Friday, May 29, 2015

Feldstein Warns About Developing Price Inflation

My favorite Keynesian economist, the former President and Chief Executive Officer of the National Bureau of Economic Research, former chairman of the Council of Economic Advisers and current Harvard professor, Martin Feldstein, correctly warns:
The Federal Reserve’s unconventional monetary policy during the past five years–the combination of massive purchases of long-term bonds and its promise to keep short-term rates very low for a very long time–caused a sharp rise in the stock market and in the prices of owner-occupied homes. Together these raised household net worth by some $10 trillion in 2013. This large increase in wealth caused households to raise their spending and businesses to invest in new capacity. That increase in spending raised employment by enough to drive the unemployment rate down to just 5.4%. But the very easy monetary policy has also left us with dangerously low interest rates and overvalued assets.

With the overall unemployment rate down to 5.4% and the rate among college graduates at only 2.7%, there is little or no slack left in labor markets. As a result, labor costs are now rising at a faster rate. Compensation per hour in the nonfarm business sector rose at a 3.1% rate in the first quarter of this year, up from 2.5% in 2014 and 1.1% in 2013.

Rising labor costs usually lead to a higher rate of price inflation. This time inflation has temporarily been kept in check by the decline over the past year in the prices of gasoline and other forms of energy and by the rising dollar’s impact on the cost of imported goods. But those offsetting forces are shifting into reverse. With oil prices recently up from their lows and the dollar no longer rising, inflation will be heading higher in the year ahead.
And he sounds Ron Paul-like on the debt situation:
 For the longer term, the economy faces a serious issue of preventing the projected explosion of the national debt. The ratio of the national debt to GDP has doubled in the past decade, from roughly 35% to about 75%. It is projected to start rising again in the near future, heading to 100% of GDP and higher unless legislative action is taken.
I am not a big fan of his big government solution: cut tax breaks, but he sees what is coming.

-RW

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