Economics

Reason Writers Around Town: Brian Doherty on the Grimness of Inflation—and how to beat it down

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Over in the Los Angeles Times opinion pages, Reason Senior Editor Brian Doherty debates Doug Henwood of the Left Business Observer on the issue of hard versus soft money, inflation, and removing politics from the economic equation. From Doherty's first salvo:

Deflations can be grim, and inflations can be grim. As a way to help ameliorate—though not eliminate—these often damaging fluctuations in currency value, I'm going to speak up for a line of thought I've long been sympathetic to: the hard money school of economics (the Austrian variety is my favorite) which posits that the best way to "manage" the money supply is to remove from political authorities the ability to make more of it willy-nilly.

Read the whole thing here.

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  1. Libertarian Psalm 145

    I will exalt You, my G-d the Market, and I will bless Your Name forever and ever.
    Every day I will bless You, and I will laud Your Name forever and ever.
    The Market is great and exceedingly lauded, and Its greatness is beyond investigation.
    Each generation will praise Your deeds to the next and of Your mightly deeds they will tell;
    The splendorous glory of Your power and Your wondrous deeds I shall discuss.
    And of Your awesome they will speak, and your greatness I shall relate.
    A recollection of Your abundant goodness they will utter and of Your righteousness they will sing exultantly.
    Gracious and merciful is The Market, slow to anger, and great in bestowing kindness.
    The Market is good to all; Its mercies are on all Its works.
    All Your works shall thank You, The Market, and Your devout ones will bless You.
    Of the glory of Your kingdom they will speak, and of Your power they will tell.
    To inform human being of Its mighty deeds, and the glorious splendor of Its kingdom.
    Your kingdom is a kingdom spanning all eternities, and Your dominion is throughout every generation.
    The Market supports all the fallen ones and straightens all the bent.
    The eyes of all look to You with hope and You give them their food in it’s proper time;
    You open Your hand, and satisfy the desire of every living thing.
    Righteous is The Market in all Its ways and magnanimous in all Its deeds.
    The Market is close to all who call upon Him – to all who call upon Him sincerely.
    The will of those who fear Him He will do; and their cry He will hear, and save them.
    The Market protects all who love Him; but all the wicked He will destroy.
    May my mouth declare the praise of The Market and may all flesh bless Its Holy Name forever and ever. We will bless The Market from its time and forever, Halleluiah!

  2. “To a hammer, everything looks like a nail.”

    Am I the only one bothered by Bernanke discovering the precise catastrophe he is an expert on shortly after he becomes the Chairman of the Fed? I’m not saying that the economy isn’t in trouble, but are we really in danger of a deflationary spiral?

  3. I will exalt You, my G-d the State, and I will bless Your Name forever and ever.
    Every day I will bless You, and I will laud Your Name forever and ever.
    The State is great and exceedingly lauded, and Its greatness is beyond investigation.
    Each generation will praise Your deeds to the next and of Your mightly deeds they will tell;
    The splendorous glory of Your power and Your wondrous deeds I shall discuss.
    And of Your awesome they will speak, and your greatness I shall relate.
    A recollection of Your abundant goodness they will utter and of Your righteousness they will sing exultantly.
    Gracious and merciful is The State, slow to anger, and great in bestowing kindness.
    The State is good to all; Its mercies are on all Its works.
    All Your works shall thank You, The State, and Your devout ones will bless You.
    Of the glory of Your kingdom they will speak, and of Your power they will tell.
    To inform human being of Its mighty deeds, and the glorious splendor of Its kingdom.
    Your kingdom is a kingdom spanning all eternities, and Your dominion is throughout every generation.
    The State supports all the fallen ones and straightens all the bent.
    The eyes of all look to You with hope and You give them their food in it’s proper time;
    You open Your hand, and satisfy the desire of every living thing.
    Righteous is The State in all Its ways and magnanimous in all Its deeds.
    The State is close to all who call upon Him – to all who call upon Him sincerely.
    The will of those who fear Him He will do; and their cry He will hear, and save them.
    The State protects all who love Him; but all the wicked He will destroy.
    May my mouth declare the praise of The State and may all flesh bless Its Holy Name forever and ever. We will bless The State from its time and forever, Halleluiah!

