This past week, two Federal Reserve Members have candidly spoken out about current fears that the U.S. will slide into deflation similar to the one that Japan experienced in the 1990′s and one that continues to pose problems. Additionally, the Federal Reserve has concerns that raising taxes at this time will impact negatively on an economic recovery that is slugglish, and that the lack of a tax policy by the Obama Administration creates uncertainty and more instability.
St. Louis Federal Reserve member James Bullard expressing his views in a paper titled ” Seven Faces of the ‘Peri’l” suggests that a policy of keeping interest rates low will lead to a Japanese-style deflationary outcome for the U.S. in the coming years. Mr. Bullard critiques 7 stories that he has encountered as a professional in economics that supports his analysis:
- Keeping interests rates near zero risks having inflation turning negative and remaining there, he foresees as a double-edge sword. That inflation rates raising increases the possiblity of a recovery, but a consistent state of deflation, and negative inflation flatlines those expectations.
- An economic policy that uses adjusting nominal interest rates as the main tool of its’ monetary policy” risks a Japanese-style outcome.
- Patterned after the U.K., Bullard recommends using appropriate “state-contingent purchases of Treasury securities as a tool to use when inflation is low and inflation rates are expected to remain low as a way to avoid deflation.
Further, another Federal Reserve member, Richard W. Fisher of the Federal Reserve Bank of Dallas, spoke out of his concern that a lack of a tax policy by the Obama Administration creates uncertainty, thus negatively impacting the recovery of the economy, and any raising of taxes at this time is a bad idea.
“For some time now in internal discussions with my colleagues at the Fed, I have ascribed the economy’s slow growth pathology to what I call “random refereeing”—the current predilection of government to rewrite the rules in the middle of the game of recovery. Businesses and consumers are being confronted with so many potential changes in the taxes and regulations that govern their behavior that they are uncertain about how to proceed downfield. Awaiting clearer signals from the referees that are the nation’s fiscal authorities and regulators, they have gone into a defensive crouch.”
But As For Me…
Although tax cuts on the wealthier citizens of the country is a populist idea, at this time an extension on tax cuts for all is needed. The real debate will turn not on whether to extend the the tax cuts, but for how long. Until that policy is fixed, expect a plodding economy with wild intervals reflecting uncertainty and more game playing by the government.
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