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Why Can't You Stop Worrying and Learn to Love Inflation?
New Yorker FINANCIAL PAGE columnist James Surowiecki
hunts down the "inflation hawks." The inflation
hawks prevented the Federal Reserve from cutting interest
rates fast enough in 2008, says the Wisdom of Crowds
author. Inflation hawks are "always afraid that inflation is about
to get out of control," the one-time Motley Fool phenom continues,
even when the inflation rate remains "relatively low." They are
"profoundly puritanical, in the original sense of that word,"
Surowiecki writes of the inflation hawks. The inflation hawks are
deluded not only in the short term but in the long, the former
New York columnist and Fortune contributing
editor concludes:
[T]here's something peculiar about how powerful fears of inflation are. In the past ninety years, the U.S. has had only one sustained bout with high inflation--in the seventies. That track record should engender some faith that central bankers are going to be responsible, and that a healthy industrial economy isn't prone to regular inflationary spirals. It hasn't.
For younger readers: In the past ninety years, the U.S. dollar has lost 87 percent of its value, according to the Dollar Times Inflation Calculator. But Surowiecki is right: All that Monopoly money flushed into the banking system by the Department of the Treasury and the Federal Reserve Bank does not come close to replacing the nearly $15 trillion in purported household net worth that has evaporated from the United States in the last three years:
As for the money the Fed has been pumping through the banks, much of it hasn't actually made it into the economy; banks are keeping hundreds of billions of dollars in reserves on hand. If the definition of inflation is too many dollars chasing too few goods, the too many dollars aren't out there.
I once dismissed James Surowiecki as just a poor man's James Poniewozik, but I have come to enjoy and look forward to his writings. Curiously, in the course of a column condemning inflation hawks, he provides no real specimens of the animal, and his only live citation is a quote from Sen. Charles Grassley (R-Iowa). Ordinarily I'd say that's the false-foil fallacy, but in this case I think he's right not to name names, because what he calls the inflation hawks you and I know as the American People. For as long as I and Surowiecki have been alive, a large majority of Americans have been citing rising costs among their most important worries.
If you add up the Gallup categories such as "cost of fuel," "education costs," "housing costs" and the general "cost of living," you find that, year after year, in good times and bad, Americans just don't like to see their money losing value. Now, for the first time almost all of us can remember, your dollar is actually buying more than it did last year. And before we have any time to experience that and assess how it works, the central bank is using every tool in its power to bring about inflation, presumably at "relatively low" rates. The question isn't why most Americans believe strange things about money. It's why their beliefs are completely ignored by their leaders.
|9.10.09 @ 12:18AM|#
There's something peculiar about how powerful fears of terrorism are. In the past 90 years, the US has had only one terrorist attack costing more than 1,000 lives, on 9/11. That track record should inspire confidence in our idiot leaders, but it hasn't.
Hugh Akston|9.10.09 @ 12:27AM|#
There's something peculiar about how powerful distrust of the federal government is. In the past 90 years, the US has only had one president resign in disgrace after being caught in a lie about spying on his political enemies. That track record should engender some faith that our elected officials are going to be honest and trustworthy. It hasn't.
|9.10.09 @ 12:45AM|#
Deflation is great..........Unless you happen to be a banker in a fractional reserve lending system combined with a fiat currency and relatively lax reserve requirements. But, it will teach you the meaning of stewardship.
Hugh Akston|9.10.09 @ 12:46AM|#
Thanks hH, but like most of my material, it's just cribbed from the true geniuses on these boards. Without credit, naturally.
|9.10.09 @ 3:37AM|#
"If you add up the Gallup categories such as "cost of fuel,"
"education costs," "housing costs" and the general "cost of
living," you find that, year after year, in good times and bad,
Americans just don't like to see their money losing value. Now, for
the first time almost all of us can remember, your dollar is
actually buying more than it did last year. And before we have any
time to experience that and assess how it works, the central bank
is using every tool in its power to bring about inflation,
presumably at "relatively low" rates. The question isn't why most
Americans believe strange things about money. It's why their
beliefs are completely ignored by their leaders."
Oy. First of all, this post conflates two different sorts of
inflation. The upswing in oil, education, and housing prices in
real terms is related primarily to a shift in the demand curves for
these products, and in the case of oil, concerns about future
supply. And government intervention figures heavily into why we've
seen the price increases we have, and there are a lot of very good
libertarian arguments to make about all the ways that our
government is shooting us in the foot. But none of these things
have anything to do with central bankers printing too much money.
