Sometimes I wonder if our financial system is in the hands of a maniac cab driver who sincerely wants to kill his passengers. Look at the latest, via Ian Welsh:
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.
This is the sort of action one takes to combat inflation. But inflation is not a factor right now. From the Financial Times
The prices of US goods and services, excluding food and fuel, fell last month for the first time since 1982 as aggressive measures to stimulate economic growth failed to inflate the cost of living.
So why is the Fed delivering further kicks to American exporters? Why are we becoming more
dependent on Chinese imports?
A growing number of people now say that a "controlled" inflation -- yes, such a thing is possible -- would be a good thing right now. A nice little wage/price spiral could make mortgage payments "doable" again. As Krugman argues, higher inflation could also lower unemployment
It goes like this: even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis.
And no, that doesn't mean that a loaf of bread would require a truckload of bank notes, as in Weimar.