Where is Dr. Paul's Inflation?

Even more than an anti-war warrior, Ron Paul is an inflation warrior. Fighting inflation by eliminating the Federal Reserve and returning to the gold standard has been the one constant in his four-decade-long political career. Indeed, one big reason he jumped into the current presidential race is because he believes that the Fed's loose monetary policy combined with Uncle Sam's trillion-dollar-plus stimulus profligacy is certain to produce a dollar catastrophe.

He noted last March:

"I think the wave of the future is inflation. It's just beginning -- to the point that the dollar will be rejected as the reserve currency of the world. If there's a panic out of the dollar you will see the destruction of the dollar rather quickly. The end stages of a currency comes quickly." He continued, "We've seen this in Zimbabwe, Mexico and Central America. Today there's an illusion and false trust in our money."

In June he warned that inflation would "hit 50 percent."

In August he said: "inflation may get out of control."

But this morning Carpe Diem's Mark Perry, no Keynesian enthusiast, examined the latest CPI report and found that inflationary pressures were falling at the end of last year. Notes Perry:

1. For the six month period ending July 2011, the annualized inflation rate for CPI: All Items was 4.1%, and that fell to only 1.8% for the six month period ending last month.
2. For the three month period ending July 2011, the annualized inflation rate for "food at home" was 5.5% and for the three month period ending January 2012, the annualized inflation rate was only 1.0%. Bottom Line: Compared to last summer for the three and six month periods ending in July 2011, inflationary pressures fell significantly towards the end of last year and in the first month of 2012 for the three and six month periods ending in January.  Inflation for food at home has fallen to only 1% (at an annual rate) for the November-January period.  

Likewise, Daniel Hanson on the American Enterprise Institute's The Enterprise blog, no Keynesian shill, earlier this month presented a series of charts -- including the one below -- tracking money supply and core inflation and concluded that the relationship between how much money there is in an economy and how much things cost is not very easy to track because "price changes are influenced by many things other than the supply of money."

All of this raises this question: Is the runaway inflation that the good doctor has been worried about only a matter of time? Or has he misdiagnosed the corrosive effects that the twin cancers of out-of-control federal spending and over-easy monetary policy might produce on the body economicus?

Discuss.

Bonus Material: Paul Krugman on Paul's Monetary Madness here.

Comments

[Tulpa]

The CPI is faker than the SSTF which is faker than a four dollar bill.

[Disinterested Observer]

Goldbugs and Misoids are as completely full of shit as any Keynesian.

[cw]

Care to explain, Mr. Disinterested?

[robc]

Exactly. I posted M2 inflation over the last decade on some post within the last week.

[robc]

And here is why we havent had inflation but will.

M2 is a function of two things (well, more than that, but simplifying here): M0 and the velocity of money.

M0 tripled. That M2 hasnt is because the velocity of money cratered (which is why M0 tripled - The Fed was fighting deflation). But, until velocity recovers, IE, we have a booming economy, M2 cant catch up to M0. We are getting 5+% inflation, but the economy cant recover fast enough to give us the bigger inflation.

We are imitating Japan from the 90s.

I predicted back in 2008 when TARP was being discussed that the options were a few years of double digit inflation or bouncing in and out of recession for a decade and slowing bleeding M0 into the system.

And my prediction was for the latter. It seems to have held up.

[Almanian]

what robc said

[bill woolsey]

First, the price level depends on the supply of money and the demand for money. The demand for money is the amount of money people want to hold. The supply of money can go up very rapidly with no inflation if the demand for money is rising rapidly as well.

Now, if the demand for money rises alot, stays high for a while, and then falls, then the quantity of money can rise alot, stay high for a while, without causing inflation. But when the demand for money falls again, the supply must fall as well to avoid inflation. It is very likely that the U.S. is in this situation. The quantity of money, especially the monetary base will probably need to fall during the next few years. I think the most likely scenario is that the Fed will reduce it.

One problem with Paul and some who think like him is an unwillingness to consider that the Fed will decrease the quantity of money when necessary. That means that the Fed will sell off some of the bonds and mortgage backed securities it holds.

The month to month girations of the CPI are very much influenced by temporary changes in the supplies of particular goods. If things get worse in the Persian Gulf, gas prices will rise alot, and the CPI will rise alot. But, if the crisis cools, then gas prices will go back down. Blaming that pattern of the Fed is a mistake. The same would happen with a gold standard of whatever type. A monetary system that avoiding inflation from that source would require alot of manipulation, in particular, a sharp enough recession to convince every other line of business to cut their prices immediately to offset the higher price of gasoline.

However, long periods of inflation are not caused by one or a series of crises impacting the supply of one or a few goods. That is back to the supply of money and the demand to hold it.

[robc]

One problem with Paul and some who think like him is an unwillingness to consider that the Fed will decrease the quantity of money when necessary.

I cant see any historical evidence to suggest this is likely. At least not to any significant scale. "Monetary base" (since M0 isnt accurate) jumps around, so it goes both up and down, but the chance of the FED pulling out even 50% of the recent increase is 0% (or possible lower).

[Sudden]

Beyond that, one has to consider the pernicious impact of our fiscal insolvency.

The fed, being the "lender of last resort" will be forced to buy up treasuries (thereby increasing the money supply) at the precise time that economic growth recovers and brings with it the inflation concerns. The sheer magnitude of treasuries that the govt will have to issue to cover its structural imbalances will be too vast for our foreign creditors to absorb, and so the Fed will be forced to buy those treasuries or the govt will "default" on its SS/MC obligations. I'll tell you this: those who are set to receive MC/SS aren't gonna give up their SS/MC payments, even if they're made in dollars made worthless from the runaway inflation, and the political class lacks the balls to piss them off.

[bill woolsey]

Generally, base money has grown at a relatively smooth rate. The last jump (which was small,) was 1999. They reduced it.

Lender of last resort doesn't mean that they lend to the government at all. It means it lends to solvent banks when no one else has liquid assets.

However, I do agree that if the Federal government doesn't close the deficit, it is quite possible that people will elect politicians who will select Fed appointees who will inflate away the debt. The current crop of Fed appointees (and even politicians) are unlikely to do it. But when things get worse--who knows.

