How Big A Problem Is Inflation For Stock Markets?

Inflation caused  by increases in economic demand predicted by the law of Supply and Demand.

Inflation caused  by increases in economic demand predicted by the law of Supply and Demand.
Wikimedia Commons / SilverStar at English Wikipedia

One often mentioned explanation  for plunging stock markets has been the specter of inflation raising its ugly, grisly head. With the American economy rousing from its slumbers, many expect rising demand for goods and services to motivate the Federal Reserve to raise interest rates.

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The Japanese Economy is Stalling Out

Shinzo Abe, Prime Minister of Japan
Wikimedia Commons/US Embassy, Tokyo

From the Wall Street Journal we learn that Japanese economic growth nearly sputtered out in the second quarter of 2016. Their exports are falling and, just like the United States, they are suffering from weak corporate investment. That is not terribly surprising, since they have been using the same Keynesian ideas to direct their policies as the United States. What is surprising is how faithful the Japanese have been to Keynesian doctrine in the face of the unremitting bad results of their policies. Continue Reading…

A Closer Look at the Index of Economic Freedom

World Map Of WSj/Heritage Foundation Index of Economic Freedom for 2016

World Map of the WSJ/Heritage Foundation Index of Economic Freedom
Image Credit: Heritage Foundation

In a number of posts I have used the Wall Street Journal/Heritage Foundation Index of Economic Freedom as a measure of the degree of state intrusion into the economy in each country for which it is calculated. However, questions have been raised about just what it does indicate. A reader wrote the following in a comment to the post Are Leftist Economies Better than Free-Markets:

When I first looked at the index, I thought 3 of the 10 criterion of the WSJ index are not monotonically correlated with less government instrusion in the economy. The first two, and then freedom from inflation/deflation. Looking at it again, I would say that none of the criterion except for, of course, taxes and government size are always monotonically correlated with smaller government, so obviously I think there is a difference between size of government and government’s tendency to intrude in the economy. 

In this essay I will look more closely at how the index is calculated, hopefully to remove any questions about what exactly it means.

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The Keynesian Emperors Have No New Clothes!

The Emperor has no clothes!

The Emperor has no new clothes!    
Image Credit: Wikimedia Commons/Vilhelm Pedersen (1820-1859)

Given all their failures in suggesting successful economic policies around the world, one would have thought Keynesians would have been generally scorned by now, their doctrines almost universally rejected. Continue Reading…

Europe’s Monetary Experiment Not Working!

How can we get a little inflation around here?!

How can we get a little inflation around here?!
Photo Credit:
 Canstockphoto.com/Bialasiewicz

Do you remember how the European Central Bank (ECB) decided to try to add more zing to the Eurozone’s economy by adding quantitative easing (QE) to negative interest rates? (if not, please read The Insanity of Negative Interest Rates and The Bad Examples of the ECB and BOJ.) Well it seems not to be working very well, as the Eurozone slid back into deflation in February!      Continue Reading…

Rational Expectations, Market Clearing, and Real Business Cycles

University of Chicago

The University of Chicago, where much of New Classical Economics was built by Robert Lucas, Jr.
Photo Credit: Wikimedia Commons

In my last post I began an examination of what is at present the only viable alternative to New Keynesian economics: New Classical economics. There may be many who are perplexed that socialism would not be considered a candidate for our economic organization, but socialism has given ample historical reasons for being rejected. If you are not convinced,   Continue Reading…

The Phillips Curve in New Keynesian Economics

Phillips curve

The original Phillips curve for the U.S. fit to 1960s data.

A non-economist might justifiably be confused about why the Federal Reserve, the European Central Bank (ECB), and the the Bank of Japan (BOJ) have insisted on keeping interest rates effectively at zero for almost an entire decade. After all, they have not had any good results in stimulating their economies. After a considerable period with no appreciable change in their low rates of economic growth, one would have to ask whether continually trying to do the same thing with no positive change was not defining central banks as insane.   Continue Reading…

U.S. Stock Markets and the Economy, February 2016.

A thrilling ride!

Investors in the stock market getting their thrills!          
Wikimedia Commons/Boris23

The last few weeks with the stock markets have certainly been an exciting roller coaster ride! As you can see in the chart below, market moves of more than 100 points in the Dow 30 index and 10 points in the S&P 500 – both up and down – have been the rule. Just as important as the size of the moves has been the volatility where a decline one day is followed many times by an increase the next. Continue Reading…

A Replacement for Keynesian Monetary Policy

Money-money-money!

