Monday, July 09, 2012

Affirmative

Our financial/political system has at least as much corruption as China.  It's also really hard to see it improving anytime soon.  As an aside I think this is mostly right, but has one thing wrong [my bold]:
The Fed’s additional “Twist” is a whimper, not a shout.  In fact, that is probably a good thing, since monetary policy has its limits, and we are near them.  We expect no more from the Fed for the rest of this year unless there is a seriously negative event.
There is no reason to think monetary policy is near its limits unless the only way for it to work is provide cheap money to banks.  But that is only "conventional" monetary policy.  Monetary policy is just affecting the supply of money.  They don't have to buy treasuries thereby effectively just giving cheap money to banks and some financial institutions.  They can create $10k in every person's bank account, or buy other debt (student loans, mortgages, credit card, ...) and light it on fire.

In addition to actual monetary policy, the fed (and other central banks) can modify expectations.  Even without putting a lot more money out there, if they indicated that 4% inflation was A-OK, then we could see changes in behavior to offset that which could positively impact the economy.

So long as the Fed keeps its 2% inflation target and refuses to use its power to create money that directly helps people, yes we are probably near the limits.  But the limits are self-induced, not real.

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