Meltzer: Don't Stop Worrying About Inflation

Jacob Sullum | May 4, 2009

In a November column, I noted how last summer's worries about runaway inflation had transmogrified into anxieties about deflation. Writing in today's New York Times, Carnegie Mellon economist (and former Reagan adviser) Allan Meltzer says we were right the first time around:

Some of my fellow economists, including many at the Fed, say that the big monetary goal is to avoid deflation. They point to the less than 1 percent decline in the consumer price index for the year ending in March as evidence that deflation is a threat. But this statistic is misleading: unstable food and energy prices may lower the price index for a few months, but deflation (or inflation) refers to the sustained rate of change of prices, not the price level. We should look instead at a less volatile price index, the gross domestic product deflator. In this year's first quarter, it rose 2.9 percent—a sure sign of inflation.

Besides, no country facing enormous budget deficits, rapid growth in the money supply and the prospect of a sustained currency devaluation as we are has ever experienced deflation. These factors are harbingers of inflation.

Meltzer, who reviews the Federal Reserve's difficult, unpopular, and ultimately successful effort to stabilize prices in the early 1980s, worries about the central bank's tendency to overstimulate a sluggish economy with easy credit and low, low interest rates, giving little thought to the inflationary hangover. Robert J. Samuelson chronicled Fed Chairman Paul Volcker's triumph over inflation in the January issue of Reason.

Comments

Invisible Finger|5.4.09 @ 3:20PM|#

Inflation, deflation... immaterial.

It's Purchasing Power that ultimately matters.

|5.4.09 @ 3:30PM|#

You're joking, right, Invisible?

Inflation is the decrease in purchasing power. Nothing more, nothing less.

Naga Sadow|5.4.09 @ 3:33PM|#

I've been telling people for almost a year now: Get ready for the 1970's. All. Over. Again.

jasno|5.4.09 @ 3:37PM|#

As someone with a large amount of debt, spread between credit cards and a mortgage, I welcome the coming wave of inflation. Sure, inflation sucks if you're the lender, but for all of us borrowers it'll be great! I just hope I have a job after the inflation hits.

|5.4.09 @ 3:37PM|#

I really enjoyed the 70s.

Naga Sadow|5.4.09 @ 3:41PM|#

Stagflation!!!!!!!!!!!

NOooooooooooooooooooooo!!!!!

|5.4.09 @ 3:44PM|#

Naga,

Yes, stagflation bad, but 70s' movies good!

|5.4.09 @ 3:46PM|#

movies, drugs, sex, music, clothes...


ok, maybe clothes are a stretch.

Naga Sadow|5.4.09 @ 3:49PM|#

Ah yes . . . but with Dolemite gone will there ever again be a bad mothafucka to put the white honkies in their place?

|5.4.09 @ 3:53PM|#

"I've been telling people for almost a year now: Get ready for the 1970's. All. Over. Again."


But the 70s didn't have minimum mandatories and the nanny state. It will be all the inflation and stagnation of the 70s without the drugs and plentiful easy sex. Boy, I am so looking forward to the Obama years.

Naga Sadow|5.4.09 @ 4:07PM|#

Are you suggesting that it's hard to get laid? Craziness abounds on this thread.

|5.4.09 @ 4:15PM|#

There are consequences for quitting your job just for the fuck of it? Oh, noes!

Brian Sorgatz|5.4.09 @ 4:22PM|#

Silver lining: The collective ego of the Democratic Party won't let inflation last long. Panic at being labeled a new generation of Jimmy Carters will inspire an economic rightward shift à la Bill Clinton rather quickly. The Obama administration may buck the trend at first, but, being a little smarter than the Bush administration, won't fight reality for so long.

That's my arrogant, know-it-all prediction, anyway.

|5.4.09 @ 4:25PM|#

but for all of us borrowers it'll be great!

Assuming you don't do anything like, ummmm, *eat* you have nothing to worry about.

|5.4.09 @ 4:29PM|#

And- gazing into my crystal ball, I see the Fed getting slammed mercilessly from all sides (except the libertarianate kookosphere)every time they even hint they might raise rates.

Naga Sadow|5.4.09 @ 4:31PM|#

HOLY FUCKING SHIT, SugarFree!

For those who glossed over SugarFree's link:

"I quit my job as at a customer support call center because it stifled my personal growth. I wanted to pursue a career as a street mime in Cleveland. Since I wouldn't be able to afford health care like I had at my job, I just went door to door in my neighborhood and gave a bill to 25 of my neighbors. Each of them only had to may $15 each month for the policy I wanted. I explained that they would be helping me to express my creativity, and since they had jobs and health insurance they shouldn't mind.
I was shocked the first month when no one sent me their payments on time."

|5.4.09 @ 4:34PM|#

It might be worse than you think:

http://www.google.com/hostednews/afp/article/ALeqM5i4estRSYeFBIII9kezxnP4jgoGZQ

Rice Bingham|5.4.09 @ 4:37PM|#

I'm not holding my breath.

dfd|5.4.09 @ 4:42PM|#

but for all of us borrowers it'll be great!