That is a completely separate issue with economic implications of
its own.
And what is demonstrated by saying that the dollar has lost 87% of
its value in the last 90 years? America has done rather well for
itself since 1919, thank you very much. For one who thinks it
through, the implication seems to actually be that small amounts of
inflation are not much to worry about! I suppose you could argue
that we all would be better off if our leaders had been more
committed to monetary stability, but that is purely hypothetical. I
don't dismiss the possibility out of hand, but nor do I see any
reason that it must be so. Perhaps when some noble seasteaders
found Libertopia and create some sort of commodity-backed currency
we can begin to test this hypothesis, but until then I don't see
any reason to rush to bash the monetary policy of the USA.
|9.10.09 @ 3:59AM|#
I am hoping for hyperinflation. I really wish that my $80,000.00 for useless law school loans became worth pennies on the dollar. I was promised lots for deferred gratification. If geitner can get away with not paying his taxes and become head of Dept of treasury, then I should be able to be a bum and not pay my student loans.
Tim Cavanaugh|9.10.09 @ 5:20AM|#
First of all, this post conflates two different sorts of
inflation.
Gah! The comments because always remind me of what I meant to
include. I meant to end the post with the sentence: "Start your
arguments over what inflation actually is."
inflation|9.10.09 @ 6:16AM|#
........inflation is an increase in the money stock, and that the upward drift of money prices is a consequence of a rise in the money stock. From the Austrians' viewpoint, rising prices are a symptom of an increase in the money stock. But what determines the price of money? 'Supply and demand' - the same forces that determine all prices on the market. If the supply of a good increases, the price will fall and vice versa. Likewise if the supply of money rises, it will tend to lower its 'price'; an increase in the demand for money will raise it.
chuggles|9.10.09 @ 6:34AM|#
There is really no such thing as a pol that is an inflation hawk; otherwise, they would support massive budget cuts in conjunction with moderate levels of interest on the money supply. Is there such an animal in Congress?
tarran|9.10.09 @ 6:56AM|#
Hmmm, if inflation is so wonderful, why is "counterfeiting"
against the law?
After all, the monetary effects of increasing the money stock
should be the same regardless of who did the increase.
|9.10.09 @ 7:04AM|#
"Hmmm, if inflation is so wonderful, why is "counterfeiting"
against the law?
After all, the monetary effects of increasing the money stock
should be the same regardless of who did the increase."
I have such a hard time telling when HnR posters are joking, these
days.
Bill Woolsey|9.10.09 @ 7:59AM|#
Increasing the quantity of money in response to an increase in
the demand for money is not inflationary. Both the post and nearly
all the comments here assume that the demand for money--the amount
of money people want to hold--is unchanging. Over the last year or
so, the demand for money rose tremendously, and so, the increases
in the quantity of money that occured were not inflationary. If the
demand for money falls (which is almost certain that it will) the
quantity of money needs to be reduced as well.
And that is why counterfeiters are illegitimate. They accept no
responsiblitiy for the money they issue--that is, they have no
intention of withdrawing it from circulation when it is not
desired. Their intention is fraud--that those accepting it from
them will believe that someone else (the government today,) will be
responsible for it. Consider the counterfeiting of private
banknotes and it all becomes clear. The banks make provision to
redeem banknotes with gold. The countifeitors spend the
money.
The thrust of the complaints cited in the post about the cost of
this and the cost of that appear based on the rankest form of money
illusion. The prices of resources is what generates the incomes
that are used to pay for health care, education, energy, or
whatever. If prices had not risen over the last 50 years, nominal
incomes would be less too.
All of that said, I favor nominal expenditure growth targeted at 3%
per year, and so a stable price level on the long run. The actual
performance of the price level since the Depression has been
undesirable. The shift towards an explicit (well, not exactly) goal
of 2% annual inflation since the late eighties was undesirable as
well.
However, worring about inflation when the demand for money is
growing rapidly was a mistake. To the degree inflation hawks
prevented the Fed from accomodating the increase in the demand for
money (and they did too some degree,) they are responsible for the
rapid drop in nominal expenditure, real production, and employment
that has occured over the last year.
Monetary institutions that avoid these disruptions by changing the
quantity of money to meet the demand to hold money are possible.
