Where Dr. Paul's Inflation Might Be

Shikha Dalmia asked earlier today: "Where is Dr. Paul's Inflation?," focusing on the most recent measures of core CPI rise, which are not alarmingly high.

Economist Bob Murphy explained a few months back from a roughly Paulite perspective why he and others fear that the stunning rise in monetary base is indeed likely to eventually show itself in unignorable price inflation. While the numbers, as they always do, have shifted, the logic goes like this:

To understand the potential problem, we need to review some basic facts. Back in the fall of 2008, when Lehman collapsed and the entire financial system appeared in jeopardy, the Fed began bailing out investment banks through massive asset purchases and extraordinary lending operations. These activities rescued the major banks that would otherwise have gone bankrupt, by taking bad assets off their books (at inflated prices) and by propping up the new "market" price of the assets remaining on their books.

When the Fed buys an asset, it writes a check on itself. This action creates new electronic reserves in the banking system. For example, if the Fed buys $10 million in mortgage-backed securities from Joe Smith, then Smith will deposit the check in his own checking account. His bank will credit Joe Smith's checking balance by $10 million, but at the same time the bank'saccount with the Fed itself will rise by $10 million too.

At any time, regulations insist that commercial banks in the United States keep a minimum amount of reserves set aside in order to "back up" the demand deposits (think of checking accounts) of their customers. For example, if a commercial bank's customers think they have a total of $1 billion in their checking accounts, then the Fed's regulations force the commercial bank to keep (roughly) $100 million set aside in reserves....

Notice that "excess reserves" are historically very close to zero. This reflects the tendency (assumed in textbook discussions of "open market operations") for commercial banks to quickly lend out any reserves they have, over and above their legally required minimum. Yet as the chart above clearly indicates, since the onset of the present crisis the commercial banks have notbeen making new loans. Instead, they have allowed the huge injections of new reserves to sit parked at the Fed.

There are several (possibly overlapping) explanations for this break from the past. Keynesians such as Paul Krugman argue that this was the predictable outcome during a liquidity trap. Proponents of MMT (modern monetary theory) argue that the economic textbook discussions have things upside down, and that banks are never constrained by reserves when deciding on making new loans. Quasi monetarists lament the Federal Reserve's decision in October 2008 to start paying interest on excess reserves — a policy whereby the Fed actually bribes banks not to make loans to their customers. Free-market guys like Mish (as well as some card-carrying Austrians) have argued all along that significant price inflation was never on the table, so long as the financial system worked through a painful process of deleveraging.

Regardless of their specific explanations for why commercial banks hadn't been lending out the trillion-plus in new reserves Bernanke created, just about every pundit agreed that this fact was a major reason that what seemed to be incredibly inflationary policies weren't leading to skyrocketing prices.

Murphy thought back in August that the reserve-leaking was about to start happening in spades, which does not seem to be the case; in fact the latest figures show excess reserves continue to pile up, increasing by nearly 50 percent in the past year, as has the monetary base, by slightly slightly more. So as long as that leakage isn't actively happening, the inflationary effects predicted by Paul are staved off, goes the story.

And let us not forget the possibility of Cantillon effects, as Murphy says:

we must remember that there are millions of different prices in the economy. The specific impact of money creation on various sectors can be very different, and operate on different time frames.

For example, during the present crisis, we had the Fed create more than a trillion dollars on behalf of rich investment bankers. At the same time, middle- and lower-class households were plagued by high unemployment, large debts, and underwater homes. In this environment, it's not surprising that the various rounds of "quantitative easing" went hand in hand with huge jumps in stock and commodity prices, but were muted in the retail sector.

If and when the inflation arises, by the way, it will not be some nutty "lucky guess" by someone who just keeps repeating himself; it will because Paul (and the Misesian monetary tradition from which he derives) recognized what he saw as the necessary end of the process the Fed has been indulging in for years now. But there are reasons within the logic of the story (for which, admittedly, Paul is far from the most complicated and sophisticated explainer on the stump) that we aren't crushed by high inflation yet. (Though, as many in the comment threads pointed out, that core CPI figure doesn't match most people's experience actually buying the things they buy the most in the real world these days, food and energy.)

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. Report abuses.

  • ||

    The counterargument is that the reserves piling up are evidence of decreasing monetary velocity, and in any case the correct thing to do is shrink the money supply once monetary velocity increases, not before.

    Funny thing is that most of the people that think we need QE and more monetary supply agree that interest on excess reserves is dumb, since it does the opposite thing to QE, keeps money out of the economy/ real money supply.

  • Becon||

    Shocked/impressed that the first comment about inflation is a very intelligent one. Well done, John Thacker.

  • Grains||

    I think Dr. Thacker is a PhD mathematician (Cornell, maybe?), so it's not like Joe Blow made the comment. But yes, it is a good one.

  • Southerner||

    I'd say the statistical lack of inflation comes from government gimmickry that both helps delay the inevitable inflation and hide what inflation we have had. Since fiat currency is based entirely on people's confidence in the government backing the currency, anything that keeps them from losing confidence in the government will keep the currency from losing value in their eyes as well for so long as the confidence lasts. The Marxist media is complicit with the Keynesians in government, so all the cracks in the economy are currently being studiously ignored just as they were back in 1929.

    Our current administration is undoubtedly hoping it can keep up this con game until at least after the elections. Whether it can do that remains to be seen, but the day of reckoning for all the accumulated debt is inevitable. Other than an outright default (which no politician wants in his historical record), the only possible way these wastrels can be planning to escape their debts is through inflation. It's a lot easier to deflect and redistribute the blame for soaring prices and increasingly worthless currency than for an on-the-books default requiring a public decision and (probably) several official signatures.

    The trouble with predicting the final economic collapse is that it's exactly like predicting strife in the Middle East: you're not really going out on a limb since it's inevitable, but you're in no position to say exactly how and when the next event will take place. People who predicted the housing bubble's collapse may be gloating now, but they spent years before 2007 wrongly predicting the explosion was coming in weeks or months, and even after that the recession didn't really hit until late in 2008. So too will inevitable inflation continue to elude its predictors until it finally catches nearly everyone by surprise. Paul and anyone else running for office would do well not to go setting dates.

  • Daniel||

    Repeat after me - recessions are a monetary phenomenon (just like inflation).

  • Becon||

    What about tsunamis destroying homes, infrastructure, and productive capacity for millions of Japanese?

    Surely a recession borne of natural disasters isn't a monetary phenomenon.

  • JR Hager||

    Hope this finds you well.

    I would only like to promote my site:
    http://jokes4libertarians.blogspot.com/
    ....we gotta laugh, or go nuts !

    I'm new at all this and don't know what
    the best way is.

    Thank you for your time today.
    USA needs a doctor. And if Dr. Paul doesn't win, there is no God.

    Looking forward,
    JR Hager
    717-721-4672

  • pmains||

    Presumably the interest on those reserves is going somewhere. Bonuses? Salaries? Cycled back into the Fed to earn more interest?

  • shrike||

    Its repairing the bank balance sheets from the mortgage bubble disaster.

    Look at JP Morgan vs a top Swiss bank like UBS. Morgan kicks their ass.

  • ||

    Its repairing the bank balance sheets from the mortgage bubble disaster.

    Slowest repair job in history. (outside of Japan)

    S&L lasted less then a year...repair of the Enron/Worldcom bubble was near instantaneous, Iceland didn't bail out shit and has already bounced back.

    How come when the FED does nearly nothing the banks repair faster then when the FED tries to help?

  • ||

    The interest on the reserves goes to paying interest on deposits, mostly. Both the interest paid by the Fed, and the interest banks pay on deposits are very low now.

    While bank earnings are mostly coming from their remaining commerical, consumer, and mortage loans, they are mostly using those earnings to build up capital--that is retaining earnings.

    Once loan demand recovers, this might be the source of capital gains for stockholders and bonuses to executives.

  • shrike||

    Dr. Paul should stick with OB/GYN since he is no economist and has been predicting "hyperinflation" since the mid 80s. The $2 trillion increase in the monetary base is insignificant considering the $13 trillion loss in US personal net worth during the Bush Credit Crash of 2008. Now the Fed pays a paltry .025% IOR on $1.6 trillion on reserve? Good for them. Our banks have fortress balance sheets now - thanks to Bernanke and Geithner.

    Fuck the banks. They need adult supervision to avoid another Bush TARP jag.

  • ||

    how is Obama's unemployment figures doing?

    15%

    Longest period of unemployment since the great depression.

    CBO says what?

  • shrike||

    Just say 9-9-9 and admit you are a pizza flipper.

  • ||

    I am a land developer.

    How is living in your mom's basement playing with the $500 bucks she gave you to invest on etrade working out for you?

  • WTF?||

    "admit you are a pizza flipper."

    What kind of idiot flips a pizza?

  • shrike||

    Flava Cain do!

  • Grains||

    Yo, try that shit with some of that disgusting deep-dish garbage. Pizza casserole fucking everywhere.

  • k2000k||

    "Fuck the banks. They need adult supervision to avoid another Bush TARP jag."

    Wait....so superision entails that we throw billions of dollars from the FED at them? Shit I wish my parents had that kid of supervision when I was a kid.

  • shrike||

    Banks don't get a damn penny 'free' from the Fed. They get loans backed by collateral and pay interest on those loans.

  • BigT||

    Interest at what rates? As you pointed out the rates are almost nil.

    Idiot remains idiot.

  • shrike||

    Yes, an emergency 30-day loan is .001% with collateral. That is a feature and not a bug.

    The Fed earned over $70 billion last year and paid the Treasury the entire amount.

  • Adam||

    I think almost(?) everyone on here agrees with your sentiments on the banks.

    However, they didn't need supervision, or at least nothing even remotely resembling the supervision of the last 25 years, for a century and a half. If we let them go through reorganization, or completely go under, they've shown they'll manage their risk appropriately. Not because they're geniuses, but because they have to, and they know no one will be there to prop them up for irresponsible lending and/or taking bad assets and making them look good.

    Why not just let them go through the same painful process everyone else has to go through? I've found the "too big to fail" argument to be very unconvincing. Of course, I feel the government isn't too big to fail, so certainly I'm not going to give that label to large corporations either.

  • H man||

    A good discussion on the economy.

    http://www.johnmauldin.com/ima.....021312.pdf

  • ||

    Maudlin is the man, he's a must read for me every week.

    Also just enjoyed reading the American Gridlock book from his outside the box essay

  • DMXRoid||

    1.) The CPI is a shitty inflation metric. Ignoring food and energy prices, which make up a huge chunk of everyone's spending, and tend to be more immune to a general price decline during a downturn than other commodities, is just a gimmicky way to hide the Fed's effects.
    2.) While the Fed's been printing money like it's going out of style, it's also been paying interest on reserves that banks hold, which gives banks an incentive NOT to release that money into the wild. A guaranteed .5% return is better than a lot of loan bets. However, that can't last forever, and as soon as the Fed STOPS doing that, all that money is going to start flowing back into the economy, and then, boom, price inflation a la housing boom.