Assuming you don't do anything like, ummmm, *eat* you have nothing to worry about.

Wages, even if they fall behind, are responsive to inflation because they have to be. If prices are generally rising, the price of labor will rise too. How do you think people in Weimar Germany could afford to buy four-billion Mark pints of beer? Debt on the other hand is nominally fixed so as a net debtor you would very likely come out ahead in any serious inflation. Of course if you lose your job it's a problem, but that's a problem whether or not there's inflation. So if there's going to be a shitty economy, as a debtor I'd prefer one with high inflation.

alan|5.4.09 @ 4:45PM|#

Naga, that one was a sarcasm troll, beautifully done too.

I loved the comment someone made about that post:

I don't see anything in Miriam's post about asking her neighbors to subsidize her coverage.

When Miriam is rooting for for, "Fingers crossed that the Obama administration can move forward on the fixes that we need so so badly", ie. tax the fuck out of people.

But the biggest disconnect prize goes to: Republicans want to paint this as a responsibility issue-- make the sacrifice, pay for insurance and you'll be fine.

How about those choke point in the price structure created by decades of interference by progressives in the market, my friends? Why do you think life in America has evolved to the point that you need a tertiary means of payment in the first place instead of paying at your pocket on an as needed basis? Don't give me that excuse that advances in medical technology allow people who would not have been saved to live longer, in what other field do advances in technology create cause prices to jump up instead of decline? None.

Licensing laws, medical school quotas and EMS regulations that stifle those clearly qualified from doing their jobs, the increase of bureaucratic burden where there are more paper pushers than operatives in the field of service, among a million nit pick pin pricks created by an endless onslaught of legislation that drains this part of our economy dry.

|5.4.09 @ 4:48PM|#

I was shocked the first month when no one sent me their payments on time.

I, on the other hand, am merely shocked that nobody sent her down the stairs Raggedy Andy* -style.

*If you don't get it, ask a motorcycle racer.

alan|5.4.09 @ 4:50PM|#

Sorry, a few things needed to be edited in that post, but I find if I wait to refresh the browser too long before I submit than the post gets lost. A quirk that could be fixed.

|5.4.09 @ 4:56PM|#

The collective ego of the Democratic Party won't let inflation last long.

But their collective cowardice will prevent them from doing anything about it.

The solution(s) to inflation are brutally painful, and unless they want to raise taxes across the board to an extraordinary degree, will entail very significant cuts to the federal budget they are so busy growing so much.

alan|5.4.09 @ 5:00PM|#

Only slightly related, as was the other post (well price structure impediments are a type of inflation, just not monetary) but a hilarious quote from Bill Bonner from this mornings news letter:

Normally, the politicos should hold their tongues...and let an
industry's owners run their businesses. Alas, as of a few days ago, the
politicians ARE the owners.

Here's a question:

When the government takes a majority stake in the auto business you
know you are:

A) In a bad dream
B) In a bad way
C) In a bad country
D) In France

alan|5.4.09 @ 5:02PM|#

crap, the best part got deleted:

Here's an easier question. Who will the U.S. government put on the
board of directors of General Motors?

A) A political hack
B) An industry hack
C) A far-sighted maverick who will shake up the business and put it on
the road to growth and prosperity

If you answered "C" - you are from another planet. There is a reason
neither governments, nor workers should own businesses. In the
following, roundabout way, we explain why...

|5.4.09 @ 5:09PM|#

The thing that shocks me about SF's post is the retards thinking that people were being denied for "arbitrary" reasons. Since when are pre-existing conditions arbitrary? If an insurance company feels the risk is too high, and that insuring someone would be a losing proposition, isn't it their right to make that decision as part of their business model?

Oh, right. Not any more. Silly me. Insurance companies lack compassion, those bastards. Damn the actuarial evidence! We're talking about Teh Children!

|5.4.09 @ 5:51PM|#

How do you think people in Weimar Germany could afford to buy four-billion Mark pints of beer?

By selling off their hard assets, like furniture and jewelry.

In theory, inflation "benefits" (existing) borrowers. Severe inflation requires aggressive and sophisticated asset management. That doesn't mean it can't be done, but I would prefer price stability (and sane economic policy).

I'm funny that way.

|5.4.09 @ 5:58PM|#

In theory, inflation "benefits" (existing) borrowers.

Actually, existing borrowers primarily benefit to the extent that they used what they borrowed to buy hard assets that appreciate at or more than the rate of inflation.

And, of course, if your interest rate isn't fixed, then you are fucked, because it will always exceed the rate of inflation anyway.

dfd|5.4.09 @ 6:14PM|#

By selling off their hard assets, like furniture and jewelry.

Why would you sell off an asset today for cash that would be worthless by tonight? People with jobs were asset buyers not sellers in Weimar Germany. There are stories about workers being paid three times a day as prices rose and having their wives come pick up the money so it could be spent before it became worthless.

But, as RC notes, adjustable rates are not so good with inflation. Unless of course it becomes a true hyperinflation and the rates don't adjust fast enough to prevent you from paying it off with worthless currency in between adjustments.

