This is not to say that monetary increases cannot still generate high inflation rates. But if the U.S. does get high inflation,even inflation exceeding double digits,the government is still confined to essentially two sources of revenue: 1) current taxes and 2) borrowing, which represents future taxes.
Interest-earning bank reserves also blur the distinction between monetary policy and fiscal policy. To see how, imagine the extreme case:Assume the interest the Fed pays on reserves is exactly the same as the interest the Treasury pays on its outstanding debt. Then Fed open-market operations are no longer exchanging government debt for created money; they are exchanging one form of government debt for another form. Monetary policy becomes entirely neutral and impotent, in a self-fulfilling Keynesian prophecy.
Jeffrey Rogers Hummel is an associate professor of economics
at San Jose State University.
Inflation? We Should Be So Lucky
Scott Sumner
This crisis has been poorly understood by economists from the very beginning. The original subprime crisis of 2007 had a relatively modest impact on both financial markets and the broader economy. The much more severe crash of late 2008 resulted from monetary policy (unintentionally) becoming far too contractionary for the economy's needs. Most economists missed this problem, as they are used to looking at faulty indicators such as nominal interest rates and the monetary base (which is the money actually produced by the Fed-cash plus bank reserves). Milton Friedman and Anna Schwartz showed that these two indicators gave highly misleading signals during the Great Contraction of 1929-33. They are no more reliable in the current crisis.
It is discouraging to see so many free market economists now warning of an inflationary time bomb. I'm afraid that New York Times columnist and recent Nobel Prize winner Paul Krugman is right: The real problem is that inflation is likely to remain too low.
In a fiat money world the only sensible indicator of monetary policy is market expectations of growth in the variable actually being targeted by the central bank. That variable might be the Consumer Price Index, but I believe the economy would be more stable if the Fed targeted nominalGDPat a roughly 5 percent annual growth rate.We know from various asset markets that nominal growth expectations turned quite bearish after mid-2008. This severely depressed aggregate demand and dramatically worsened the debt crisis.
Almost everyone has reversed the causation, assuming that the
intensification of the financial crisis caused the big drop in
nominal income,whereas the reverse is closer to the truth. Nine
months later the markets continue to signal that inflation and
nominal growth will remain below the Fed's
implicit target for years to come. Monetary policy remains too
contractionary, which has led to a very costly reliance on fiscal
stimulus.
Most economists have a deeply ingrained instinct that printing money inevitably leads to inflation. Although our gut might tell us that the recent explosion of the monetary base is reminiscent of Germany circa 1923, it is actually more like Japan after 1998. Yet Japan has seen almost no growth in nominal incomes since 1993. This isn't to say that Japan was "stuck"in a liquidity trap; although nominal interest rates cannot fall below zero, monetary policy could have sprung the trap if the Bank of Japan had been willing to devalue the yen or commit to a policy of mild inflation. Zero interest rates reflected deflationary expectations, not "easy money."
Once the Fed began paying interest on reserves in October 2008, banks hoarded massive amounts of excess reserves, and monetary policy became much less effective. This deflationary policy was analogous to the Fed's 1936-37 decision to double reserve requirements, but it was even more costly. Both policies encouraged banks to hold on to reserves, which prevented monetary injections from stimulating the economy.
It may be hard for free market economists to admit they were wrong about inflation, but I'm afraid that is exactly what the markets are telling us. If we don't pay attention, then monetarist, supply-side, and Austrian ideas may be discredited for all the wrong reasons.
Scott Sumner (ssumner@bentley.edu), a professor of economics at Bentley University, focuses on monetary economics, particularly the role of the gold standard in the Great Depression. He blogs at blogsandwikis.bentley.edu/themoneyillusion.
The Choice: Great Depression or Great Inflation?
Randall Parker
Now that it appears the threat of a worldwide financial market meltdown has subsided, the public is assessing the threat of future inflation.Many commentators are speaking as if massive 1970s-style inflation is a foregone conclusion and claiming the Fed has done a great wrong.
Hardly. How about a recap of Federal Reserve actions with some historical perspective?
Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time.
|9.22.09 @ 3:11PM|#
Flat Tax - bring it!
"The effects of collectivism are inevitably and undeniably destructive."
F.A. Hayek
|9.22.09 @ 3:24PM|#
Inflation is one of the stealthiest taxes. A more libertarian government would have the currency pegged to something real it can be redeemed for, or at least have laws limiting the average inflation rate to 0%.
|9.22.09 @ 3:28PM|#
Amen, Profeed! Ban the Fed and the IRS! Re-establish the gold standard! Initiate the flat tax! Invest in gold!
Michael Ejercito|9.22.09 @ 3:30PM|#
I favor a return to the gold standard.