[Daniel]

And you're so cocksure of that ... because you gut says so ?

[Adam]

By far the most interesting comment in this discussion; why has 'velocity' not reared its ugly head?

Personally, I found Bob Higgs posts over at The Beacon to be quite helpful on this subject. If we look at the Excess Reserve accounts over at the Fed we find that they grew by 1500% between July '08 and Sept. '11. So you get the idea, it went from under $50 Billion to over $1.6 Trillion (yes, Trillion with a "T"). So really, the question is, "what is going to happen when or if this begins spilling into the economy.

It's interesting that Bloomberg was also saying that the relatively low rate of inflation "proves the critics wrong". This seems odd given that QE1 and QE2 were designed to serve as monetary stimulus but have instead served as excess cash for the largest banks in the country. For me, another great question is "where's the effect of the stimulus?". It seems to me we're seeing more economic activity despite the current regime's policies, not because of them.

[bill woolsey]

Velocity is the relationship between nominal income and the quantity of money.

Mo is not used in the U.S., we say base money or the monetary base.

The relationship between base money and M2 is called the M2 money multiplier.

The relationship between M2 and nominal income (which is nominal GDP) is M2 Velocity.

There is also M1 Velocity (and an M1 money multiplier.)

MZM velocity and the MZM money multiplier are probably most relevant.

Unfortunately, overnight repurchase aggreements and overnight commercial paper is included in no measure of the money supply, so all of the figures are doubtful.

I don't know of any measure of overnight commercial paper. Overnight repurchase aggreements fell after 2008, which would depress an true measure of the quantity of money.

Perhaps the best bet is the "Divisa" measures, but they try to get at the "moneyness" in a broad variety of liquid assets by looking at relative yields.

The Divisia measures show that the quantity of money fell substantially.

[robc]

Mo is not used in the U.S., we say base money or the monetary base.

M0 is a lot shorter to type than monetary base. AFAICT, they are the exact same thing, but that is as a layperson, maybe their are subtle difference of which Im unaware.

[Adam]

Bill, uummm, that's all very interesting, and in some, very vague, way related to the article's question and following comments.....but what's your point?

And, yes, Money Base, or M0 is not a part of the money supply....yet, however, the money supplied to the banks via QE1 and QE2 was designed to make its way into the economy.

[cthorm]

Didn't expect to see you here Bill. Cheers.

Bill is exactly write. Paul's prognostications are fundamentally uninformed, and proven wrong, because you can't imply anything from a change in M. On their own, M and V don't matter, it's the combination that matters.

Despite Paul's false calls for a dollar collapse, he has lots of good points on the Fed. They're unaccountable, they rely too heavily on discretion, and their decisions have powerful consequences for the economy. Hayek and Friedman gave us the answer a long time ago: stabilize nominal income (i.e. stabilize growth in M*V). Scott Sumner, Bill, Lars Christensen and the rest of the Market Monetarist community have offered ways to make monetary policy rule-based, which would get rid of a lot of the downsides of a central bank.

[Invisible Finger]

This seems odd given that QE1 and QE2 were designed to serve as monetary stimulus but have instead served as excess cash for the largest banks

WRONG! QE1 and QE2 were designed to serves cash to the largest banks. Whatever made you think the Fed ever does anything else? The Fed has always been about the banks first and foremost. Always.

[Adam]

Ok, now remember, I'm with you on this one. I agree completely, but I was talking about the 'stated' purposes of, well really, any policy action by the Fed they tell us will spur growth via increased lending, consumption, etc...

So whether or not the real intention is to make sure their buddies at Goldman and BoA have as easy of a time avoiding competition as possible (which is exactly what I think is happening), they state that the purpose is to encourage lending....which is definitely didn't accomplish. But some how this "proves the Fed's critics wrong".

[df]

When the package size of a certain good decreases, but the price remains constant is that measured in the CPI?

Tuna and toliet paper are good examples.

What about when a lower-quality product stealthly replaces the higher-quality version? I order envelopes from Staples every 6 months for work. I order the same item# as always, but I was surprised when I received a lower-quality product than my prior order. The paper was thinner, the fold-over flap was smaller, and the strip of self-sealing adhesive was about 1/3 the size as before.

Are those changes measured in the CPI?

[Sam Grove]

The jugs of maple syrup at COSTCO have gotten significantly smaller over the past few years.

[CatoTheElder]

CPI makes many adjustments for changes in goods, including changes for package size.

Another important adjustment is the BoL's hedonic adjustment, which reflects the value of product improvements. For example, Congress mandated reformulation and a 10% ethanol standard in motor gasoline that caused prices to increase by a few percent and gas mileage to fall. The BoL's hedonic adjustment for the reformulated gasoline kept the price increases related to reformulation and the mandate from increasing the CPI ... because the new crappy gasoline with lower mileage was deemed by our betters to be a quality improvement.

[Mike M.]

Let's see what happens in the next few months now that gasoline is going to $4, and possibly significantly higher than that.

[West Texas]

Dumbass, they already keep energy prices out of most CPI calculations. $4 gas will just be ignored.

[jasno]

Dumbass, most things are made of plastic or wrapped in plastic. Plastic is made from oil. If crude prices shoot up, resin prices will shoot up.

[Sean L.]

Also - anything moved from point A to point B (read: everything) is affected by transportation costs.

[Invisible Finger]

Also, higher gas prices will tend to reduce demand other spending, thereby suppressing prices.

[Max]

Kudos to Shikha Dalmia for raising the question.

[Alan Vanneman]

Yes indeed. One might also ask, where is Tim Cavanaugh's inflation? Hey, and how about that Dow? And how are those "austerity budgets" doing in Europe? Four more years! Four more years!*

*Four more years of a bloodthirsty foreign policy that's only 99% as bad as Dick Cheney's! Yeah, that's what I voted for.

[Hobie & Mustard]

Us too!

[RBS]

One might also ask, does anyone read your shitty blog?

[Adam]

Apparently everyone here did. What kind of a question is that for a comments section where everyone commenting clearly read it?

