The fundamental question for the U.S. macroeconomic forecast is if the pandemic recovery can continue or if the economy is heading into a recession. This outcome will be determined largely by Federal Reserve actions during the quarters ahead. Given how long the Fed waited to fight the current bought of inflation, it is not likely they can return inflation to its target rate without monetary policy changes which would also induce a recession.

It is an open question if the Fed has the fortitude to follow-through fighting inflation. The forecast then, is either for recession, or anemic growth accompanied by continued inflation.

CERF’s baseline forecast embodies the assumption that the Fed will cease substantive hikes by December 31^st of 2022 and that the economy will not be pushed into recession. We do have one 25 basis point hike in early 2023, but no other hikes. This is a low confidence forecast, since it necessarily involves predicting the behavior of a body of political actors at the Fed.

This forecast for the Fed’s policy rate has implications for inflation. Inflation, with substantial momentum at the current time of writing, will not be much reined in by this forecast of Fed policy.

How strong is the Fed’s policy stance on inflation? The real ten-year Treasury yield was -3.1 percent using September yields with the core PCE deflator. As conventional wisdom has always argued, a negative interest rate of that magnitude indicates policy that is massively stimulative.

The presumed level of short term interest rates under this forecast scenario is that they reach 4.625 percent (based on the midpoint of the Fed’s target range) by mid-2023. By the Fed’s own analysis the rate needs to be above 6 percent in order to adequately combat inflation.

Inflation will subside, but it will not subside quickly, and the real 10-year Treasury yield will remain in negative territory for all of 2023, indicating that instead of being restrictive, the Fed’s policy will remain stimulative, for about a year.

We forecast that the Core PCE deflator will still be 4.8 percent at the end of 2022, and that it will still be 4.3 percent at the end of 2023. This is higher than the consensus forecast of 3.2 percent, but our forecast is lower than inflation expectations, such as the University of Michigan’s survey value of 4.8 percent.

This forecast is one where rates are not really that high. The chart below shows the third quarter real 10-year Treasury is still quite negative, and it shows real rates during the Volcker policy era in the early 1980s that did succeed in fighting inflation, and also pushed the economy into recession.

Because rates are not really that high, inflation will remain persistent, and, growth will be weak but positive. We do not forecast a recession in this scenario, in part because rates are not actually that high. They will not get high enough to halt inflation, and they will not be high enough to cause a recession.

CERF has argued that monetary and fiscal policy has been much too stimulative. While it is possible to justify stimulating the economy in the time of crises, policies have been a ratchet, ramping up support through payments and credit in times of crises and not subsiding thereafter. This occurred after the 2007-08 financial crises and again during the Pandemic in 2020.

Overly-stimulative policies help us understand the macroeconomic environment we are in today. Some forecasters are saying that the Fed’s impotence against inflation, with 300 basis points of hikes in seven months having failed to slow inflation momentum, has surprised almost everyone. This does not surprise CERF. The economy is overstimulated. According to CoBank estimates the U.S. household sector still has $2 Trillion in excess savings. And, we point to the most recent University of Michigan survey data, which as of October showed consumer’s expect inflation will still be 4.8 percent a year from now.

There are risks to this forecast. One alternate scenario is that the Fed does continue raising rates aggressively during 2023, sending the short term policy target well-over 6 percent. In this scenario, the real 10-year Treasury yield would surge into positive territory more rapidly, inflation would subside more quickly during 2023, and the economy would experience a recession.

Why is our baseline case that the Fed does not get in front of inflation? They have shown before that they are sensitive to markets, especially, the stock market. In October of 2018, they announced a balance sheet normalization policy that sent the S&P 500 into a 24 percent decline in just 3 months. On January 4, 2019, Fed chair Jerome Powell signaled a reversal of policy normalization, and in March of that year, stated that a multi-trillion dollar balance sheet might go on indefinitely. This of course, gave rise to the notion of QE-infinity, the idea that the Fed would never normalize policy.

The effect of significantly higher rates will have an important follow-on effect of raising the debt service costs for the U.S. This is more of an issue now, where the debt to GDP ratio is 120 percent, a historically high level for the U.S. This will be another source of pressure against further Fed rate hikes to levels above 5 percent.

CERF’s economic forecast for the next eight quarters is for growth substantially below potential. Many forecasters, including the Fed, point to demographic factors and make post-industrialized economy arguments to rationalize below potential growth. CERF disagrees. Most of the sub-par growth is driven by poor policies, policies that throw a blanket on what would be a much more healthy and robust economy.

