UPDATE 1:45AM EST, 7/12/10: The post from Krugman's blog, upon which I originally reported in this post, is now considerably more brutal, if not downright eviscerating, and in Monday's NY Times...
The Feckless Fed
By PAUL KRUGMAN
New York Times
July 12, 2010
Back in 2002, a professor turned Federal Reserve official by the name of Ben Bernanke gave a widely quoted speech titled "Deflation: Making Sure `It' Doesn't Happen Here." Like other economists, myself included, Mr. Bernanke was deeply disturbed by Japan's stubborn, seemingly incurable deflation, which in turn was "associated with years of painfully slow growth, rising joblessness, and apparently intractable financial problems." This sort of thing wasn't supposed to happen to an advanced nation with sophisticated policy makers. Could something similar happen to the United States?
Not to worry, said Mr. Bernanke: the Fed had the tools required to head off an American version of the Japan syndrome, and it would use them if necessary...
Krugman's NYT Op-Ed Column excerpt, continued...
...Today, Mr. Bernanke is the Fed's chairman -- and his 2002 speech reads like famous last words. We aren't literally suffering deflation (yet). But inflation is far below the Fed's preferred rate of 1.7 to 2 percent, and trending steadily lower; it's a good bet that by some measures we'll be seeing deflation by sometime next year. Meanwhile, we already have painfully slow growth, very high joblessness, and intractable financial problems. And what is the Fed's response? It's debating -- with ponderous slowness -- whether maybe, possibly, it should consider trying to do something about the situation, one of these days...
# # #
Also, Calculated Risk is reporting on this story now, and includes another eye-opener from, of all places, the Atlanta Federal Reserve Branch: "Deflation and the Fed."
Deflation and The Fed
by CalculatedRisk on 7/11/2010 11:59:00 PM
...And an interesting point from Mike Bryan, vice president and senior economist at the Atlanta Fed: "How close to deflation are we? Perhaps just a little closer than you thought."
CPI will be released on Friday, and expectations are for another slight decline in the headline number. Persistent deflation (like in Japan) would be a serious problem. Perhaps if rents are increasing slightly, as recent reports suggests, the U.S. might avoid deflation without further Fed action (I'm not confident that rents have bottomed given the high vacancy and unemployment rate - especially if I'm correct about growth slowing in the 2nd half of 2010).
Note: Last week I asked "What might the Fed do?" and I excerpted from Bernanke's 2002 speech. If the trend towards deflation continues, I think the FOMC - based on Bernanke's speech - might set "explicit ceilings for yields on longer-maturity Treasury debt".
(End of Update)
# # #
Here's the original post, from earlier today...
(Still on the Rec List. Thanks everyone! With Krugman turning it up a notch, in Monday's NY Times--as opposed to just his blog post from earlier on Sunday--it's a considerably more important story. And, yeah, he really goes to town on the Fed in the Times, much moreso than he did on his blog, a few hours prior...)
This afternoon, in "Trending Toward Deflation," Paul Krugman continues with a theme upon which he's focused for many weeks, "The Third Depression." I posted a diary on this about 12 days ago, "Krugman Is Calling It: "The Third Depression" (updated)."
At the end of today's post, he pretty much blows up Fed Chair Ben Bernanke's prior assurances that the Fed will control the matter, wherein Bernanke claims the likelihood of deflation occurring under his watch is virtually negligible.
Here's Krugman, today, telling Bernanke, "Domo arigato, Bernanke-san."
Trending Toward Deflation
Paul Krugman
NY Times Blog
July 11, 2010, 11:25 am
Inflation has been falling, but how close are we to deflation? I found myself wondering that after observing John Makin's combusting coiffure, his prediction that we might see deflation this year.
Here's the thing: the usual way inflation is measured is by looking at the change from a year earlier. But if inflation is trending lower, that's a lagging indicator...
--SNIP--
...deflation isn't some distant possibility -- it's already here by some measures, not far off by others. And of course there isn't some magic boundary effect when you cross zero; falling inflation is raising real interest rates and making debt problems worse as we speak.
