On a recent tour of our local stores Mrs. K. has been annoyed to discover that one of her favorite house-hold products, normally stocked on the shelves of several local stores is no longer available. The product--a stove-top cleaning agent-- was formally easily procured and widely available. But not so now.
“Why can’t I find this item any longer?” she asked with the annoyance.
“Well that product may not have a lot of demand, so Green’s, Walmarts, CVS, True Value, etc. do not wish to replace their stock so quickly, when they are gone. They are reducing or eliminating the shelf-stocks of products that don't sell quickly. It's just one way to reduce overhead," I said.
“So this is just a response to the bad economy then?”
“Yes, it’s a sign of low demand.”
"Yeah, that low demand may be the result of the fact that a good portion of the population is under or unemployed. Less money out there…less demand for stove-top cleaners and other stuff.”
Right now it is jobs, jobs, jobs that are on everyone’s mind. Today, I read in Portfolio.com, with some alarm that there are five applicants for every job that opens. Also, that there are some 15 million Americans out of work right now, and that nearly half a million have quit trying to find work. The formal joblessness rate is recorded as 9.6%, but that would be much worse were it not for the those, nearly 500,000 who simply just quit looking.
Also the inflation rate has dropped down to 1.1% and has been holding steady at this rate for some months. That is well below the 2% rate that is considered desirable.
“That doesn’t sound too threatening. Why should I be concerned with the fact that prices are not rising much?”
“Well the problem is that such a low rate of inflation is and indicator of low consumer demand for goods and services.
“So that’s why I can’t find that “cook top” spray cleaner, I like to use”?
“Exactly!“
“Some products which are not your big sellers are in lower demand anyway…and are simply eliminated off the shelves, as a way to reduce costs and raise profits.“
“That’s one way to control expenses, but it makes me mad!“
“But more importantly, these circumstances of low demand may develop into what the economists call a “vicious deflationary cycle” in which low consumer demand causes product prices to fall, (or they may be simply eliminated as your cook top cleaner), this causes shoppers (like you and me) to retard purchases since they anticipate the continuing fall in prices (Why should you pay more for some product today when you can get some product cheaper tomorrow?). Then the store-owner, responding to low demand, may decrease prices further, while the products manufacturer or producer who is faced with less orders for his product, sells his stock at lower prices since he has too much of it, and, as well, may decide to slow production. These results exacerbate the problem and result in lower demand for labor in both the production end and in the sales end of the economy, resulting in lay offs, and firings. But job losses and reduced employment only tend to decrease money in circulation, and thus depress demand even further. The end result is a continual spiral downward of demand, as prices fall and employees are laid off. This deflationary spiral can be described as a classic “vicious cycle” or a process which tends to exacerbate the cause or causes which generate it.
What can the Fed do? I read recently that Ben Bernanke is planning to decrease long term interest rates and stimulate growth by having the Fed purchase (“soak up”) Treasury Bonds. Bernanke will buy them with money he just freshly printed at the Treasury. That sounds like a nice way to say we are just printing money as we need it. But here’s how it works.
Treasury Bonds are safe but they do not make much interest. So to get the attention of buyers, the government has to keep interest rates at a level high enough to encourage sales. These practices will costs us in the long run. By buying up Treasury Bonds, a cash infusion is put directly into government coffers. Since the government would have less urgency to sell bonds, they need not encourage buyers by raising interest rates. This action would tend to decrease the value of the dollar, since in effect by creating money ex nihilo, the government is in effect is decreasing the value of its currency.
That might make the Chinese angry….since they hold so much of our debt they will be paid back in inflated currency.
But I’ve not heard anyone one claim that we are just printing up money as we need it. No the polite term for this process is called quantitative easing (QE). Formally this describes a policy used by central banks like the Fed to increase the supply of money. To do this they increase the excess reserves of the banking system. Quantitative Easing is resorted to when other “normal” methods of nudging the economy along have failed. Prior to QE you may remember the Fed lowered bank interest rates, and the interbank interest rate (or discount rate). But sine these are at or close to zero….there is only one other “tool” to try that is falling back on the printing presses.
In fact it is even simpler than that. The central bank simply credits own account with money it creates out of thin air (ex nihilo---out of nothing). Then using this account it purchases financial assets, including government bonds, debts, mortgage backed securities, corporate bonds and other assets. This process is referred to as “open market operations”. Once the funds are out there, it is hoped that banks will have more reserves so they can use these funds to lend out to firms or individuals.
From Japan article http://www.nytimes.com/2010/10/17/world/asia/17japan.html?src=me&ref=general
Still, as political pressure builds to reduce federal spending and budget deficits, other economists are now warning of “Japanification” — of falling into the same deflationary trap of collapsed demand that occurs when consumers refuse to consume, corporations hold back on investments and banks sit on cash. It becomes a vicious, self-reinforcing cycle: as prices fall further and jobs disappear, consumers tighten their purse strings even more and companies cut back on spending and delay expansion plans.
http://climateprogress.org/2010/10/17/is-this-what-america-faces-if-the-tea-party-triumphs/
“Why can’t I find this item any longer?” she asked with the annoyance.