Monetary and fiscal policies should follow policy rules, or a logic that is guided by economic theory and analysis. Policies since 2008, especially monetary policy, have been ad hoc. They depress economic activity through the specific disincentivizing impacts they impart on investing for the future, but in addition, they depress the economy through policy uncertainty. This uncertainty doesn’t just add difficulty to forecasting, but it also reduces the ability of households, establishments, and governments to make decisions for their, and the our nation’s, future.

The post U.S. Forecast Highlights appeared first on Center for Economic Research and Forecasting.

Readers of CERF blogs and forecast publications know that CERF economists are critical of the Fed’s monetary policy, and have been for seven years now.  The Fed’s policies starting in December of 2008 were extraordinary, unprecedented, not recommended by economic theory, and have contributed to anemic growth and wealth generation for the past decade.

Prior to December of 2008, the Fed mainly relied on one policy tool, the Federal Funds Target rate (FFRT).  During the dark days of the financial crisis, they added two more policy tools, quantitative easing (QE) and interest on reserves (IOR).  CERF is most critical of IOR.

There are a few things that economists agree on, and one of them is that financial intermediation is good for the economy.  This is the process by which banks use savings deposits as a pool of funds to extend credit to businesses and households.  The IOR reduces the quantity of loanable funds available for intermediation by taking them out of the banking system and locking them up as reserves at the Fed.  Lending falls, investment expenditures fall, growth slows, and capital accumulation and future wealth fall.  These are unmistakably bad economic outcomes compared with having those funds available and extended to households and businesses who are growing.

What’s more, it is not clear how the Fed would respond if there were a severe recession tomorrow.  If they raised IOR, this would further restrict credit.  They could reduce IOR, but in a severe recession, weak loan demand would make this less effective.

It is clear that the Fed wants to maintain a massive balance sheet, and they have documented various technical benefits.  However, it is fearful of rapidly unwinding it, and this is the real reason for the glacial reduction pace.  A consequence of the Fed’s massive balance sheet is that it destroys the Fed’s ability to control short term interest rates.  IOR, a rate that the Fed sets directly, provides the short term interest control they desire.  The interest rate on reserves may actually be the most impactful policy that the Fed is employing, but that is only because unwinding the balance sheet would wreak unknown but horrible damage to the economy.

CERF economists have also criticized the fact that the Fed’s policy statements highlight the FFRT and QE, but IOR information is no longer provided in the Fed’s main press release.  Since December of 2015, changes to IOR have been deliberately buried in a technical note separate from the press release.

At the panel, Chair Powell and former chair Bernanke stressed the Fed’s goal of being transparent.  They repeated their desire to clearly and frequently communicate their policy intentions to the world.  However, not one word was uttered about IOR at any point during the one-hour long discussion on Monetary Policy.  It was clear this was done on purpose.  Neither the press nor the economics profession have properly brought the IOR policy and the resulting economic detriment to light until recently.  In particular, the January 1^st Wall Street Journal article, The Fed’s Obama-era Hangover by Phil Gramm and Thomas Saving, highlights the powerful impact of IOR on credit.  The article also explains that the Fed is now an interest rate follower.  It is no longer setting or leading short term rates.

It is clear that the Fed’s stated transparency goal is contradicted by the reality of the Fed’s actions.

I have a theory to explain this contradiction.  As forecasters, CERF economists routinely promulgate their economic analysis and their forecasts to the press and the community.  This is a challenge.  Economics is a complicated undertaking.  There are subtleties and complexities.  It happens that we’ll interview with the Media and then read their article and wonder what went wrong because the written article miss-represents our views and/or our analysis.  This appears to be a reality of the interface between economists and non-economists.

We have tools to deal with this issue.  We tell stories as much as possible.  We try to pull back from talking about many relevant factors to focus on one key factor.  But these strategies do not always work.

It may be that the Fed does not talk about IOR because it is difficult to explain.  There is more to IOR than the financial intermediation impact, as the Gramm and Saving article reveals.  The complexities include IOR interaction with other policy tools and various aspects of the economy.  It is difficult to explain to the public, in fact, even to economists who do not follow monetary policy closely.  Perhaps more important, the Fed does not want to publicly admit they are deeply fearful of the impact of rapidly unwinding the balance sheet.  Chair Powell would loathe to discuss either the difficulties with unwinding the balance sheet, or the IOR’s impact on the economy in public.