Such institutions can provide for stable nominal incomes and gently
falling prices, growing nominal incomes and stable prices, and,
finally, gently rising prices and someone more rapid increases in
nominal incomes.
robc|9.10.09 @ 8:13AM|#
Bill,
I favor nominal expenditure growth targeted at 3% per
year
Sprinkle standard libertarian disclaimers around...I oppose the
existence of the Fed...However, why 3% instead of 0%?
If they can control inflation at 3% +/- 2%, why not 0% +/- 2%?
roylan|9.10.09 @ 8:40AM|#
And that is why counterfeiters are illegitimate. They accept no responsiblitiy for the money they issue--that is, they have no intention of withdrawing it from circulation when it is not desired.
Good one! ROFL
..as if M3 had actually gone down once in 100 years...
T|9.10.09 @ 9:15AM|#
Monetary institutions that avoid these disruptions by
changing the quantity of money to meet the demand to hold money are
possible.
What would such an animal look like? I have a sneaking suspicion
your esquilax looks remarkably like the Fed.
|9.10.09 @ 9:45AM|#
But Surowiecki is right: All that Monopoly money flushed
into the banking system by the Department of the Treasury and the
Federal Reserve Bank does not come close to replacing the nearly
$15 trillion in purported household net worth that has evaporated
from the United States in the last three years.
This is something of a fallacy. Much of that $15 trillion was in
unrealized, speculative asset "value", especially in the housing
market. It was illiquid, and can't be compared with the injection
of trillions of dollars of actual cash into the economy. When you
replace illiquid, speculative value with actual cash, you will get
inflation.
Not only that, but the kind of inflation that concerns people now
isn't "demand" inflation cause by a mismatch of the money supply
with assets, its hyper-inflation, caused by a loss of confidence in
the currency. Take a look at a USDX chart sometime if you want to
see a loss of confidence in the dollar unfolding in real time.
Citizen Nothing|9.10.09 @ 9:51AM|#
H&R - where Monetarists and Austrians come to duke it out. I see a reality TV show in the making.
|9.10.09 @ 10:50AM|#
Dude, counterfeiting may be illegal, but so is destroying money. Basically, it's illegal for futz with the money supply, both positively and negatively.
dave b.|9.10.09 @ 11:06AM|#
Increasing the quantity of money in response to an increase
in the demand for money is not inflationary.
Increasing the money supply is ALWAYS inflationary. It's the very
definition of inflation. More money chasing the same amount of
goods and services. Highest bidder wins.
Over the last year or so, the demand for money rose
tremendously, and so, the increases in the quantity of money that
occured were not inflationary.
[Citation needed.] I have one for you. All you have to do is check
out the CPI and PPI for the past several months. Other than a
slight downtick in July, the rest of the year has been up. Remind
us again how this isn't inflation.
If the demand for money falls (which is almost certain that it
will) the quantity of money needs to be reduced as well.
Name one instance in the entire history of money where this has
happened.
And what is demonstrated by saying that the dollar has lost 87%
of its value in the last 90 years?
Are you serious? The Weimar republic must have been a blast for
you.
Sean Healy|9.10.09 @ 11:16AM|#
Don't bother Bill, you're dealing with a religion here. In other words people who mistake a historical contingency (the gold standard) for an eternal truth (gold is money).
dave b.|9.10.09 @ 11:25AM|#
Don't bother Bill, you're dealing with a religion here. In
other words people who mistake a historical contingency (the gold
standard) for an eternal truth (gold is money).
Only one poster in the entire thread other than Bill the
Inflationist mentioned anything about gold, so STFU and go back to
your troll cave.
|9.10.09 @ 11:33AM|#
Are you serious? The Weimar republic must have been a blast
for you.
So 2% annual inflation is comparable to 21% daily inflation? Maybe
you're the one that needs to go back to your troll cave. Or at
least an economics course.
dave b.|9.10.09 @ 11:42AM|#
So 2% annual inflation is comparable to 21% daily inflation?
Maybe you're the one that needs to go back to your troll cave. Or
at least an economics course.
Point me to the 2% inflation. Even the lying US gov't can't fudge
the numbers enough to get it under 3%-5% per year using their
ridiculous 'hedonic adjustments'. Those of us who are smart enough
to see past the lies know that the real rate of inflation is more
like 10%/yr, verified by ShadowStats. I won't even address the fact
that a Keynesian retard says someone else needs an economics
class.
dave b.|9.10.09 @ 11:59AM|#
Suck my ass, dave b. I've been on H&R for
years.