    Except when you oppress and kill people.

  4. …are we really in danger of a deflationary spiral?

    Maybe. Who knows? What a stupid question.

  5. I’ve never gotten a decent answer from Austrians on this site as to why they prefer the arbitrary inflations and deflations which would inevitably caused by fluctuations in the supply and industrial demand for soft yellow metal over those tied to the state of the economy. Or, how a metallic standard would cure the primary cause of bubbles and crashes (human psychology and extension of credit to dubious actors for uneconomic means.)

    This latter isn’t impacted one whit by being able to convert currency into specie.

  6. Hail Market,
    Full of grace,
    Prosperity is with thee.
    Blessed art thou among systems,
    and blessed is the fruit
    of thy womb, Capital.
    Holy Market,
    Mother of Goods,
    pray for us consumers now,
    and at the hour of our bankruptcy.
    Amen.

  7. Look at me! Look at me!

  8. Chomsky on American libertarianism:

    Man: What’s the difference between “libertarian” and “anarchist,” exactly?

    Chomsky: There’s no difference, really. I think they’re the same thing. But you see, “libertarian” has a special meaning in the United States. The United States is off the spectrum of the main tradition in this respect: what’s called “libertarianism” here is unbridled capitalism. Now, that’s always been opposed in the European libertarian tradition, where every anarchist has been a socialist-because the point is, if you have unbridled capitalism, you have all kinds of authority: you have extreme authority.

    If capital is privately controlled, then people are going to have to rent themselves in order to survive. Now, you can say, “they rent themselves freely, it’s a free contract”-but that’s a joke. If your choice is, “do what I tell you or starve,” that’s not a choice-it’s in fact what was commonly referred to as wage slavery in more civilized times, like the eighteenth and nineteenth centuries, for example.

    The American version of “libertarianism” is an aberration, though-nobody really takes it seriously. I mean, everybody knows that a society that worked by American libertarian principles would self-destruct in three seconds. The only reason people pretend to take it seriously is because you can use it as a weapon. Like, when somebody comes out in favor of a tax, you can say: “No, I’m a libertarian, I’m against that tax”-but of course, I’m still in favor of the government building roads, and having schools, and killing Libyans, and all that sort of stuff.

    Now, there are consistent libertarians, people like Murray Rothbard-and if you just read the world that they describe, it’s a world so full of hate that no human being would want to live in it. This is a world where you don’t have roads because you don’t see any reason why you should cooperate in building a road that you’re not going to use: if you want a road, you get together with a bunch of other people who are going to use that road and you build it, then you charge people to ride on it. If you don’t like the pollution from somebody’s automobile, you take them to court and you litigate it. Who would want to live in a world like that? It’s a world built on hatred.19

    The whole thing’s not even worth talking about, though. First of all, it couldn’t function for a second-and if it could, al

  9. Good for you Brian, advocating the hard money school-Austrian variety. Well spake. Too bad the Keynesians are determined to follow the Weimar road.

    doom
    DOOOM
    DOOOOM

  10. Our Rulers, who art in Washington,
    Hallowed be thy Names.
    Thy kingdom come.
    Thy will be done,
    In practice as it is in theory.
    Give us this day our daily bread.
    And forgive us our trespasses,
    As we forgive your trespasses against us.
    And lead us not into prosperity,
    But deliver us from capitalism.
    For thine is the kingdom,
    and the power, and the glory,
    for ever and ever.

    Amen.

  11. Lefiti must really be annoyed at being ignored recently. He’s working himself into a masturbatory frenzy this afternoon…

  12. I’ve never gotten a decent answer from Austrians on this site as to why they prefer the arbitrary inflations and deflations which would inevitably caused by fluctuations in the supply and industrial demand for soft yellow metal over those tied to the state of the economy.