Just Passing Through|9.22.09 @ 3:31PM|#
Flat tax?! How about no tax at all.
|9.22.09 @ 4:00PM|#
What the hell is with that guy's hair. Use some conditioner for the love of God.
|9.22.09 @ 4:05PM|#
A government gold standard ain't much better than a government fiat system. A gold standard isn't proof against inflation, unless you went to 100% reserves. But we don't have enough gold in the world to cover the monetary supply, so you can't do it without extreme hyper-deflation.
Free banking is the answer. Get the government OUT of banking, and let a system emerge and evolve from the monetary choices of individuals. Let the market decide, not some anti-social Rothbardian sitting in his mother's basement who wants to use the state to impose his ideal of anarchy.
Sam Grove|9.22.09 @ 4:07PM|#
How about just freeing us from politically induced standards?
Such standards are illusory referents, as their value is as subject to market forces as any commodity.
josey|9.22.09 @ 4:09PM|#
"A more libertarian government would have the currency pegged to something real..."
And a real libertarian government would not presume the right to enforce an absolute monopoly on currency. I don't trust the government to dictate the price of my bread, so why should I trust it to dictate the value of my money?
|9.22.09 @ 4:10PM|#
Of course a flat tax.
With a round number.
ZERO
|9.22.09 @ 4:12PM|#
Anybody who doesn't think we've already baked hyper-inflation into our currency is economically clueless.
Chinese Trade Minister|9.22.09 @ 4:32PM|#
A flat tax too?! Can't you Americans get by just with tire tarriffs?
Chinese Trade Minister|9.22.09 @ 4:33PM|#
Never mind. My deputy just explained it to me: "inflation" and "flat". Very funny.
Kevin|9.22.09 @ 5:07PM|#
I think Sting sang it best:
"History... will teach us nothing."
Or maybe it was Ambrose Bierce who said something about children trying to spell "GOD" with all the wrong blocks.
Anywhoo... no one has a freaking clue. Someone will be right, and it will be of no more value than praising a broken watch for being right twice a day.
Which is all the more reason to get the government out of trying to regulate the economy.
|9.22.09 @ 5:24PM|#
John Maudlin has done a very excellent series on articles on the inflation/deflation debate
http://www.2000wave.com/gateway.asp
Short answer, you'd better hope they can cause inflation, because deflation would have been worse.
Longer term though, things will have to change. Debts will have to shrink, and savings will have to go up.
It's going to be a very tough transition.
|9.22.09 @ 5:36PM|#
Inflation?
LMFAO at retards like Peter Schit.
We'll be lucky if we don't see 20% more DEFLATION.
Milk, dairy, natural gas and other consumable commodities are at 10-yr lows.
The "inflation" town criers are basically opportunistic goldbugs.
Abby Martin|9.22.09 @ 5:39PM|#
We just created an organization to discuss just this! Please visit us at
http://www.thefreeenterprisenation.org
</|9.22.09 @ 5:49PM|#
Following Luskin and Schiff's investment advice is a pretty fast way to go broke.
</|9.22.09 @ 5:50PM|#
Especially Luskin
|9.22.09 @ 6:17PM|#
Milk, dairy, natural gas and other consumable commodities are at 10-yr lows.
Yet, oddly, with very few exceptions, the rest of the commodities complex are heading up, with some metals (particularly the "bellwether" copper) up pretty sharply.
There's a reason why anyone with big dollar reserves is trading them for commodities, especially fuel and metals, as fast as they can. Long-term, the dollar is wrecked.
Rice Bingham|9.22.09 @ 6:26PM|#
How long is 'long term'?
Sean W. Malone|9.22.09 @ 6:37PM|#
Shrike... I would say that I hope you put your money where your mouth is, and prepare for severe deflation like Krugman is telling you to....... But even idiots deserve some mercy, I suppose.
In other news silver is up nearly $4 an oz since I bought in... Hooray for that.
squarooticus|9.22.09 @ 6:48PM|#
Brandybuck:
You mean hyper-*in*flation, right? Because each $ would suddenly be worth a lot fewer grams of gold than it is now.
Interesting you should put it this way since Rothbard was a proponent of free banking, not of a gold standard.
Sean W. Malone|9.22.09 @ 7:06PM|#
"Brandybuck:
so you can't do it without extreme hyper-deflation.
You mean hyper-*in*flation, right? Because each $ would suddenly be worth a lot fewer grams of gold than it is now."
No, he had it right... Right now gold is "pegged" at $1000 an oz, let's say. But if we returned to a gold standard now, and divided the supply of money by the US' supply of gold, there would be many times more of the amount of dollars per oz. of gold available - much much greater than $1000 per oz.
A quick googling says the US reserve is 282,191,696 ounces of gold (8,000 tonnes). So if we set a gold standard again, based on the current M2 money supply - $8.2977 Trillion - that would be about $29,404.47 per Ounce of Gold.
