As you may have heard, the Federal Reserve had decided to increase the discount rate: the rate at which short term loans are made to banks.
The primary effect of this is to strengthen the dollar. That will help reduce effective resource prices and make it easier to export to the US. Both of these things are what the US’s most important creditors (aka: China and Japan), want.
A quarter point increase won’t make much difference, the question is if this is a signal that the Fed intends to continue tightening. Doing so is likely to strangle the incipient, but extremely weak, recovery. One can only conclude that losing more Democratic seats is ok by Bernanke, and quite likely by Obama as well. It is possible that now that Bernanke has been reappointed he’s biting the hand that fed him, but given Obama’s actions since before he was elected, it’s at least as likely that Obama is onside for this. Keeping creditors happy is important if the administration wants to make another run at the financial play.
The bottom line is this, as I’ve been saying for some time: the plan is Japanification. Except that since the US is not a net exporter, Japanification will not work nearly as well in America as it did in Japan—and it sucked in Japan.
Once more, the percentage of Americans employed will not recover to pre-Great Recession levels in at least a generation and probably more. This is a deliberate policy choice and everything Obama and Bernanke has done—from refusing to take over banks, to refusing to force lending at reasonable rates, to engaging in an inadequate stimulus, to refusing to make Banks recognize their losses, to doing everything they can to encourage slashing Social Security and Medicare, has had the effect of making Japanification more and more likely.
Unfortunately Japanification is not a stable solution set for the US.
Oh well.
anonymous
“Except that since the US is not a net exporter, Japanification will not work nearly as well in America as it did in Japan—and it sucked in Japan.”
And the rest of the world wasn’t in or on the brink of recession or worse then. Well, it was a long decade, so maybe for parts of it. We’re gonna stay the course. They may not be smart, or creative, or endowed with spines, but at least they’re predictable.
chicago dyke
i guess i’m missing the part where unemployed people and people suffering 30% increases in mandatory expenses like health insurance or energy, while wages stagnate, are able to buy lots of slightly cheaper junk from China or even nice expensive stuff like digiteevees from Japan.
it’s anecdotal, but because of what i do i am in the local big box plastic junk and grocery store every day. they are reducing what is on the shelves, not cramming in more. i don’t think this plan is going to work the way they want it to.
Mandos
And this, of course, is the point: the People Who Matter believe that the problem with the Bush years is that the financial play was incorrectly operated, not incorrect in itself.
tjfxh
Raising the discount (penalty rate for borrowing reserves from the Fed instead of borrowing in the interbank market) will make no different with the amount of excess reserves in the FRS.
Japanification is not an option in the US because it is a net importer and not a net exporter.
The strategy of the Fed seems to be to manage ongoing deleveraging while avoiding the real threat of deflation and the perceived threat of inflation.
The raising of the discount rate is simply to quell inflationary expectations that are all imagination and have no basis in fact. The real threat is that deflation will get out of hand.
lambert strether
Well, I can think of some reasons why, culturally, we’re different from the Japanese. How many buildings have the Japanese lost to small planes recently?
jo6pac
Great post then as now and as I said then the race to the bottom continues. Only now it’s becoming avalanche.
Since you asked
lambert, funny that you would mention small planes. Japan lost two entire cities worth of buildings and over 400,000 thousand civilians to American small planes dropping atomic bombs, in addition to the hundreds of thousands of civilian lives lost to firebombs also dropped by American small planes.
Of course, that wasn’t recent. And Americans weren’t killed by those bombs. So the incidents must not be important.