[RBS]

Really? I had no idea everyone here reads vanneman's blog regularly.

[Adam]

Apparently, you're much more familiar with him since you know he has a blog.....and there was no mention of this fact in his comment above. So, what does his blog have to do with his comment?

[Sam Grove]

If you hover your mouse pointer over his name, you will see that it links to avanneman-dot-blogspot-dot-com. Looks like a blog to me.

[Francisco d Anconia]

Like your site.

[Adam]

Excellent correction, thanks. I visited his site, and it certainly didn't spur my interest, but I definitely wouldn't call it "shitty" because it didn't suit me.

[Old Soldier]

Sure nothing is more expensive - except luxury items like groceries and gasoline.

[Tim]

Medical care, education, property taxes...

[Tony]

At least contraceptives are free - as they should be.

[Tim]

It's in the Constitution.

[Ezra Klein]

Right as usual. Of course, it's hard to read the Constitution on your own. I mean, it's, like, 100 years old and stuff, so it's best to trust the left wing hacks attempting to dismantle our Constitutional system of government experts.

[Winda Fooshur]

Hey, I use gasoline for contraception. Don't I get a break?

[Proprietist]

Tony's world: where "paid for by taxpayers" = "free". You're a very smart man, Tony.

[CatoTheElder]

There is only inflation in the things you need, but it is offset by deflation in the things you have.

I.e., things you need: groceries, gasoline, medical services.

Things you have: house, investments.

[Mike M.]

Also, Reason giving a hat tip to freaking Krugman of all people for hammering Ron Paul? Please don't go all Chapman on us Ms. Dalmia.

[Tulpa]

My God, I missed that last line.

Whiskey.
Tango.
Foxtrot.
?!

[The Derider]

Read the article. He says almost exactly the same thing.

The predictions of the Austrian school were dead wrong.

[Mike M.]

The biggest reason why inflation has been relatively low the last few months is because the U.S. lucked into an incredibly mild winter this year, which has unexpectedly driven the demand for oil unusually low.

Had this one been as bad as the previous couple of winters before it, we would already be well over $4 a gallon now and possibly starting $5 right in the face.

[Johnny Clamboat]

Like most Austrians, he ignores the role of credit destruction in a fiat system, which has dwarfed the increase in money supply.

[Wesley]

He doesn't ignore it, but he discounts it, and you're right. But the credit will return, at most of it will, and we'll get the inflation that we're warned abotu.

[pmains]

There's another wrinkle here, which is that inflation causes, among other things, oil shocks. Oil shocks typically (albeit not always) lead to recessions. This leads to more credit destruction. Panicked about deflation, we then malinvest more paper in the banks. Pretty much what robc was saying above.

[H man]

^
THIS See Steve Keen. This is one thing Steve Keen has right. In a credit economy demand is a function of credit.

[Brandon]

Go to the fucking grocery store, dipshit. The Keynesians are in denial.

[sarcasmic]

The fact that you get less food for more money at the store can't be because of inflation because the experts said so.

[Tulpa]

Wow, Paul Krugman thinks the Austrians were wrong?

[Daniel]

Anyone with a decent economic education thinks "austrian" economics is crap.

To be fair, so is old-school Keynesianism.

And this may come as a shock to the enlightened minds around here - but there are other economic models out there, which do a much better job at explaining the facts

[Brett L]

This is the internet. You'll carry a lot more credibility if you link some of these better models. I'd be interested to see them.

[Daniel]

No you wouldn't - be honest with yourself. And it's very unfortunate that libertarianism has allowed itself to be associated with gold-quackery and the Austrian Business Cycle Theory (which is pure nonsense) - but I guess people are more interested in proving their commitment to a particular ideology than in getting to the truth.

But just in care you care to open your eyes

uneasymoney.com/2012/02/12/am-i-being-unfair-to-the-gold-standard/

uneasymoney.com/2012/02/01/daniel-kuehn-explains-the-dearly-beloved-depression-of-1920-21/

uneasymoney.com/2011/12/12/keynes-v-hayek-enough-already/

themoneyillusion.com/?p=1094

marketmonetarist.com/2012/02/11/i-am-blaming-murray-rothbard-for-my-writers-block/

[Arcaster]

You hang out at Cafehayek, Daniel?

[cthorm]

CafeHayek closed the comments section about a month ago. Too many trolls.

[Adam]

I probably shouldn't mention it, but they've brought it back, but using Facebook somehow. I've never enjoyed the comments section so I still don't comment though.

[frank chodorov]

uneasymoney.com, a proto-Keynesian blog, is where libertarians should be getting their "truth"???

[Daniel]

You know, Krugman has allowed himself to become a partisan hack - but that doesn't mean that everything he says is wrong.

He is a pretty damn good economist, after all.

[KDN]

He used to be. He's so focused on partisan hackery now that I'm surprised he remembers any of it.

[Opinions]

are like assholes.

[Assholes]

have opinions.

[So]

if Opinions are like assholes and assholes have opinions...this means that opinions have opinions?

[Francisco d Anconia]

It's the transitive property.

[R C Dean]

We have a strange mix of monetary inflation and deleveraging deflation right now. The deleveraging is masking the inflation. The Fed is thinking that it can balance the two to some kind of happy medium/soft landing. Unfortunately, the deleveraging shows up in some parts of the economy (housing), while the inflation shows up in other parts (food and fuel). So, your assets are declining, your consumables are increasing, which is the worst of both worlds, but the combined inflation rate makes it look like things are just dandy.

[Daniel]

So what, in your opinion, would be the right course of action ?

[Sudden]

Housing prices are only considered in the CPI as rent; property values are not factored into it. Due to the massive deleveraging and foreclosures, the supply of renters has increased and residential rents are climbing are fairly steady levels. Much of the offsetting decreases in prices aren't coming from assets, as much as other goods that have greater discretionary components than food and fuel like clothing, consumer electronics, etc.

[Invisible Finger]

There's another area with very inflated prices right now - Treauries.