Me too, shithead. Check the archives.
Invisible Finger|9.10.09 @ 12:13PM|#
The upswing in oil, education, and housing prices in real
terms is related primarily to a shift in the demand curves for
these products,
In the cases of education and housing, those upswings in demand are
a direct result of ...you guessed it... deficit spending in
government programs in order to upswing the demand in those
sectors.
Invisible Finger|9.10.09 @ 12:15PM|#
Likewise if the supply of money rises, it will tend to lower
its 'price'; an increase in the demand for money will raise
it.
Exactly. Low interest rates for mortgages were a direct result of
an increase in the supply of money (aka leverage) in the banking
system. That is inflation in money supply which resulted in
inflation of house prices.
Invisible Finger|9.10.09 @ 12:19PM|#
Over the last year or so, the demand for money rose
tremendously,
No, it didn't. The hysteria over the supply of credit rose
tremendously.
The demand for money was essentially unchanged, the SUPPLY of
CREDIT was REDUCED.
|9.10.09 @ 12:36PM|#
2% inflation is 87% inflation over 90 years (more accurately,
2.25%). I guess I what you really need is a math class. And hedonic
improvements aren't b.s., unless you think that a PC today is the
same thing as a PC 10 years ago or that a 5 bedroom house is the
same as a 3 bedroom house.
What makes you think I'm a Keynesian? I also find it amazing that
people have lost 50% of their buying power over the last decade and
not even noticed, because that's what the difference between 2% and
your supposed 10% inflation implies. Do you have the glasses from
They Live?
Robert|9.10.09 @ 1:22PM|#
Much of that $15 trillion was in unrealized, speculative asset "value", especially in the housing market. It was illiquid, and can't be compared with the injection of trillions of dollars of actual cash into the economy. When you replace illiquid, speculative value with actual cash, you will get inflation.
The unrealized asset value, though illiquid, was still being spent
on. People adjusted their spending based on the reserves they
thought they had. Granted, such illiquid perceived assets aren't a
1:1 replacement for currency, but they still amount to a lot.
Liquid assets go out of circulation because of the realization that
there weren't these asset values backing them up.
It's not just banks and their reserves. It's individuals and their
reserves, and other businesses and their reserves. All those credit
card accounts that are now dead -- including mine. And the credit
cards and other loans that won't be issued. The disappearance of
credit from the economy is driving up the demand for, and the value
of, money. Dollars may well inflate and depreciate relative to
other currencies, but money in general is deflating.
|9.10.09 @ 2:42PM|#
The thing about the dollar losing value is that everything takes
more dollars to buy. That includes labor. So people are paid a
higher number of dollars to buy things using a higher number of
dollars. If it happens slow enough, it's ok. If it happens rapidly,
this is a bad thing.
Deflation will mean that the dollar is gaining value, so the number
of dollars it takes to buy labor and goods goes down. If it happens
slowly, this is ok. If it happens rapidly, this is a bad
thing.
Inflation/deflation, it doesn't matter as long as it happens very
slowly.
|9.10.09 @ 2:55PM|#
Juice,
The problem is the downward stickiness of things like wages and
leases. People are psychologically better equipped to handle things
like annual cost of living adjustments up due to inflation.
However, people would not like cost of living adjustments down due
to deflation. This is explained by the diminishing marginal utility
of money.
alan|9.10.09 @ 3:03PM|#
Citizen Nothing | September 10, 2009, 9:51am | #
H&R - where Monetarists and Austrians come to duke it out. I
see a reality TV show in the making.
I suspect the reason for this contention is that in an accurate
accounting of what truly occurs in the economy lies between the
Austrian and Chicago poles where we can safely dismissed the Marx,
Fisher and Keynes distortions to the historical dustbin.
I lean to the Austrian perspective, but I have to give high marks
to Bill Woolsey for a good explanation coming from the Moneterist
perspective even if I disagree with the blame he levels. Bernanke's
tight fisted policies did set off the recession, but the underlying
instability caused by the Greenspan Bubble was already there to be
set off. The housing market price correction was unavoidable.
Delay-able, perhaps, but unavoidable.
Funny, how this mirrors the Rothbard/Milton disagreement over The
Great Depression.
