Sequestration : Completely Unnecessary?

[lance]

Wages are prices. In a general price inflation, all prices are rising, wages in particular are rising. Inflation cannot be responsible for a fall in living standards.

What if your living mostly off of savings?

[Zwinmar]

Ah but the problem is that wages rise at a slower rate than every other price.

[KrauserKrauser]

Even if economic growth is achieved, there wont be any broad based wage increase due to the oligarchy that refuses to share.profits with employees.

The rich have already been the only.beneficiary f the recent economic.recovery and will continue to refuse to share the benefits because they are able to buy the politicians that refuse to.enact reforms.

Wage growth is effectively stagnant for the vast majority of the population and will remain so.

[Surlethe]

The Bank of Japan instituted such a policy beginning in January of this year. We shall soon see if theory translates to reality.
I have my doubts, but we should know one way or another by the end of the year.

By the way, the Fed is already at $85 billion per month though it hasn't initiated a 10% escalator. Yet. That we know of.

Yes, I know -- moving to open-ended QE, with termination based on macroeconomic condition, was a huge step in the right direction. It still hasn't been enough to push expectations where they need to be, but ensuring the central bank's actions are based on measurable results instead of arbitrary numbers pulled out of thin air is good news.

I've been following news from Japan with interest. Another interesting case is Switzerland, where the central bank pegged the franc to the euro in September 2011. (More precisely, it declared a ceiling on the value of the franc at 0.8.) Here is the price of 1 franc in euros; it's amazing what a central bank can do just by managing expectations.

[Surlethe]

Wages are prices. In a general price inflation, all prices are rising, wages in particular are rising. Inflation cannot be responsible for a fall in living standards.

What if your living mostly off of savings?

If inflation is stable, the interest rate on your savings will have an inflation premium built into it. If inflation is unexpectedly high, as a creditor, you're screwed. If inflation is unexpectedly low, as a creditor, you get a bonus. If you're holding cash instead of investments, you're stupid.

[Surlethe]

Ah but the problem is that wages rise at a slower rate than every other price.

The whole point of this thread is that this is not inflation. If wages are rising at a slower rate than other prices, then there is an underlying REAL factor causing a change in relative prices.

Median income stagnation and growing inequality is caused by REAL factors: globalization, rising returns to capital, technological advance, rising education premium. Wage falling as a share of income is caused by REAL factors. Inflation is not real, it's nominal -- it doesn't cause or affect any long-run trends, and only unexpected changes in inflation can cause real, short-run impacts.

[J]

Yes, I know -- moving to open-ended QE, with termination based on macroeconomic condition, was a huge step in the right direction. It still hasn't been enough to push expectations where they need to be, but ensuring the central bank's actions are based on measurable results instead of arbitrary numbers pulled out of thin air is good news.

Suppose those policies fail in reflating their economy. Then what? What would the implications be for a)monetary policy and b)modern economic theory?

Another interesting case is Switzerland, where the central bank pegged the franc to the euro in September 2011. (More precisely, it declared a ceiling on the value of the franc at 0.8.) Here is the price of 1 franc in euros; it's amazing what a central bank can do just by managing expectations.

Perception is reality...until it isn't. Expectations can change and relying solely upon them to manage goals is not a prudent course of action.

PS. Keep an eye on Italy as well. It's likely to become interesting after their recent election.

[Surlethe]

Suppose those policies fail in reflating their economy. Then what? What would the implications be for a)monetary policy and b)modern economic theory?

Economists would develop new models to encompass the new data. Monetary policy would then come to rely on these new models. Of course, these policies won't fail in reflating the economy - no central bank in the history of fiat money has been unable to cause inflation.

Perception is reality...until it isn't. Expectations can change and relying solely upon them to manage goals is not a prudent course of action.

Expectations do change, especially when they're not managed, as we all learned in 2008. What do you think triggered the financial crisis? (Hint: obviously not deflation in the housing sector, since that had been going on for years.) However, I'm not advocating for using expectations as the *sole* channel of monetary policy. I just want the central bank to use expectations to put people back to work.

[J]

Suppose those policies fail in reflating their economy. Then what? What would the implications be for a)monetary policy and b)modern economic theory?