[Tulpa]

From the comments in the AEI article (by commenter John, presumably no relation to our John):

Unfortunately, there a number of problems with these graphs. First of all, graphing only percent change is deceptive in that it shows only immediate shocks to indicators, rather than long-term changes. Saying that changes in energy prices result from factors outside the feds control because major events cause spikes is a bit like arguing that cancer doesn't kill people because we see spikes in death rates during wartime.

To be sure, prices are greatly influenced by things having nothing to do with the money supply (e.g., the invasion in Iraq). But, over the long haul, it's hard to dispute the relationship between an increasing money supply and the devaluing of currency. (See this graph from the St. Louis Fed, for instance) As M1 and M2 have risen, so has CPI.

Finally, we must understand that Austrians (such as Paul) do not argue that the Fed's actions result in immediate market volatility. Instead, they believe that expansion of the money supply leads to mal-investment, which eventually results in volatility when the "house of cards" propped up by cheap credit falls down (e.g., the savings and loan crisis, the dot com bust, the housing market crash, etc.). No matter how often the Fed claims that market volatility is a result of things outside its control (such as a bubble in the housing market), the reality is that the Fed encourages the behaviors which cause those events to occur.

[Brandon]

He didn't suggest going to war with anyone or call anyone an antisemite. Can't be our John.

[Daniel]

That is so full of crap - for the very simple reason that recessions, like inflation, are a monetary phenomenon.

When the Fed tightens too much (like it did in 2008, like it in 1929, like it din in 1921) - we end up in a recession.

So "the house of cards" falls down only when the monetary authority decides so.

[Brett L]

Wat? How could the Fed loosen anymore when the prime rate was at 0% and the printing.

[Daniel]

I don't remember there being an 11th commandment that says "Thou shalt conduct monetary policy solely through the interest rate".

In fact, Bernanke wrote the textbook on how to conduct monetary policy at the zero lower bound - but that was before the group-think at the Fed brainwashed him.

And yeah, right now money is still TOO TIGHT - not as tight as it used to be in 2009, but still too tight.

[Daniel]

And besides, to quote Milton Friedman - very low interest rates is usually a sign money has been too tight.

[Brett L]

Easy money didn't have anything to do with the asset bubble corrections? Really?

[Daniel]

Prior to 2008 - yes, money was too easy (not by a whole lot, but still too easy)

But since 2008 - it has been too tight. Period.

[Tim]

Inflation is our fate because the freaking debt is so out of control the only way to deal with it will be to inflate dollars beyond recognition.

INSERT COINS AND MAKE A SELCTION: THIS MACHINE ACCEPTS ONE THOUSAND AND FIVE THOUSAND DOLLAR BILLS.

[The Question of Auban]

Although there are three major units, (The Altairian Dollar, the Flainian Pobble Bead and the Triganic Pu) none of them count. The Altarian Dollar has recently collapsed, the Flainian Pobble Bead is only exchangeble for other Flainian Pobble Beads, and the Triganic Pu has its own very special problems. Its exchange rate of eight Ningis to one Pu is simple enough, but since a Ningi is a triangular rubber coin six thousand eight hundred miles along each side, no one has ever collected enough to own one Pu. Ningis are not negotiable currency, because the Galactibanks refuse to deal in fiddling small change. From this basic premise it is very simple to prove that the Galactibanks are also the product of a deranged imagination.

[sarcasmic]

I have less food in the fridge and less money left in my wallet, but at least I can be comforted that there's no inflation.

Experts said so so it must be true.

[Tim]

That's why you don't need a raise this year!

[sarcasmic]

And I'm not getting one either. Corporate pay freeze.

[Tim]

Don't worry: be hopey.

[sarcasmic]

Had an interview last week that might get me out of this shithole.

You'll know I landed it if you no longer see me making posts here, because I will actually have work to do.

[Sudden]

I'm working towards the same leave of absence from Reason.

[Old Soldier]

Got the freeze last year. This year we do the full review / bonus / raises dance with an absurdly small pool of money.

[Ken Shultz]

Screaming about inflation at a time when the 10-year treasury is holding steady at 2% is a lot like the boy who cried wolf.

To be fair, however, I think Paul's criticism of the Fed, over recent years, has focused more on criticizing a loose money policy as the ultimate cause of all the misinvestment that tripped off the last recession.

[Old Mexican]

Re: Ken Shultz,

Screaming about inflation at a time when the 10-year treasury is holding steady at 2% is a lot like the boy who cried wolf.

Screaming about inflation when my house has a 10 year anti-termite guarantee is a lot like the boy who cried wolf.

Same irrelevant shit, Ken.

[Ken Shultz]

The rate on the 10-year treasury is hardly irrelevant. The going rate on TIPS is hardly irrelevant.

Screaming about inflation even as interest rates stay near historical lows is irrelevant.

[Old Mexican]

Re: Ken Shultz,

The rate on the 10-year treasury is hardly irrelevant. The going rate on TIPS is hardly irrelevant.

It is irrelevant as an indicator of inflation.

You don't seem to get it, Ken. Prices are not an indicator of the future, they're the result of market clearing, i.e. what already happened. They're a lagging indicator of reality. They still convey information about what people value more or less right now but not in the future - nobody can know the future, which is why people buy futures and insurance.

The money supply is a loaded spring. The treasury bond rate cannot tell you when the spring will be released. Prices can only tell you that the spring has been released.

[Ken Shultz]

Prices are not an indicator of the future, they're the result of market clearing, i.e. what already happened. They're a lagging indicator of reality.

If you think there's a better estimate of where inflation is headed, I'd like to see it...

Take the yield curve from treasuries, from whatever maturity, say ten years, and compare it to the TIPS for the same maturity.

You get it? It's taken from highly liquid markets. They're both secured by the government, which under normal conditions means they're not skewed by questions about creditworthiness.

Furthermore, you get to match a yield from a treasury that's protected against inflation and compare it to the same maturity of another treasury that is NOT protected against inflation...

What's the difference between them?

The difference is the implicit assumed rate of inflation over the term of that maturity.

You want to know what the market says the rate of inflation will be over the next 14 months? Compare the yields on a TIPS security and a regular treasury that mature in 14 months.