The Fed needs to come clean.  The Gramm-Saving article is likely to generate greater commentary, more articles, and additional questions directed to the Fed about its IOR policy and its assessment of the impact of IOR on the economy.  I expect that the pressure will become large enough that the Fed will be forced to directly address its IOR policy to the public.

With greater Fed transparency in IOR, academic researchers should then contribute.  They can build theoretical models of monetary policy that postulate and analyze formulae linking IOR to reserve flows, lending, investment, economic growth, and capital formation.  Empirical papers should then be written that test and use these new theories, and in particular, they should measure the detriment that IOR has on financial intermediation, economic growth, and wealth formation.

As we await greater scrutiny of Fed policy, it is becoming increasingly clear to the CERF team that the Fed doesn’t know how to undo the mess it created during the financial crisis.  The need to maintain its massive balance sheet necessitates ever higher IOR.  It places the Fed in the position of following market interest rates rather than driving them, as highlighted by Gramm and Saving.  It jeopardizes the Fed’s activist mandate and renders it impotent if a severe recession were to occur tomorrow.  This is such a mess that we should assume the next economic contraction could be at least as bad as the last one that the Fed seeded.

Gramm P. and T. Saving, The Fed’s Obama-Era Hangover, The Wall Street Journal, Jan. 1, 2019 https://www.wsj.com/articles/the-feds-obama-era-hangover-11546374393?mod=mhp

The post The Fed Needs to Come Clean appeared first on Center for Economic Research and Forecasting.

Liftoff has market watchers glued to their monitors for a number of important economic reasons. Because the rate is related to other longer-term interest rates through the Term Structure, and the longer-term rates are used to discount cash flows, this affects net present value (NPV) calculations, making more investment projects appear profitable. Aside from new projects, lower corporate bond rates bring down a firm’s borrowing costs, raising their net income.

The argument for low rates in late 2008/early 2009 was a good one. We had faced a serious financial crises and were in the middle of a serious recession, one that appeared at the time to be the second greatest economic contraction since 1929. Many financial entities faced a liquidity crunch, where short-term credit had vanished. Firms shelved positive NPV projects. Households were upside down on their homes. Because the housing market was so decimated the lower mortgage rates were thought to be needed to help resurrect home sales activity and promote refinancing which in some cases could help a household remain as a homeowner.

The Fed’s dual mandate of price stability and economic growth, argue in a conventional way against raising rates at this time. Historically, rates were raised as a way to cool down an economy with rising inflation or dropped as a way to spur economic growth. However, inflation and economic growth continue remain low compared with postwar U.S. history.

Despite this, I think the Fed should immediately begin the process of raising rates toward historically normal levels. The abnormally low interest rates were probably justified by the double feature of a financial crises and a large economic contraction back in late 2008/early 2009, but they do not have that justification now. The canonical Taylor rule formula as published by FRED at the St. Louis District Federal Reserve bank calls for a Federal Funds Target rate of 2.44 percent.

It is safe to say that financial markets, consumption activity, and savings and investment decisions are being distorted by the low interest rates. As one example, household balance sheet rebuilding was and still is important for the long-term economic health of the U.S. A higher return to savings would aid and incentivize this activity.

The economy should be able to grow with interest rates at normal levels. If it cannot, then it needs to relearn this ability. If this process ends up taking some time, we should begin it sooner rather than later. An imminent financial crisis does not seem to be a high probability event at this time. However, if one did happen now, being at the zero lower bound would be an inconvenient reality indeed.

The post Federal Funds Rate Policy appeared first on Center for Economic Research and Forecasting.

Taylor’s trying to supply principles to guide policy makers as they try to put our economy on track again. He has five of them:

• Predictable policy framework
• Rule of law
• Strong incentives
• Reliance on markets
• Clearly limited role for government

Taylor provides lots of evidence that our current problems are a result of not following these principles. I believe him. However, I’m not sure his arguments are strong enough to convince someone not predisposed to believe him. He was clearly trying to write something for non-technical people, and that probably weakened his case. It won’t change any hard-Keynesian minds.

It’s not surprising that when it comes to monetary policy, Taylor recommends a policy rule. He created the Taylor Rule after all. I’ve never been sympathetic to policy rules. Constraints usually don’t improve outcomes. Still, Taylor makes a good argument that the short-term demands of modern politics provide irresistible incentives for action at the expense of long-term prosperity.

Once you decide to use a rule, you have to decide which rule. Again, it is not surprising that Taylor recommends a Taylor Rule. That presents a couple of problems.

