Fed’s Kohn: Weak economy to keep inflation at bay
High unemployment, tight credit, vacant homes and idle factories point to a tepid U.S. economic recovery in which core measures of inflation are likely to slow further, the Federal Reserve’s No. 2 official said. “I don’t think a V-shaped recovery is the most likely outcome this time around,” Fed Vice Chairman Donald Kohn told the National Association for Business Economics. In a defense of the Fed’s pledge to keep benchmark interest rates unusually low for an extended period, Kohn said the economy would likely be producing “well below” its potential for some time and that expectations of future inflation would more likely fall than rise. “I expect that, for a while, the risk of further declines in underlying rates of inflation will be greater than the risk of increases,” he said. Kohn said U.S. economic activity turned up in the third quarter as investors waded gingerly back into riskier waters and businesses began to restock depleted inventories. Recent news on housing has been encouraging and new home construction should pick up gradually in coming months, he added. But because of weak labor markets, consumer spending, which accounts for about 70 percent of U.S. economic output, will remain muted, the Fed vice chairman said. Further, credit remains tight for many borrowers, both consumers as well as small and medium-sized businesses, he added.

Re-read those housing bubble pieces, I actually think he was advocating another bubble to replace the tech one.

He wants everything – bailouts, sustainable deficits, artificially low interest rates, “healthy inflation”, and a healthy market. It’s just not feasible, and he thinks it is.

Most of the economist (both from the left and the right) that I have read seem to be in agreement that some level of monetary stimulus was required. The question is when this stimulus should end and what should be the velocity of this change (a steep rise in interest rates or a more gradual change).

Krugman was a constant critic over many years of the Fed low interest rate policy and he is one of the few people who called the housing bubble. His columns were consistent — artificially low interest rates were driving a housing bubble that was going to burst in a big way. The growth in both the deficit and the debt during a period of growth was a big problem. As I have read his recent columns over the last year, it is simply that in a recession we must be careful to not end the monetary stimulus too early lest it cut the legs off of any potential recovery. Yes, in the short term that means higher deficits and higher debt that will need to be addressed (i.e. spending cuts and/or taxes) in the medium to long run. However, if you suffocate the recovery the deficit and debt problems are likely to be more severe.

It’s often mentioned in the world that Italy is fiscally irresponsible. The US has 350% debt to GDP yet Italy is roughly 275% debt to GDP.