The ten year yield on NON-inflation protected securities has been hovering around an UN-freakingly-believable 2% for a long time right now. Subtract the yield on the TIPS for the same maturity--and you got your answer about what the market's been saying about inflation over the last few years.

There's no question that lower rates and overspending by the government will lead to inflation again some day--there's also no question but that there are very few signs anywhere pointing to the fact that inflation is something we should be worried about right now.

I'd cut the government in half tomorrow (more the day after) if I could, but it isn't because I'm afraid of inflation. It's because I want more efficiency, more investment in the private sector, and more growth.

[cthorm]

Old Mex,

You're out of your god damn mind. MARKETS are NOT backward looking. They are not LAGGING indicators, they are the best LEADING indicators we have. You're acting as if a certain future is necessary for market prices to convey information, and that's bullshit. Reality is Bayesian, events have probabilities that we assess constantly based on new information. TIPS spreads are the best measure of expected forward inflation.

Saying the money supply is a loaded spring is like saying you don't have free will. Jesus.

[Daniel]

You know, very low interest rates is usually a sign that money is TOO TIGHT - and if you've got a problem with that, take it with Milton Friedman.

[Pal]

I did....I've sent him like 1000 emails and he hasn't yet responded....I know he's around because I see him on youtube all the time.

[Tulpa]

Europe's outlook is even worse than ours, and the yen is a shambles as well. There's no other "safe haven" for investors to dump their money into.

A plugged toilet lifts all turds.

[Timon19]

A plugged toilet lifts all turds.

Thread winner?

[Tulpa]

Not original though, I've used it before.

We do need to work in Santorum somehow.

[DK]

Santorum stains regardless of the functionality of the toilet.

[rather]

I work in santorum all the time!

[Robert S]

He's got my vote.

[Cabeza de Vaca]

^Nice

[BlueBook]

Nope, only turds with high fat content. Saw it on House.

[Tulpa]

It's actually trapped gas more than fat that makes turds float. The density difference between fat and normal poo matter is fairly small.

[Rev. Blue Moon]

I learned something today. The value of which I question, but still...pack it away in the Mind Palace, I guess.

[Tulpa]

It's useful for not thinking you have cystic fibrosis when your turds float consistently; you're just an above-average gas producer. Changed my life, for sure.

[Gojira]

...pack it away...

I see what you did there.

[Curious]

How does the diarrhea get stuck on the upper reaches of the bowl? Did it bounce or did it fire out sideways?

[Sen Bullworth]

Vortex forces

[R C Dean]

The Treasury rates are manipulated by Fed policy. The Fed has an overt policy to suppress long bond rates. They'll print as many dollars as it takes to buy enough bonds to keep rates low.

Prices in a manipulated market mean little.

[Ken Shultz]

What about the difference between TIPS and standard treasuries, RC Dean?

How is the fed manipulating the difference between them?

It isn't. The market is.

[Invisible Finger]

Ken: Low yield = high price.

The price of treasuries is high That is called "price inflation". When the price of treasuries deflates, we'll start seeing other prices inflate.

[RedDragon6009]

Rising Fuel Prices Push CPI to Highest Gain in Four Months

[P Brooks]

Velocity of money matters.

[robc]

So much this.

[ELI5]

Great, now justify that claim using methodological individualism.

[Joanie Woods]

Sounds like a party plan to me dude. Wow.

http://www.anon-dot.tk

[cw]

From an interesting article on Mises.org:

"A government can only issue fiat money under two conditions: (1) its Treasury issues paper currency that is legal tender or (2) the Treasury's IOUs are accepted as reserves by a central bank that issues the currency. John Law tried experiment #1; we are in the midst of a global experiment using #2. The purpose of the Constitutional gold standard - and the Constitution's failure to enumerate among Congress' powers the right to establish a national bank - was to prevent the government from converting debt to money. None of this has anything to do with the fractional reserve system of banking. The authors of our Constitution had no fear of either debt or fractional reserve banking. They explicitly gave Congress the authority to borrow money, and their own business dealings with entirely in bills of exchange and other forms of credit. They had no more reason to fear a free bank's dealings in credit than any other merchant's - provided that the bank, like everyone else, accepted the principle that debtors could be compelled to pay in coin.

The founders did not expect the gold standard to abolish price fluctuations; that was not its purpose, nor could anyone with any commercial experience expect "price stability" to be the result of requiring the government's monopoly over legal tender to be restricted by the requirement that Money be Coin. Coin would be as subject to the market as any other good or service; and, as Morgan said, its price would "fluctuate". What would not easily fluctuate would be the supply.

I once had the privilege of asking Milton Friedman if he could identify the parts of an item's price fluctuations that were "monetary" and the parts that were the result of changes in the supply and demand for the item. His answer was "no". I was then impertinent enough to ask if anyone could identify the parts of the changes in price indices and measures of "the economy" such as GDP that were "monetary" and the parts of the changes that were not. He was kind enough to smile and say that he thought that was a difficult question to answer. It remains so.

Our time would be better spent answering a question for which there is a clear historical answer - how can the government's inevitable abuse of its monopoly power over legal tender be permanently restricted? Ending fractional reserve banking will do nothing; it will be a prohibition against credit itself. Solve the problem of what the government is allowed to issue as Money and the market will successfully regulate any abuses of private credit - as it does when government is not allowed to put its thumb on the scale."

Comment credit to LetUsHavePeace.

[Rev. Blue Moon]

OT: When I click on an ad on H&R, does reason get paid for that? I only ask because I keep getting an ad for "Help Sen. Sherrod Brown end Citizen's United", and I want that hoarse douchebag to pay this place through the nose.

[SW_Ohio]

+1

I would do this also.

[P Brooks]

Corporations (and individuals) are sitting on huge piles of cash. I believe this is in large part because the Fed has completely fucked up the price signaling mechanism of the money markets.

[Mike M.]

This, +100. Fucking Bernanke has distorted the markets to an extent the Fed has never even approached before in its history.

[angus]

+101

The money is in cash waiting for an opportunity.

[Tulpa]

You sound like a 99%er

[Daniel]

You people have to be off your meds.

In the 1980s, when inflation was at 4%, conservatives were screaming that tight money was strangling the economy.

