Milton Friedman proved, conclusively, that the Phillips Model is not the way to run an economy -- into chaos through reactionary "fixes", such, as it appears you may be suggesting SHOULD be done.
I have said the Fed IS using Phillips Curve theory as a basis for its use of the funds rate target, but I strongly contend that is erroneous and irrational. As to MF's role, as recently as 2004, Fed intellectuals credited MF with modifying the Phillips Curve in 1968 so that it is still the model in use at the Fed. MF is credited also with convincing the Keynesian establishment that there is no "long run" tradeoff of unemployment vs. inflation, but as Keynes said "in the long run we are all dead." In practice, the Fed still treats unemployment as the price to be paid for lower inflation, as that is the only mechanism the funds rate target can provide.
Fed Chairman Bernanke made clear months back that this move FOR US exports would be occurring. For this to "occur", the dollar must drop, making our produced goods more attractive to the buyer.
This is precisely the type of intrusion into the market that intellectuals insist upon trying, while doing so much damage in the process. Their contention is that Americans will be much better off if they pay greater value for what they buy, and receive less value for what they sell. Experience since 2004 shows the fallacy; we pay more and we get less, making the current account deficit much worse than it would have been otherwise. The Fed should be prohibited from changing the values of private assets based on its theories of what will be best for Americans. The Fed should be required to provide currency with stable value - period.
I've been reading, regularly, Mr. Bernanke's speeches and clips regarding the economy since he's been in office, and has made clear to me that the Feds have a very clear plan about the economy -- including temp "inflationary" measures, which of course, is in contrast to your: "There is no assurance that the Fed would respond as it should."
You are saying that the Fed is intentionally weakening the dollar as a "temporary inflationary measure." If you can cite particular statements of BB to that effect, I will be very appreciative. By all its public statements I have seen, the Fed contends it is trying to strengthen the dollar and is raising the funds rate target for that purpose. Either in what you have read or in what I have read, the Fed is misleading. My contention is that the higher funds rate targets, coupled with regular purchases of T-securities in the open market, have produced a weaker dollar and greater inflation. Are you of the view that the funds rate hikes are intended to weaken the dollar, as well as the economy?
With the fed budget drastically reduced, with this amazing economy with low unemployment, increased incentives for improving human resources, investment in resources -- suggests to me, strongly, that while the value of the dollar will dip, the real value of the dollar remains strong based upon the points in first part of my sentence. This then readies the stage for the next run.
The reduced budget deficit produced by higher tax revenues, the low unemployment rate, increased incentives for investment - all these result from the well-advised fiscal policies of the Bush administration, specifically the 2003 cuts in marginal tax rates. Based on those 2003 tax cuts, the dollar was holding its value very well and interest rates were lower than today. But the Fed then insisted on raising the short-term rates, effectively increasing the costs of capital to consumers and small/medium businesses by at least 4.25%, a total effective drain of capital of at least $180 billion/year. That Fed mismanagement countermands the supply side tax cuts, will eventually cause small/medium businesses to stop hiring, especially if the Fed decides to raise the short rate higher. If the rate goes higher, recession will follow and the dollar will weaken further. Then the Fed-induced cycle will start all over, but after great capital losses.
The Democrats are strung out on mandating minimum wage increases, thereby attempting to ensure that whatever anti-inflationary measures are in place will be more difficult to implement. Which means, those parts of the country implementing higher minimum wages will assuredly be the sooner at experiencing businesses leaving those districts. We can then expect those districts to scream about the deleterious effects of the Bush economy; but these effects will not be observable to the average consumer until a year or so after the 2008 Presidential elections. In this regard, nonetheless, minimum wage mandatory "sentencing" can be a help or a hindrence.
Democrat economic policy is hopeless, almost, on both the fiscal and monetary side of the equation. That is why lost opportunities with a good Republican president are so distressing, due to inadequate economic advice.
When politicians enact micro-policies which serve to inflate the dollar, it is the Fed's job to hold the dollar steady.
This is precisely the type of intrusion into the market that intellectuals insist upon trying, while doing so much damage in the process. Their contention is that Americans will be much better off if they pay greater value for what they buy, and receive less value for what they sell. Experience since 2004 shows the fallacy; we pay more and we get less, making the current account deficit much worse than it would have been otherwise. The Fed should be prohibited from changing the values of private assets based on its theories of what will be best for Americans. The Fed should be required to provide currency with stable value - period.
I suspect you ignore the actual flexibility of the value of the dollar. Real GDP versus nominal GDP tends to show that variance. Are you arguing for a "board" with no rules, then?
You are saying that the Fed is intentionally weakening the dollar as a "temporary inflationary measure."
If you've gotten that impression, it's wrong. The Fed is not "intentionally weaking the dollar for the sole purpose as a hedge against "temporary inflation".
By all its public statements I have seen, the Fed contends it is trying to strengthen the dollar and is raising the funds rate target for that purpose.
I concur.
My contention is that the higher funds rate targets, coupled with regular purchases of T-securities in the open market, have produced a weaker dollar and greater inflation.
This is, in fact, a true assessment. But will it result in the horrid inflation of the 60s? Not necessarily.
Long term, these actions are strengthening the dollar in real terms across all market sectors. Which ultimately results in the dollar buying more rather than less.
Are you of the view that the funds rate hikes are intended to weaken the dollar, as well as the economy?
No. We've just been through a vast growth in our economy. It is now time to take those goods and services to the market. To make those goods and services attractive to buyers, couching the market is a very important bit in balancing all trade sectors.
The reduced budget deficit produced by higher tax revenues, the low unemployment rate, increased incentives for investment - all these result from the well-advised fiscal policies of the Bush administration, specifically the 2003 cuts in marginal tax rates. Based on those 2003 tax cuts, the dollar was holding its value very well and interest rates were lower than today. But the Fed then insisted on raising the short-term rates, effectively increasing the costs of capital to consumers and small/medium businesses by at least 4.25%, a total effective drain of capital of at least $180 billion/year.
Are you against reinvestment in the American economy?
That Fed mismanagement countermands the supply side tax cuts, will eventually cause small/medium businesses to stop hiring, especially if the Fed decides to raise the short rate higher. If the rate goes higher, recession will follow and the dollar will weaken further. Then the Fed-induced cycle will start all over, but after great capital losses.
Your analysis posits that small/medium businesses owners have no concept of what to do with their profits. On the plus side, this downturn permits companies, using credits/incentives, to reinvest in their own human resources; to streamline their operations, to train new employees, to get a handle on their operations, in addition to reinvesting in their own company via expansion, streamlining, investing in stocks and options, purchasing related firms, etc.
Democrat economic policy is hopeless, almost, on both the fiscal and monetary side of the equation. That is why lost opportunities with a good Republican president are so distressing, due to inadequate economic advice.
I concur fully with you in re Democrat economic policy. I do not see where the President and the Feds are awry. All actions by Feds portray to me all the signs necessary to achieve a REAL solid improvement in the value of the dollar. The stage setting. Cooling the low percentage rates of housing loans, for starters. That had to happen. The whackiest kinds of loans were being created which put me in mind of the S&L scandals of the past. Now, whether or not you think this is good or bad depends upon which part of the market section you are viewing this from. The Feds are tasked with the job of bank sector solidity.