How many of these should we make?      Image Credit: Freeimages.com/Tracy Olson

As the world confronts the smoking ruin of Keynesian monetary policy [see the posts Economic Damage Created by the Fed, and Why Have ZIRP and QE Failed?, and BOJ Also Losing Credibility and Its QE War, and The Insanity of Negative Interest Rates], some non-Keynesians are discussing what should replace it.  Continue Reading…

BOJ Also Losing Credibility And Its QE War

Haruhiko Kuroda, Governor of the Bank of Japan

Haruhiko Kuroda, Governor of the Bank of Japan
Photo Credit: Wikimedia Commons/Asian Development Bank

Move over Federal Reserve! You are not the only ones losing credibility and in the dog house! Japan’s equivalent of the U.S. Federal Reserve, the Bank of Japan (BOJ), is currently waging war against low growth using Quantitative Easing (QE) as their primary weapon. Just as the results of the Federal Reserve’s QE and Zero Interest Rate Policy (ZIRP) were big failures, BOJ’s QE program is also turning into a big flop, as chronicled in Japan: The Great QE Experiment Fails by Steven Knight and in the Wall Street Journal post (access requires subscription) The Bank of Japan Lays an Egg.      Continue Reading…

The Insanity of Negative Interest Rates

Alice entering the domain of the European Central Bank

Alice entering the domain of the European Central Bank
Image Credit: Wikimedia Commons/John Tenniel (1820-1914) (PD-US)

Europe has now officially entered into the world of Alice in Wonderland! The European Central Bank (ECB) has jumped through the looking glass displaying negative interest rates, mirrored from what they actually should be. Because of their intimate commercial ties, three small neighbors of the Eurozone (the part of the European Community using the Euro as their currency) – Denmark, Sweden, and Switzerland – have also adopted negative interest rates.     Continue Reading…

Whatever Will We Do About the Fed?

Fed_building_DC

Federal Reserve Building, Washington DC         Photo Credit:  Flickr.com/wwarby

Last September 10, I commented on Senator Richard Shelby’s Financial Regulatory Improvement Bill in A More Accountable Fed. Greg Ip in The False Promise of a Rules-Based Fed reported the bill was passed last week by the House of Representatives. A section-by-section summary of the bill can be found here, and the contents of the entire bill can be found here. Now, despite the seemingly boring topic promised by the bill’s title, a conflict of epic dimensions is forming over its passage. At stake is whether the progressive Left can continue to depend on the Fed to pursue New Keynesian monetary policies. Our unfortunate experiences with the Fed’s Zero Interest Rate Policy (ZIRP) and Quantitative Easing (QE), however, seem to require we force the Fed away from this direction. At the very least, Congress should take some of the Fed’s discretion on monetary policy away from it and instruct them to use a monetary rule. Continue Reading…

Failures of New Keynesian Economics

The wreck of an elegant porsche!

The wreck of an elegant model!                Photo Credit: Flickr.com/Kevin Hutchinson

The New Keynesian economics is such an elegant mental construct that it is almost disappointing that it gives such a counter-productive set of policy recommendations! I say this as a fervent believer in free-markets who could be expected to cheer its failures. Its greatest triumph is that it could do what its neo-Keynesian predecessor could not: give a coherent and believable explanation for the stagflation of the 1970s, as we saw in the post How New Keynesians Explain 1970s Stagflation.    Continue Reading…

How New Keynesians Explain 1970s Stagflation

Stagflation Advice

Dr. Jimmy Carter’s Stagflation Advice: “I’m Going To Give It To You Straight—I Don’t Have Any Idea What I’m Doing.”                              Image Credit: Flickr.com/cliff1066

We are just about at the point where we can understand the New Keynesian explanation for the stagflation of the latter half of the 1970s.   Continue Reading…

New Keynesian Adjustments for Inflation

Burning money

One view of what to do with too much money!
Photo Credit: CanStockPhoto.com/dolgachov      (c) Can Stock Photo

[NOTE: Edited on 11/13/2015 to ensure proper interpretation of the Taylor Rule.]

The New Keynesian views of inflation, interest rates, and aggregate demand (a synonym for GDP), and the links between them are captured in two relations. As discussed in our last post, the first Continue Reading…

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