Tim Cavanaugh|5.4.09 @ 6:25PM|#

The Fed isn't worried about deflation. It is worried that inflation will not be high enough. In fact, although the Fed Open Market Committee makes a big case that it doesn't exactly do inflation targeting, it is quite open about being in favor of "desirable" inflation. (In Fedspeak, anything below the inflation target is "subdued.") In the most recent available FOMC minutes, "several [committee members] expressed the view that inflation was likely to persist below desirable levels." What the desirable level is, nobody knows, because the Fed doesn't do inflation targeting.

But the Fed's official policy is in favor of inflation. It is one of the few agencies of the government guardians of the public trust that is completely forthright about its support for something that Americans oppose almost unanimously.

|5.4.09 @ 7:21PM|#

The anti-inflation forces might be listened to, if it weren't for all those wingnuts going around warning us about hyperinflation. All you Birchers, C4Lers, et al, STFU about the hyperinflation! We may certainly get 1970's style inflation, but that's a far far different thing than Zimbabwesque hyperinflation.

1920's Germany/Austria had a problem with it because very few people know the cause of inflation. Nationalizing all of the printing presses to keep up with the demand for Deutschmarks was seen as the solution, not the disease. Remember, back then unbacked fiat money was a very new thing. There are enough of us now who know the causes of inflation that it will not be repeated again at such hyper levels. And in contrast to Zimbabwe, we don't have a dictator executing those who don't take the notes.

Not that we won't screw ourselves up royally, I'm fairly sure we will. We just don't have the political environment that will get us into a true hyperinflation. The key part being "hyper".

Sean W. Malone|5.4.09 @ 7:38PM|#

Brandybuck: At what point do we consider it "hyper" though? I'm not expecting it to go the way of Zimbabwe, but over say 2-3 years, would not a 200%+ price increase be severe enough?

Either way, I'm working on positioning myself accordingly. The way i figure it, right now I can either do "well", or "REALLLLLLLY well" hedging against inflation and carefully timing other investments.

Ebeneezer Scrooge|5.4.09 @ 10:10PM|#

Brian,

Silver lining: The collective ego of the Democratic Party won't let inflation last long.

I hope you're right.

I'm afraid RC Dean is right. What the D's will do is use this whole business as the excuse to finish turning us into a European look-alike state.

Ebeneezer Scrooge|5.4.09 @ 10:19PM|#

Tim,

Well if you put it this way

It is one of the few agencies of the government guardians of the public trust that is completely forthright about its support for something that Americans oppose almost unanimously.

then yes. But elected D's and R's both have done their fair share of going against majority desires. Take for example the invasion of Iraq, the bail outs, and other things that I'm sure Obama will insist on trying to jam down our throats in spite of evidence that the majority is not interested.

I for one am convinced that our government no longer cares what the wishes of the governed are.

I am also convinced that P Brooks will be shocked, just shocked.

BakedPenguin|5.4.09 @ 10:30PM|#

M2 money supply - a narrow view of money - consists of currency, travelers checks, demand deposits, other 'checkable' deposits, money markets and savings accounts. As of March, it was estimated to be $8.3 trillion. To get to 100% inflation, we'd need about 5 'stimulus' plans a year, paid straight out of new dollars created by the Fed. (Or 4 new plans and the current budget deficit).

I definitely agree that the bailout crap is going to lead to inflation, and Obama's increased spending on a go forward basis will accelerate the whole process. However, the idea that it will lead to hyper inflation is silly.

Ebeneezer Scrooge|5.4.09 @ 10:32PM|#

The idea that a baked penguin is telling me how economics works is also silly. But that's okay.

alan|5.4.09 @ 10:50PM|#

Those who thrive on internecine conflict among the libertarian ranks vastly underestimate the danger that Obama represents to what we all hold in common.

|5.4.09 @ 11:29PM|#

But the Fed's official policy is in favor of inflation.

But Tim- this is based on, among other things, the central bankers' consensus that price stability (like Japan's "lost decade") creates a "Why buy today, if the price will be equal (or less) down the road" collapse of consumerism.

Now go buy a new washing machine. And a house to put it in.

mark|5.5.09 @ 12:01AM|#

BakedPenguin, why ignore M3? When the Chinese come back with their bonds and ask for dollars, the Fed will have to print print print!

|5.5.09 @ 12:59AM|#

Brandybuck: At what point do we consider it "hyper" though? I'm not expecting it to go the way of Zimbabwe, but over say 2-3 years, would not a 200%+ price increase be severe enough?

200% over two years is not hyperinflation. it's *SEVERE* inflation, to be sure, but nowhere near the insanity that is hyperinflation. 2000% probably, but 200% no. One key characteristic of hyperinflation, is that the prices continue to rise precipitously even after you have stopped printing new notes. That happens because the public has lost any means to calculate effective prices. That's when the government's get really screwy, and start imprisoning people for "hording", or for using gold or other currencies. If allowed to barter, the economy can manage to limp on a bit, but if even that is outlawed, you get total collapse.

BP: If the stimulus goes to banks to shore up their deposits, then you can easily get 100% inflation with only one stimulus a year, thanks to the magic of fractional reserve banking.