Nowadays, inflation is below 2% and there are no signs of it increasing ... and yet you people yell that hyperinflation is just around the corner ...

[Invisible Finger]

Most of us here don't give a flying fuck what "conservatives in the 80's" thought in the 80's because we aren't conservatives.

[Daniel]

That whooshing sound you just heard ?

That was my point, going right over your head.

[ryan]

and yet you people yell that hyperinflation is just around the corner ...

No one has said that.

[Adam]

I'd agree 100%, and I'd throw in the principle of 'Regime Uncertainty' in general. The regulatory environment is so shaky and 'uncertain' that firms are simply not willing to invest, and as a consequence still aren't really hiring, only slightly more than before.

[2ndClassProle]

Do any of these experts ever go shopping or buy groceries?

[Jerry]

Where is Dr. Paul's Inflation?

Exported to China. Next.

[pmains]

Also, true. Murray Rothbard's History of Money and Banking in the United States has a section where he goes over how Britain pulled the same scam from 1921-1926.

[mdb]

don't forget mit's bpp

http://bpp.mit.edu/usa/

no inflation there either

[tarran]

The inflation has happened! They expanded the money supply.

And when the Fed stops paying interest on deposits to banks, and they decide to loan all that newly created money out to people who bid up prices as the view with other purchasers for scarce goods, then we can discuss the CPI.

Honestly, it's like someone standing on a beach in bali and saying there can't be a tsunami coming, the water has receded to historic lows!

[Tulpa]

There are two different kinds of inflation, and it annoys me when people equivocate.

Monetary inflation has already happened. Price inflation is not the same thing, as it is affected by other factors too (efficiency gains, increased competition,etc)

[tarran]

You and me both. 🙂

It's a losing battle - we can't compete with the spokes-models for the news networks who with smiles or frowny faces talk about inflation like it's rainy or sunny weekend forecasts.

[Old Mexican]

Re: Tulpa,

Monetary inflation has already happened.

Tulpa, there's only ONE inflation: The increase in the money supply.

So-called "price inflation" may be the effect of sudden spikes in demand (for example a lack of food after a flood after a flood, or when a certain key factory is destroyed) but those are market corrections, not inflation. INFLATION is the increase of the money supply.

[Rev. Blue Moon]

Oh lord, I have to ally myself with both OM and sarcasmic today. Rand help me in my hour of need.

[Tulpa]

Why do people have to say that they're unhappy to agree with someone else? Can't we all just be friends who agree and disagree on different topics?

(except Tony)

[sarcasmic]

Fuck you, that's why.

Also, fried chicken.

[Tulpa]

I'm happy to disagree with sarcasmic. So happy I'm going to rub one out reading your post. Ha!

[Popular Girls]

"Ew."
"Seriously?"
"Dude, that's so gross."

[Gojira]

Also, fried chicken.

Please Zod let this become a meme. Then I can die happy knowing that I created a meme on H&R.

Also, fried chicken.

[robc]

Sigh, I have to agree with Tulpa now?

Except, Im willing to agree to Tony, but Im guessing he has never been right. But, I havent read a post of his in years, so no clue.

[Almanian]

He was actually right once. I distinctly remember pointing it out.

Then he went right back to full retard.

[Tulpa]

The only reason to care about monetary inflation is because it tends to cause price inflation, all else being equal.

Money is useless in itself. It only becomes useful when it is exchanged for items that actually have value, and that's only affected by price inflation.

[Almanian]

Paper money is also pretty good for getting a bonfire started, so it's not only useful for exchanging for goods and cervixes

[robc]

I think its the other way around. The only reason to care about price inflation is that it affects our pocketbooks.

But price changes are the result of a multitude of factors:

Monetary Inflation
Change in demand
Change in supply
Technological advancements
Efficiency advancements
Subsidies
Tariffs
Taxes
etc and etc

Monetary Inflation stands separate, so is a much more useful MEASURE.

[CrackertyAssCracker]

I would find it interesting though if there were a non-BS measure that did what CPI was originally nominally designed to do. No more than 10 components. Each component time-smoothed in some way inversely proportional to observed variance thru time. But no hedonic BS, and no substitution effects. And if the composition changes over time, then its a smoothed transition of dropping one component and adding another, and that's it. And gold better damn well be one of the components.

[Robert]

Correction: Dollar inflation has already happened. Considering all the things that people treat more or less as money -- IOUs of various sorts -- it doesn't seem that the total money supply has expanded. Dollars have been stretched to cover the loss of the other IOUs.

[Rev. Blue Moon]

I can see inflation with my own two eyes. I hate to throw in with sarcasmic here, but I don't need an expert to tell me that what I am seeing in my year-on-year books is wrong.

[robc]

I disagree, but only because Im going to fight ? outrance that inflation is a monetary phenomenon and not a price one.

Like martinis. Must contain gin.

If you want to refer to something as a vodka martini or price inflation, feel free, but use the qualifier.

No qualifier:
Martini = gin + vermouth
Inflation = Monetary

Tieing together threads nicely.

[Rev. Blue Moon]

There is no distinction between monetary inflation and price inflation.

[robc]

Huh?

If that were the case, the CPI would match the change in M2 (or M3 or whichever measure of the money supply you think best represents monetary inflation).

[sarcasmic]

You have a point.

[robc]

I think the counterpoint is that the CPI is complete bullshit and doesnt measure price inflation.

But, as price inflation is defined, its the tool. So, I think the counterpoint is bullshit.

[sarcasmic]

All I know for sure is that I'm spending more money and getting less for it.

Fuck the experts.

[Tulpa]

CPI is bullshit because of the things it doesn't include. But the prices of those things haven't been going up as fast as Mx either.

[GILMORE]

Tulpa|2.17.12 @ 12:16PM|#

CPI is bullshit because of the things it doesn't include

Erm. Depends.

You want food and energy included in "Core" CPI? Whats the case there other than its just a measure of how price inflation hits our wallets in the short term, as opposed to long term real inflation?

[robc]

How are food and energy not "core"? Almost everyone buys them on a regular basis. They are as core as core comes.

