-I read Scott Sumner’s blog today and he has a new post about reforms to the healthcare system that marry well with the good ideas in David Goldhill’s book. Specifically, the main reform should be to provide everyone with a health savings account and then insurance (perhaps even a single payer) for catastrophic events. It brings in market concepts (as individuals have to be thoughtful about spending for the non-existential stuff) and yet still satisfies those who endorse state intervention and an end to private insurance.
-Speaking of Sumner, he gets credit for pointing out that fiscal stimulus is not a game-changer in the way that some would like us to believe. Specifically, the Fed is always in a position to temper the fiscal side through its conduct of monetary policy and manipulation of rates. In other words, the Fed is much more important. Which then got me thinking about the counter-argument, which is that while the Fed can print money, it ultimately has no control over its velocity. In other words, they can only play defense. Both sides agree, though, that expectations are very important.
So, what do I think? I continue to read a lot of people who believe in a deflationary threat. But, in that battle between inflation and deflation, the Fed always gets another turn at bat. So, if it’s inflation they want, it’s inflation they’ll get. But, how do you work through the issue of velocity?
And here’s where the ephemeral “expectations” piece matters. As we continue to struggle through a low growth, weak employment world, two things should eventually happen: (1) people will realize that the Fed does not have a handle on things and is trapped in the current policy stance; and (2) as the desired results continue to be elusive, the Fed will amp up (rather than taper) its efforts. Between those two realities, dynamics will change as well as the expectations for inflation. And the Fed won’t be able to do a thing about it, unless they are finally prepared to enable the recession/depression that they have tried so hard to prevent.
