes Gary Shilling, an economist and investment adviser.
It happened again in the 1920s, with the electrification of factories and mass production of cars.
"Historically, when you get those big bursts of technology," deflation has followed, Shilling said.
Other forces may also contribute this time, such as global outsourcing and a consumer "saving spree" after 20 years of borrowing. |
