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Robert Pollin is Professor of Economics and founding Codirector of the Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst. His research centers on macroeconomics, conditions for low-wage workers in the US and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the US. Most recently, he co-authored the reports Job Opportunities for the Green Economy (June 2008) and Green Recovery(September 2008), exploring the broader economic benefits of large-scale investments in a clean-energy economy in the US. He has worked with the United Nations Development Programme and the United Nations Economic Commission on Africa on policies to promote to promote decent employment expansion and poverty reduction in Latin America and sub-Saharan Africa. He has also worked with the Joint Economic Committee of the US Congress and as a member of the Capital Formation Subcouncil of the US Competiveness Policy Council.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay, coming to you again from the PERI institute in Amherst, Massachusetts. A few days ago we interviewed Bob Pollin. We were talking about news stories. Here it is again. The "Fed tries to energize the recovery". And underneath here it says, "Smiling stocks, bummed out bonds". Now joining us, codirector of the PERI institute Bob Pollin will help us try to understand all of this. Thanks for joining us again. Alright. So what does this mean, "Smiling stocks, bummed out bonds", based on the Fed saying they're going to buy $600 billion of bonds? So what is this about?ROBERT POLLIN, CODIRECTOR, POLITICAL ECONOMY RESEARCH INSTITUTE: Well, basically the idea is that the interest rates are going to go down so that that means the yields, I mean the amount of money you make on interest rates on bonds, is based on the interest rate.JAY: So let's talk about who this affects. So, first of all, retired people or somebody with a little bit of savings, they want to put their money someplace really safe, and often what they do is they buy bonds. So they got the bonds in the bank now. How does that affect an ordinary person who's got some savings in bonds in a bank? What happens to [inaudible] POLLIN: Well, okay, so let's say you're earning a Treasury bond. I mean, the rate is fixed on the bond. So the rate is, let's say, 3 percent. Now, the Fed is going to go in and start buying those bonds. The price on the bonds will go up, so at least in the short term they'll benefit. What's going to happen is that the rates on new bonds is going to go down. But the real concern here with bondholders, because the rates are fixed (a 3 percent bond is a 3 percent bond no matter what happens in the next 25 years), is inflation. So if you're going to get a 3 percent return, but the value of the dollar goes down because of inflation, then, you know, if you're going to get, you know, $30 on a $1,000 bond, the value of that $30, what you can buy for $30, is also going down.JAY: Right. So if you've got more or less zero percent inflation and you're getting 3 percent of your bond, you're making 3 percent. But if inflation's 3 percent and you're getting 3 percent on your bond, you're down to zero. Now, so the Fed is saying that we can do this quantitative easing, increasing the money supply, in a way that isn't inflationary, up to a point. So why are bondholders so concerned, then?POLLIN: Because they want to make sure.JAY: They don't believe [inaudible] POLLIN: It is going to be inflationary. How much it's going to inflationary is an issue. But, you know, what these people are ignoring is that the greatest danger to the financial system, including themselves, is deflation, because deflation means, conversely with inflation, that the value of the dollars is going up, the value of the dollar is going up. So that means that debt holdersit's going to be more difficult for people to pay off their debts. In a deflation it's more difficult to pay off your debts. In an inflation, with cheaper dollars, it's easier to pay off your debts.JAY: But if you own government bonds, aren't you doing fine with deflation? 'Cause now your 3 percent's worth even more, and when you cash out your bond, your dollars buy even more. So you might actually like deflation.POLLIN: Yeah, yeah. I mean, again, that's very short-term, narrow thinking, because if we think about the financial system as a whole, if we already have a very fragile financial system, if you have a deflation and on average it's more difficult for everybody to pay off their debts, we will have more debt defaults. The kinds of things that happened, you know, a year and a half ago will certainly reemerge. Ordinary people will start defaulting, foreclosing. That will inevitably happen as a consequence of deflation.JAY: So if you're really focused on your bonds and on your savings accounts, whatyou may think you're protecting this, but as the whole economy is burning around you.POLLIN: That's right.JAY: In which case, in the end you might be dealing with such a collapse that what you had may not be worth much anyway.POLLIN: Well, yeah. I mean, you can say, great, deflation is good for me because I'm still going to get $30 on a $1,000 bond, and $30 will buy more because prices have fallen.JAY: Well, is this part of the problem--is that there's a lot of people sitting on a lot of cash right now? And as you've pointed out in previous interviews, some of the big banks are sitting on almost $1 trillion of cash. A lot of businesses are staying liquid, a lot of investors are staying liquid. They're allwantsoand if you're sitting on a lot of cash, then maybe austerity measures, no stimulus, and deflation is good for you, 'cause at some point you're going to be able to buy back in at bargain prices.POLLIN: Yes. I mean.JAY: Except a lot of people are going to lose their houses and homes [inaudible] POLLIN: Yeah. Yeah. I mean, yeah, it's playing with fire, because you can say, yeah, when the value ofwhen deflation hits, the value of my money goes up, I'm sitting on $1 trillion, and now I can buy more with $1 trillion dollars than I could last year. But then all that ignores is the fact that it's also more difficult for each and every person that is a debtor in this economy, it makes it more difficult for them to pay back their debts. And when that happens, of course, you can have a massive debt devaluation because there's all these defaults out there. That's what happened a year and a half ago. And, by the way, we really haven't had any experience with major deflation in this economy. So we [are] moving into uncharted territories. It's extremely dangerous. Bernanke himself and actually even Greenspan acknowledge this. So the notion that deflation is a solution to everything is scary.JAY: Theit kind of leads you to this thing is that these really are class issues. Like, if you're on the side of sitting on a lot of dough and you want short-term gain, and then, you know, après moi, la déluge, you know, if I make my short-term gain, then the hell with what comes next, you're in this camp. If you're trying to think longer-term, you're in this other camp. But it seems like in this last vote there's a heck of a lot of people voted either for the short-term gain or out of the fear of inflation.POLLIN: Who knows what they were voting for. I mean, they're voting for the fact that they don't have jobs, that we're at, as you said in the last interview, properly measured, nearly 20 percent unemployment. People can't pay off their mortgages. They're getting, you know, fear of being tossed out of their homes. They think the government is arrogant. We've borrowed all this money, there's a big deficit, and there's no jobs. I mean, I don't think that most people are thinking much beyond that. If they are, they're fairly sophisticated. And, unfortunately, sophisticated people, [it] turns out, don't really understand what's going on either.JAY: Or just want to make a quick buck.POLLIN: Yeah. Well, they certainly want to make a quick buck. Now, whether you can make a quick buck in a deflationary environment, again, I think it's very, very tenuous. I can certainly play out the logic, but I can play out the other logic. When, you know, tens of millions of people can't pay off their debts, they. JAY: The unfortunate thing is the way to make a quick buck in this economy is take your dollars and go to Asia and Latin America and do your investments over there and let it burn here a little longer.POLLIN: Okay. Yeah. That's certainly the thought.JAY: Thanks for joining us.POLLIN: Okay. Thank you.JAY: I think if the question is what should people at home do, start to understand economics. And that's what we're going to try to do. Let's have a real debate about what's going on and what we can do about it. Thanks for joining us on The Real News Network.
End of Transcript
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