I suppose it depends on how you look at it, but we're talking about a massive "inflation" of the price in gold.
Sean W. Malone|9.22.09 @ 7:07PM|#
oh... oi vey... sorry Brandybuck, I think I misread what you'd said. Anyway... There's some fun math just the same.
Sean W. Malone|9.22.09 @ 7:13PM|#
The thing that actually really concerns me is that there's probably no way out of the current financial mess the US is in. Scott Summer takes this Friedman/Schwartz view, which was - as far as I can tell - pretty wrong on the Great Depression in terms of discovering the ultimate causes, and is basically towing the Bernanke line....... It's shit like that that makes me disillusioned with the Chicago School.
Anyway, I've been thinking about it all a lot lately, and like Peter Schiff, I just don't see how we're going to escape significant inflation but worse I don't see how it's going to be politically viable to do anything about the debt of the unfunded liabilities.
To some extent, the only thing I can think to do is just bail and go move somewhere else, renounce or evade future US taxes and try to raise a family someplace that doesn't think my life belongs to the overlords. There aren't many really appealing options on the table right now.
Brian Defferding|9.22.09 @ 8:08PM|#
"Following Luskin and Schiff's investment advice is a pretty fast way to go broke."
Gold and other precious metals are at an all-time high right now. Mining stocks are profiting well. Anyone who took Schiff's advice is probably doing great. He is a goldbug, but he's not a goldbug for no reason whatsoever; I'm pretty sure the deficit spending and quantitative easing of the Federal Reserve might have a lot to do with it.
mark|9.22.09 @ 8:20PM|#
To some extent, the only thing I can think to do is just bail and go move somewhere else, renounce or evade future US taxes and try to raise a family someplace that doesn't think my life belongs to the overlords. There aren't many really appealing options on the table right now.
I'm going to reiterate this after they pass ObamaCare, but basically This Is America and it's the Socialists who will have to leave, not me. They can leech off me all they want and I will keep working harder. I will not shug, I will fight to keep this country as free as it can be. There are so many more battles to be fought. Debating is infinitely preferable to despairing. Hold onto your wealth as best you can, but take comfort in the knowledge that wealth is not everything, and in fact you can't take it with you. The journey is just as important as the destination.
How's that for cliche-based wisdom? Hope it helps, nonetheless.
Frank|9.22.09 @ 9:06PM|#
1) How can an economist who supports a central planning authority to set the price of money be considered a "free-market" economist? Or is Reason using Bush's definition?
2) Why is Schiff the only one that makes a distinction between inflation and price inflation?
3) I don't know all of the details of Schiff's investments but I know from reading one of his books that his strategy is very similar to mine and I have been doing very well. I think I may take advantage of volatility more than he does (I don't know for sure), selling into strength and buying the dips but it would be hard for me to believe Schiff's clients have lost money if they didn't liquidate their positions late last year.
Huh?
Obama|9.22.09 @ 9:07PM|#
They can leech off me all they want and I will keep working harder.
Mark, stop by for a beer anytime.
Sean W. Malone|9.22.09 @ 9:08PM|#
I appreciate the sentiment Mark, and I share it to a large degree, but I don't see how it's smart or moral to accept being leeched from. It's not about money, but about the quality of life I want to provide for myself and my potential family.
I'm still early in this metaphorical game... I'm 26. I have a lot of life, a lot of social security & FICA, a lot of income tax, a lot of lowered productivity years ahead of me if I stick around and watch this country implode. But worse, I think it's actually going to be a lot more painful than anyone's prepared to acknowledge.
I'm not sure how to solve that problem...
mark|9.22.09 @ 9:31PM|#
I'm 27, so apparently both of us have a lot left to learn. After this whole health care battle is over, I plan on studying philosophy and history. They assigned me Thucydides in college but I never read it; instead I read Ayn Rand. It had some kind of value for me then, but really I would have rather read something more meaningful, and more useful, like the Tao Te Ching.
I hope to be ready for any possible implosion, but like I said before, This Is America, and I just don't see this country going down the proverbial tubes. Things are going to get worse before they get better, but history shows that they always get better.
Frankly I would not be so invested in debating politics if I wasn't paying FICA. Now I can, with a straight face, complain that my money is going to GM to buy state-sponsored propaganda during Monday Night Football. And I can find plenty of other people who can appreciate the sentiment. Taxes keep the government accountable, ultimately (which is why I hate inflation, it's so goddamn sneaky).
Sean W. Malone|9.23.09 @ 2:27AM|#
Empires rise and Empires fall... Worth checking out and reading upon antiquities historian, John Lewis.
