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Nov. 20, 2009
Rabbi David Aaron: How to make every second of your life come first
Caroline B. Glick: Whither American Jewry
Nov. 19, 2009
Binyamin L. Jolkovsky: Please Listen to this Godcast (5 minutes)
Jonathan Tobin: ADL Crosses the Line with Report Bashing Obama Critics
Nov. 18, 2009
Rabbi Yonason Goldson: What Judaism has to say about the secret of the Mona Lisa's smile
JWisdom.com: The (Jewish) Dating Game with Rabbi Lawrence Hajioff (8 minutes)
Nov. 17, 2009
Steven Emerson: How Does the 4th Amendment Impact Terror Finance Investigations?
JWisdom.com: If Frank Sinatra married Edith Piaf with Rabbi Y.Y. Rubinstein (2 minutes) Life lessons from what would be regarded as the most inappropriate lyrics ever sung
Nov. 16, 2009
The Jewish Ethicist by Rabbi Dr. Asher Meir : When borrowing is stealing
JWisdom.com: Deconstructing faith with Rabbi Warren Goldstein (9 minutes)
Nov. 13, 2009
JWisdom.com Sarah's subjective reality with Rabbi Sroy Levitansky ( 6 minutes)
Caroline B. Glick: Obama's failure, Netanyahu's opportunity
Nov. 12, 2009
The Kosher Gourmet By Marialisa Calta : A sweet sweet potato treat
JWisdom.com Does God get tired? with Rabbi Harvey Belovski ( 5 minutes)
Nov. 11, 2009
Rabbi Avi Shafran: Jews and money: When anti-Semitism isn't
JWisdom.com Marriages are not made in Heaven with Rabbi Lawrence Hajioff (VERY fast 15 minutes)
Nov. 10, 2009
Michael Doyle: Author of book exposing CAIR ordered to remove supporting documents from Web
JWisdom.com If the creation so loudly shouts the existence of the Creator, why aren't more people believers? with Rabbi Naftali Brawer (9 minutes)
Nov. 9, 2009
Mark Steyn: Shooter exposes hole in U.S. terror strategy
JWisdom.com It's never too late to have a happy childhood with Sarah Chana Radcliffe (5 minutes)
Nov. 6, 2009
Rabbi Berel Wein: Choosing to hear
JWisdom.com Zero to 1/60th: How to Empower An Hour with Gavriel Aryeh Sande (7 minutes)
Caroline B. Glick The mullahs' big week
Suzanne Fields A Fallen Wall for Fallen Man
Nov. 5, 2009
The Kosher Gourmet: Three scrumptious -- but simple -- butternut squash dishes
JWisdom.com Hidden Hints: Unlocking Faith & Prayer with Rabbi Jay Yaacov Schwartz (10 minutes)
Nov. 4, 2009
Tom Hamburger and Kim Geiger: Should prayers be covered?
JWisdom.com When God played peacemaker With Rabbi Sroy Levitansky (5 minutes)
Nov. 3, 2009
Martin Peretz: Beware, Barack. Beware, Rahm. Beware, Axelrod
JWisdom.com Are you are closet idolater? With Sara Yoheved Rigler (10 minutes)
Nov. 2, 2009
Paul Greenberg: The Holocaust is now on Facebook
JWisdom.com Abraham's Strange Change With Rabbi Yitzchok Fingerer (5 minutes)
Oct. 29, 2003
Mortimer B. Zuckerman: Graffiti On History's Walls (MUST-READ!)

Jewish World Review June 8, 2009 / 16 Sivan 5769

Flirting with deflation or inflation? Now the economy might be at risk of both

By Robert J. Samuelson


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http://www.JewishWorldReview.com | To make sense of today's most perplexing economic debate — whether we're flirting with inflation or deflation — it's worth recalling what happened after World War II. Under intense political pressure, President Harry Truman lifted wage-price controls. All heck broke loose. Suppressed during the war, wages and prices exploded. Autoworkers, steelworkers and others went on strike for higher pay. In 1946 and 1947, consumer prices rose 8.5 and 14.4 percent, respectively.


What's instructive is that prices then stabilized. There was no upward wage-price spiral as occurred in the 1960s and 1970s. True, a mild recession in late 1948 and 1949 helped temper price increases. But inflation subsided mainly because people didn't expect it to continue. They'd lived through the Depression, when prices declined. They knew that, except for the impact of wars, American prices were usually fairly stable.