    I don’t think inflation is bad in and of itself. But government inflation is bad, just as government anything is bad. Growing wheat is natural market process, but that is still no excuse to nationalize and monopolize the production of wheat.

    Also, don’t confuse the “gold standard” of the late 19th, earty 20th century as any sort of free market money. It was a gold standard, but it was centralized and monopolized by the government and fractional reserve system allowed it to inflate fairly freely.

    There is a difference between the natural inflation and artificial inflation. No gold rush ever precipitated hyperinflation. No one every dragged a wheelbarrow full of gold certificates to a baker to buy a loaf of bread. I would have to look up the numbers for this year, but given the bailouts it seems that 2009 has inflated the money supply more than any single year of any gold rush ever.

    Or, how a metallic standard would cure the primary cause of bubbles and crashes (human psychology and extension of credit to dubious actors for uneconomic means.)

    Boom/bust cycles are caused by the malinvestments. Earlier stages of production are expanding due to greater credit even though there is no market demand for the expansion. Eventually it collapses.

    This does happen to some extent with natural inflation. But governments tend to increase their inflationary rates precisely when they should be contracting. Deflation is a corrective factor, and pumping vast amounts of money into a system trying to correct only postpones the inevitable. It makes the busts worse.

    p.s. I’m not an advocate of a gold standard as that requires a state to enforce. Instead I advocate free banking

  13. “I’ve never gotten a decent answer from Austrians on this site as to why they prefer the arbitrary inflations and deflations which would inevitably caused by fluctuations in the supply and industrial demand for soft yellow metal over those tied to the state of the economy. Or, how a metallic standard would cure the primary cause of bubbles and crashes (human psychology and extension of credit to dubious actors for uneconomic means.)

    This latter isn’t impacted one whit by being able to convert currency into specie.”

    I think you’re just setting up a straw man. It doesn’t have to be gold, gold is merely a good candidate. The whole point is that one should be free to choose whatever means of exchange one desires.

    Also, manias and panics cannot be solved other than through a totalitarian state which tells you what to buy and sell. People are sheep and will plow into retrospectively dumb “investments” like beanie babies. Reducing the scope of government will prevent many manias by taking away the easy credit punch bowl, and by removing fool-hardy government schemes and mandates. If you research manias throughout history, the worst ones initiated by the government sticking its phallus in the middle of private contracts (Tulips, Mississippi River Valley, Railroads, and finally, Real Estate). Government *could* quell some manias by pursuing cases of fraud, but since governments were making money hand over fist through real estate taxes, nothing happened.

  14. I don’t think inflation is bad in and of itself. But government inflation is bad, just as government anything is bad.

    Wait…WTF?!

  15. Also, inflation and deflation aren’t intrinsically bad (in moderation), they just benefit savers in the former and debtors in the latter. *Both* extreme deflation and inflation are bad because they distort people’s rational expectations as to what their money is worth and aggravate herd like behavior (“Never put your money in banks, they can’t be trusted!” or “Houses always go up in value!”)

  16. @lefiti:

    It should be noted that Noam Chomsky isn’t a consistent anarchist. He’s gone on record for saying that porn should be banned–even if it’s consensual.

  17. “Who would want to live in a world like that?”

    I would! It sounds totally awesome.

  18. Yo, fuck Chomsky.

  19. I don’t think gold is The Answer. States can abuse it just as easily in an appropriately opportunistic moment.

    Centralized money of any kind is stuck not to human nature, but the nature of the small central clique of humans who control the money. This always has a predictable outcome of inflation of the money and its eventual ruin. Gold money isn’t immune to the same phenomena, its called debasement. That’s how our own inflation started in the New Deal 1.0 days.

    People through history via some populist mechanism – whether it’s voting for the local pork-getter or rioting against the Emperor when there’s no free bread and circuses – motivate their potentates to inflating money, to try and get something for nothing. Its human nature and these failures are a collective guilt of the society.

    Inflation in all its guises – debasement, printing, endless credit and borrowing – sneaks up and mugs the offending society because it is mathematically logarithmic, yet over a long time. All the damage begins really compounding in the last ten to twenty percent of the Falling Down moment. Its sort of like compounding interest – on a 30 year bond most the money you will make on the bond is in the last few years of the contract – but in reverse with our current predicaments.

