Hannah Blog

February 22, 2012

From the Federal Reserve,

Filed under: Economy — hannah @ 6:27 am

a staff report you might find interesting in terms of austerity and the deficit.

http://www.newyorkfed.org/research/staff_reports/sr551.html

That link only leads you to the summary. The whole report is a pdf and has to be downloaded.

The summary is interesting in itself. It states, in part:

Cutting government spending on goods and services increases the budget deficit if the nominal interest rate is close to zero. This is the message of a simple but standard New Keynesian DSGE model calibrated with Bayesian methods. The cut in spending reduces output and thus—holding rates for labor and sales taxes constant—reduces revenues by even more than what is saved by the spending cut.

In case you haven’t noticed, the Federal Reserve has set the base interest rate at 0.025% Moreover, it has announced that this rate will not be increased before 2014. Obviously, the Fed is trying to wean people off speculating on the interest rate in deciding where to invest their extra cash.

Also remember there was a time (which most rich people can recall because it was only 20 years ago) when the Fed rate was 8.1% See how far the prospect for free unearned income has fallen?

What’s even more telling about that staff report is the assertion that the effects of budget policies depend on what people expect to happen.

If deficits trigger expectations of i) lower long-run government spending, ii) higher long-run sales taxes, or iii) higher future inflation, they are expansionary. If deficits trigger expectations of higher long-run labor taxes or lower long-run productivity, they are contractionary.

Which simply means that the analysts haven’t a clue. But, what it means in the context of deciders who have no rational expectations (no-one would be foolish enough to argue that “nobody could expect” Condi Rice is a singular phenomenon), is an unasked and unanswered question. It does, however, provide a hint at why banksters (national and international) keep yammering about “confidence.” Confidence seems to be a synonym for rosy expectations that are created by positive statements–like “morning in America.” Or, in other words, the analysts at the Federal Reserve have bought into the notion that the global economy runs on hype.

Which is actually consistent with the belief that humans are all automatons and respond to prompts–i.e. it’s just a matter of the right buttons being pushed.

If that’s a valid interpretation, then perhaps we should reconsider and conclude that lies aren’t deceptions–they’re just efforts to find the right buttons that will set everything right.

“How can we get people to do what we want? Let’s see if a prod here and a stick there will work.” That’s what the phrase “deficits trigger” says, right?

It’s a very primitive way of looking at human behavior. But it is consistent with the binary model. Do you see how human agency or responsibility is left out of the phrase “deficits trigger”?

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