The lesson for today: Psychology matters. What economists call "expectations" shape how workers, managers and investors behave. If they fear inflation, they act in ways that bring it about. The converse is also true, as the late 1940s remind. The lesson provides context for today's debate. Are the Federal Reserve's easy-money policies laying the groundwork for higher inflation? Or will these policies prevent deflation — a broad decline of prices — that would deepen the economic slump?


The questions arise from the Fed's strenuous efforts to contain the economic crisis. It has cut the overnight Fed funds rate almost to zero. It has made loans when private lenders wouldn't — in the commercial paper market, for instance. To lower long-term interest rates, it has pledged to buy $1.25 trillion of mortgage securities backed by Fannie Mae and Freddie Mac and $300 billion of long-term Treasury bonds. All these measures are without modern precedent.


Precisely, say the inflation worriers. Once the economy recovers, the easy money and credit will spawn inflation. Cheap loans will bid up prices; wages may follow. Low interest rates will encourage spending and deter saving. The Fed will be "under pressure from Congress, the administration and business …to prevent interest rates from increasing," warns economist Allan Meltzer of Carnegie Mellon University. With huge budget deficits, the White House and Congress will want to hold down borrowing costs. Inflation psychology will emerge.


Nonsense, say deflation worriers. Inflation results mainly from too much demand chasing too little supply. Today, too much supply chases too little demand. High unemployment and slack business capacity (idle factories, vacant office suites, closed mines) impede wage and price increases. If the Fed doesn't maintain cheap credit, shrinking demand might cause prices and wages to spiral down. "Deflation, not inflation, is the clear and present danger," retorts Princeton economist and New York Times columnist Paul Krugman.


It seems impossible for both arguments to be correct, but they may be. As Krugman notes, inflationary pressures are almost nonexistent. In the past year, the Consumer Price Index has been roughly stable. In May, unemployment rose to 9.4 percent from 8.9 percent. A survey by Challenger, Gray and Christmas found that 52 percent of firms had frozen or cut salaries. GM's bankruptcy is but one indicator of excess industrial capacity. The surplus is worldwide, finds a study by Joseph Lupton and David Hensley of J.P. Morgan. Inflationary expectations are low.


All this gives the Fed maneuvering room. Expectations matter; inflation won't burst forth instantly. Even Meltzer doesn't see an immediate surge. "When will it come? Surely not right away," he writes.


Still, Meltzer's warning remains relevant. The Fed has often overdone expansionary policies and fostered inflationary expectations. In the 1960s and '70s, that occurred through excess demand and a classic wage-price spiral. The danger now might emerge through exchange rates and commodity prices. Inflation fears could raise prices of commodities (oil, metals, foodstuffs) and depress the dollar. Imports would become costlier, allowing domestic producers to raise prices. Once inflationary practices take hold, high inflation and unemployment can coexist: dreaded "stagflation." In 1977, both inflation and unemployment were about 7 percent.


There's evidence (better housing and auto sales, stronger growth in "emerging markets") that the danger of a deflationary economic free fall is ebbing. Someday, the Fed will have to raise interest rates. Fed Chairman Ben Bernanke has pledged to preempt high inflation. Will the Fed get the timing right and resist contrary political pressures? Will the pledges reassure markets?


One reason they might not is that Bernanke's term as chairman expires in January. Any replacement named by President Obama would be seen, fairly or not, as more beholden to the administration. The president could eliminate that perception by offering Bernanke — who has performed well in the crisis — a second four-year term now and, if he accepts, announcing the reappointment. That would not settle today's deflation-inflation debate. Only time will do that, but it would remove a needless uncertainty.

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05/25/09: A ‘crisis’ America needs 05/18/09: Will somebody finally say that Obama is irresponsibly mortgaging our future?
05/04/09: The Bias Against Oil And Gas
04/27/09: Environmentalists maximize the dangers of global warming while pretending we can conquer it at virtually no cost
04/20/09: Our Depression Obsession
03/23/09: Geithner treads a line between financial paralysis and populist resentment
03/23/09: American Capitalism Besieged
01/06/09: The limits of pump priming
12/29/08: Humbled By Our Ignorance
07/31/08: The homeownership obsession
07/24/08: A Depression? Hardly
07/17/08: Why isn't globalization making the interconnected world more stable?



© 2009, WPWG

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