An article in the WSJ today deals with the relationship between excess production capacity (slack) and inflation: Slack Attack: Fed Faces Test on Inflation. It examines whether the evidence slack in our economy will protect us from inflation.
I suspect inflation is more likely than people realize. We haven’t had it for a few decades, so it seems like we never will have a problem with it.
I wonder if economists have a way to differentiate the effects of macroeconomic factors from cultural changes in what people are demanding. For example, the factory in this article that makes doors isn’t producing nearly at its full capacity. Is that a sign that the Fed should inject more money into the economy, or might it be that ten years ago new doors were a popular product but now people want some other product or service?
When I read about sales of manufactured goods being down, I wonder if they might be being replaced by things totally unrelated. Maybe people feel like they have enough cars big-screen TVs in their lives, for example, and now they want to spend their money on $5-a-cup fair-trade coffee. (This is certainly true for my enclave on the near west side of Madison, WI.)
I feel sorry for the town of Bend, OR suffering from massive layoffs at its door and window factory. I question how much of that effect is due to the economic cycle and how much of it is certain types products and services falling into and out of fashion over time.
We should be very cautious about our loose monetary and fiscal policy. Once inflation comes back, it will be hard to get rid of.
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Unfortunately, you won't know about people's trade-offs until it happens.
ReplyDeletePsychology is fical and it's the thorn in the side of economists.
For example, you might be correct. Most people already have some form of door on their place of residence. Doors are also fairly expensive. It is not hard to assume that a new door is a luxary. However, coffee bought in a way that brings hope to poor farmers at a time when social responsibility and social settings for coffee are popular and cheap forms of getting away from it all. Who knows the trade-off.
My guess on inflation was that China was taking so many dollars out of curculation that it held down inflation over the last decade. Who knows what the future holds if no one is willing to continue to fund the US.
@conservative generation
ReplyDeletesocial responsibility and social settings for coffee are popular and cheap forms of getting away from it all
I'm suggesting the trend may before coffee in a social setting to be the luxury people want while former luxuries might be moving toward being a cheap addition/escape/etc. So when people say, "People forgoing 'luxuries' in favor of 'cheap escapes', we need to pump money into the economy," I say to make sure it's not just those particular luxuries are out of fashion.
Great post! I really like your page!!
ReplyDeleteCOMMON CENTS
http://www.commoncts.blogspot.com
Inflation will come back my friend and may eclipse that of the 1970's, mark my words. Also, I amended the post that you replied on, tell me what you think -
ReplyDeletehttp://www.leftcoastrebel.com/2009/09/michael-moore-capitalism.html