    Welcome to the last twenty percent of the big Reversed Bond in the sky, friends. I figure we will have no more than ten years of stimulus-printing, stimulus-borrowing, bail-outs, green-envy, a couple little wars, and some health-car’in – starting with the coming Obamagasma – before the Chinese get tired of financing this shit and it’s tits-up. Enjoy.

  20. Brandybuck;

    I don’t think inflation is bad in and of itself. But government inflation is bad, just as government anything is bad.

    Meh.. wildcat banks (free market money) can cause (and have) inflation as easily as a central bank. I know the counterargument of trust, reputation, and prudent fear of failure serving as a freemarket counterbalance. I am sympathetic to the argument theoretically, but empirically, there is strong evidence against it.

    There is a difference between the natural inflation and artificial inflation. No gold rush ever precipitated hyperinflation.

    The only difference is one of degree. In fact deflationary stagnations caused by tightness of money and fear of illiquity are much more often the fear with inflexible systems linked to metals.

    Ergosumabbas,

    I think you’re just setting up a straw man. It doesn’t have to be gold, gold is merely a good candidate.

    If I’ve been effective enough in pointing out the difficulties of a gold standard that it is viewed as a strawman on a libertarian website, then I have been sucessful indeed. I put it out there, because I generally get a lot of flack for busting on the gold crowd. I see I’ve attracted the attention of the free banking crew instead today. I actually have a lot less of a problem with that concept than you might think. Free banking is a concept that I like a lot – in fact I support efforts like e-gold etc. I do take issue with the idea that USD are somehow a monopoly currency in this country. There are many counter examples that argue otherwise – mostly local barter arrangements. The big more visible ones tend to run afoul of the laws (like money laundering statues) but that doesn’t stop people from saying it’s because of “legal tender laws” – which it’s not. In fact, we have free banking in the US, and these currencies exist peacably beside the dollar. It’s just that money – like telephones – has a lot of network effects that determine it’s success. You can only use wildcat currencies where they are accepted voluntarily.

    Also, inflation and deflation aren’t intrinsically bad (in moderation), they just benefit savers in the former and debtors in the latter. *Both* extreme deflation and inflation are bad because they distort people’s rational expectations as to what their money is worth and aggravate herd like behavior

    Well put. I would only add that moderate deflation can much more easily turn into extreme deflation, and is always accompanied by much worse economic outcomes than moderate inflation. Which is why every mainstream economist that I am aware of views a couple of percents of inflation as “price stability”

  21. I did an interesting calculation on the oft cited roman debasement and inflation example. Very good records exist, and I was able to compare the value of silver denari(common unit of money that were debased from being solid silver to solid bronze with just a silver wash) to that of solid gold aureus (corrected for weight and purity) which were commonly used as stores of wealth. Over the 200 odd year time period that I looked at, inflation averaged a remarkably un-remarkable 6%.

    Also during this time period, the roman empire expanded enormously in size and citizenry and wealth/capita. The money supply increased many times faster than the 6% would indicate because of this. The romans inflated their currency through debasement because of the raw demand for more currency in an expanding economy.

  22. Domoarrigato;

    What was the 200-year period you looked at? Most of what the Roman Empire was built during the Republic…at least the big-money “acquisitions” if you will. Your time-frame sounds more like the late Republic than the Empire.

  23. Hal – you might be right – (non-financial) history is not my strong suit – and I did this several years ago – not right in front of me at the moment…

  24. You know, sitting here thinking about it, there’s another big caveat in looking at money and collective social behavior with ancient societies – especially the Roman transition from Republic to Empire – and that’s slavery.

    In the late Republic and especially the Empire, most people’s participation in money transactions was as the commodity the monies were being exchanged for. That also would have a significant impact on “assets” in a society that practiced a high form of ledger accounting like the Romans did.