Ebeneezer Scrooge|9.23.09 @ 4:11AM|#
Anyway, I've been thinking about it all a lot lately, and like Peter Schiff, I just don't see how we're going to escape significant inflation
In the long run we can't. In spite of what anyone in the interviews may have said, sooner or later the cat has to get out of the bag. Unless the whole system manages to collapse first, in which case kitty-kitty is muosh.
but worse I don't see how it's going to be politically viable to do anything about the debt of the unfunded liabilities.
The only thing that will be politically viable is adding to the unfunded liabilities. You remember how California got away with that one.
There is nowhere else to go. I've got (ahem) a few years on you and have been looking for the escape hatch longer than you have. Give it up, you're here and this is it. When it's all said and done, people from third world countries would still rather be here, given the chance. Meanwhile, Europe has decided that its own success just isn't worth anything after all and they wish they could just go back to being a third world rat hole. Which Europe is in the process of doing, and the US seems intent on following a few steps behind.
My reading of history: the US has survived in the long run only because, every time the government comes up with a way to slam the economy, the economy has managed to grow even faster.
It's always been the actual way out, and this time is no different. Maybe we'll invent nano-fortified, nuclear powered computer-brained cyborg worker beasts that you can grow bazillions of overnight in test tubes, and they'll just take care of us because that's what they were grown for and besides their heads are full of software.
Or maybe we'll come up with something even better than that.
|9.23.09 @ 8:11AM|#
Donald Luskin? Do you guys have no self respect at all? Why not just grab a random crack whore and see what she thinks? Luskin is a complete moron.
mark|9.23.09 @ 10:58AM|#
That Ayn Rand comment I made was a bit of a cheap shot. Harry Browne said her books were important to him, so I can't just dismiss her out of hand. But it's important to realize that she did not have the Answer to life, only one of many ways to look at it.
|9.23.09 @ 11:19AM|#
Federal Reserve Notes will keep their value as long as the government accepts them as payment for taxes. If it stopped accepting them, and we had to pay our taxes in beaver pelts or other commodities, then the argument our currency's lack of "backing" would start to make some sense.
|9.23.09 @ 12:18PM|#
@ Scrooge
The politically viable thing might be to issue more debt, but the bond market won't/can't take that much. There's jut no way the rest of the world is going to finance trillion dollar deficits each year for the next 50 years.
Michael Ejercito|9.23.09 @ 9:52PM|#
What is the downside of hyperdeflation?
Frank|9.24.09 @ 12:11AM|#
"Dr. Deflation" (Martin Weiss) Changes His Mind After 27+ Years
Source
|9.24.09 @ 7:27AM|#
What I got out of this article is that even well respected economists don't have a fucking clue what's going to happen. These guys were all across the map with their predictions, and had varying explanations for their predictions. What bothers my libertarian sensibilities is that the more Keyensian/Krugman-minded economists seem to have much more detailed explanations for their analyses than the free-market-minded ones do. And everyone one knows the world economy is complicated as hell. I would like my beloved free-market economists to show more details than the obligatory "spending=inflation, Fed" rhetoric. I'm free market to the bone, and it's discouraging to see our ideas get hammered.
Rodger Malcolm Mitchell|9.26.09 @ 11:34AM|#
Peter Schiff says: "Almost every dictionary defines inflation as an expansion of the money supply, not rising prices." Untrue. Inflation is the loss of money's value compared with the value of goods and services."
The value of money is based on supply and demand. Increasing the supply does not cause inflation if the demand (interest rates) increases proportionately.
Peter Schiff says, "Although more money may not immediately translate into rising prices, over time the correlation is extremely reliable." Untrue. Look at a graph of inflation vs. M3 growth and you will see there is no historical relationship between M3 growth and inflation. The reason: Money supply is only half the supply/demand story.
When the Fed gets a whiff of inflation it raises interest rates, which by increasing the demand for money, increases the value of money (i.e. prevent/cure inflation).
You can read more about this at: http://rodgermmitchell.wordpress.com/2009/09/09/46/ and http://rodgermmitchell.wordpress.com/2009/09/24/is-inflation-too-much-money-chasing-too-few-goods/
Rodger Malcolm Mitchell
|10.4.09 @ 12:11PM|#
As I read all the bloviating in these essays, my eyes crossed in boredom. I did read all of them, but could have missed what I was primarily looking for (I could not bear to read them a second time).
While realizing that these writers were trying to be factual, I was hoping to find some reference to the moral issue of the Federal Reserve manipulating what I consider my private property: my money. Why does the libertarian press not discuss the morality of money more often? Would this not put more pressure on politicians and their pet economists to discuss moral issues? I don't expect this kind of discussion from Fox or MSNBC but I wish they would. I wish everyone would, including Reason.
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abercrombie milano|5.27.10 @ 7:00AM|#
Federal Reserve Notes will keep their value as long as the government accepts them as payment for taxes. If it stopped accepting them, and we had to pay our taxes in beaver pelts or other commodities, then the argument our currency's lack of "backing" would start to make some sense.
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