[was: Re: [PEN-L:7620] RE: Re: RE: Re: Re:GDP Byte by Dean Baker, 1/31/01]
Ian wrote:
>The ECI [employment cost index] has been rather benign through the '90's, no?
it's quite possible that the Fed has different standards of what's benign
than you or I. They triumphed over inflation on the backs of the working
class, so they try to make sure that the neoliberal movement and the
deunionization trend, etc. (what they might call "Truth, Justice, and the
American Way" as Super AG stands arms akimbo in front of a waving American
flag), continue. I think Greider is right when he suggests that the Fed
allowed 4 percent unemployment only because AG feared deflation.
>And haven't they been moving rates to prevent capital outflows, even as
>they worry about the trade
>deficit?
I don't get this, since there has been a tremendous amount of capital
_inflow_, which has boosted the stock market and the dollar exchange rate.
The latter has hurt the trade deficit. I don't think that the Fed has been
keeping rates high in order to attract these funds. Maybe they should be
worrying about future capital flight, but I haven't seen that.
All else constant (as it never is), the Fed's interest-rate cuttings should
lead the dollar exchange rate to fall (possibly encouraged by speculation).
In fact, the dollar should fall steeply, which should moderate the U.S.
near-recession at the expense of other countries -- unless their CBs cut
interest rates, too. Then the question comes up: how effective are rate
cuts at provoking increases in investment spending? can they "push on a
string"?
For what it's worth, they seem to have encouraged a housing boomlet. (The
unpredicted nature of the boomlet suggests once again that the Fed can't
predict the future well and thus can't fine tune the economy.)
>Given the FOMC meets every six weeks haven't they been far more worried
>about bank balance sheets in the face of high corporate debt/consumer debt
>even as profits have been better in the 90's than the 80's?
the banks aren't suffering yet, so it's possible the Fed's not worried.
Lowering rates may hurt bank incomes, BTW, which could make things worse
for them. It depends on how much the banks have lots of flexible interest
rate assets (T-bills, etc.) relative to fixed rate assets (long-term loans)
and little in the way of flexible rate assets. I'd have to examine the data...
>Isn't household debt at an all time high precisely because the ECI is
>benign hence credit/debt inflation to keep aggregate demand afloat?
Low & stagnant wages -- not a low ECI -- encourages indebtedness for most
people, but it's the stock market that's encouraged indebtedness for the
high rollers. Asset inflation (is that what credit/debt inflation means?)
helps those with lots of debts survive. If the Fed lets housing prices and
stock prices plummet, then consumers of several different income classes
are in deep yoghurt. This would encourage a sharp fall in consumption,
perhaps sharper than what's happened recently. I don't think, however, that
the Fed has been very worried about this, though likely they should be.
Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~JDevine