The following chart shows the natural log of annual change in the CPI less food and energy. When using logs, exponential growth (or in this case, decay) is seen as a straight line.
Click to enlarge.
No matter how hard the Fed tries, it cannot seem to break through the top of the decaying trend channel. So what's the latest tactic? Taper! Good luck on that. Maybe it works. Maybe it doesn't.
As seen in the following chart, the Fed has had substantially more "success" with energy though. The chart shows the annual change in the CPI for energy (not the natural log).
Click to enlarge.
And when I say "success", I really mean "confidence building" chaos. Note that ZIRP has actually helped to calm things down a bit in recent years. Nothing stops chaos like nothing apparently. So here oil is,
chugging along at the $100 level looking for forward guidance. Perhaps it wants to believe that the global economy is robust, but it just isn't all that sure. Or perhaps that's just me talking as a permabear? (Hint: Oil can't actually believe anything. It's just a liquid. I may be a permabear, but I'm not entirely crazy, lol. Sigh.)
November 22, 2002
Deflation: Making Sure "It" Doesn't Happen Here
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
You will note that Bernanke did not mention wages or salaries in that paragraph, nor anywhere else in his speech for that matter. Perhaps the Fed's ability to decrease the value of a dollar is at best like a blunt hammer, and not a surgical instrument.
It would also seem that our government is not all that determined to generate higher spending at a level that could guarantee positive inflation (much like Japan since their housing bust in the early 1990s). Perhaps $100 oil,
massive debt relative to disposable personal income, and
a congressional approval rating of just 12% has something to do with it. Go figure.
First, as you know, Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies (for evidence see, for example, Posen, 1998). Fortunately, the U.S. economy does not share these problems, at least not to anything like the same degree, suggesting that anti-deflationary monetary and fiscal policies would be more potent here than they have been in Japan.
That was then, this is now.
I know not with what weapons Great Recession III will be fought, but Great Recession IV will be fought with sticks and stones.
Sigh.
Source Data:
St. Louis Fed: Custom Chart #1
St. Louis Fed: Custom Chart #2
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