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Put on Your Economic Thinking Caps

  1. Jan 7, 2009 #1
    CBS New, Los Angeles, 4:20 AM 1/7/09: "The Federal Reserve announces, the rate of inflation is uncomfortably low."

    What does this mean? Why was this announced--what is the intent? How does this relate to the last 14 years of economic changes?

    For those interested in future economic devolopments, I think this is a good place to both ask the relevant questions (For this rather interesting statement, did I ask them all?) and answer them too.

    Please, please, no politics!

    Any ideas?
     
  2. jcsd
  3. Jan 7, 2009 #2

    Astronuc

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    Staff: Mentor

    I think the low inflation implies a concern over deflation, i.e. capital (investments, home/real estate) actually loses value.

    If this also coincides with lower wages, there will be less consumption, which is about 2/3's of the US economy. One could ask, is an economy based on consumption and heavily weighted to services inherently sound?

    There is also tighter credit, which will dissuade consumption.

    Deflation can lead to a spiral downward in economic activity.

    What is the incentive to invest now and in the future?

    In what should investors be investing? Energy? Renewable energy (e.g. wind, solar, geothermal, biomass, . . . )?

    I can think of lots of questions based depending on how general or specific the criterion.
     
    Last edited: Jan 7, 2009
  4. Jan 7, 2009 #3
    The current trend seems to be debt management. Wether or not one can invest in this I have no idea. :-/
     
  5. Jan 7, 2009 #4
    It may mean many things. As pointed out it may indicate a coming period of deflation. It may also indicate a lower than projected income level which alters fiscal policy (lack of tax $) which will increase the debt to equity ratio as prices and income do not rise faster than accumalting debt and may result in decrease investment.
     
  6. Jan 7, 2009 #5

    russ_watters

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    Given the performance of the stock market over the past six months, I think a generic stock-based mutual fund (say, an S&P index fund) would be the obvious choice.
     
  7. Jan 7, 2009 #6

    russ_watters

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    Could you provide a link so we can read the quote in context? It's tough to respond to your questions without it. And pasting that quote into google yields only this thread.
     
  8. Jan 7, 2009 #7

    mheslep

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    The Federal Reserve chairman thought the topic of deflation worthy of an entire speech back in 2002, which included the consequences of deflation and his recommended actions should it ever occur. That would tend to explain the Fed's specific mention of it recently.
    http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

    Consequences:
    Japan's deflation is treated, to contrast why it wouldn't happen here. Oops.
    :uhh:

    Edit: an especially relevant blurb in that speech for those watching the mortgage rates drop since October and looking to refi or buy a home:
    Sure enough, the rates for all long term mortgages fell today, after starting to level off or even creep back up before today.
     
    Last edited: Jan 7, 2009
  9. Jan 7, 2009 #8

    mheslep

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    http://www.federalreserve.gov/monetarypolicy/fomcminutes20081216.htm
     
  10. Jan 8, 2009 #9
    Thank you for the exact quote mheslep! and the link, good work. I rolled out of bed open the thread, so I was a bit concerned.

    "Moreover, inflation would continue to fall, reflecting both the drop in commodity prices that had already occurred and the buildup of economic slack; indeed some [FOMC] members saw significant risks that inflation could decline and persist for a time at uncomfortably low levels."

    (The Federal Reserve Bank's Federal Open Market Committee (FOMC) are the boy, who by buying end selling interest rate instruments such as Treasury Bills, manipulate the interest rates which FRB member banks lend money overnight to other member banks. This has a far reaching effect on lending rates overall. The quoted "prime rate", that has more than often lately meant the interest rate quoted in the WSJ, is the ~average overnight rate that member banks are currently charging, plus 3%. "Members" refers to representatives of FRB branch banks, whether the branch is currently represented on the committee or not. They serve in rotation, but all attend.)

    The contex insisted by Watter becomes an issue. This wasn't a banner item, but buried in a report. And some suprizingly cognant reporter at CBS managed to fish it out. So it's hard to read: Was it in there to create an effect, or was it there because it's true, both, or neither?
     
    Last edited: Jan 8, 2009
  11. Jan 8, 2009 #10
     
    Last edited: Jan 8, 2009
  12. Jan 8, 2009 #11
    Printing money solves the deflation issue.
     
  13. Jan 8, 2009 #12

    mheslep

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    That is the first step for the Fed but it is not guaranteed to work, as seen when you read Benanke's 2002 speech. Look at the details of what happens when the Fed 'prints money'. Ok they print it (or more accurately, their computer credits the computer in some bank that agrees to take money from the fed). Then what? To raise prices, they have to get the money into people's hands that can spend or invest it. The fed has only indirect means to 'drop money from a helicopter', they can not directly put in into individual hands. Mostly, they rely on commercial banks to do that, and at the moment the banks are not all that cooperative, thus the additional steps described by Bernanke.
     
  14. Jan 8, 2009 #13
    That's were Obama's public spending plan comes in. Government buys goods and services from the private sector so the money goes directly to the economy. However, I'm concerned of the plan to give money as tax cuts, if all that money isn't spent.

    Don't forget that banks have to make a profit for the shareholders. They can't do that by sitting on the money.
     
    Last edited: Jan 8, 2009
  15. Jan 8, 2009 #14
    That system has been running for a very long time.


    http://www.henryckliu.com/page162.html
    The key to walk away from here is that monetary policy of the United States is dependent upon internation policy: who do we like and who likes us?
     
  16. Jan 8, 2009 #15

    mheslep

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    I have been referring to monetary policy under control of the fed, not fiscal policy,

    They don't 'have to' make a profit, they want to do the best they can. If they decide that loaning money will lose money, then they may decide that buying up market share (other banks) and sitting on money now and then lending later is the smart move - not that the government wants the TARP money used that way.
     
  17. Jan 9, 2009 #16
    If history is an example, and the last decade has tracked the 1930's very well, I don' think the FRB is going to let the stock market wip-saw the economy anytime soon in wild speculation and dramatic price changes. It was one of the reasons the FRB bank was established. I guess they needed a second lesson.
     
  18. Jan 9, 2009 #17
    I think that the FED is able to cooperate with the government.
     
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