Why Can't You Stop Worrying and Learn to Love Inflation?


New Yorker FINANCIAL PAGE columnist James Surowiecki hunts down the "inflation hawks." The inflation hawks prevented the Federal Reserve from cutting interest rates fast enough in 2008, says the Wisdom of Crowds author. Inflation hawks are "always afraid that inflation is about to get out of control," the one-time Motley Fool phenom continues, even when the inflation rate remains "relatively low." They are "profoundly puritanical, in the original sense of that word," Surowiecki writes of the inflation hawks. The inflation hawks are deluded not only in the short term but in the long, the former New York columnist and Fortune contributing editor concludes:

[T]here's something peculiar about how powerful fears of inflation are. In the past ninety years, the U.S. has had only one sustained bout with high inflation–in the seventies. That track record should engender some faith that central bankers are going to be responsible, and that a healthy industrial economy isn't prone to regular inflationary spirals. It hasn't.

For younger readers: In the past ninety years, the U.S. dollar has lost 87 percent of its value, according to the Dollar Times Inflation Calculator. But Surowiecki is right: All that Monopoly money flushed into the banking system by the Department of the Treasury and the Federal Reserve Bank does not come close to replacing the nearly $15 trillion in purported household net worth that has evaporated from the United States in the last three years:

As for the money the Fed has been pumping through the banks, much of it hasn't actually made it into the economy; banks are keeping hundreds of billions of dollars in reserves on hand. If the definition of inflation is too many dollars chasing too few goods, the too many dollars aren't out there.

I once dismissed James Surowiecki as just a poor man's James Poniewozik, but I have come to enjoy and look forward to his writings. Curiously, in the course of a column condemning inflation hawks, he provides no real specimens of the animal, and his only live citation is a quote from Sen. Charles Grassley (R-Iowa). Ordinarily I'd say that's the false-foil fallacy, but in this case I think he's right not to name names, because what he calls the inflation hawks you and I know as the American People. For as long as I and Surowiecki have been alive, a large majority of Americans have been citing rising costs among their most important worries.

If you add up the Gallup categories such as "cost of fuel," "education costs," "housing costs" and the general "cost of living," you find that, year after year, in good times and bad, Americans just don't like to see their money losing value. Now, for the first time almost all of us can remember, your dollar is actually buying more than it did last year. And before we have any time to experience that and assess how it works, the central bank is using every tool in its power to bring about inflation, presumably at "relatively low" rates. The question isn't why most Americans believe strange things about money. It's why their beliefs are completely ignored by their leaders.