Monthly Archives: February 2008

The Falling Dollar

Larry White writes:

Note that, using the year-over-year CPI as a measure of current inflation, the Fed funds rate is currently negative in real terms: 3.0 – 4.1 = -1.1. Not surprisingly foreign investors are dumping short-term dollar assets with the result that, as Forbes headlined, “Dollar slumps to new all-time euro low as Bernanke hints at rate cuts”.

Yeesh! Meanwhile, Barry Ritholtz provides the visual:

What Ended the Depression?

Paul Krugman writes:

The fact is that war is, in general, expansionary for the economy, at least in the short run. World War II, remember, ended the Great Depression.

Of course, the evidence is quite to the contrary.

A Federal Government Fix

Our friend James Pethokoukis of U.S. News and World Report recently asked me to provide my thoughts on a federal government bailout to “fix” the housing market and stabilize the economy. You can read my thoughts here (along with those of Russ Roberts, Dean Baker, Don Luskin, Craig Newmark, John Tamny, and Daniel Mitchell).

A Look At Inflation

Recall from the equation of exchange that:

MV = PY

where M is money, V is velocity, P is the price level, and Y is real output. Therefore, when written as growth rates (assuming velocity is constant):

Inflation = Money (M2) growth – Real GDP growth

Inflation is thus graphed below:

inflation.jpg

The graph begs the question, “where are the inflation hawks?”

Stagflation?

James Hamilton discusses rising inflation.

Advice for the Candidates

John Stossel writes:

The economy is far too complex for any president — no matter how smart — to manage. How can politicians and bureaucrats possibly know what hundreds of millions of individuals know, want and aspire to? How can government employees fathom what trade-offs to make in a world of scarce resources?

They can’t. That’s why free people are more prosperous than unfree people.

Presidential candidates should promise to keep their hands off the economy.

Read the whole thing.

MV = Py

Tyler Cowen on Jared Bernstein’s new book:

There is a chapter called “Why do economists seem to fear inflation? And why do prices always go up, never down?”

Imagine trying to answer those questions without ever writing the two words: “money supply.”

Ouch!