I’m Back!

2012 September 4
by SJ Leeds

Admit it…you missed me.  It’s been eight days since I’ve written.  It’s just been a crazy, busy time for me.  Classes started, I’m working on a project outside of school, etc.  But, there was some fun too…my ten-year old and I went to Dallas to see the Tide play Michigan.  Thoughts on that game are toward the end of today’s blog.


Several topics to mention today…

First, I wrote an outline of Fed Chairman Bernanke’s speech.  Here’s a link if you’re interested in reading it.  It’s probably just a five to ten minute read.


Next, I want to summarize a short piece from one of my favorite writers / economists.  Martin Feldstein is a Harvard professor.  He chaired President Reagan’s Council of Economic Advisors and he is an advisor to Governor Romney.  (He’s also on President Obama’s Council on Jobs and Competitiveness.)  Tomorrow, I’m probably going to write about another of his recent pieces.


So today, I’ll start with his piece that is titled, “Is Inflation Returning?”  Below, I’ve simply lifted (or paraphrased) many of his key points.  You should read this because we’re in a unique time – we’re worried about both inflation and deflation.  If you read Chairman Bernanke’s speech, you’ll see that he argues that one of the benefits from Fed policy has been fighting off deflation.  At the same time, many investors worry about inflation.  Here are Professor Feldstein’s main points:


1. Inflation is low in every industrial country.


2. High unemployment and slow GDP growth remove upward price pressure.


3. Yet, investors still seem worried about inflation.


4. Investors see large increase in bank reserves and worry that inflation normally follows this.


5. Fed officials argue against inflation by saying that while reserves have increased 22% / year for the past three years, M2 (a measure of the money supply) has only increased less than 6% / year during this time period.


6. In the past, large reserves have ultimately been loaned out (increasing the money supply) and have fueled spending and inflation.


7. Now, banks are willing to hold their excess reserves at the Fed because the Fed pays interest on those deposits.


8. The Fed’s “exit strategy” from all of this quantitative easing is (in part) to raise the interest rate paid on these reserves.  This way, banks will leave a significant part of the reserves at the Fed, rather than loan all of them out.


9. Of course, this is just the theory.  We have no idea whether this will work.


10. Since so many of the unemployed are “long-term unemployed,” these people will be slow to be hired.  So, the fear is that there will be inflation in the product market (rather than the labor market).  (It’s probably conceivable that we could see inflation in parts of the labor market without that inflation existing in all of it.)


11. It will be difficult for the Fed to raise rates (to curb inflation) while unemployment is high.  This is a huge risk that we face.


My personal take on this is that I’m a far way from being nervous about inflation.  I tend to believe the Fed wants some inflation (while keeping rates low).  This effectively lowers the real value of the debt.  But, the reality is that anything is possible, so it helps to think about this.  I also tend to be skeptical of inflation due to high unemployment, globalization, stagnant wage growth and deleveraging (which makes me wonder where the product market inflation will come from).  With that said, things can change very quickly.


One other note…you should realize that many people feel that interest should not be paid on reserves right now.  That way, there would be more incentive to loan these reserves out and stimulate the economy.  In fact, St. Louis Fed President Bullard thinks that we should have negative rates on excess reserves (i.e., banks should pay interest on the $1.25 trillion of excess reserves held at the Fed).  The thought is that this would result in greater lending.


Now, on to what you really care about…football.  We’re back to the greatest time of the year.  Only one of my kids is really into football, so I took him to the game this weekend.  I had never been to the new Cowboys stadium.


They sell a special type of beer at Jerryworld.  I didn’t have any of it and it was called Miller Lite, but there was something that was much better about it.  I’m sure of it because they were able to charge $8.50 for each one.  You heard me right.  (For a lot of my readers, $8.50 buys you a case of the stuff you drink.)  With that said, I can tell you that $5 water doesn’t taste that much better than tap water.  But, I felt sort of wealthy walking around with that water bottle.   I told my son to keep it as a souvenir.


Finally, you’ll appreciate just how cheap I am.  Tickets on the Michigan side were much cheaper than the Alabama side (evidence that markets do work).  So, you know where cheap Daddy bought seats (but they were on the 35 yard line).  Other than the old lady in front of us who kept flipping off the ref (yes, the game would have been completely different if the ref didn’t make those calls…), the Michigan fans were incredibly nice.  As Alabama moved further and further ahead, these Michigan fans sang the nicest song to us (Hail to the Victors).  Such good sports.  Very, very nice people.  Roll Tide.


Have a great week.

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