However, worrying about inflation when the demand for money is
growing rapidly was a mistake.
To underscore that, did you see this:
The Federal Reserve reported Tuesday that consumers in July
ratcheted back their credit by a larger-than-anticipated $21.6
billion from June, the most on records dating to 1943. Economists
had expected credit to drop by $4 billion.
New World Dan|9.10.09 @ 3:56PM|#
Alterations to the currency supply are intrinsicly redistributions of wealth. The primary effect is a redistribution from those who have cash assets to wherever the created currency is distributed. The secondary effect is even sweeter. It's a redistribution from those who have dollar denominated assets to those who have dollar denominated debt. Deflation, of course, is the reverse. Except that deflation can cause in increase in defaults on debt, as we've seen the past few years in the housing and mortgage markets. And that's the real problem with deflation.
Invisible Finger|9.10.09 @ 6:25PM|#
If it happens rapidly, this is a bad thing.
Why?
Or is this a case of "I don't like it, so it's bad"?
Russ 2000|9.10.09 @ 7:20PM|#
Funny, how this mirrors the Rothbard/Milton disagreement
over The Great Depression.
People really should read Rothbard's book on the Great Depression.
You may not agree with his opinions, but it is the best description
of how the Central-Bank-directed monetary system works in the
US.
Even if you don't care to know how the system works, seeing how
closely today's situation matches then - even down to the proposed
and implemented solutions (including Bernanke's) - except that the
political parties are reversed. Nothing will convince you better
that partisan politics is the hobgoblin of small minds.
Russ 2000|9.10.09 @ 7:44PM|#
but money in general is deflating.
Banking and Government in general are inflating.
Bill Woolsey|9.10.09 @ 9:30PM|#
robc:
Nominal expenditure growing 3% results in 3% growth in nominal
income. This best signals the trend 3% growth rate in real incomes.
When real income is greater or less than trend, the changes in the
price level provide a better signal of the unusual excess or
shortfall of goods than flucutaions in nominal incomes. Generally,
having particular goods prices fall when there are in surplus and
rise when they are in shortage provides a good signal. Similarly,
having nominal interst rates match real interst rates generally,
provides a good signal of intertermporal prices.
The zero nominal income growth, 3% deflation scheme is a less
desirably environment for prices to provide effective microeconomic
coordination.
But I don't think a productivity norm is that much worse.
Dave b.
The quantity of goods changes, so changes in the quantity of money
cannot always be iflatonary on your standard.
Anyway, a supply and demand approach to money--where the quantity
of money and the demand to hold it are emphasized, provides a much
better framework to understand money, expenditure, and prices, than
imagining that all money exchanges for all goods. The next step is
to see that velocity isn't one. And then, step by step, you are led
to the quantity of money and the demand to hold it.
The quantity of money has fallen. Base money, M1, and M2 have all
fallen. Base money fell about 100 billion over the last couple of
months. M1 fell about 70 billion in the late ninties. Of course, M2
fell during the thrities. I don't know about M3, because I have
never followed that measure. Do you have some reason to believe
that group of assets is somehow better reflects the concept of the
medium of exchange?
|9.11.09 @ 2:13PM|#
The quantity of goods changes, so changes in the quantity of money cannot always be inflatonary on your standard.
How closely related are the quantities of goods to the quantities
of money?
How closely should they be related in an ideal economy?
Should the quantity of money available also take into account the
availability of services, or labor?
|9.12.09 @ 11:14AM|#
Media Geek:
Services are a type of good, but I should say, "goods and services"
rather than goods, just to be clear. Generally, I do.
The relationship between the dollar value of the goods and services
(GDP) and the quantity of money is called velocity. It is a ratio
of the two.
If the quantity of money changes in the opposite direction as
velocity (and in proportion), then GDP is stablized. Given
velocity, if the quantity of money changes with real GDP, then GDP
grows with real GDP and the price level is stablized.
The trend growth rate of the volume of goods and services is the
trend growth rate in real GDP. It is about 3%. And that is the
reason for the 3% growth rate for total expenditure. What that
implies about the quantity of money depends on velocity.
However, I prefer to desribe all of this focusing on the demand to
hold money rather than the equation of exchange. The quantity of
money should adjust to the demand to hold money conditional of
nominal income remaining on a 3% growth path. Generally, this
implies a growing quantity of money, but sometimes it will require
it to shrink.
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