    3.) Re: shrike, a loss in net worth doesn't mean that you need an equivalent amount of money injected back into the system to restore things to normal, especially given that a lot of that "loss" was just a completely necessary price adjustment (one that hasn't completed) in the housing market.

    Inflation is comin, y'all.

  • beezle||

    More importantly, they keep changing how the CPI is calculated and have consistently done so to reflect lower inflationary pressures.

  • ||

    Before you could get a steak for $20, now you can get a burger for $20, see you are just as well off.

  • BigT||

    Can't wait for the $20 soyburger!

  • ||

    Or a $20 bun.

  • ||

    The CPI does include food and energy prices.

    The core CPI leaves those out.

    The core inflation and the "headline" inflation usually move together. The "headline" inflation fluctuates around the core inflation rate.

  • ||

    http://monetaryfreedom-billwoo.....on_17.html

    Here is a graph showing core and headline inflation. Headline includes food and energy.

  • mr simple||

    The problem with using energy and food in inflation measurements is that food and energy prices can fluctuate for reasons outside of inflation and are more likely to compared to the other items in the basket. CPI, like all macro measurements, is at best an estimate based on someone's best guess of how to measure it. None of them should be thought of as absolute truth.

  • ||

    Then use an estimate. Food and fuel are not free of charge.

  • mr simple||

    They use both. That's the difference between core and headline inflation. Try to keep up.
    No one's suggesting their free of charge, but prices change for reasons other than inflation.

  • robc||

    The CPI is a shitty inflation metric.

    Well, duh, considering inflation is monetary and has nothing to do with price.

  • shrike||

    You can't have high inflation with excess capacity, falling real estate prices, and low wage growth.

    Treasuries confirm this. Ron Paul will just have to remain wrong.

  • DMXRoid||

    I think the stagflation of the 70's disproves that statement.

  • shrike||

    Employment was high in the 70s. Real estate gained value. Wages went up.

    The dollar severely slumped due to Nixon untying it from a fixed $35 gold exchange.

  • Old Mexican||

    Re: shrike,

    Employment was high in the 70s. Real estate gained value. Wages went up.


    You must be talking about the events in another planet, shrike.

    And YES, you CAN have inflation with low wage increases and all that, because inflation is the continuous increase of the money supply.

  • DMXRoid||

    You're just wrong about this. Unemployment rose significantly, from 3.3% at the start of the decade to over 8% at the end of it, Wages went up slower than the 13% inflation that was slamming us by 1979, and with interest rates in the neighborhood of 12%, I doubt you saw any real value gain over inflation in housing as well.

  • ||

    My figures show an unemployment rate of 4% in 1970 and was up to 6% in 1971. It was below 5% in 73, and then rose all the way to 9% by mid 1975. By 1979, it was down to 6%.

  • shrike||

    10 million jobs created under Carter. Don't piss on the only Libertarian president in our lifetime.

    Dereg helped a lot.

  • WTF?||

    "10 million jobs created under Carter."

    Which, as the unemployment numbers that proved you a liar show, wasn't nearly enough to keep up with population growth.

    Fuck off and die now.

  • LilDebbie||

    Kill yourself.

    Might I recommend smoldering charcoal goals in the bathroom? That seems to be the best method according to the professionals down at alt.suicide.holiday.

    P.S. No really, kill yourself. If you happen upon a loaded handgun, please do not hesitate to put it in your mouth and pull the trigger.

  • Adam||

    Don't tell that to the Venezuelans who are seeing almost 30% inflation (or at least were 4 months ago, the last time I checked), and lots and lots of excessive capacity.

  • .||

    Employment was high in the 70s. Real estate gained value. Wages went up.

    I lived through the 70's. Wages may have gone up but purchasing power sure as hell didn't.

  • ||

    Inflation is a monetary phenomenon independent of changes in supply and demand.

    right now there is low demand giving the market downward price pressure and high inflation because the fed is throwing money out of helicopters...this has kept prices relatively stable. Though Gasoline is 4$ a gallon and gold has shot up through the roof and the whole fucking world is giving the US dollar the cold shoulder....

    Just as Ron Paul would predict.

  • shrike||

    Bullshit. Since mid 2008 when QE began the dollar is up 10% and oil/gas/coal prices are down 50% in the USA only.

  • ||

    QE started in in November of 2008 and did not fully ramp up until march of 2009

    oil prices gone from 50$ in January of 2009 a barrel to over 100$ a barrel today.

  • Mike M.||

    I swear to God, I wish so much that you would get pancreatic cancer, or maybe just die in a fiery car crash.

  • ||

    Inflation is a monetary phenomenon independent of changes in supply and demand.

    Except that Austrian economics, from Menger to Bohm-Bawerk to Garrison to Boettke, bases its capital theory on the premise that money is an economic good. Whether it is specie or fiat, money has it's own supply and demand.

  • Adam||

    I agree, but it seems the argument is that inflation is based on the supply and demand of money, not on the supply and demand of goods and services in general.

    Unless I'm missing something, and in that case, I'm wrong. It happened once before.

  • Bond market||

    Treasuries confirm this.

    You are a fucking idiot. The price of treasuries is very high, almost hyper-inflationarily so.

  • Becon||

    High treasuries prices means low yields. How is a 1% return on the 5-year note consistent with hyperinflation?

  • Becon||

    Furthermore the TIPS spread on the 5-year is 2.17. 0.86% yield versus -1.31%.

  • Libertarian2||

    This is a subject that bothers me. Libertarian economists have been preaching doom and gloom since at least Harry Browne and the Reagan debt of -- gasp! -- $1 trillion. Now, Iisten to libertarian economists and believe most of what they say, but where is the doom? What explains our relative tranquility during a time of $14T of debt and the Fed dropping money out of helicopters?

  • TV is an opiate||

    Where was the tranquility at the Occupy Wherever protests?

    The doom is masked by sending checks and updating smart card amounts so nobody has to see breadlines.

  • .||

    You don't need breadlines when you have foodstamps and government commodities programs to feed people.

  • Gojira||

    I think the doom prophets 25 years ago made the fatal error of assuming that humans are rational, and not insane/retarded (not pointing fingers, I include myself in that statement).

    They never believed foreigners would slurp up our debt the way they have. They couldn't have foreseen the rise of China (they knew it would grow, but couldn't predict the mind-boggling amount of growth they've experienced). Nor could they have predicted the formation of the EU (sure there was the common market or whatever they called it, but there was no one currency controlled by a central bank).

    They couldn't have foreseen the explosion in credit use by individuals/families, which consumption helped keep things afloat for awhile. Nor could they have imagined the productivity gains of the internet, which helped us out enormously.

    These things keep pushing back the date, but not the fact, of monetary armageddon.

  • ||

    No.

    Volcker and Reagan shifted inflation from high and rising to low and falling. The recession was tough, and those of us who thought the politicians would never suffer that were wrong.

    The Fed is committed to preventing a repeat of the seventies (or really, the move from the sixties to the seventies.)

    Ron Paul hasn't seemed to recognize this change.

    Now, the Fed is planning on 2% inflation forever. I don't like that. Paul shouldn't like that.

    And, fashions might change. When the fiscal pressure gets bad enough, we might find that politicians start believing that money groth has nothing to do with inflation. And they will be able to find people who agree with that and who will accept appointment to the Fed.

    It is always true that increases in the money supply can be reserved. The Fed knows this and they will do that if needed to keep inflation at about 2%.

    I disagree with their approach, and think the Fed can and should keep spending on output growing on a 3% growth path. And that could involve large increases and decreases in the quantity of money. And that is exactly what the Fed should do. Increase the quantity of money when appropriate and decrease it when appropriate. It is all about the demand for money--how much people want to hold.

  • robc||

    Now, the Fed is planning on 2% inflation forever.

    Then they have been doing a crappy job, as we have been running about 5% for the last decade.

  • Invisible Finger||

    And they are now completely ignoring the signs that China and Russia are slowly beginning to reduce their treasury holdings. And why wouldn't they sell when prices are very high?

  • ||

    If you get out of the land of Rothwell/Rockbard, you don't find much apocalyptic pronouncements. Yes inflation is bad but it doesn't mean that every Fed action is going to make us look like Zimbabwe. Inflation is bad, but so is taxation, regulation, zoning laws, bans on taco trucks, etc.

  • .||

    Yeah,so is counterfeiting, embezzlement, passing bad checks and check kiting, con games, and your parents pilfering money out of your piggy bank. If we are going to put inflation into perspective, let's make it a more truthful one, shall we?

  • Adam||

    Thanks for this. You should always post a link to Mark Perry's blog when you say that. I'm not saying that sarcastically, btw.

  • Invisible Finger||

    All those "excess" reserves are there for a reason - the banks are STILL capital constrained with deteriorating/overpriced assets that they still have to realize losses on. They are using the excess reserves to do this slowly.

    Secondly, while we are not seeing massive price inflation is all sectors, we SHOULD be seeing significant (not hyper) price DEFLATION in most sectors with the drop in consumer credit (sans student loans). The fact that we aren't seeing this price deflation is because the Fed printed to make up the difference (and then some, but that excess is still in bank reserves).

    Thirdly, thanks to the CPI being gamed by removing energy, food, and housing (owners equivalent rent was introduced at a very convenient time) most people were fooled into thinking there wasn't much inflation BEFORE the crash when in fact housing indeed saw hyper-inflation of prices, and a few other sectors did, too, notably college tuition and fees.

    Lastly, I don't know about most other markets, but I am seeing hyper-inflation in my local property taxes despite lower property valuations. That will certainly suppress consumer demand and keep prices from rapidly inflating. CPI is a joke if taxation isn't part of the formula.

  • shrike||

    Very rational. Your higher property taxes are not inflation though. They reflect the local desperation to offset tax losses in foreclosures and business closings.

  • Mr. FIFY||

    It's bullshit, is what it is. My house MIGHT sell for fifty grand now, but it's being assessed much higher. And when we complain, local liberaltards say tough shit, you fucking home-owners... pony up so we can build more schools we don't need.

    I suspect the local assessors are members of your party, shrike.

  • shrike||

    Like I said, desperation from lower tax receipts. Can't you read?

  • .||

    Then let them try lower government salaries and pension plans, as well as a lower but more industrious government work force.

  • Mr. FIFY||

    Yes, I read it... and I see that you agree with it.

    Still no excuse for it, though.

  • ||

    Inflation is a monetary phenomenon.

    It is independent of changes brought on by changes in supply and demand.

    so lets say there is a banana freeze so the supply of bananas goes down and prices go up because there are fewer bananas. This is price increase is not inflation.

    Lets say the fed throws 1 trillion dollars out of helicopters and the price of bananas goes up. This price change is inflation.

    Now lets say two things happen...the economy tanks so demand tanks so prices goes down...but at the same time the FED throws 1 trillion dollars out of helicopters which drives inflation.

