Balancing Inflation and Growth Part 11 of 13

One would like to think that as the economy slows, inflationary pressures will do likewise. But we cannot always be sure they will, given the globalized commodities trading system nature of the U.S. economy. Demand-pull pressures abroad have an increasingly potent influence on our domestic economy. Traditionally, a central bank would expect slack to develop as the economy under its jurisdiction weakened, leading to less demand for most inputs and an easing of price pressures. We no longer operate in a traditional economy. Domestic inflation developments have become increasingly less sensitive to domestic measures of slack. In an open, globalized economy, capacity utilization and inflation pressures need to be measured, or at a minimum, understood in their global context.

You cannot think in a purely domestic context about the pricing of oil or steel or soybeans or pulp or shoes or clothing or even what I consider to be one of lifes essentials, beer, because innovations in transportation and communications technology have all but eliminated national borders for almost any product for which trade barriers were negotiated away during the 1980s and 90s. More commodity training books vexing for economists and econometric modelers, the information technology revolution and the spread of the Internet have blurred the once-clear distinction between easy-to-trade goods and difficult-to-trade services.

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Challenges for Monetary Policy Part 10 of 14

I mentioned single malt whiskey earlier to describe the effective time lags of monetary policy. I realize it is only lunchtime, but lets return to the economics liquor cabinet for a moment. Inflation is like absinthe. The narcotic allure of inflation is a dangerous thing. It might seem like the remedy to bail out a government or a bad book of business and forget your troubles More Wealth From Short Term Forex Trading. Yet our experience in the past has taught us only too well that inflation is a dangerous elixir that ultimately proves debilitating for businesses, consumers, investorsincluding those foreign investors who have lately come to the aid of some large balance sheets hereand especially for the poor, the elderly and people on fixed incomes. It even inculcates bad financial behavioral patterns in the young by encouraging spending rather than investment and saving. Inflation is bad for Main Street and Wall Street and even for Sesame Street.

Yet we central bankers also traverse Lombard Street, and we know from Walter Bagehot that in times of crisis, liquidity is key How to Start an Import Business. As a voter on the FOMC this year, I stand ready to take substantive action to support growth and provide insurance against downside risk, as long as inflation expectations remain contained.

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