Re: Power of the Dollar and US Strategic Interests

[William F Hummel <wfhummel@xxxxxxxxxxx>]

Henry Liu wrote:

>William F Hummel wrote:

>> OK, this is a matter of jobs and pay scales.  There is nothing the Fed
>> can do to solve that problem directly.  It can help create a favorable
>> environment by maintaining a low Fed funds rate, but that has a lower
>> bound.  Ultimately the solution is to be found in policies that lead
>> to real job creation.  Then the amount of spending money will take
>> care of itself.  Focusing on increasing the money supply won't help,
>>
>Yet, monetarists claim otherwise: that interest rate policies can and do
>  have an impact on inflation which in turn impacts unemployment through
>NAIRU.

High interest rates can cause inflation if they don't break the back
of the economy because the cost of borrowing gets built into prices.
But too high an interest rate can have the opposite effect, as we saw
in the great recession of the early 1980s.
>
>If full employment is taken as a fixed goal, a corresponding appropriate
>money supply will need to be maintained to achieve that goal.

Which implies the money supply is a control variable, whereas in fact
it is a dependent variable.  The Fed can only control the short term
interest rate.  It is then up to the banking system and borrowers as
to how much (transaction) money is created.  Monetary policy designed
to create more money is like pushing on a string.

>But that
>is not what central banks do at present.  They operate on some voodoo
>theory that NAIRU is the cardinal rule to keep inflation in check, using
>current unemployment to fight future unemployment.

NAIRU is an ex post concept, and varies with time and place.  It has
not been a key monetary policy indicator for many years, particularly
in Japan and now also in the US.  The inventor of the NAIRU concept
never contemplated the effect of a deflationary environment on
unemployment.

German unemployment of 10% is not the result of high interest rates.
It is due mainly to structural rigidities, especially in labor.  The
rules of employment, overly generous retirement benefits, and the
clout of labor unions have created a sort of political rigor mortis
there.

William F Hummel