    If these two things happen at once then in real price terms it will appear that prices have not really risen....but in fact the market would be experiencing very high inflation.

    This is what is happening right now.

  • Echo Wars||

    That was called "stagflation" in the mid-70's. Then the price inflation happened around 1980.

    (Then Volcker jacked up interest rates around '81, then the S&L's died because of that a couple years later. Then the push to "de-reg" financial institutions - which is the ONE area libertarians should demand regulation since we never win the fractional reserve banking/accounting fight.)

  • ||

    excellent explanation Joshua

  • ||

    Corning:

    Wrong.

    How did the demand for goods fall? It is because the demand for money rose. If the Fed expands the quantity of money in that situation there is no excess money.

    Most economists would say that the banana freeze story is inflation. It is just that the least bad option is for the quantity of money to remain unchanged.

  • ||

    Most economists would say that the banana freeze story is inflation.

    No they wouldn't.

    In fact measures of inflation specifically take food out of measures for inflation because they show changes in the weather rather then monetary effects.

    Check it out.

    http://en.wikipedia.org/wiki/Inflation

  • hk||

    You're right, but the cost of food can also be caused by government intervention, IIRC.

  • ||

    yes. In fact all food has gone up...yet production is at all time highs.

    One would think a general increase in all foods imported from the whole fucking world that it would not be weather causing that increase. In fact it is my opinion the rise in food prices today is due to mostly inflation and not the weather.

    You can choose to not buy a new PC or a new washer and dryer...therefor low demand would disguise price inflation of those goods....you can't not buy food...so one would expect a general increase in food prices cannot be disguised by low demand. Therefore we see the rise in food prices yet not in washers and dryers and PCs.

  • ||

    You are mistaken about measures of inflation.
    The Fed has just finally said they are targeting this:

    http://research.stlouisfed.org.....EPI?cid=21

    It includes food and fuel. We call it "headline" inflation and it is inflation.

    But they _are_ constantly refering to this:

    http://research.stlouisfed.org.....LFE?cid=21

    That is core inflation.

    The inflation rate is the rate of change of the price level. "Inflation" is when it is positive. "Deflation" is when it is negative.

    Now, the Fed has a policy that it calls "flexible inflation targeting." And that includes failing to action to prevent changes in food prices.

    You know, I do teach this stuff.

    Mises defined inflation as an excess supply of money. An increase in the quantity of money not matched by an increase in the demand to hold money. Usually, he did analysis assuming a constant demand for money, so any increase in the quantity of money was an excess supply of money.

    Rothbard made a slight change in this, defining inflation as an increase in the quantity of money not matched by an increase in the quantity of gold.

    Mises accepted that increases in the quantity of gold (like from mining) could be inflationary. He also accepted that increases in what he called fiduciary media (unbacked paper money) would not be inflationary if it was matched by an increase in the demand to hold money.

    That a 100% gold standard could have inflation, and that fractional reserve banks might not always call inflation was one of those areas where Mises hardcore classical liberalism was not enough for Rothbard's anarcho-capitalist propaganda. (Market is never bad, government is never good, and fractional reserve banks somehow count as government.)

    You know, I really do know alot about libertarian monetary theory.

  • robc||

    You know, I do teach this stuff.

    Then you should know that inflation is monetary.

    The best (probably) measure we have of inflation is change in M2 (what with M3 not being tracked any more).

    Anything else is price wanking.

  • Old Mexican||

    Re: Bill Woosley,

    How did the demand for goods fall? It is because the demand for money rose.


    At one point, it does. This explains the fall in consumer activity, as people started to hoard cash in a panic.

    But there's one nagging problem, Bill - people still have to eat. The demand for goods has to go up, and now there's all that money in people's hands...

    People who subscribe to the idea that a demand for money must be accompanied by a quick and rapid supply of money do not understand the role that money plays in the market. Money not only serves as a medium of exchange, but also as a measure of previous PRODUCTION. You PRODUCE in order to CONSUME, i.e. to exchange. When central banks print out more money, or create it out of thin air, they're actually taking people's previous production in a subrepticious way to profit from it. This is THEFT. Think of it as having a thief taking your nice Harvard diploma and changing it for one from the Roseanne Beauty School.

    The money supply is thus NOT supposed to increase upon demand. What should happen is that the increase in demand for money should be followed by the lowering of commodity prices.

  • Daniel||

    I take it the concept of "downward stickiness" (of prices and wages) must be too complicated for the likes of you.

    David Hume understood all of this in the 18th century ... And yet here we are, in the 21st century, still having to argue why a sudden deflationary shock is A BAD THING ...

  • Old Mexican||

    Re: Daniel,

    take it the concept of "downward stickiness" (of prices and wages) must be too complicated for the likes of you.


    It must seem like the perfect concept for you, because you don't have to understand it to wield it around like a chimp wields a stick, only because it sounds pretty.

    Prices fall all the time. Just look at the price of flat screen TVs and Big Macs.

  • Daniel||

    So, you're saying that "downward stickiness" isn't real ... or that it doesn't matter.

    Either way, reality disagrees (yet is doesn't seem to bother you, I wonder why)

  • Old Mexican||

    Re: Daniel,

    So, you're saying that "downward stickiness" isn't real ... or that it doesn't matter.


    I'm saying you do not understand what it means and still use the concept for everything. The phenomenon of "downright" stickiness is nothing more than people's unwillingness to lower their expectations or cut their loses. But still the TRUE PRICE of something WILL MANIFEST ITSELF in some way or other, downright stickiness or not. In the case of labor, it will be in the form of unemployment. In the end, the phenomenon is strictly temporary.

  • Daniel||

    So, in other words, nominal stability is for pussies - because IN THE LONG RUN things return to equilibrium.

    Try telling that to someone who lost his job because of the deflationary shock in 2008. See how much consolation it's to him/her to know that, eventually, equilibrium will be reached again.

    Are you a closet sadist ?

  • Old Mexican||

    Re: Daniel,

    So, in other words, nominal stability is for pussies


    "Nominal" stability?

    because IN THE LONG RUN things return to equilibrium.


    Things do not destabilize by themselves, you dolt. It has been the Federal Reserve the very cause of all the instability of the past 99 years.

    Try telling that to someone who lost his job because of the deflationary shock in 2008.


    Oh, I can tell him - because that would be the truth. Do you really think that changes the fact that the deflation was caused by the previous inflation? What exactly are you trying to argue, Daniel? That we need further inflation to stem the deflation? That would be like digging a hole under the guy falling from the cliff to delay the inevitable.

  • Daniel||

    Well, yeah - the Fed DID cause the deflationary shock of 2008.

    My problem is with semi-literates like you who argue that the Fed shouldn't correct its mistake.

    "deflation was caused by the previous inflation" - I'm trying to argue that the sentence I just quoted is pure idiocy.

  • Mr. FIFY||

    Which party is in power now, Daniel?

    Hint: It's the party that's train-fucking the economy after the last party had its turn.

  • Daniel||

    Obama-nomics is crap, true.

    But most of the economic damage right now has been caused by the Fed - they fucked up big time in 2008 - and (partly because of hysteria over non-existent hyper-inflation) have yet to correct their huge error.

  • Sam Grove||

    Trains have to be moving before they can crash.

  • robc||

    Nominal stability is for pussies.

    Hail Eris!

  • Old Mexican||

    Re: Daniel,

    And yet here we are, in the 21st century, still having to argue why a sudden deflationary shock is A BAD THING ...


    Really? Tell me, genius - WHY is it a "bad" thing?

    For your information, there can't be a sudden deflationary shock without a previous INFLATIONARY shock. Deflations do not come from nowhere. The DEFLATION is actually the correction from the previous inflation, when prices are readjusted to their natural level. To people it may seem like a "bad" thing but so is taking Pepto for your heartburn.

  • Daniel||

    "Deflations do not come from nowhere."

    Give me a call when you get back to planet Earth. I have many interesting things to show you.

    In the meanwhile, please refrain from commenting on macro-economic issues.

  • Old Mexican||

    Re: Daniel,

    In the meanwhile, please refrain from commenting on macro-economic issues.


    Please refrain from commenting on economics in total. You certainly have no grasp of even the most fundamental and basic of economic concepts.

  • Daniel||

    Coming from you, it's a compliment - so thank you.

  • Fuck you daniel||

    "Coming from you, it's a compliment - so thank you."

    Smug, fails to cite his assertions, and plays stupid troll games.

    Welcome to the ignore list daniel!

  • Invisible Finger||

    People are saving in part because taxes are going up.

    The government does not want people to save, they want them to produce! Arbeit Macht Frei!

    Of course, if this forces people in their 70's to take fast-food jobs, then that's a job a 16-year old can't get. That's why the trend has also been to keep people in school longer and longer.

  • ||

    And in prison.

  • .||

    And at war in foreign countries.

  • .||

    People are saving in part because taxes are going up.

    The government does not want people to save, they want them to produce!

    Actually what the government, or the Fed, really wants is for people to spend. It's doing its damnedest to re-ignite consumer confidence and spending by what was once called "priming the pump."

  • ||

    You are assuming that the quantity of money can only increase. It can be decreased to. That is what an inflation targeting central bank is committed to doing when the demand to hold money falls.

    By the way, people can demand more money and continue to eat. When they accumulate larger money balances, total consumption is less than income. But they can still eat some. When they stop adding to money balances, they can consume all of their income and still hold the larger money balances. They can eat by making purchases out of current income.

    Then, when they spend away the accumulated balances, they consume more than income. Still eating.

    When they do spend away the money balances, that is when the quantity of money needs to fall again. The demand to hold money is falling.

    Of course, there are many other things that can be done involving the rate of accumulation of other assets, like stocks and bonds, or adjusting money holdings by buying and selling bonds already held.

  • Adam||

    "You are assuming that the quantity of money can only increase. It can be decreased to. "

    Certainly, just about anything 'can' happen, but whether or not something is likely to happen is often a different matter.

    My question is an honest, sincere one and it's this: When have we seen an actual decrease in nominal terms?

  • Daniel||

    The last time we had actual deflation ?

    Ummm ... late 2008 ? Those were the good old days, if I remember them well ...

  • Daniel||

    And where exactly does the velocity of money fit in your theory ?

    Oh, that's right - it doesn't.

    Just because you don't understand it doesn't mean you can ignore it, though.

  • ||

    The velocity of money (also called velocity of circulation) is the average frequency with which a unit of money is spent in a specific period of time.

    ummm

    Didn't I say demand was down?

    MV = PQ

    V can be used to find Q but Q never changes.....P can change. sometimes it changes because of M sometimes because of V...sometimes it even stays about the same when v goes down and M goes up....just like it is today.

    Or are you one of those nomenclature nazis who requires everyone use the exact terms and words that you have determined to only be allowed?

  • Daniel||

    Aggregate demand doesn't just go away magically on its own.

  • ||

  • ||

    Really?

    http://www.tradersnarrative.co.....5/consumer confidence index May 2009.png

  • Daniel||

    God ... I don't understand how Bill Woolsey has the patience and self-discipline to remain polite when confronted with such nonsense ...