So "it" is happening here. Domo arigato, Bernanke-san.
Bold type is diarist's emphasis.
Krugman has a couple of charts worthy of note in the piece. First there's the Cleveland Fed's Median Consumer Price Inflation nos., here: Cleveland Fed (Trend Chart)
But, as Krugman points out, there are those that tell us the drop in owner-occupied housing prices is skewing the numbers. So, Krugman dispels that myth by taking a look at the trend in market-based prices for personal consumption (sans food and energy), right here: PCE (Trend Chart).
Here's the start of Bernanke's speech (linked in Krugman's post, today) before the Federal Reserve Board, on November 21, 2002, by then-governor (not Fed Chair) Ben Bernanke: "Remarks by Governor Ben S. Bernanke."
Remarks by Governor Ben S. Bernanke
Before the National Economists Club, Washington, D.C.
November 21, 2002
Deflation: Making Sure "It" Doesn't Happen Here
Since World War II, inflation--the apparently inexorable rise in the prices of goods and services--has been the bane of central bankers. Economists of various stripes have argued that inflation is the inevitable result of (pick your favorite) the abandonment of metallic monetary standards, a lack of fiscal discipline, shocks to the price of oil and other commodities, struggles over the distribution of income, excessive money creation, self-confirming inflation expectations, an "inflation bias" in the policies of central banks, and still others. Despite widespread "inflation pessimism," however, during the 1980s and 1990s most industrial-country central banks were able to cage, if not entirely tame, the inflation dragon. Although a number of factors converged to make this happy outcome possible, an essential element was the heightened understanding by central bankers and, equally as important, by political leaders and the public at large of the very high costs of allowing the economy to stray too far from price stability.
With inflation rates now quite low in the United States, however, some have expressed concern that we may soon face a new problem--the danger of deflation, or falling prices. That this concern is not purely hypothetical is brought home to us whenever we read newspaper reports about Japan, where what seems to be a relatively moderate deflation--a decline in consumer prices of about 1 percent per year--has been associated with years of painfully slow growth, rising joblessness, and apparently intractable financial problems in the banking and corporate sectors. While it is difficult to sort out cause from effect, the consensus view is that deflation has been an important negative factor in the Japanese slump.
So, is deflation a threat to the economic health of the United States? Not to leave you in suspense, I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small, for two principal reasons. The first is the resilience and structural stability of the U.S. economy itself. Over the years, the U.S. economy has shown a remarkable ability to absorb shocks of all kinds, to recover, and to continue to grow. Flexible and efficient markets for labor and capital, an entrepreneurial tradition, and a general willingness to tolerate and even embrace technological and economic change all contribute to this resiliency. A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape...
So, here we are, less than four months from the November elections, and many folks in this community aren't even contemplating a double-dip recession. They're talking about a recovery.
Well, that could still be half-right, especially if the first "dip" isn't "done dippin'," "Calculated Risk Stunner: No Double-Dip If The Recession Isn't Over" (7/3/10).
Then again, Bernanke could just pump another couple of trillion into Wall Street: "Is Bernanke's "Plan B" Another $2+ Trillion For Wall St?" (6/25/10).
Today, we're hearing rumors that's already going on, behind our backs! "Is The Fed Funding The Treasury Through The Banks?" (A must read, IMHO.)
Here's Charles Hugh Smith, (h/t to Zero Hedge) someone who's quickly becoming one of my favorite bloggers on the economy putting it all out there for us in very easy-to-understand terms: "The Financial Con Of The Decade Explained So Simply Even A Congressman Will Get It." (And, please don't discount Smith's politics just because it's linked via Zero Hedge; Smith is definitely talking quite vehemently from the left.)
Yes, while esteemed economists from the right and the left are now voicing greater concerns about the direction of our economy, the very same folks that got us into this mess are telling us: "No problem, we've got this under control."
Didn't we hear that before September 2008? From the very same people, no less?
According to Paul Krugman, today, it's not under control...at all.