There are lots of Taylor Rules. They’ve become a class of rules. Probably every monetary economist at a top-ten department has his or her own version.

The various Taylor Rules can come up with rather different policy prescriptions. So, the selection of the proper Taylor Rule is a real issue. However, probably none of them would have the devastating impacts of some of the worst mistakes the Fed has made in its almost 100 year history.

I have a bigger problem with Taylor Rules though, and it the zero bound on interest rates. Sometimes some Taylor rules recommend negative nominal interest rates, and we just haven’t figure out how to do that. I think Taylor’s response would be that if you followed a Taylor Rule in the first place, you would never have reached the problem of a zero lower bound. That’s probably true.

There is a rule that competes with the Taylor Rules, a Nominal GDP Target Rule. Scott Sumner has been a key proponent of NGDP targeting. Sumner argues that the Fed has the power to create any nominal GDP it wants.

Here’s an example: Suppose the Fed creates a target of five percent nominal GDP growth. If nominal GDP is shrinking at, say, two percent, then all the Fed has to do is generate seven percent inflation. If it can create the seven percent inflation, it will create the five percent NGDP growth.

I have a problem with this too. I don’t believe that the Fed can always create inflation. The Fed controls the monetary base, but turning the base into money, which is what is required to generate inflation, requires the cooperation of banks and borrowers. The past few years provide strong evidence that banks and borrowers can’t be counted on to cooperate. That is, banks may not lend and borrowers may not borrow, at exactly the time we need them to if monetary policy is to be effective.

I think Sumner would have two responses. First, he would argue that if the Fed had followed this policy in the first place, we would never have reached the problem of banks and borrowers not cooperating in creating money. That’s probably true.

A second response would be that the Fed just hasn’t tried hard enough. Like the Keynesian response that true fiscal stimulus was never tried, this argument can always be made, and I think they are both wrong. At over 35 percent of gross product, total government spending (including federal, state, and local) exceeds that at the peak of WWII, and no one would argue that we are seeing a vigorous recovery. Similarly, QEs 1 and 2 were unprecedented efforts to increase the money supply. They failed, because banks weren’t lending and borrowers weren’t borrowing.

These are second order problems, though. If either Taylor or Sumner were in charge of our monetary policy over the past decade, we’d probably be a lot better off than we are today. If policy makers had followed Taylor’s principles, we’d probably be a lot better off than we are today.

It’s a shame that Taylor’s principles are controversial. It is a shame that millions of Americans are unemployed, in part because we’ve moved so far away from those principles. Taylor has written an excellent guide for policy going forward. I highly recommend First Principles.

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The topic is a Taylor Rule, which is a method, proposed John Taylor, for determining what Fed Policy should be.  That is, what is the interest rate that the Fed should be maintaining?  There are several versions of the Taylor Rule, and the Fed looks at several of them, but they do not use them to set policy.  Why have 300 economists if you could replace them with a rule?

Krugman has been on a bit of a rampage about bond prices, and he uses the Taylor rule to propel his argument that bonds are not overpriced, that is they are not paying too little interest.  Mankiw just notes that Krugman is using a Taylor Rule that he, Mankiw, recommended.

I’m interested in the policy implications.  The Mankiw Taylor rule currently implies that the optimal Fed Fund Rate should be approximately -6.2 percent.   Of course, that’s impossible.  So, the Feds Fund Rate is approximately zero.

The inability to have a negative interest rate is dragging our economy down.  However, policy makers do have a tool available to them, one that would allow them to overcome the zero lower bound on interest rates.  A large investment tax credit would effectively create a negative interest rate for businesses considering investment and expansion, and this is what we need.

Consumers and governments, already overextended, cannot be the source of a robust recovery by continuing debt-fueled consumption.  In the end, only technological advances and investment can drive a long-lasting and vigorous recovery.  To do that, we need to create an effectively negative interest rate.  Without that, Krugman’s forecast of four years of zero interest rates is probably correct, and that implies lots of economic pain.

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Let’s call the disease bailoutitis. It is not fatal, but it leads to an extended period of serious constipation, near-death experiences, and eventually, a painful hangover.

Bailouts, as we are currently performing them, amount to free insurance. You don’t see free insurance offered very often, for good reason. It doesn’t matter how much money you start with, you eventually run out of money offering free insurance, even without a moral hazard problem. The math just doesn’t provide for any other outcome.

Then what? Well something fails and we have a collapse, something like what followed Lehman Brothers collapse, only worse, something like what the bailouts are intended to avoid, only worse. By propping up countries, states, and companies, we are only postponing our problem, a problem that will be much larger because of our postponement.