    Anyways, you're mistaking the chain of causation.

    AD is down because money is too tight - in other words, AD went away because of what the Fed did (or didn't do, to be more precise).

  • ||

    Demand is down because people are scared, broke and unemployed.

    If you want to talk about why they are scared broke and unemployed you are free to do so.

    But please don't use it as some magical reason why inflation cannot be disguised by downward pricing pressure from low demand.

  • Daniel||

    And "people are scared, broke and unemployed" because tight money is strangling the economy ... And just who is responsible for monetary policy ? Why, our "friends" at the Fed.

    "inflation cannot be disguised by downward pricing pressure from low demand."

    Ummm ... what are you going on about ?

    Either prices rise, or they don't.
    Either the increase in demand for money (or the fall in velocity, if you prefer to label it like that) is offset by the increase in the money supply - in which case you end up with inflation - or it isn't - and you end up with deflation.

    Either way, looking at the increase in money supply alone tells you nothing.

  • Shut the fuck up||

    "Either way, looking at the increase in money supply alone tells you nothing."

    He's countered every single assertion you make with citations.

    You've provided another troll to the board.

    Shut the fuck up now, you've embarrassed yourself enough.

  • ||

    Oh wait Q can change...

    Bully wipes are not what they use to be.

    But it is safe to say Q has not changed much between 2009 and 2012...though I admit that smart phones have gotten pretty nifty in the past few years.

  • ||

    output dropped alot in 2008 and early 2009. It has been rising since mid 2009 at slow rate. It has caught up to where it was at the begining of 2008, but it remains about 10% below the trend of 1984 to 2008.

  • squarooticus||

    Precisely. Basically, the banking system is taking the excess savings that used to result from natural deflation---that is, productivity increases that lead to falling prices---and profiting from it by trying to keep prices stable. The savings from those productivity increases have to go somewhere: it used to go into the increased wealth of savers, but inflation has basically eliminated this.

    The banks win because they transform the diffuse benefits of deflation into the concentrated benefits of inflation. The government wins because they force money out of savings into speculative ventures, increasing GDP and tax receipts. Borrowers don't really win because assets (like houses) price in inflation, making them more expensive than they would otherwise be. Savers definitely lose.

    Why do so few people understand this dynamic? This isn't rocket science.

  • ||

    Most money takes the form of checkable deposits. The "diffuse benefits of deflation" that dissappear with stable growth in money expenditures on output are mostly turned into concentrated benefits in the form of interest on checkable deposits. The people holding the money get the benefits.

    To the degree that banks issue zero interest paper money, then an absence of deflation does provide a benefit to banks, though with competition, they will somehow compete it away. I think higher interest on checkable deposits is the most likely effect. The circulation a single bank can maintain depends on how many people use its checking accounts, and the way to get more is the pay higher interest. This does tend to reduce the use of hand-to-hand currency and instead get people to use checking accounts.

    All that leaves is real capital gains on gold holdings.

    You are probably making an error of holding nominal incomes constant. In the deflationary scenario, nominal incomes grow more slowly (or maybe stay constant.) In the stable price scenario (or inflationary one) nomninal incomes, like wages, grow more quickly.

    Realisticly, government captures the gain on hand to hand currency--the Fed monopolizes it. If this is used to fund more government spending, I suppose it provides a concentrated benefit. However, it could be used to reduce tax rates, providing a diffuse benefit.

    Personally, I favor full privatization of hand to hand currency, and allowing competition to determine the distrubution of the benefits of the money creation associated with stable growth in nominal expenditure.

  • we||

    I would like to acknowledge to Ron Paul that it is theoretically possible we could have a major inflation problem in the future because we are pumping out too much paper money today, even though we don't see inflation happening right this very minute.

    In return, I would like him to acknowledge that we could have a climate problem in the future because we are putting too much greenhouse gas into the atmosphere today, even if we are not having a greenhouse-gas catastrophe at this very minute.

  • Old Mexican||

    Re: wee wee,

    In return, I would like him to acknowledge that we could have a climate problem in the future because we are putting too much greenhouse gas into the atmosphere today


    You have NO idea, NO clue, of what you're talking about.

  • hk||

    Well that's not the point. If climate change is real there are still other problems we should focus on first.

  • arbo||

    Climate is not static. Adapt or die.

  • hk||

    We, the problem is that more people die from starvation and lack of access to clean water. So imposing an embargo on them is not smart.

    "We" need to put our priorities in the right order.

  • k2000k||

    And how pray tell do we comabt global warming? The Kyoto treaty was said to have little effect on the continued warming of the planet. The fact is global warming is only a real big issue for certain areas of the world, coastal regions and the maldives, and the poor. For the wealthy it will be an expensive inconveniance. I feel compelled to also mention that I saw a report, that was warning about global warming btw, that mentioned we would see a net increase in arable land. It is not the catastrophe it is made out to be.

  • Old Mexican||

    Re: k2000k,

    And how pray tell do we comabt global warming?


    Don't bother - wee wee there is simply conflating two entirely different phenomena, which tells me he has no clue, no idea of how money works or even what is it.

  • ||

    No mention of the velocity of money though. If velocity is decreasing (which is has been) then that can counteract (at least for a while) the increases in the money supply.

  • Old Mexican||

    Re: Kroneborge,

    Here is a good article related to that subject.

  • ||

    This is an interesting article. I had a conversation with another friend of mine about fractional reserve banking. I really don't see how banking works without fractional reserve banking.

    With FRB, a bank can borrow at 2% lend at 5% leverage up 10 times and make a pretty nice return, even after overhead.

    With no FRB, how would that work? Interest rates would have to shoot up.

  • Old Mexican||

    Re: Kroneborge,

    With no FRB, how would that work? Interest rates would have to shoot up.


    They would have. But that would encourage savings, which in turn will provide capital for investments. Central banks (e.g. the Federal Reserve), through the manipulation of the interest rate, fool people into thinking there are plenty savings to fund long term projects, capital investments and startups, when in fact there aren't. The subsequent dislocation between investment and consumption (because of the misleading interest rate) is what fuels the malinvestment which dries up credit, creating the bust.

  • ||

    Yes, higher interest rates would definitely encourage less consumption and more savings (which I support in general I support).

    But I wonder how high the hurdle would be. For example, if you were using capital budgeting techniques to evaluate projects, your higher interest rates would really disallow a large number of projects. I guess you are arguing that many of those projects shouldn't be taken.

    I guess it would really depend on how high interest rates would have to go. It would seem the debt rate would have to go up at least 3-5%, and possibly closer to 5-10%, and equity returns would have to rise as well. Those would have hugely negative effects on the NPV of projects.

    I guess it would really depend on how much interest rates would have to go up. I just have a hard time thinking we could get realistic interest rates to make a bank profitable.

  • Invisible Finger||

    Here's where some of the Austrian/Libertarian school throws pragmatism out the window.

    In any complex economy, FRB is inevitable. But there's no reason why it can't be LIMITED. But since there's also a "no government regulation of any kind" fetish running through those schools, the only regulation allowed is 100% elimination of FRB.

    Without getting into a purity argument, Ijust think it's funny seeing the MF Global bankruptcy being totally un-regulated by an administration that bitched to high-heaven about lax regulation of the financial industry.

    FRB is inevitable and that is mostly due to the fact that central governments are inevitably fractional-reserve enterprises. The government lets financial fraud go whenever they're in the middle of it.

  • ||

    I'm certainly in favor of limits to FRB, and leverage in general. Anything over 10x is just asking for trouble.

    A very interesting discussion on the recent financial crisis and leverage can be found here
    http://www.amazon.com/American.....607&sr=1-1

  • ||

    Leverage relates capital to debt. Capital is net worth, total assets less liabilities. It is not a type of asset.

    Reserves is vault cash and reserve balances. Reserve ratios relate transactions balances (checking accounts,) which is a type of bank liability to reserves.

    100% reserve banking vs. fractional reserve banking has nothing to do with leverage.

    Banks have reserve requirements and capital requirements. They are different.

    Reserve requirements are completely undesirable. Capital requirements (which limit leverage,) does protect depositors from loss.

  • Daniel||

    What the f*ck man, again with this "hyperinflation is just aroung the corner" bullsh*t ?

    How many times do you people have to be proven wrong ?

    And you know what - don't take my word for it. Take the market's word.

    We all agree that the market know best, right ? (this is not sarcasm, btw).

    And right now the markets are forecasting low inflation !!!

    http://thefaintofheart.wordpre.....day-again/

    So - either the markets are sh*t at forecasting - or any talk of hyperinflation is just fear-mongering.

    Which one is it ??

  • Old Mexican||

    Re: Daniel,

    And right now the markets are forecasting low inflation !!!


    Yeah, you run with that, Dannyboy.

  • Daniel||

    Do you have an actual argument ... or do you simply enjoy being a contrarian moron (you're doing a bang-up job at it, btw) ?

  • Old Mexican||

    Re: Daniel,

    Do you have an actual argument[...]


    Do you??? Because you haven't provided at least ONE.

  • Daniel||

    So you're a semi-literate retard, I gather.

    Can't you idiot read ? Bill Woolsey is trying his very best to correct you morons, but even if you don't believe his explanations (after all, a real American has no need for fancy-shmancy book learnin') - there's still the issue of what the market believes will happen.

    And the market has a tendency of being right, whereas you morons have a tendency of being wrong.

    http://www.econbrowser.com/arc.....pec_1.html

  • Old Mexican||

    Re: Damiel,

    So you're a semi-literate retard, I gather.

    Can't you idiot read ? Bill Woolsey is trying his very best to correct you morons,


    The person who does not seem to have a grasp for the written word happens to be you. YOU asked me if I had arguments, which of course I do - you're simply not paying attention. YOU, on the other hand, haven't presented even ONE. And now you want to latch on to someone else's posts, like a remora?

    You're a shyster, Daniel, and an intellectual fraud.

  • Daniel||

    Yeah man, I saw you posting some regurgitated "austrian" drivel.

    However, there's still a tiny problem - YOUR theories are contradicted flat-out by reality (namely, there has been no hyper-inflation, nor are there any signs of it in the near future).

    A rational man would readjust his opinions.
    Someone driven by emotions would double down on them.

    Guess we know which one you are.

  • Old Mexican||

    Re: Daniel,

    Yeah man, I saw you posting some regurgitated "austrian" drivel.


    You're a fraud, Daniel. A useless fraud.

  • Daniel||

    Thank you again :-)

  • Mr. FIFY||

    Posting Keynesian drivel is worse, Daniel... although IMPLEMENTING Keynesian drivel is, of course, far more damaging than just masturbating to it.

  • Daniel||

    I know this will come as shocking news around here, but there are other schools of economic thought out there - it's not just "austrian" non-sense vs keynesian non-sense.

    And I might ask you where exactly have I talked about stuff like fiscal stimulus ?