“Well that product may not have a lot of demand, so Green’s, Walmarts, CVS, True Value, etc. do not wish to replace their stock so quickly, when they are gone. They are reducing or eliminating the shelf-stocks of products that don't sell quickly. It's just one way to reduce overhead," I said.
“So this is just a response to the bad economy then?”
“Yes, it’s a sign of low demand.”
"Yeah, that low demand may be the result of the fact that a good portion of the population is under or unemployed. Less money out there…less demand for stove-top cleaners and other stuff.”
Right now it is jobs, jobs, jobs that are on everyone’s mind. Today, I read in Portfolio.com, with some alarm that there are five applicants for every job that opens. Also, that there are some 15 million Americans out of work right now, and that nearly half a million have quit trying to find work. The formal joblessness rate is recorded as 9.6%, but that would be much worse were it not for the those, nearly 500,000 who simply just quit looking.
Also the inflation rate has dropped down to 1.1% and has been holding steady at this rate for some months. That is well below the 2% rate that is considered desirable.
“That doesn’t sound too threatening. Why should I be concerned with the fact that prices are not rising much?”
“Well the problem is that such a low rate of inflation is and indicator of low consumer demand for goods and services.
“So that’s why I can’t find that “cook top” spray cleaner, I like to use”?
“Exactly!“
“Some products which are not your big sellers are in lower demand anyway…and are simply eliminated off the shelves, as a way to reduce costs and raise profits.“
“That’s one way to control expenses, but it makes me mad!“
“But more importantly, these circumstances of low demand may develop into what the economists call a “vicious deflationary cycle” in which low consumer demand causes product prices to fall, (or they may be simply eliminated as your cook top cleaner), this causes shoppers (like you and me) to retard purchases since they anticipate the continuing fall in prices (Why should you pay more for some product today when you can get some product cheaper tomorrow?). Then the store-owner, responding to low demand, may decrease prices further, while the products manufacturer or producer who is faced with less orders for his product, sells his stock at lower prices since he has too much of it, and, as well, may decide to slow production. These results exacerbate the problem and result in lower demand for labor in both the production end and in the sales end of the economy, resulting in lay offs, and firings. But job losses and reduced employment only tend to decrease money in circulation, and thus depress demand even further. The end result is a continual spiral downward of demand, as prices fall and employees are laid off. This deflationary spiral can be described as a classic “vicious cycle” or a process which tends to exacerbate the cause or causes which generate it.
What can the Fed do? I read recently that Ben Bernanke is planning to decrease long term interest rates and stimulate growth by having the Fed purchase (“soak up”) Treasury Bonds. Bernanke will buy them with money he just freshly printed at the Treasury. That sounds like a nice way to say we are just printing money as we need it. But here’s how it works.
Treasury Bonds are safe but they do not make much interest. So to get the attention of buyers, the government has to keep interest rates at a level high enough to encourage sales. These practices will costs us in the long run. By buying up Treasury Bonds, a cash infusion is put directly into government coffers. Since the government would have less urgency to sell bonds, they need not encourage buyers by raising interest rates. This action would tend to decrease the value of the dollar, since in effect by creating money ex nihilo, the government is in effect is decreasing the value of its currency.
That might make the Chinese angry….since they hold so much of our debt they will be paid back in inflated currency.
But I’ve not heard anyone one claim that we are just printing up money as we need it. No the polite term for this process is called quantitative easing (QE). Formally this describes a policy used by central banks like the Fed to increase the supply of money. To do this they increase the excess reserves of the banking system. Quantitative Easing is resorted to when other “normal” methods of nudging the economy along have failed. Prior to QE you may remember the Fed lowered bank interest rates, and the interbank interest rate (or discount rate). But sine these are at or close to zero….there is only one other “tool” to try that is falling back on the printing presses.
In fact it is even simpler than that. The central bank simply credits own account with money it creates out of thin air (ex nihilo---out of nothing). Then using this account it purchases financial assets, including government bonds, debts, mortgage backed securities, corporate bonds and other assets. This process is referred to as “open market operations”. Once the funds are out there, it is hoped that banks will have more reserves so they can use these funds to lend out to firms or individuals.
From Japan article http://www.nytimes.com/2010/10/17/world/asia/17japan.html?src=me&ref=general
Still, as political pressure builds to reduce federal spending and budget deficits, other economists are now warning of “Japanification” — of falling into the same deflationary trap of collapsed demand that occurs when consumers refuse to consume, corporations hold back on investments and banks sit on cash. It becomes a vicious, self-reinforcing cycle: as prices fall further and jobs disappear, consumers tighten their purse strings even more and companies cut back on spending and delay expansion plans.
http://climateprogress.org/2010/10/17/is-this-what-america-faces-if-the-tea-party-triumphs/
No comments:
Post a Comment