Economists would develop new models to encompass the new data. Monetary policy would then come to rely on these new models. Of course, these policies won't fail in reflating the economy - no central bank in the history of fiat money has been unable to cause inflation.

One would hope that is the case. On the other hand, they may become true believers (failed because it wasn't pure, and didn't do it right & hard enough). And while it's technically true that no CB has failed in creating inflation, the Zimbabwe model for instance isn't one to strive for.

Expectations do change, especially when they're not managed, as we all learned in 2008. What do you think triggered the financial crisis? (Hint: obviously not deflation in the housing sector, since that had been going on for years.)

Debt saturation & ponzi finance.

However, I'm not advocating for using expectations as the *sole* channel of monetary policy. I just want the central bank to use expectations to put people back to work.

And I want a baby unicorn.

[J]

The Bank of Japan instituted such a policy beginning in January of this year. We shall soon see if theory translates to reality.
I have my doubts, but we should know one way or another by the end of the year.

By the way, the Fed is already at $85 billion per month though it hasn't initiated a 10% escalator. Yet. That we know of.

Yes, I know -- moving to open-ended QE, with termination based on macroeconomic condition, was a huge step in the right direction. It still hasn't been enough to push expectations where they need to be, but ensuring the central bank's actions are based on measurable results instead of arbitrary numbers pulled out of thin air is good news.

Well the year is up and results were mixed to disappointing. "Abenomics" had a promising start which turned into disappointment by the middle of the year, the last half of the year was well below forecasts & expectations. Unexpectedly, of course.
http://www.ft.com/cms/s/0/b5e6efea-976b ... ab7de.html

Of greater concern is the trade deficit and what appears to be a case of large scale off-shoring.
http://www.alhambrapartners.com/2014/03 ... ot-enough/
Excerpts:

In post-tsunami Japan, there is widespread recognition that the sudden introduction of merchandise trade deficits would be a significant hurdle to restore vitality in the economic system. A good deal of that analysis, however, has had no more than a cursory focus on the dearth of indigenous energy sources, including the now-evident lack of nuclear generation capacity and usage. Following that line of thinking, turning on the nuclear reactors is believed to assuage so much of the “need” to import, therefore restoring trade order.

Restoration of trade balance is supposed to unleash one of the primary factors of Abenomics: the Japanese export machine. These are nice theories in academic settings, though even there they are far less robust than is talked about publicly. As with the US, however, there is no shortage of faith in these theories and models about theories, a pertinent fact to the unending malaise besetting the global economy.

The real world is just too complex to fit inside the subjective assumptions that create these economic models upon which all monetary interjection, and thus all “markets”, rest. It is not energy that is pushing the Japanese trade deficit, but rather currency instability itself – an outcome not even modeled by monetary “experts.”

Japanese businesses are doing what they see fit under the circumstances, and given both the scale of currency instability and the persistent and overriding threat of even more (as inevitably it will be viewed as “not enough”), they simply move production capacity offshore. Where once Japan was an export powerhouse, the instability that is supposed to guide this assumed renaissance is instead the very agent of destruction. Just as it is practiced elsewhere, monetary intrusion on a massive scale is only fit to hollow out the economic system.

As industry so clearly moves away from the growing artificial instability, profitability increases, particularly for the financial sector. That leads to an increase in the amount of resources dedicated to financial management of all this instability, set against the profit motives and operational constraints that favor offshoring. At the margins of the Japanese economy, then, we see where the system becomes so hollow – dedicated increasingly to finance in the place of losses in true production. That all sectors appear more profitable is the illusion, because the means required to achieve that fact are very different and ultimately scale well past detrimental.

Beyond some point, this theoretical tipping point, lies a condition whereby Japanese firms will derive too much profitability from offshoring and the accounting “boosts” from devaluation to be irreversible – in the parlance of the orthodoxy, it gets more and more “sticky” as more overseas investments are made. That will tend to operate as a positive feedback loop whereby the only “solution” palatable to both authorities and multi-nationals is doing more of that which is hollowing out the economy in the first place – intervention through instability.

Hooray for unintended consequences. Oops.