There are other issues. With every bailout we are rewarding a bad player by taxing a good player, creating terrible incentives and diverting funds from beneficial uses.

Now, we’re in a Catch 22 situation. We’ve created the expectation of bailouts, and the incentives have had their effect. There will be failures and financial crises if we stop bailing out bad players. There will be failure and financial crises if we don’t stop bailing out bad players. The lower-cost option is to stop bailing out the bad players now.

The post The World Has Gone into Bailout Mode Today appeared first on Center for Economic Research and Forecasting.

How will the Fed raise the short-term market interest rate? The old-fashioned way of tightening monetary policy is to shrink the amount of reserves outstanding by selling assets. Over the past one and a half years, the Fed has piled on securities with long maturities and exposed itself to credit risk. If it sold those assets, it would post considerable losses, deadly to the institution’s already fragile reputation in the current political climate. Instead, the Fed will raise the rate it pays on excess reserves (or deposits of banks at the Fed). Banks will pull up interest rates in the money market as the alternative use of reserves—parking them at the Fed—becomes more remunerative.

Who at the Fed will raise the short-term market interest rate? Congress explicitly gave the authority to raise the interest rate on excess reserves to the Board of Governors (or the seven appointed officials who work in Washington), not the Federal Open Market Committee (FOMC, or the board governors and a subset of reserve bank presidents who normally vote on reserve conditions). Thus, the balance of power within the Fed will shift toward the governors when the instrument of policy becomes the interest rate on reserves. (Bernanke elided this issue in his recent testimony when he left the impression that the FOMC will still set policy in conjunction with the board. In fact, the Federal Reserve Act prohibits the board from delegating monetary policy to others.) This matters because two slots on the board are currently open, giving the White House an important opportunity to shape monetary policy through future nominations. Indeed, given natural turnover among governors, President Obama will probably be able to appoint a majority of the board in a single term of office.

In the first paragraph, Vince highlights the flipside of quantitative easing. The Fed bought a bunch of long-term financial assets, the value of which will go down when interest rates go up. Now, owning these assets is a constraint on Fed actions. There is already plenty of pressure to reduce the already-compromised “Fed independence.” Selling those assets at a loss will further increase pressure for more congressional oversight.

This means the Fed will control inflationary pressure by increasing the rate they pay on excess bank deposits at the Fed. That will work, but it will likely have a more negative impact on economic activity than traditional methods. With high risk-free yields at the Fed, banks, already under regulatory pressure, undercapitalized, and risk averse after the 2008 meltdown, will have no incentive to lend. Small business, which traditionally funded growth with bank loans, will have difficulty obtaining capital. Big business, with direct access to debt and equity markets, will have easier access.

Economic growth, therefore, will probably be slower than under traditional Fed tightening, and it will be biased toward big business. Small business, handicapped by an uneven playing field, will almost surely decline as a percentage of business activity.

The second paragraph is important, because it implies that Fed policy will become more political. Given current and projected United States debts levels, political pressure to monetarize the debt will be strong. As debt levels and interest rates increase, interest costs will soar, as will the pressure to inflate. Will a more politicized Fed resist that pressure? I wouldn’t bet on it.

Jeff isn’t buying any of this. He says:

It seems peculiar to me that the Fed would conduct its monetary policy with a major constraint being the effect on its own profitability. While it might be embarrassing to sell some securities at a loss, it would be even more embarrassing to have a portfolio like the thrifts in the 1980s: long-term fixed rate assets funded with short-term liabilities in a rising rate environment. That would look really stupid.

Good point. We’ll see.

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Banks can borrow from the Fed at rates near zero. Then, they can purchase Treasuries for about three percent. Voila, banks have a three percent risk-free return, and no incentive to lend to business.

The conclusion is that the Fed has rates too low.

I disagree.

First, we need to acknowledge that many banks are in no condition to be taking risks, and many of their customers are in no condition to be assuming additional debt. Also, the Fed is paying interest on excess deposits, which is silly, and it complicates the analysis. However, even if banks could lend, borrowers could borrow, and the Fed didn’t pay interest on excess reserves, I don’t think the above analysis is correct.

The easiest way to think about the situation is to ask: what would the banks be doing if there were no Treasuries to buy? They would be investing in something else, something like loaning to businesses and consumers. This is pretty much the definition of crowding out.