[Sudden]

The rationale is that both items are prone to dips and spikes resulting from factors beyond monetary inflation: i.e. mideast oil cartels and crop yield variance resulting from changing weather conditions year over year. Doubly considered with energy is that its impact reverberates throughout other prices already included in the CPI because energy is itself a raw material as much as a finished product at the retail level. That said, I can understand this rationale, and there are ways to mitigate it without removing it from the CPI calculus entirely.

[Rev. Blue Moon]

I don't agree with that - the CPI is not reflective of inflation all the time:

Link. I should have said that I don't think there are two kinds of inflation and that the distinction is arbitrary.

[Tulpa]

There is no distinction between monetary inflation and price inflation.

Since 2007 we've had breakneck monetary inflation and barely noticeable price inflation. so, no.

[angus]

Price inflation hasn't occured because there are strong deflationary pressures involved. Since 2007 there has been a recession so banks aren't willing to loan money and regulatory reform such that banks must retain higher reserves of capital.

The bulk of the monetary inflation was provided straight to banks and hasn't moved from there.

M up, V down, Q constant-ish ~ P static.

[Old Mexican]

Bottom Line: Compared to last summer for the three and six month periods ending in July 2011, inflationary pressures fell significantly towards the end of last year and in the first month of 2012 for the three and six month periods ending in January. Inflation for food at home has fallen to only 1% (at an annual rate) for the November-January period.

That's the inflation rate. That doesn't mean prices are falling, only that they're not going up as quickly.

And you can kiss those trends goodbye once the cost of fuel starts to make itself felt in the transportation industry.

Besides, it looks like those so-called "not so Keynesian" economists still treat inflation as some sort of cosmic phenomenon, that happens just because the universe is unfair with us poor mortals. Inflation is the increase in the money supply - that's the concept. There's a clear cause cause and there's an effect.

The fact that prices have not gone up as quickly as one could expect is very easily explained: Most of the monetary base is still a base, it hasn't been distributed throughout the economy. The banks are holding on to the cash in order to reap no-risk interests from the Federal Reserve. That is why we're not Zimbabwe, but that does not mean we can never be.

[Invisible Finger]

STOP talking about FUEL PRICES in a vaccuum!!!

IF the price of fuel increases, it could be because of supply restrictions OR increased monetary velocity. Whichever reason occurs will have different effects on other prices.

If it's a supply issue, it will likely SUPPRESS prices on other items because it will not have any other affect on wages other than possibly downwards.

If it's mostly monetary that fuel prices rise (increase in velocity, we already know M0 has ballooned), then wages will also be rising because of monetary reasons and the affect will not adversely affect demand.

The Fed's ZIRP policy is having a downward affect on prices because those who can save are saving even more since they are getting no return on "safe" investments otherwise while fuel and energy prices rise. Once the Fed ends the stupid ZIRP policy there might be a slight uptick in velocity, and if it is seen in CPI the Fed will probably immediately return to ZIRP. But since the Fed has said ZIRP to 2014 at the earliest, it's safe to assume fuel price increase will be due to supply shock which will suppress other prices.

[@AgoristDon]

FedGov claims only 3% inflation. ShadowStats notes 11% is the more accurate number as it was calculated not long ago.

Lies, Damned Lies, and Statistics - FedGov's Tall Tales
http://tirelessagorist.blogspo.....stics.html

[Alexander]

Inflation is caused by excessive money supply, there is nothing wrong with the fiat system as such. Why is RP so obsessed with gold? Why do we have to back money with gold? Why not copper? or platinum? Why do we have to back it with a metal? The only important thing is not to print too much of it, it doesn?t matter if you have gold to back it or not.
For a period of 20 years, from the late 70s to the late 90s, gold lost an enormous amount of its value. How does that match with RP theories of an always increasing gold purchasing power?
He needs to read Milton Friedman.
M.V=P.Y (where is gold in the equation?)

[Rev. Blue Moon]

Backing it with something is incentive not to overprint.

[sapient]

That doesn't mean that the govt. won't cheat and still print more money while saying that each dollar is backed by gold.

The gold standard is pointless. Without fiat currency (which every other nation in the world uses), we'd be worse off than we already are. What needs to happen is a change in the way govt. is allowed to spend money, not just some pointless "incentive" not to spend that won't work anyway.

[sarcasmic]

If gold lost its value, why did the price increase?

[Tim]

Fuck you, that's why.

[sarcasmic]

Also, fried chicken.

[tarran]

Ron Paul advocates lifting all legal tender laws and allowing people to choose the money they wish to transact business in through market forces. That's the normative bit.

He predicts that the end result will be that gold will become the standard as it has throughout history when people are left to their own devices. That's descriptive, and not normative.

[Old Mexican]

Re: Alexander,

Inflation is caused by excessive money supply, there is nothing wrong with the fiat system as such.

There is when there's a monopoly over the money supply.

Why is RP so obsessed with gold? Why do we have to back money with gold? Why not copper? or platinum? Why do we have to back it with a metal?

You should learn first what is money so you can ask better questions.

I recommend you read The Theory Of Money And Credit, by Ludwig von Mises.

For a period of 20 years, from the late 70s to the late 90s, gold lost an enormous amount of its value.

Actually, what happened was that the dollar gained value compared to gold, but there wasn't enough gold production to say that it lost value.

[Sam Grove]

How do you know gold lost value?

Are you referring to the dollar a a fixed measure of value?

[Alexander]

When you are talking about prices, you need a point of reference. Gold was cheapest in USD in 1999 than it was in 1979. That is in NOMINAL terms. If you take into account the inflation of that period (That is, the average increase in prices of those 20 years) the value would be much less. That means that if the dollar had been pegged to Gold in 1979 we would have experienced a very high inflation in that period. This contradicts Paul theory on the Gold Standard. The bad thing about this iks that we should be focusing on abolishing real threats to economic liberty such as the NLRB, EPA and Obamacare. That would be really important, but it seems that Paul focuses on the Gold Standard to distinguish himself from the other candidates.

[Sean L.]

