Deflating the Post's Deflation Fears


It's always fun to read the Post's editorials on economic issues, since you never know what you might find. For example, it recently told readers that reducing the annual cost of living adjustment for Social Security beneficiaries by 0.3 percentage points annually (i.e. 3 percent after 10 years, 6 percent after 20 years, and 9 percent after 30 years) "won't hurt."

Today we get the Post's assessment of the Fed's QE2 policy. It praises the policy for preventing deflation, which it says was a risk at the time the Fed started the program. Actually, it is hard to see how deflation was a serious risk in the fall of 2010 or much impact of QE2. The core inflation rate has been pretty constant over this period, running in the range of 1.0 to 1.5 percent, with nominal wage growth running close to 1.6 percent.

The Post also makes a common mistake in viewing deflation as some sort of grave economic threat. There are good reasons for wanting a higher inflation rate (e.g. 3-4 percent) as economists across the political spectrum have argued. Most importantly it would reduce the real interest rate at a point where the nominal interest is already stuck at its zero lower bound.

In this context, a lower inflation rate is worse than a higher one, but crossing zero holds no special magic. In other words, it is bad news if the rate of inflation falls from 0.5 percent to -0.5 percent, but there is no reason to believe that this decline in the inflation rate is any worse than the drop from 1.5 percent to 0.5 percent.

The Post may be thinking about the sort of rapid deflation that was seen at the start of the Great Depression, when prices were dropping at near double-digit rates. That kind of deflation makes any sort of economic planning almost impossible, but there was little risk that economy would see rates of deflation go that high.

The other oddity in the Post's piece is that it blames QE2 for the run-up in commodity prices:

"But the negative consequences of QE2 ? all of them also foreseeable ? have canceled out some of the positives. Perhaps the most important of these was a commodity price boom, caused by the fact that many investors used the Fed?s freshly printed money to speculate on grain or oil. The winnings accrued to a wealthy few, while the U.S. middle class coped with higher prices for groceries and gasoline."

There are two big problems with this story. First, much of the recent run-up in commodity prices is likely to be enduring, driven by rapid growth in China and elsewhere in the developing world. I don't know anyone betting on a return to $40 a barrel oil.

However the other part is even more bizarre. Speculators did not need QE2 to speculate. The Post's editorial writers are probably too young to remember, but back in 2008, before the collapse of Lehman, most commodity prices were even higher than their recent peaks. The Fed was in a tightening phase at that point. Given that we saw a much larger speculative bubble just three years ago, when the Fed still had relatively tight monetary policy, why would anyone think that the current bubble was primarily due to the Fed's actions?

Oh well, that's why it is always fun to read the Post's editorials on economic issues. 

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Your Privacy And Bankruptcy

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Filing for bankruptcy is a difficult decision and many fear that everyone will find out they have filed for bankruptcy protection. Bankruptcy is designed to be an tool that provides assistance to those experiencing tough times, and not a punishment. Although filing for bankruptcy is public information, it doesn't have to be public record that changes your life in a negative way.

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Leading Senate Democrat Says Benefit Cuts To Medicare And Medicaid Are Off The Table In Debt Ceiling Negotiations


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Update 2: Last week Sen. Chuck Schumer said Democrats could agree to changes in the "delivery side" of Medicare.

"We believe that Medicare provides very good health care but it does it inefficiently," he reportedly said last week. "The way to bring savings out of Medicare while at the same time preserving the benefits is to make it more efficient in terms of the delivery system."

Update: Clarifies Schumer said "benefit cuts" to the programs are off the table.

Original: In an appearance on Countdown with Keith Olbermann, Sen. Chuck Schumer (D-NY) said Senate Democrats would not support "benefit cuts" to Medicare or Medicaid as part of a deal to reduce the deficit and raise the debt ceiling. 

On Tuesday Sens. Joe Lieberman (I-CT) and Tom Coburn (R-OK) introduced a bill that would cut $600 billion from Medicare, a proposal many thought would form part of a final debt ceiling deal.

Schumer's statement came as a blow to President Barack Obama, who called for an examination of entitlement spending to be combined with tax increases, in a press conference Wednesday.

The move also costs Democrats the high-ground of asserting that everything is "on the table" in deficit reduction talks — they have relentlessly criticized Republicans for refusing to negotiate on a deal including tax increases.

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AMD Gets To $10 Without Losing Its Breath

AMD's main product lines include desktop microprocessors, notebook microprocessors and server microprocessors which contribute about 32%, 30% and 21% to AMD stock, respectively, as per our estimates. Our price estimate for AMD stands at $9.48, implying a near 40% premium to the market price.

Source: http://blogs.forbes.com/greatspeculations/2011/06/30/amd-gets-to-10-without-losing-its-breath/

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MasterCard Vs Visa

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MasterCard as well as Visa are two of the more popular credit cards, although Discover is also launching a strong push for consumer ownership with some of its fantastic bonuses, but currently the first two are used in more than 22 million outlets all over the world, so in terms of usage a Visa or a MasterCard is the one most vendors would accept. But the question for many consumers is which to use, MasterCard or Visa? Visa used to be the front runner, and for a time many outlets preferred Visa than MasterCard, but now things have...

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Something To Consider ? Legal Arbitration Clauses In Franchise Agreements

One thing that many franchise buyers do not consider of very much importance is where the arbitration will be done in case there is a dispute in the future with their franchise. Not long ago, I noticed that there was an arbitration clause for a franchisor, which caused all legal disputes to be handled in [...]

Source: http://www.legaldebthelponline.com/2011/06/29/something-to-consider-legal-arbitration-clauses-in-franchise-agreements/

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