#459: money honey.

maybe it's because it's almost time to start thinking about resolutions.

maybe it's because we're going to need another car in less than 2 months.

maybe it's because we're soon going to be legally responsible for each other's financial well being.

...but i'm super motivated to review all of our savings, retirement plans, credit cards, student loans, etc. i'm planning to discuss with the fiance tonight and i'm actually really looking forward to it.

during our annual christmas dinner last week, a friend shared that she and her husband use separate checking accounts along with a joint savings account. the husband is responsible for the major bills like rent and utilities. they are each responsible for their own car and insurance bills. and then they both contribute any excess to the joint savings account.

back when i was actually making money, we were headed down a similar path. we both contributed to a joint checking and paid all of our joint expenditures (meals, vacations, etc) through that account. we each paid for our own cars and insurance and also had our own separate retirement, investment, and savings accounts.

i thought that's how we would keep things. but not so.

because now that my income structure has changed (as in, been whittled down closer to zero), that process no longer works. we now deposit both of our incomes to a joint checking and disperse funds to a joint savings twice monthly. all of our bills (his, mine, ours) are now jointly paid out of the...joint checking.

i no longer have a 401k to contribute to...so we'll have to talk about setting up a separate IRA for me.

we have slightly different philosophies when it comes to the market (i'm fairly aggressive and like to experiment...he's conservative) so it might be in our best interest to keep building our investment accounts separately.

ok, now i'm just babbling. too much sugar.

at the end of the day, no matter what we decide to do with all of our accounts, i'm glad the fiance and i can talk very openly about money. we have different strengths and weaknesses when it comes to managing finances and i think (AND I HOPE AND I PRAY) that with continued transparency, we will always be able to resolve money issues logically and adeptly.

i keep hearing that MONEY (especially after buying a house, having kids, [insert additional financial burdens here]) creates all sorts of problems in relationships...so i'm banking on our open communication (pun anyone?) to keep us from falling into that trap.

The Next Round of Ammunition

With the Fed having cut its target interest rate today to a range of zero to 1/4 percent, many people will be asking whether the central bank has run out of ammunition. A good question. Obviously, the next step is not going to be further cuts in the federal funds rate. But there is still more the Fed can do.

Notice this passage in the Fed's press release (emphasis added):

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

The phrase "for some time" is aimed at managing expectations in order to keep long-term interest rates down.

The next step for the Fed is to drop the "price stability" rhetoric. The Fed has never been truly committed to stable prices. After all, inflation during the Volcker-Greenspan era averaged about 2 to 3 percent. The Fed could have lowered inflation to zero if it had wanted. Now that zero, or even below zero, is a possibility, the Fed needs to convince people that we are going back to the normal inflation rate of 2 to 3 percent.

Let me suggest this wording for the Fed's next press release:

The Committee recognizes that moderate inflation would be desirable under the present circumstances. In particular, the overall level of prices a decade hence should be about 30 percent higher than the price level today. The committee anticipates keeping the stance of monetary policy sufficiently accomodative to achieve that degree of inflation over the coming decade.

That is, even if the Fed cannot reduce nominal interest rates, it can reduce real interest rates by committing to a modest amount of inflation.

Some would view this as a radical change in monetary policy. In some ways, it would be. Given how weak the economy is, however, a bit of radicalism may be called for. I am more comfortable having the Fed commit itself to modest inflation than having the federal government commit itself to a trillion dollars of new spending. The more we can rely on monetary rather than fiscal policy to return the economy to full employment and sustainable growth, the better off future generations of taxpayers will be.

The abandonment of "price stability" would be the modern equivalent of Roosevelt's abandonment of the gold standard. Of all the things that Roosevelt did to get the economy out of the Depression, jettisoning the gold standard was the most successful. Today, monetary policy is fettered not by gold but by fear of inflation. Perhaps it is time is get over that fear, at least for a while. As Jim Tobin said in an earlier era, there are worse things than inflation, and we have them.

---
Update: A reader points out to me that Paul Krugman seems miffed that I failed to cite his contribution to the large literature on expectations management by the central bank. Sorry, Paul. I actually do like Paul's paper on the topic quite a lot, and I cite it in my intermediate macro text when I discuss the liquidity trap (see footnote 5 on page 325 of the 6th edition).

It is funny. For academics, it is an occupational hazard to feel that your work is insufficiently cited. I had always assumed that the feeling would go away after winning a Nobel prize. I guess I was wrong.

LONDON - on the street, king's cross + soho + mayfair, 12/16/08

Chu and Pigou

The Wall Street Journal reports that Steven Chu, who was just named energy secretary in the incoming administration, is a member of the Pigou Club:

In a sign of one major internal difference, Mr. Chu has called for gradually ramping up gasoline taxes over 15 years to coax consumers into buying more-efficient cars and living in neighborhoods closer to work.

"Somehow we have to figure out how to boost the price of gasoline to the levels in Europe," Mr. Chu, who directs the Lawrence Berkeley National Laboratory in California, said in an interview with The Wall Street Journal in September.

But Mr. Obama has dismissed the idea of boosting the federal gasoline tax, a move energy experts say could be the single most effective step to promote alternative energies and temper demand.

N.B.: NEC Director Larry Summers is also a club member in good standing. Will the energy secretary and NEC director manage to convince the president-elect to change his mind? Stay tuned.

LONDON - on the street, soho + mayfair, 12/15/08

#458: yes or no.

when you travel, does your e-ring follow.

as in...let's say you're traveling from the states to the middle east...in oh, let's say, 5 days. like, would you wear your e-ring or leave it behind.

#457: lovely lady lunch.

i promised you pictures from this pahtay. i made the soup, the custard, the pancakes and tartines. the ladies loved it. and the drink of the day was the uber refreshing arnold palmer.

side note: the "my water broke!" game was a HUGE hit. thank you anonymous commenter. i highly recommend it. little babies can be found at your neighborhood michaels. sounds wrong...but it was oh so right.














happy monday.