March 28, 2009
THE NATURE OF THE BEAST
Jeffrey Lacker, president of the Richmond Fed, is a voting member of the FOMC and a card-carrying hawk on matters of inflation. So when he warns that monetary policy faces new hurdles, our ears perk up. As we've been discussing, minting money is easy.;taking it away is something else. The hazards on the latter have rarely been higher at this juncture. At a talk a few days back at the College of Charleston, Lacker summarized the approaching task on soaking up the massive liquidity that's now in the system, albeit much of it sitting idle for the moment:
"Whether it has an inflationary impact or not depends on our skill at the Federal Reserve in withdrawing the stimulus in a timely way when the economy begins to recover. That is a very delicate, very hard policy...The economy when it recovers is spotty...Inevitably, we face this dilemma. Do we keep policy easy and stimulative because of the sectors that are lagging behind in this recovery or do we get ahead of the curve...it is going to be a tough call."
Posted by jp at March 28, 2009 5:52 AM
The concept of "velocity" is quite interesting to me. I have been interested in the cause of recessions which seems to me the result of hoarding or in effect bringing the average velocity down. I am interested about where you read about this topic. I would be very pleased if you could share this.
Posted by: Danny at April 11, 2009 1:21 AM
For as long as I can remember, we, the public, have been told that inflation is the result of government printing money. Clearly, the last few months have demonstrated that inflation is not a function of the quantity of money. Seemingly, the government can print all the money it wants and we are still seeing deflation; see for example, California public works contracts coming in at more that half expectations.
Recently, I’ve read that inflation is a function of the velocity of money. I’m not sure what that means, but at least it’s not repeating the obviously false notion that it has to do with quantity. Now however Lacker with his ‘soaking up’ concept is still implying that inflation is a function of quantity. It seems to me that the velocity hypothesis implies that the problem in the future will not be to ‘soak up’ money; rather, to slow the velocity.
At any rate, the bottom line is that I don’t think anyone understands how the new world economic order works. They are still thinking in national terms when the economy is reacting to international factors. But they get paid to say things that sound like the know what they are talking about when in fact that don’t.
Just a thought!
Posted by: Tom at March 31, 2009 8:01 AM