January 12, 2015

'TIL THEY PRY THIS IDEOLOGY FROM MY COLD DEAD HANDS....:

How Is It That Economists Still Don't Get Where Inflation Comes From? (John Hilsenrath, 1/12/15, WSJ)

This is not a great moment for either Phillips curve or monetarist strains of economic thought.

Phillips curve economists see tradeoffs between unemployment and inflation. As unemployment falls, they believe, slack diminishes in labor markets and pushes up wages and prices more broadly.

Monetarists believe money is the root of inflation. When the central bank prints lots of money, that diminishes the currency's purchasing power and causes prices to rise broadly.

Well, unemployment is falling and the Federal Reserve printed trillions of dollars' worth of currency that it pumped into the financial system through multiple rounds of quantitative easing. You'd think after all that, inflation would show up somewhere. Yet it is going in the other direction. [...]

I suspect the models and theory also don't put enough weight on modern global factors. On the surface, the U.S. looks like a relatively closed economy. Exports account for just 13% of total economic output. But the economy is deeply linked to the rest of the world by financial markets and multinational supply networks. U.S. workers compete not just against each other, but also against workers in China, Mexico and India. Financial markets transmit shocks and global saving reallocations in milliseconds. Global demand imbalances weigh on commodities prices. All of these factors have important effects on inflation and the financing of bubbles.

...if economics were a science, the failure of reality to comply with theory would require one to alter the latter. 

Posted by at January 12, 2015 3:13 PM
  

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