Comments (8)

• Steve

  A couple of relatively safe predictions:

  1. The US dollar will continue its decline. There may be fits and starts to the currency, but its fate is all but assured. With Bernanke and his helicopter showering the economy with funny money to bail out his banking buddies, I'm not exactly going out on a limb.

  2. The Bush administration will continue its belligerent warmongering in the Middle East. Whatever one thinks of Bush's and Cheney's mental states, the beating of war drums about Iran is extremely destabilizing. The uncertainty in the energy markets will keep up pressure on fuel prices.

  As prices for gas approach $4/gallon, we'll begin to see calls for Congress to "do something." As they always do in such cases, they'll do the most destructive and economically illogical thing possible: price controls.

  So I'm in agreement with Mr. Saied. We'll get stagflation yet again, complete with gas lines, unemployment, and inflation.

  Published: November 5, 2007 10:25 PM

• TLWP Sam

  I thought the stagflation of the 1970s was the big-time kick-in-the-guts for Keynesian economics as there was supposed to be a trade-off between employment and inflation? Likewise didn't stagflation caused the shift toward Monetarianism who didn't see an inverse relationship between unemployment and inflation?

  Published: November 5, 2007 11:31 PM

• Niccolò

  TLWP, yes it did switch to Monetarism, kind of... But thats assuming that Monetarism is all that different from Keynesianism - which its not - and that the New Keynesians have not already popped back into the picture along with the Monetarists - which they have.

  Published: November 6, 2007 12:30 AM

• David Saied

  Bernanke is not acting like a monetarist and his writings seem to make him somewhat of a light keynesian, a believer in government monetary intervention to avoid credit crisis (read Shostak's article recently).

  Part of the current problem is that CPI is really a bad measure of actual relative price level increase, specially since they leave out asset prices and other items that are the ones that are rising more rapidly. Plus they have come up with all kinds of things like "core inflation", etc. to make CPI price increases seem lower, thus, we may enter into stagflation sooner than current CPI levels will allow us to see.

  Published: November 6, 2007 5:37 AM

• Anthony

  Keynesianism does not die, it just comes back in ever more horrid forms. :(

  Published: November 6, 2007 10:41 AM

• Fundamentalist

  TLWP: "I thought the stagflation of the 1970s was the big-time kick-in-the-guts for Keynesian economics ..."

  If I remember correctly, the stagflation of the 70's only modified one aspect of Keynes: that monetary inflation doesn't cause price inflation. Keynes seems to have been an old style Real Bills guy. Friedman convinced everyone that monetary policy does cause price inflation, but he also insisted that the GDP shows dips from the growth trend during recessions. He explained those as being caused by shocks. He didn't believe that they were caused by malinvestment resulting from monetary inflation.

  Friedman also didn't believe that inflation is harmful; it just raises all prices at the same time. So Friedman didn't see the Fed as causing any problems, only solving them. I think he would agree with Bernanke's attempt to get ahead of the financial results of shocks, such as the housing problems.

  Hopefully, this next round of stagflation will cause serious cracks in the mainstream econ paradigm.

  Published: November 6, 2007 4:03 PM

• olmedo

  this is like the seventies all over again with one big difference: this time around the USA is "loaded" with debt!!!

  today compared to the seventies :

  --in the seventies the USA was a net creditor now is a pathologic debtor owing the rest of the world gigantic amounts of money (very much like latin america during th seventies).

  
  --during the seventies the USA had a strong manufacturing base depending on imports only for raw materials today, it is hard to imagine anything that is not manufacturated in china or anywhere but the USA(i am not a protectionist).

  these differences make a Volker type policies next to impossible ,"politically", for Bernake given that a decisive increase in the interest rates to stop monetary expansion will simply bankrupt the entire US financial sector together with the rest of the economy just like it did to Latin America during Volker interest increases in the eighties.

  therefore, the prospect of Argentinians style hiper-inflation are very much real today....god, please, have mercy on us!
  

  Published: November 6, 2007 7:04 PM

• Dave

  Olmedo, you have brought up some key points that I was not considering. Indeed private and public debt in the US are at an all time high, like it was in Latin America in the late 70s. So indeed, a Volcker style monetary squeeze would make the US economy collapse. But maybe at least we need a non-easy money type of fed policy, so the credit and debt party does not continue. I think it was Chringle that has said that pumping more easy money into this economy at this stage is like buying more beer at 5am at a frat party full of drunks. The party must end.

  Published: November 7, 2007 8:00 AM