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(email exchange)

>   
>   On Thu, Mar 12, 2009 at 3:31 PM, Tom wrote:
>   
>   Christina Romer gave a speech on Monday at Brookings in which she
>   strongly argued for dollar devaluation as a tool to create economic
>   recovery.
>   

Continues the beggar they neighbor policies that Paulson pushed.

>   
>   This is the sort of thing that provides political cover for Fed Chairman Ben
>   Bernanke to pursue a more aggressive quantitative easing policy.
>   

Yes, of course he doesn’t matter for anything of consequence, but that’s another story.

>   
>   Romer, who is chair of the Council of Economic Advisors, praised FDR’s
>   1933 decision to allow the gold price to float up from $20.63/oz. to
>   $34.85/oz.
>   

Yes, should have floated it entirely.

Back then, the gold standard constrained even the US Treasury from borrowing.

We don’t have that issue, so moving the USD down for that reason is moot.

>   
>   That decision offers a template for what the Fed could do today, she said
>   (italics mine):
>   
>   This monetary expansion [in the wake of the 1933 devaluation] couldn’t
>   lower nominal interest rates because they were already near zero. What it
>   could do was break expectations of deflation.
>   

That pesky, ridiculous, ‘inflation expectations theory’ again!

>   
>   Prices had fallen 25% between 1929 and 1933. People throughout the
>   economy expected this deflation to continue. As a result, the real cost of
>   borrowing and investing was exceedingly high.
>   

Expectations had nothing to do with it. Lack of aggregate demand did. And the Treasury was revenue constrained due to the gold standard.

>   
>   Consumers and businesses wanted to sit on any cash they had because
>   they expected its real purchasing power to increase as prices fell.
>   

Not the reason. When on a gold standard, a rising value of gold is expressed by falling prices for everything else as gold is fixed.

Hence the revaluation upward of the price of gold which was a devaluation of the dollar. (Dollar buys less gold)

>   
>   Devaluation followed by rapid monetary expansion broke this deflationary
>   spiral. Expectations of rapid deflation were replaced by expectations of
>   price stability or even some inflation. This change in
>   expectations brought real interest rates down dramatically.
>   

No, deficit spending supported demand and broke the deflation.

>   
>   The change in the real cost of borrowing and investing appears to have had
>   a beneficial impact on consumer and firm behavior. The first thing that
>   turned around was interest-sensitive spending. For example, car sales
>   surged in the summer of 1933. One sign that lower real interest rates were
>   crucial is that real fixed investment and consumer spending on durables
>   both rose dramatically between 1933 and 1934, while consumer spending
>   on services barely budged.
>   

Must have been something else going on.

>   
>   Romer’s analysis of the Roosevelt devaluation parallels Bernanke’s almost
>   exactly.
>   

Comforting!

>   
>   Bernanke also has written that loose monetary policy was the key to the
>   economic recovery of 1933-34. Further on in her speech, Romer cautions
>   against letting up on stimulative measures too quickly, lest the economy
>   plunge back into recession, such as happened to the U.S. in 1937.
>   

In 1937 there was a new whopping social security tax that was ‘off budget’ and sent the economy into a tailspin as it drained billions of financial assets from the private sector.

Doesn’t anyone in DC know how any of it works?????

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