    Basically, all I'm saying is that, right now, tight money is causing a slump in aggregate demand - and you all seem to find it shocking and preposterous.

  • Mr. FIFY||

    "Can't you idiot read?"

    /facepalm

  • hk||

    Um no, Old Mexican clearly explained how consumption occurs because of exchange. You need technological innovation and production, in order to have consumption.

    You can't create wealth out of thin air.

  • Daniel||

    No, you can't create wealth out of thin air - but you can strangle it with tight money, or make it go belly-up with a sudden deflationary shock.

  • Old Mexican||

    Re: Daniel,

    but you can strangle it with tight money


    Wealth =/= money.

    Idiot.

  • ||

    Wealth =/= money.

    That's true, but that doesn't mean changes in money don't have an effect on the ability to create wealth. Which I think was his point.

  • Daniel||

    Kroneborge - yes, that was precisely my point - sharp changes in money have VERY REAL effects.

  • Daniel||

    You can throw hissy fits until you pop a vein, but it still won't change the fact that nominal shocks have VERY REAL effects.

  • Shut the fuck up||

    "Bill Woolsey is " a fucking moron.

  • BigT||

    Retard: the market has been promised near zero interest rates from the Fed for two more years. Hence inflation is postponed. But when treasuries aren't selling well, look out. Diarrhea of the treasury!

  • k2000k||

    One word...

    Zimbabwe

  • Daniel||

    Oh look, another idiot with nothing to say ...

  • Mr. FIFY||

    DemocraticUnderground is over thataway, Daniel.

  • Daniel||

    So because I'm not hyper-ventilating over non-existent dangers ... I'm a socialist ?

  • shrike||

    Yes, if you don't suck Ron Paul's tiny withered cock you are a socialist.

  • Mr. FIFY||

    You're either a socialist, or you're not.

    There are no substitutes for capitalism.

  • Anacreon||

    Drink!

  • Sudden||

    Markets are routinely wrong for periods of time. There exists a level of groupthink within even markets. The important thing is that markets are, over time, self-correcting mechanisms.

    That said, I generally agree with you that hyperinflation concerns are overblown in the near term. I think, as robc stated in the earlier thread, that we're in the midst of a 1990's Japan cycle here. We still have plenty of deleveraging left ahead.

    You are absolutely right about the velocity of money being stagnant. It will recover at some point, and the low inflation expectations are based upon the notion that the fed will be able to sell treasuries as that happens in order to contract the metric fuckton of money it's dropped into the system.

    The problem though, is that when that happens, our monetary policy may be severely restrained by our fiscal policy. The Fed is the lender of last resort, the largest buyer of treasuries, and the one that must buy those treasuries if there are no other buyers around. The massive structural imbalances on our govt's balance sheet will force the feds to finance a continuing and worsening deficit for the forseeable future absent and highly unlikely reform to entitlements.

    The problem is that the Fed may be left as the one who has to be a bigtime net buyer of treasuries at the time that velocity begins expanding (thereby making it difficult to contract the money supply as it is forced to buy considerably more treasuries than it can sell).

  • robc||

    the notion that the fed will be able to sell treasuries as that happens in order to contract the metric fuckton of money it's dropped into the system.

    I asked this of Bill in the other thread, dont think he answered: Is their any historical evidence of the Fed doing this?

    I dont believe they will have the cajones to pull 1/2 the money out of the supply. I think the Fed will "control" inflation and we will have anemic growth for the next decade plus with 5% inflation.

    The velocity wont recover, because if it does, inflation WILL go double digits and to prevent that they will drop us back into another recession instead.

    We will bounce in and out of recessions with anemic growth in between for a while.

  • Shut the fuck up||

    "And you know what - don't take my word for it. "

    Why change the status quo.

  • Old Mexican||

    Murphy thought back in August that the reserve-leaking was about to start happening in spades, which does not seem to be the case; in fact the latest figures show excess reserves continue to pile up, increasing by nearly 50 percent in the past year, as has the monetary base, by slightly slightly more. So as long as that leakage isn't actively happening, the inflationary effects predicted by Paul are staved off, goes the story.


    So far. Remember, this is a fractional reserve banking system. The monetary base would end up becoming just the reserve for each one of the banks, meaning that money creation through credit expansion will pop the cork aand let the Genie out.

  • ||

    If the current level of base money remains unchanged, then it is very likely that there will be massive inflation in a few years.

    My prediction is that this will not happen because the quantity of base money will decrease as loan demand recovers.

    The Fed made one trillion in loans in 2008-2009. Nearly all of those were paid back.

    The Fed has bought lots of mortgage backed securities, but these are all backed by the U.S. treasury. And they own lots of U.S. bonds.

    The Fed should have no problem selling this in three to five years.

    However, if people begin that the U.S. government will refuse to pay off its debt, or will inflate it away, when the financial situation gets very difficult in 20 years or so, then all of those problems will roll back to now.

    If that happens, the fact that the Fed increased base money from about $800 billion to $2.6 trillion over the last four years will have approximately nothing to do with the crisis.

    If the U.S. government is believed to be willing and able to impose European levels of taxation and hold the line on government spending, basically limit the health care it pays for, then lends will continue to lend. The Fed will be able to sell off all the government bonds and treasury guaranteed mortgage backed securities it needs.

    But if people don't believe that will happen (or government spending will be cut even more, like we libertarians want, and any tax cuts are more modest than spending cuts,) then an immediate disaster is possible. It isn't impossible to avoid inflation in such a scenario, but difficult.

  • Daniel||

    Hey Bill,

    Don't you feel like you're wasting your breath among these retards ?

    "Zimbabwe", "GOLD !!!111oneoneone", "ZOMG hyperinflation" seems to be all they're capable of spouting.

  • shrike||

    There are many Glenn Beck "libertarians" that post here.

  • Mr. FIFY||

    And I count at least two Team Bluetards in the immediate posting vicinity.

    Your point, shrike?

  • Daniel||

    So because I'm not hyper-ventilating about non-existent dangers ... I'm some sort of socialist ?

    Funny, my friends always accuse of being an anarchist with dangerous ideas ... but I guess you know better.

  • Shut the fuck up||

    1) Why are you nut hugging Bill Woolsey so hard?

    2) You're a bloviating joke.

  • Mr. FIFY||

    You come in here and salivate over Team Blue bullshit, Daniel. What other conclusion is there?

  • Daniel||

    Let me ask again, dipshit.

    What I'm saying is that

    1) money is TOO TIGHT, thus causing a slump in aggregate demand
    2) not only has the sky not fallen ... sorry, has there been no great inflation, but the market forecasts low inflation for the next few years.
    3) the gold standard truly is a "barbarous relic"
    4) austrian business cycle theory is wrong.

    Nowhere did I call for fiscal stimulus - what the economy needs is monetary stimulus to get back on track. And by that I mean a period of 4-5% inflation - and that ONLY UNTIL full employment is restored - instead of the 1-2% the Fed is content with right now.

    The obvious conclusion (to me, at least) is that Bernanke is not the great inflationista bogeyman you make him out to be - but quite the contrary.

    Now I ask of you - how the fuck does any of the above make me a socialist ?

    Because I have faith in the market's ability to forecast ?
    Because I point out that the gold standard is not the way to go ?
    Because I don't worry over non-existent dangers ?
    Because I don't buy Rothbard's theories ?

    Or is it because I come here and dare upset the existing group-think by pointing out the pesky facts which don't fit your cockamamie theories ?

  • The Pointer-Outer||

    You're getting angry, Daniel. Simmer down.

  • Sudden||

    The Fed should have no problem selling this in three to five years.

    The Fed may very well have a problem being a NET seller of treasuries, as it may be forced to be a considerably buyer from the govt in order to continue financing massive structural deficits from entitlements.

    It may have an easier time selling some of the MBS it bought, but it's unclear how much of the MBS it bought will be around at the time. I'm not privy to their balance sheet, but my understanding was that much of the MBS they bought during the TARP bailout period were the most toxic and may have therefore defaulted in the intervening years.

  • shrike||

    The Fed balance sheet is public info. MBS is around $1 trillion the last I looked. And none is toxic. Its all agency MBS which is 100% guaranteed (the puny bit of Maiden Lane excepted).

  • Sudden||

    The question becomes how is it valued at a trillion and what will be its market value at the time the fed needs to sell it. One of the issues that complicates the matter is that it will be seen as selling these assets to combat inflation fears, and the assets it will be selling at the time are notes that were made at historically low interest rates, therefore the discount that these would have to be sold at to match with the simultaneous inflation fears at that time may very well be so profound as to negate a lot of its power as a monetary tool.

  • Invisible Finger||

    Only the balance sheet is public info, not the details of the assets. Every FOIA request for information on the exact MBS purchases has been denied.

  • LilDebbie||

    It sure helps when you can guarantee your own assets.

    But I digress, kill yourself.

  • ||

    As I explained elsewhere in this thread, I support Ron Paul (voted for him a few weeks ago and sent him some money.) I preferred Gary Johnson. I have sent him some money, hope he wins the LP nomination, and expect to vote for him.

    I am not at all sympathetic to the Democrats.

    While Bernanke could have been worse, he was bad, should not have been reappointed, and should not be reappointed in the future.

    I am a libertarian monetary economist.

    I am a market monetarist.

    The least bad monetary institution is one that keeps spending on output growing at a slow, stable rate. For the most part, this requires and results from having the quantity of money adjusted to the amount people want to hold.

    I am very skeptical of the gold standard. I am very skeptical of the Austrian business cycle theory. I think 100% reserve banking dogma-- from Rothbard and his followers-- is damn foolish.

    I don't know much about Daniel's political views. He seems pretty sound on monetary theory, though I don't favor calling for inflation. I see inflation (by which I mean a rising price level,) to be a possible unfortunate side effect of getting spending on output back to trend.

  • HistorySquared||

    Bank of England Chairman Mervyn King studied the relationship between the growth in the monetary base and inflation for 116 countries from 1968-98. The 2-5 year correlation was not impressive; however, over periods like 5-10 years, “the correlations become almost perfect,” notes FT. “Over these longer horizons, the growth of the monetary base seems to be directly associated with the growth of both broad money and inflation. This association has been replicated in many other pieces of research, including this piece published by the Minneapolis Fed in 1995.”

  • ||

    The great thing about predicting things like this is that no matter what you predict, eventually you're going to be right.

    Whether Paul's insistence on his dogmatism makes him unappealing as a candidate to people who work in the markets every day is a separate question entirely and more important than whether he's right about inflation. And if he keeps talking about inflation like this, he is gonna keep making himself look like a...less desirable, marginal candidate.

    I'm already sick of people assuming I agree with Ron Paul on any given issue once they hear I'm a libertarian. He's making people who really will be legitimately worried about inflation in the future look foolish. When the inflation wolf really does show up, who's gonna listen to us then?

    There's no question that overspending and an easy monetary policy will eventually lead to inflationary pressure. Whether that inflation will come to bear in eight months or eight years is yet another question entirely, and if you want to answer that question? The best place to look for an answer isn't in Ron Paul's ideology.