The fact is that downside risk still dominates the forecast, and the Fed needs to keep interest rates low, at least for a while longer. If our banks were healthy, this would be a clear-cut example of crowding out. The banks aren’t healthy, but I’m thinking some crowding out is definitely happening.

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I’m as concerned as anyone about total government spending and the deficit. I’m probably more concerned than most about bank lending to business. But, conspiracy isn’t the problem.

Part one of Melloan’s theory is that the Fed is causing banks to be excessively risk averse. He says “The Federal Reserve, which supervises some 7,000 banks, has been telling bankers that they must cut risk.”

The FDIC reported today that there are 552 banks on their problem list. Banks have been charging off $40 to $50 billion per quarter in loans for a year now. Capital has been eroded, and banks are way overleveraged, in part because of excessive risk taking. You think that maybe banks should be more risk averse today? You think that maybe there is a rational reason for banks to lend less to business and purchase more government securities?

The real problem is not some government conspiracy. The real problem is the government’s quiescence.

Too many of our banks are zombies, and we face something like Japan’s lost decade if we don’t fix them. This is the single most serious United States problem today. It drives me crazy that we are wasting huge amounts of resources and political capital on second-order problems while ignoring the bank problem.

Robust recovery requires banks lending to businesses. Banks can’t lend to businesses until they are adequately capitalized, and the bad assets are off the books. We will not have a robust recovery and put people back to work until our banks are fixed.

Bankruptcy is one way to clean up our banks. Since the FDIC fund is currently upside down, -8.2 billion, this would require external funds to the FDIC. The other option is the one successfully used by Sweden. They nationalized the banks, cleaned them up, and resold them. This would also require an investment.

Either way, fixing the banks is a far better use of money than some Stimulus 2 program or even the unspent portion of the current stimulus program.

The post It is Not a Conspiracy appeared first on Center for Economic Research and Forecasting.

I think Fed policy has been too tight. Instead of paying interest on excess deposit, they should be charging a fee. Of course, many disagree and worry about inflation, and that is what I thought I was reading as Shelton proceeds with her thesis that the Fed’s policy may be fueling a new asset bubble. This is pretty standard stuff, boringly standard in fact. I was about to quit reading and go on to something else when I came to a paragraph that stopped me cold:

“Deflation is seen as the bugaboo of Keynesian economics. But it can actually serve to spur economic activity as lower prices enable struggling consumers to get back in the game, and enterprising individuals can build businesses using tangible assets that yield valid profits.”

That paragraph is breathtaking, so wrong on so many levels, so counter to what we know to be true. I couldn’t believe that an economist would say that. So, I looked for her tag line. Sure enough, it says she’s an economist. I did a web search. She’s got at least one book out. She’s in the WSJ frequently. She’s all for a gold standard.

Shelton received her Ph.D. in Business Administration at the University of Utah, and she’s a professor at the Duxx Graduate School of Business at Monterrey, Mexico. One observer—goes by Federalist on the web, but I couldn’t find a name—described her as having few credentials. I don’t think that is exactly true. She has impressive credentials, just not as an economist.

Let’s correct her paragraph:

No one is going to mistake me for a Keynesian, but I’m certain that deflation is bad. Economists in general, not just Keynesian, know deflation is bad. I don’t know of one credible economist, from a top 50 school, with a Ph.D. in economics, who believes that deflation is not bad.

Shelton goes beyond saying deflation is not bad. She claims deflation is good, stimulative, spurring economic activity, “enabling struggling consumers to get back in the game.” Amazing.

Here’s the story on deflation: As prices fall, no one has an incentive to purchase anything, the cost will be less tomorrow; consumption and investment decline. Borrowers pay with deflated dollars, making real interest rates very high, again leading to less investment and consumption. Wages don’t adjust quickly, leading to unemployment, 25 percent in the depression. Asset values decline, but debts become more burdensome, leading to credit defaults and over-leveraged banks, businesses, and consumers. Lending, borrowing, consumption, investment, and economic activity decline.

One problem of smart people pontificating outside their field is that they come up with ideas that sound good, don’t hold up to serious analysis. Economists have performed a huge amount of research on inflation and deflation, empirical research and theoretical research. The profession has rejected the thesis that deflation is good. The risk is that someone with authority listens to someone like Shelton and tries to implement her recommendations. That would be tragic. Bad policy leads to a bad economy, and the costs of a bad economy are immense and not just financial. Serious recessions change lives, usually for the worse. Careers, families, and lives are destroyed. It is a shame that Shelton has a mouthpiece as big as the Wall Street Journal.

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