  25. @HAL-9000

    Hypothetically, if we’re headed towards a crack-up boom endgame fiat currency scenario (which is possible within our lifetimes if Bernanke makes the wrong move), what do you recommend as a hedge?

    My view is that guns, shiny objects (works of art, jewelry, bullion, etc.), and real estate would do nicely, and not be a total waste of money if things continue plod along like they always have.

  26. domo-

    A gold standard currency isn’t based on the market supply of gold, but rather on the stock of gold held in reserve by the issuing authority. The value of that gold may fluctuate depending on market supply, but the issuing authority can react to that by buying or selling its stock. As long as the commodity-to-paper ratio is stable, the currency is relatively resistant to inflation/deflation.

  27. I am not really sure what types of assets to hoard up on for fiat money implosion. But I don’t think we’ll end up in a scenario like that.

    No matter the money, the economic assets in the United States are just intrinsically worth more than any pile of assets anywhere in the world. The government can blow money up but it can’t blow that intrinsic value up (well, without a nuclear war anyways…Doh!).

    What comes after the big day the first Treasury check bounces? I can’t say and I wouldn’t trust anyone else on their guess either because it will totally be up to the schmucks running things at that time. As evidenced by current developments, monetary fate is at the whim of personalities and not process at this point.

  28. Meh.. wildcat banks (free market money) can cause (and have) inflation as easily as a central bank. I know the counterargument of trust, reputation, and prudent fear of failure serving as a freemarket counterbalance. I am sympathetic to the argument theoretically, but empirically, there is strong evidence against it.

    Wildcat banks for a uniquely American phenomena because the American banking system of the 19th century was wholly unique. There was a hodgepodge of state banking regulations so that one could not call it “free” banking. Better examples of largely unregulated banks issuing their own currency can be found in Ireland and Scotland.

    Will a private bank be unassailable, guaranteeing investors that it will be around for centuries? Of course not! As the old saying goes, “utopia is not an option.” The question is not whether private banks are perfect, but whether an emergent system of private banking would work better than a central government bank.

  29. I think private banks and private security markets would be cool financial innovations. Right now accessing the financial markets is a game rigged by law to go through Gatekeepers of the Secret Guild in Manhattan – they not of the Golden Fleece but of the Golden Fleecing of me – and the rigging is made possible by my not-so-local federal government. The most grotesque examples of that quid pro quo are on display now.

    I’d love an ebay for stocks instead, or a market where I am my own broker with my own user ID and account. Maintain a credit rating in my financial market/bank of choosing that I understand and can help or hinder. Sell personal or collateralized bonds that I issue to raise debt instead of crawl to The Man for a loan…all these types of thing that right now would land me in jail for some tax violation.

    Instead, now my tax dollars are insuring Prince Al-Waheed Bin Talal’s interest in Citibank is worth the billions he believes it should be, and make sure Citibank and its ilk can fleece me at the other end if I want to access financial markets. Awesome.

  30. Heuri-
    I disagree with your 6:14. The primary accelerator (but not the base cause) of the current crisis were the vast number of side deals in credit which did not go through any sort of central clearing house in ensure both sides of the ledger were balanced.

  31. My branch of anarchism works baby
    I have thousands of pages written on my anarchist economic theories,
    thousands of pages with equations, graphs loads of stuff like that
    they ain’t quite finished yet so I’ll just some it up with one word
    Sharing
    yeah baby

    My anarchism is Lenin statey good hmmmmm

  32. Noam,

    Roderick Long is right, your anarchism in theory is statism in practice.

    http://www.theartofthepossible.net/2008/09/04/chomskys-augustinian-anarchism/

  33. Chomsky:

    Killing Fields? What Killing Fields? The Americans left Southeast Asia, and it became a paradise under the Vietnamese and Cambodian Communism. I love tyranny. It works best.

  34. That Chomsky fella ain’t too bright is he? I suspect he knows that in a just world he would have difficulty finding work. This seems to be the common theme amongst socialists. Their reasoning is that they are people of great worth. The current system does not recognize this fact. Thus the current system must be unjust. Idiots. Uh, I mean academics.

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