    The best place to look is at the spread between treasuries and TIPS. If there's a better estimation of where inflation is headed over any given period of time in the future, a better estimation than the spread between regular treasuries and TIPS, I can't imagine what that is.

    And right now that spread is miniscule. Take the 2% they're getting for 10 year treasuries, subtract the yield from TIPS of the same maturity, and that market information is much more informative, accurate and useful than anything Ron Paul has to say on the subject.

    I mean, seriously? How can anyone who believes in free markets ignore what the markets are telling us about inflation--and trust Ron Paul instead? That's one of the reasons why I've never jumped on Ron Paul's bandwagon--'cause it seems to become more about Ron Paul and less about libertarianism all the time.

  • ||

    Maybe one of Paul's cheerleaders can help me understand that...

    If you want to get rid of the Fed and replaced it with a market rate--because a floating market rate is better than the Fed?

    Then why the hell are you ignoring everything the market rates are telling us about inflation right now?

  • Invisible Finger||

    Which markets are you cherry-picking?

  • ||

    Which markets are you cherry-picking?

    The spread between TIPS (Treasury Inflation Protected Securities) and regular treasuries of the same maturity.

    That's not cherry picking.

    That's taking two securities with little in the way of risk of default--looking at the one that isn't protected against inflation and contrasting that to the other security that is protected against inflation.

    ...both of the same maturity. Pick any maturity you want.

  • Invisible Finger||

    It absolutely IS cherry picking because it is ONLY ONE market.

    And TIPS are indexed to CPI, which is gamed to keep the rate low. Most people I know buying TIPS are buying them to keep their losses at 2% instead of 6%. None of them expect TIPS to keep up with monetary inflation, only CPI inflation.

  • ||

    So, you're saying that the TIPS buyers and sellers out there aren't taking their estimation of the accuracy of CPI into consideration when they price the securities?

    That's...um...hard to understand.

  • Invisible Finger||

    Ken, they are taking the accuracy into account in the exact same manner they took the accuracy of real estate value expectations into account. The prices indicate that people (read: banks and pension funds) are plowing in and hoping to flip.

  • Invisible Finger||

    To phrase it another way, why look at the spread versus the amount of foreign holdings? Look at EU debt yields and they were fairly constant and then shot up in some countries and now they're fighting over haircuts. IT was a good predictor until it wasn't. Since we are NOW living through the "it wasn't a good predictor" time, why should US treasuries be a good predictor of anything?

    The spread is really only indicative of present demand for the 2 products. To me that looks more like a bubble than a predictor of low inflation - it looks like oncoming DEflation in the prices of those two items to me.

  • ||

    IT was a good predictor until it wasn't.

    It's still the best predictor out there, but you can't confuse your time horizons.

    It's the best predictor of what will happen--given the way things are right now. It will change its prediction exactly one minute from now.

    There's no doubt that the future is hard to predict--even for the market, but the market is the best, most consistently accurate predictor we have--given the way things are right now.

    The good news is that the "right now" just so happens to be the time frame within which we make all of our decisions.

    How long has Ron Paul been predicting inflation? I bet there are two year treasuries that have gone through their initial offerings and been redeemed since Ron Paul started warning us all about impending inflation.

    When those new market corrections come at us next time, they'll come like a thief in the night, too. That won't make the bear fund guys who make their bread and butter selling gloom and doom--every day no matter what--sudden geniuses. Every once in a while someone gets lucky, but no one knows when the worm's gonna suddenly turn--not with any consistency.

    Is Ron Paul right that we're gonna have inflation eventually if we keep going as we're going? Absolutely. Are we likely to fall into an inflationary spiral within the next two to five years? Nobody knows for sure, but the best predictor we have isn't worried about inflation right now--and hasn't been for years.

    Why does Ron Paul pretend otherwise?

    I'm giving him the benefit of the doubt when I call that "pandering".

  • robc||

    Is Ron Paul right that we're gonna have inflation eventually if we keep going as we're going?

    What eventually, why have inflation now.

    Running over 5%.

  • ||

    Where are you getting that number from, rob?

    I'm seein' about 3% here:

    ftp://ftp.bls.gov/pub/special....../cpiai.txt

  • robc||

    See below.

    Also, repeat after me:

    INFLATION IS MONETARY.
    INFLATION IS MONETARY.
    INFLATION IS MONETARY.
    INFLATION IS MONETARY.
    INFLATION IS MONETARY.
    INFLATION IS MONETARY.
    INFLATION IS MONETARY.

  • robc||

    Also, I apparently lowballed it with "over 5%".

  • ||

    I don't see it.

    Was there supposed to be a link on that?

  • robc||

    No link, chart at bottom of page. Last comment.

    I got the info from a government spreadsheet. I could try to find the link again, but googling on M2 shouldnt be too hard.

  • Sudden||

    Not a cheerleader, although generally a supporter. One thing I will say however is that a criticism of the treasury and TIPS markets can be made insofar as the Fed is the most singularly dominant player in it and can exert an influence within that market that distorts it to some degree,

  • ||

    But to whatever extent the Fed is manipulating them, it's manipulating them both the same way, isn't it?

    Again, we're looking at the spread--not the floating market rates themselves. We're just looking at the difference between the two rates.

  • Sudden||

    But to whatever extent the Fed is manipulating them, it's manipulating them both the same way, isn't it?

    Is it though? I ask that legitimately, I sadly don't have the time to study all the various machinations of the Fed, but it stands to reason that it could choose to manipulate each one in opposite directions so as to get them as close to meeting as possible. It also strikes me as something that would be within the feds purview as being "anti-inflationary" because perceptions of inflation in the near to medium term, especially at a time when the monetary base has increased so vastly, could very well have a compounding effect on its severity.

  • ||

    Once the securities have been auctioned off, the markets are pricing both of them based on more or less the same basis--except for inflation. They have the same risk of default (very little), and whatever influence the Fed is having on them, it's having on them both...

    There's only one difference. One accounts for inflation and the other doesn't, so the market prices them differently based on how each of them will fare given more inflation.

    The spread between them fluctuates based on people's fears about inflation and the actual inflation--and that collective wisdom is gold.

    There are times when interest in both securities can spike; generally that hits them both at the same time.

    If people do sometimes flock into one rather than the other, say, when growth stocks are crashing, that generally hasn't been because of inflation fears--for years. And if everybody did jump into non-inflation adjusted treasuries, even so, wouldn't the spread still tell us something useful about how the markets perceive the risk of inflation at that point in time?

  • Invisible Finger||

    Then why does the Fed buy TIPS?

  • ||

    So, you're saying you find it ironic that the very body whose real responsibility is keeping inflation in check--would hedge itself against inflation?

    You think that's sort of like an airplane pilot buying life insurance out of one of those machines in the airport before he gets on a plane--he's flying himself?

    I do too!

    Any way you slice it, that doesn't seem right. I think the explanation must have something to do with the Fed's reluctance to raise rates in the current climate and/or their fear that they won't be able to raise rates high enough.

    There may be some politics involved, here, especially with this effing president. I haven't seen Obama show any reverence to long held principles yet, and if he thought replacing someone at the Fed would make them stop raising rates when it suited him to do so, I don't think he'd hesitate for a second to politicize the Fed.

    The other thing the Fed buying TIPS might imply is that they're hedging against the risk that Congress doesn't have the testicular fortitude to get the budget under control. Make no mistake; Ron Paul is right as rain that if we don't change course dramatically, there will be hell to pay in the form of inflation--when that happens is another question entirely.

    Anyway, if the Fed doesn't think Congress has what it takes to change course dramatically, then it might even be irresponsible not to hedge themselves against inflation--even though they're the ones flying the plane through that storm themselves!

    So, that's my guess.

  • Sudden||

    +1 intertoobz for this.

    Inasmuch as RP is the most palatable major party candidate in my lifetime (born well after Goldwater), he is a far cry from my ideal. Yes, I support him and generally share some of his concerns where inflation and monetary policy is concerned, but like Ken stated above eloquently, it's important to not be hyperbolic when referring to the threat of inflation.

    Ron Paul would do much better for his chances if he spoke about the spectre of hyperinflation as being something that will happen if we continue on our current path for the next decade, because it would be both more factually accurate and would offer the simultaneous advantage of making him look like the optimistic chap that can actually change that trajectory (voters like that whole sunny optimist thing).

  • shrike||

    Great post. I use Treasuries the same way. I will vote for Ron Paul on Super Tuesday but not with enthusiasm.

  • shrink||

    "I will vote for Ron Paul"

    HAHAHAHAHAHAHAHAHAHAHAHAHAHAHA

  • Sanjuro Tsubaki||

    I don't think anyone who gives a flip about politics is going to vote for anyone with much enthusiasm.... except for the voters whose votes were bought outright by Obama.

  • Old Mexican||

    Re: Ken Shultz,

    How can anyone who believes in free markets ignore what the markets are telling us about inflation--and trust Ron Paul instead?


    And I remember when the markets were telling us that the dot.com would turn us all into billionaires. And the housing bubble into rich home flippers.

    Really, Ken - if the market (that is, US people) could know the future, do you really think we would be betting on things like stocks and treasuries?

    Please.

  • ||

    I don't remember saying that the markets will always accurately predict the future.

    They are the best estimation, the most accurate estimation, certainly a consistently better estimate than anything else out there.

    They're limited by the information available, but then so is everyone else. If Ron Paul is better at predicting inflation than the markets, then by all means, he should get into the TIPS and treasury markets, go long on one and short on the other--and call us once he's as rich as Bill Gates.

    I'm not saying the markets are perfect predictors of the future, but I am saying they're the best thing we've got.

    I am saying they're better at predicting inflation than Ron Paul or anybody else--and that's why I thought Ron Paul wanted to replace the Fed with a market rate!

  • .||

    I am saying they're better at predicting inflation than Ron Paul or anybody else--and that's why I thought Ron Paul wanted to replace the Fed with a market rate!

    As I understand him the reason he wants to replace the Fed with a market rate is so that the purchasing power of our money can't be manipulated by one select group.

  • Jerry||

    You know when Paul Krugman talks about China's savings rate being too high? He's actually making a pseudo-Austrian critique on the US exporting its inflation. Not that he would be aware of that.

  • gfgfgegy||

    Cantillon effects? The leakage isn't happening? This is like on Star Trek when they throw in some "temporal flux" to explain away some plot inconsistency. In this case it's the inconsistency of ideology and reality. Why didn't Doherty add that the dog ate Ron Paul's inflation?

  • ||

    isn't government printing the very definition of trickle down economics?

  • Sevo||

    No.

  • Sanjuro Tsubaki||

    Time for Rameh Ponnuru to pile on:

    http://www.nationalreview.com/.....sh-ponnuru

  • ||

    "A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence to stimulate economic growth."

    http://en.wikipedia.org/wiki/Liquidity_trap

  • ||

    I didn't read the wiki, but that isn't what a liquidity trap means. It is when expansions in the quantity of money held by the nonbanking public fall to result in lower interest rates. (I think increases in the demand for reserves by banks can be a similar problem.)

