March 25, 2009
In this article, it explains the different combatants in which the banks are using to fight off inflation rates through it's monetary policy. When inflation rate for monetary policy is in stable, then mortgages also maintain stability due to the interest rate lever. Bank has set an inflation target of two per cent and interest rates are raised or lowered to increase or reduce borrowing, which in turn depresses demand. In this way, the banks are then able to control inflation. The bank has also been trying to encourage lending by injecting liquidity into the financial system, however many also fear that this injection of liquidity would cause the threat of stagflation. However, the bank is currently not "printing money" to carry out this task. Rather, they are purchasing assets, such as commercial paper and bankers' acceptances, from financial institutions, then later replacing these assets with cash and more liquid government securities. For inflation watchers, this should be good news because in January, the banks predicted that the inflation rates will return to the 2% range by the first half of 2011 because this is also the time where most people predict the economy will return to it's fullest potential once again.
Connections to Introduction
The connection I make with this article and chapter 8 has to do with the term stagflation. Stagflation is a term used to describe a situation of depressed levels of real output in the economy, combined with rising prices. In simpler sense, stagflation is basically an inflation with no economic growth. In the article, the banks were plotting to input a large cash flow to try to jump start the financial system, in order to encourage lending. However, many people are widely concerned with this point of practice mainly because of the threat of stagflation. If the money they implemented into the financial system ended up with results that is unproductive, then many fear that this money would only increase inflation since many assume that this large cash flow is basically going to be produced by "printing money." But in reality the bank is going to accomplish this by purchasing assets, such as commercial paper and bankers' acceptances, from financial institutions that have been unable to trade them because of tight credit markets and replacing them with cash or more liquid government securities.
Reflection
Overall, I think it's still a mystery to many people in how the banks are actually going to implement their strategy in jump starting the financial system again. Up until now, many people have speculated that the banks only strategy is to "print money." However, I was actually surprise to hear that the banks was using another strategy to increase the demand for lending. This strategy is actually something I have never really heard about, but I think it's actually a better idea than to "print money," because this strategy of purchasing assets can lower the chance of stagflation. I also feel that it's good news to hear that the economy will eventually rise back up to its potential by 2011.
Connections to Introduction
The connection I make with this article and chapter 8 has to do with the term stagflation. Stagflation is a term used to describe a situation of depressed levels of real output in the economy, combined with rising prices. In simpler sense, stagflation is basically an inflation with no economic growth. In the article, the banks were plotting to input a large cash flow to try to jump start the financial system, in order to encourage lending. However, many people are widely concerned with this point of practice mainly because of the threat of stagflation. If the money they implemented into the financial system ended up with results that is unproductive, then many fear that this money would only increase inflation since many assume that this large cash flow is basically going to be produced by "printing money." But in reality the bank is going to accomplish this by purchasing assets, such as commercial paper and bankers' acceptances, from financial institutions that have been unable to trade them because of tight credit markets and replacing them with cash or more liquid government securities.
Reflection
Overall, I think it's still a mystery to many people in how the banks are actually going to implement their strategy in jump starting the financial system again. Up until now, many people have speculated that the banks only strategy is to "print money." However, I was actually surprise to hear that the banks was using another strategy to increase the demand for lending. This strategy is actually something I have never really heard about, but I think it's actually a better idea than to "print money," because this strategy of purchasing assets can lower the chance of stagflation. I also feel that it's good news to hear that the economy will eventually rise back up to its potential by 2011.