  • ||

    Inflation stats book-cooking aside, in a recession prices are supposed to go down. They haven't in a lot of areas, especially commodities. Some 'missing' inflation is, I believe, manifest in prices that would have dropped but haven't.

  • ||

    Also, despite my credibly profound comment above (2.17.12 @ 9:51PM);

    Hove you been to a grocery store lately?
    Or to a gas pump?

  • ||

    First, economists learned that expectations of inflation generate a kind of inertia. At most, "recessions" slow the rate of price and wage increase. And booms raise the rate price increase. We can settle into an inflationary equilibirum, where spending, output, saving, investment, real interest rates, and the like, are pretty much where they would be, but prices and wages are all increasing.

    Second, recessions (and booms) due to slower or more rapid growing in spending aren't the only possibility. With recessions _defined_ based on total output, we can have supply side recessions where production falls and inflation rises. This is what happens when the supply of an important product like oil is significantly reduced. However, the increase in inflation is temporary. Prices rise faster for a time, and then go back to rising like before.

    If we start an an equilibirum with price level stablity, then recessions causes by slower (or falling) spending, do result in lower prices--deflation. However, a decrease in the supply of something like oil, would involve falling production and rising prices. Inflation and recession at the same time.

  • ||

    good calls
    Though supermarket milk was among the commodities I had in mind. Prices for it are looking - do forgive - frothy.

  • Mr Whipple||

    I think it was Friedman and the Chicago School that "brought back" the quantity theory of money. Palyi wrote a small reference on it. Basically, price inflation lags monetary inflation by 3 - 5 years, according to him, in 1960.

    http://mises.org/books/inflation_primer_palyi.pdf

  • Mr Whipple||

    Are there actually any "mainstream" freshwater economists left? Plosser of the Philly Fed? Hoenig of the KC fed?

    We really are "all Keynesians, now", I guess. God (as we understood him) help us.

  • Chris||

    "we must remember that there are millions of different prices in the economy. The specific impact of money creation on various sectors can be very different, and operate on different time frames."

    In other words, "Yeah, my predictions aren't looking so hot right now, but that's just because the economy, with its millions of prices, is so complex. The inflation is still to come." And yet Bob Murphy is willing to say that the market has it wrong in the way it is pricing the risk of inflation, and, unlike the decentralized knowledge of the market, he in his ivory tower knows what's going to happen to these millions of prices in the economy. Which is it? You can't have it both ways. Prices can't be too complex to show inflation when you appear wrong, only to turn around and state that you can better predict than the market what is going to happen to those millions of prices in the future. The hubris is right up there with Krugman.

    Oh yeah, and never reason from a price change.

  • Mr Whipple||

    Don't forget about energy prices. Natural gas is in the basement due to the large supply from Marcellus shale projects. Gas prices have gone from $5.50 in Jan '10 to about $2.60. Do you think that might have an effect on prices?

  • ||

    Those guys seem to know what the deal is. WOw.

    www.totally-anon.tk

  • Max||

    "If and when the inflation arises, by the way, it will not be some nutty "lucky guess" by someone who just keeps repeating himself; it will because Paul (and the Misesian monetary tradition from which he derives) recognized what he saw as the necessary end of the process the Fed has been indulging in for years now..."

    If I read this sentence correctly, it is not anything the fedactually does that causes inflation, but the mere fact that Ron Paul (and the Misesian monetray tradition) recognizes something Paul (and maybe the Misesian monetray tradition) saw as the inevitable outcome of what the Fed does. So can we avoid inflation by distracting Paul and that tradition so they don't recognize stuff?

  • Mr. FIFY||

    Can't be a real Max post.

  • ||

    I was thinkin' the same thing.

  • .||

    So can we avoid inflation by distracting Paul and that tradition so they don't recognize stuff?

    You mean can the wool continue being pulled over the general public's eyes so that they don't realize how they're being screwed by the government and the financial establishment? Not likely with the growth of the Internet.

  • robc||

    I got your inflation right here, bitches.

    2000 6.11%
    2001 10.45
    2002 6.34
    2003 5.03
    2004 5.71
    2005 4.11
    2006 5.88
    2007 6.02
    2008 9.98
    2009 3.43
    2010 3.31
    2011 9.59

    Dec to Dec percent change in M2.

  • robc||

    As I said in the other thread, if these numbers had been used for colas for SS payments (amongst other things), SS would already be dead, or teetering.

  • ||

    I don't think anybody was arguing that there hasn't been a lot of easy money out there.

    I don't think anybody was arguing, either, that if we keep dumping more money into the money supply, it won't turn into inflation eventually.

    The questions are where the tipping point is and when that tipping point happens. If we keep going in the direction we're going, inflation will happen, yes, but are we there yet?

    So far the answer is "no". Long term, keeping inflation under control should always be a concern, but there are other excellent reasons to do the things Ron Paul says, even if there isn't any inflation on the horizon--yet.

    And if people like Ron Paul keep crying wolf on inflation, when there isn't any in sight, doesn't that help make it less likely that people will listen to us and do the smart things for those other reasons?

    We should be slashing taxes right now. We should be slashing regulation and doing other things to encourage hiring and growth. Those are all excellent reasons to do the things Ron Paul says, and the problems associated with not doing those things are in plain sight.

    No need to keep crying wolf over inflation. When it's nowhere in sight? When Europe is reeling? When China, just today, cut its banks' reserve requirements because it's more worried about growth than inflation?

    Even China's worried growth!

  • robc||

    Apparently you didnt repeat after me up above.

    Lets try again:

    INFLATION IS MONETARY.
    INFLATION IS MONETARY.
    INFLATION IS MONETARY.
    INFLATION IS MONETARY.
    INFLATION IS MONETARY.
    INFLATION IS MONETARY.

    Inflation has fuckall to do with prices of goods.

  • robc||

    I will give you a break (no I wont) because even wikipedia fucks this up. Monetary inflation goes to a page on monetary inflation. Price inflation goes to a page on inflation.

    Sigh.

    The opening paragraph of the monetary inflation page gets it right though:

    Monetary inflation is a sustained increase in the money supply of a country. It usually results in price inflation, which is a rise in the general level of prices of goods and services . Originally the term "inflation" was used to refer only to monetary inflation, whereas in present usage it usually refers to price inflation. Members of the Austrian School of economics make no such distinction, maintaining that monetary inflation is inflation.

    Two minor nits. It isnt just the Austrians, it was all old-school economists. Also, the bolded part is the important part.

    Normally, I will argue that language changes over time and deal with it. But not here. Primarily because it is jargon, and jargon within a field should stay consistent. The change in language has had political effects that go beyond evolution of language, so Im not giving any ground on this.

  • ||

    Normally, I will argue that language changes over time and deal with it. But not here. Primarily because it is jargon, and jargon within a field should stay consistent.

    I appreciate staying consistent, but if we're trying to stay relevant, shouldn't we use words in the way people already understand them?

    When 99% of the people out there are hearing about "inflation", they're hearing "problems associated with price increases". When I express concern about Ron Paul crying wolf, I'm talking about all the people out there who may not listen when we really are in danger of--price increases...

    ...because Ron Paul is crying "inflation". Hell, both Dalmia's and Doherty's posts were about price increases, were they not?

  • robc||

    When it's nowhere in sight?

    WTF? Its been over 9% 2 of the last 4 years. How the fuck is that not in sight?

  • ||

    I was talking about inflationary pressure on prices. I think that's what Ron Paul's talking about when he talks about "inflation", too.

    I think that's what Doherty's and Dalmia's posts were about.

  • veemee sashimi||

    I think robc is arguing that this 9% is the inflationary pressure on prices, and the change in actual prices contains this pressure and pressure in the opposite direction from other factors.

    At least from my limited economic understanding, that's the argument. I've always been intrigued by this argument because a banana in 2012 should cost less than a banana in 1912. Banana farming, shipping, selling and preserving techniques have all substantially improved since then so the price of a banana should drop. So the "real" inflation is not the change in the price of bananas from 1912 to 2012 but the change in the price of bananas from what the price would have been in 1912 with current productivity levels (IE considerably higher).

  • ||

    I got your inflation right here, bitches.

    Growth in the money supply may lead to inflation, but it's not inflation itself. A 9.59% jump in M2 does not equal a 9.59% inflation rate.

    That's like equating how much fuel a car is burning with how fast it's going. What if the gear's in neutral?

    Hell, you're showing a 9.98 percent change in M2 in 2008, and for most of 2008, the CPI was negative.

  • robc||

    False. That is the DEFINITION of inflation.

    Price inflation is some hippy 60s creation, it is not inflation.

    Inflation is monetary. Price infaltion is not inflation.

  • .||

    + infinity!

    This whole idea that price inflation is the same as inflation was/is an attempt to confuse the public ito believing that there is no inflation unless prices go up. Go up? Hell, if the Fed weren't robbing existing dollars of their purchasing power by expanding the supply of money and/or credit, the general price level would have been going down over the years.

  • Chris||

    If you take those M2 change rates as a rate of inflation, then you are saying that the price level has more than doubled since the year 2000 (has increased by 108.3% to be exact). This clearly has not happened to the price levels of capital assets like real estate or stocks. The price of food as a whole hasn't doubled. Or the price of technology. Outside of commodities, which have experienced huge increases of demand since 2000, how many things have seen their price even come close to doubling?

    Or, if you look at the other side of the coin, we've had a nominal increase in national income/wages of about 64% since the year 2000. If you're trying to tell us that by inflation alone, aside from any real productivity growth in workers, nominal national wages should be 108.3% higher, then that means that the real value of American workers has fallen by 52% since the year 2000.

  • robc||

    then you are saying that the price level

    No, Im not. Price has fuckall to do with inflation. How hard is this to understand?

  • Chris||

    If, as you say, "Price has fuckall to do with inflation," then why should I care if M2 grows by 100,000% next year? I mean, it's not like that would cause the price of anything I pay for to go up. Price has fuckall to do with inflation.

  • robc||

    Answered below, the other tiime you posted it.

  • Daniel||

    Ok, let's try it this way

    M * V = P * Q

    So Q = M * V / P

    Now we know that prices and wages are sticky in the short run.

    So if the likes you had their wet dreams come true and the monetary base was frozen ... every time the demand for money went up - you'd go into deflation, and every time it would go down - you'd end up with inflation.

    So either you think nominal stability is for pussies - or you're not thinking it through.

  • robc||

    Nominal stability is for pussies.

  • robc||

    Also, your equation is wrong, it is:

    PV=nRT

    And honestly, who the fuck considers money to be an ideal gas anyway?

  • Daniel||

    It was meant to drive home the implication of your fetish for a "frozen" money supply.

    To point out the obvious - that with a frozen money supply, anytime the demand for money went up - you'd find yourself in a recession.

    And since your religion forbids monetary easing - you'd stay in a recession until the economy would transition to a new equilibrium.

  • robc||

    It was meant to drive home the implication of your fetish for a "frozen" money supply.

    I doubt you can find any evidence of me wanting a frozen money supply. Go on, point it out, I will be waiting.

    ....

    yeah, didnt think so.

    The money supply should be something real. Lets call it gold (it doesnt have to be, but since you are probably going to call me a goldbug eventually, lets skip ahead). I in no way would oppose people mining gold and increasing the money supply.

    As far as fiat money goes, I dont want it frozen or shrinking or expanding. I want it extinct.

  • Daniel||

    Ok, my bad. You don't want to freeze the money supply - you want to put the economy at the mercy of an arbitrarily chosen commodity.

    Consider this - the US goes on a copper standard.

    China (since sinophobia is in fashion nowadays) suddenly starts hoarding copper.

    The result - a deflationary shock in the US.

    Think it can't happen ? It did, only the other way around - in the 1930s, the US government forced the Chinese off their silver standard.

  • Old Mexican||

    Re: Daniel,

    So if the likes you had their wet dreams come true and the monetary base was frozen ... every time the demand for money went up - you'd go into deflation, and every time it would go down - you'd end up with inflation.


    AND?

    By the way, you're economics-illiterate. An increase in the demand of money does not translate to "deflation". You're yet another boob that thinks "deflation" and "inflation" means "lowering prices" and "rising prices".

    The choice of holding cash is made by an individual, Daniel. Other individuals may choose NOT to hold cash. It is not a pervasive phenomenon, no matter how many candles you light at the altar of Krugman. Instead, money creation by the fractional reserve banking system IS pervasive. The money creation by the banks and the Federal Reserve IS disruptive and destabilizing.

  • Daniel||

    Wow, I've never seen someone trying so hard to deny reality (though I suppose illiteracy might have something to do with it).

    So in 1929 NGDP fell by half in the US, in 2008 it fell by more than 10% - but no, you see no deflation.

    Christ, you seem too intellectually impaired to be able to type - and yet you do it somehow - I'm stumped :-)

  • Chris||

    If, as you say, "Price has fuckall to do with inflation," then why should I care if M2 grows by 100,000% next year? I mean, it's not like that would cause the price of anything I pay for to go up. Price has fuckall to do with inflation.

  • robc||

    You care because it devalues your money.

    Which, in the long run, will affect price.

    But price is the dependent variable in this case. Money supply is the indepenedent variable. Price is not in the equation for calculating inflation (hence the fuckall), however, price does get affected. But, price increases ARE NOT inflation. Price increases are a possible result of inflation. But not the only one.

    Price depends on (repeating myself from other thread):

    changes in damand
    changes in supply
    technological advances
    efficiency advances
    etc etc
    and, of course, money supply.

  • Daniel||

    "Price has fuckall to do with inflation."

    and

    "it devalues your money"

    So ... even if prices don't change much (because the increase in the money supply is offset by the increase in demand for money) ... there's still "devaluation" going on ?

    WTF man, what have you been smoking ? Must be the good stuff, can you connect to me your "supplier" ?

  • Mr. FIFY||

    "WTF man, what have you been smoking?"

    NOW you sound like a social conservative, Daniel. Make up your mind, eh?

  • robc||

    And its not just ME saying it. Every economic pre-60s said it. Austrians still do.

    And that last point is important, because we are discussing Paul's comments. And guess what the fuck he means when he uses the term "inflation". Thats right, monetary inflation.

    So when discussing "where is Paul's inflation", its important to look at it monetarily to see if he might be on to something.

  • ||

    robc:

    You are mistaken about how economists defined inflation before 1960.

    There may have been economists in 1860 who defined inflation in terms of changes in the quantity of money. But that approach is long, long gone.

    The meaning of words depends on usage.

    Today, the inflation rate is the rate of change in the price level. "Inflation" is a positive change. "Deflation" is a negative change.

    Most economists believe that money growth is a key determinant of inflation. If we are talking about significant and sustained inflation, the consensus view is that the growth rate of the money supply is the cause.

    If we are talking about short lived fluctuations in the inflation rate, then looking to money growth is one possible cause.

    Why pick M2? The entire notion that we can define "the" money supply is long gone as well.

  • robc||

    But that approach is long, long gone.

    No it isnt. For one thing, every Austrian still defines it that way. And we are discussing Paul's comments on inflation, and since he following austrian school, that is what he meant. So, whatever else you want to say about change in the language, IN THIS CONTEXT OF DISCUSSING PAUL'S COMMENTS, we have no choice but to use the correct definition.

    Why pick M2?

    Because the M3 isnt published anymore. Its the best easily available estimate.

    And it does a better job of estimating monetary inflation than the CPI does with price inflation.

  • Daniel||

    Dude, who the fuck cares (other than austro-nuts, of course) whether the money supply expands or contracts ?

    What matters IN THE REAL WORLD is NOMINAL STABILITY - that is to say, whether money holds its purchasing power or not.

    You know, if money supply is halved but the demand for money falls by a factor of 3 ... you'd still end up with "price inflation" ... though by your definition you'd be in "monetary deflation".

  • Old Mexican||

    Re: Ken Shultz,

    They are the best estimation, the most accurate estimation, certainly a consistently better estimate than anything else out there.


    You're assuming that inflation is what the market says it will be. That is not true, first. Second, the fact that people gamble their money buying treasuries does not mean they can also forecast inflation.

    Third, you're still thinking on the assumption that INFLATION is something arcane that just happens. It is not, it is entirely, 100%, a monetary phenomenon.

  • Daniel||

    In other words - between the aggregate decision of people who actually put their money where their mouths are and the gut feeling of a biased individual (and we're all biased - however, the marketplace has a tendency to even them out) - you'd rather go with a gut feeling.

    I have a bridge I'd like to sell you.

    Funny thing about austro-nuts. They will shout that the markets are efficient - until the market forecast disagrees with their misconceptions - at which point the markets suddenly cease to be efficient.

  • Old Mexican||

    Re: Daniel,

    In other words - between the aggregate decision of people who actually put their money where their mouths are and the gut feeling of a biased individual (and we're all biased - however, the marketplace has a tendency to even them out) - you'd rather go with a gut feeling.


    That's not even the argument. Who's being semi-illiterate, again? The fact that people gamble with their money does not make them better forecasters.

    And knowing the phenomenon and what it entails does not equate to "gut feeling". That is your appreciation because of your lack of understanding of basic economic concepts, Daniel. Inflation IS a monetary phenomenon, the increase of the money supply at an accelerated rate. Even a temporary increase is NOT inflation: It has to be continuous.

    I have a bridge I'd like to sell you.


    You keep that thought, Daniel. That is, the thought that you know better, that nobody can fool you. Keep it up.

  • Daniel||

    I don't know about other people - but I certainly know better than someone who argues that the TIPS spread is irrelevant.

  • ||

    You're assuming that inflation is what the market says it will be.

    I'm saying that the market prediction is a better prediction than anything else available. In a contest between Ron Paul predicting the future and what the market says about the future? I'll take the market's opinion almost all the time.

    Second, the fact that people gamble their money buying treasuries does not mean they can also forecast inflation.

    The collective analysis of market participants is a better estimation than anything else out there. All those millions of people from their own perspectives... This is Free Markets 101 stuff.

    Third, you're still thinking on the assumption that INFLATION is something arcane that just happens. It is not, it is entirely, 100%, a monetary phenomenon.

    Baloney. I haven't said anything like that.

    There's nothing arcane about it. And there's nothing arcane about the money market participants put down in real time to price those very real securities either.

    Incidentally, this is the first time I've read someone refer to buying inflation protected treasuries as gambling. Is there a safer investment out there? Maybe if the Swiss government sold an inflation protected security, but then American investors would have extra currency risk.

  • Old Mexican||

    Re: Daniel,

    My problem is with semi-literates like you who argue that the Fed shouldn't correct its mistake.


    Well, there is certainly a semi-illiterate in our midst, Daniel. The way the Fed corrects its mistake is by not leveraging any more banks or the government, i.e. STOP CREATING MONEY. This is NOT what the Fed is currently doing, it is not correcting any mistake, rather compounding it.

    "deflation was caused by the previous inflation" - I'm trying to argue that the sentence I just quoted is pure idiocy.


    You haven't argued anything, Daniel, which is why I am calling you an intellectual fraud.

    The deflation is the correction after the previous inflation, when assets are revalued to their proper level and the bad debts and investments liquidated. You totally ignore or choose to ignore that most money created by the banks is totally imaginary, it's backed out only by the good word of debtors. When reality sinks in, you have so-called "deflation."

  • Daniel||

    In other words - nominal stability is for pussies, deflationary shocks do no harm - and the moon is made of cheese.

    Also - show me a bank that tried to inflate and found it impossible to do so.

    Oh, wait - there's no such thing.

  • Old Mexican||

    Re: Daniel,

    In other words - nominal stability is for pussies, deflationary shocks do no harm - and the moon is made of cheese.


    You're still behaving like the intellectual fraud that you demonstrated to be, Daniel. You still don't understand that DEFLATION is not simply an increase in demand for money. DEFLATION is the correction that happens after the previous inflationary increase in the money supply stops or cannot stimulate the economy any more. That means that it is not a phenomenon of the market, it is entirely the fault of money creation. If you don't create money, you won't have deflation.

  • Daniel||

    Like I said - show me a central bank that tried to inflate and failed.

  • ||

    Perhaps by some odd definition.

    Deflation will occur if there is a shortage of money--if the quantity of money is less than the demand to hold money.

    This could result from higher money demand and an unchanged quantity. Or, a lower quantity of money and unchanged demand. Or, any number of combinations.

    Of course, deflation is a negative inflation rate, which is a decrease in the price level.

    In my view, deflation does not require a previous inflation.

    I suspect that the assumption is that you are definition inflation as an increase in the quantity of money unbacked by gold, and deflation as a decrease in this unbacked paper money. The only way there can be a decrease in unbacked paper money is if it was first created.

    On the other hand, if gold coin is made melted and put into people's teeth, that doesn't count.

    It comes down to Rothbardian propaganda by definition.

    No inflation or deflation possible with 100% gold reserve banking.

    But the rest of us want to know about the determination of the price level--the purchasing power of money. We aren't specifically interested in the amount of unbacked paper money that has been created or destroyed.

  • Daniel||

    "Rothbardian propaganda by definition"

    HA !!! Good one - I'm gonna steal this one and use it :-D

  • ||

    Regardless of who started it, by the way, you guys should ixnay on the name calling.

    Leave that to the trolls.

  • han||

    I appeared a few days ago on PJTV’s Front Page with Allen Barton.

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online

  • Video Game Nation: How gaming is making America freer – and more fun.
  • Matt Welch: How the left turned against free speech.
  • Nothing Left to Cut? Congress can’t live within their means.
  • And much more.

SUBSCRIBE

advertisement