"That means that if the dollar had been pegged to Gold in 1979 we would have experienced a very high inflation in that period. This contradicts Paul theory on the Gold Standard."

No, it doesn't. Having a gold standard does not equal pegging the price of the dollar to gold.

I'm not defending a gold-backed or fiat dollar here, just saying that your are lumping together two totally different things.

[Alexander]

Please explain.
I always thought of the gold standard as fixing the value of an amount of gold at 1 dollar (say 0,1 grams). At that price govt. has to sell or buy, and the price can not depart from that.

[robc]

Why is RP so obsessed with gold? Why do we have to back money with gold?

He isnt. He hasnt suggested the latter either.

Does anyone actually listen to what Paul says?

[Anyone]

Why should I listen to a crazy person?

[Almanian]

In my admittedly-limited experience, no.

[bill woolsey]

I support Paul.

One reason is that he says audit the Fed and allow people to use alternative monies if they want.

I don't see either of these things very valuable, but they aren't bad either.

He then wants a complete review of the monetary system, and he will be leading the effort to end the Fed. He doesn't really promise to end the Fed right away.

On the other hand, looking at Paul's long standing views on these issues, it is pretty clear that what he favors is a gold standard with no central bank. And he almost certainly believes that the ordinary laws against fraud would require that all monetary instruments be 100% backed by gold, if not made of gold, as in gold coins.

Since Paul is more of an educator than a politician, he isn't always very good at distinguishing between explaining to people how he thinks things should be, and what he is promising to do as President.

I would worry about Paul's appointments to the Fed.

[fred]

Inflation is Comming, its the calm before the storm

[Cotton Candy]

There will be inflation, and all ready is, look at the gas prices and food prices

[Almanian]

WHERE IS YOUR INFLATION NOW, DOCTOR PAUL!!! MWAAAAAAHAHAHAHAHAHAHAHAHAHAHA!

[Rich]

Serious question: What are examples of "inflationary pressures", other than "excessive" money printing?

[Almanian]

32 psi my Mustang

42 psi my Ninja

80 psi my Super Duty pickup

There are other examples of inflationary pressures elsewhere, I'm sure.

[Almanian]

...other than "excessive money printing", to be clear

[*]

Where's inflation? Same place as the zombie apocalypse, the coming global superstorm, and the ape uprising. Neither real nor unreal. Just... looming. On the edge reality's horizon. Where there's a door, and behind that door stands a man with no face or something.

[The Real *]

Inflation is just some myth that old superstitious people from the 1970's like to talk about. Nobody believes in your fantasies, grandpa!!

[squarooticus]

This is not really that difficult to understand: in the long term, the price level is a function of the number of dollars in circulation, but in the short term it lags behind this number as a matter of psychological inertia.

To wit, if you instantaneously redefined the dollar to be two dollars and doubled everyone's account balances and cash holdings, what would happen? Of course the nominal price of everything would double nearly instantaneously. Alternatively, if you double the account balances of only a few people, and do it quietly, most people won't notice a thing because those dollars won't be chasing prices higher in any substantive way, preserving the subjective value of the dollar.

There's nothing magical about the value of a dollar itself: its value is purely subjective, though the limits of that subjectivity depend on whether it's unbacked or backed by something scarce. What the Fed is trying to do is to keep the subjective value of each dollar the same while increasing the total supply of dollars, something that is simply not sustainable long-term: those dollars currently sequestered away in banks and foreign reserve accounts will eventually find their way home, resulting in a feedback cycle where more dollars are competing for the same quantity of goods and services, driving the subjective value of each dollar down, putting even more dollars into the market, etc., etc.

[Rev. Blue Moon]

There's nothing magical about the value of a dollar itself: its value is purely subjective, though the limits of that subjectivity depend on whether it's unbacked or backed by something scarce.

That makes it NOT SUBJECTIVE.

[squarooticus]

That makes it NOT SUBJECTIVE.

Sure it is. If the dollar is backed by gold and the number of dollars goes up, people will begin to reduce their subjective valuation of the dollar anticipating that the government won't be able to make good on its convertibility. Similarly, gold backing might itself go through a period of reduced demand, as people shift their demand from cash to stocks. In either case, it's subjective, though the constraints to subjectivity are greater in the presence of gold convertibility.

[bill woolsey]

Squar:

You are wrong about this backing business. Less backing reduces the demand for gold, and results in inflation. It isn't that less backing makes people value the money less.

Also, in your first comment, you assume the demand for money is fixed. If that is correct, then changes in the quantity of money have a proportional effect on prices. But the demand to hold money can change. The quantity theory of money is "ceteris paribus," that is, a fixed demand for money. If the ratio of money demand to output is assumed fixed, and real output is assumed fixed, it comes to the same thing.

[squarooticus]

It isn't that less backing makes people value the money less.

Sure it can. I certainly value dollars less because they are not convertible.

you assume the demand for money is fixed

I made no such assumption; in fact, I thought I quite explicitly said the opposite of this. I don't understand the root of your miscomprehension, so I won't try to correct you.

[Sam Grove]

A "dollar" is an arbitrary reference. The objective value of $1 is...$1.
What is the value of a dollar? Depends.

[squarooticus]

I should add that this process of the "coming out" of dollars into the open marketplace (via repatriation and reduced subjective value) is something that is likely to happen very quickly once the secret gets out: this is what produces hyperinflation. The entire apparatus of government involved in generating statistics, from the Fed to the Treasury to the BLS, has made an art out of making inflation seem much tamer than it is to avoid setting off the panic that causes people to dump their dollars before the next fool: it's not that the dollar isn't already devaluing at 10+% per year, it's that a vanishingly small percentage of dollar holders understand that this is happening.

[Fluffy]

To the points made here I would add a simple observation:

The natural state of being for an economy with growing productivity is...deflation.

Assuming a constant number of labor hours input, if productivity per labor hour increases, prices should decline.

So to tell the real story of inflation over the last century, we would have to first try to determine how far prices would have deflated if the money supply had grown only at the rate of the production of precious metals, given productivity per hour gains over the same period.

[CrackertyAssCracker]

+1.

Over the long term, if we are getting more productive, prices should be going down. The difference between how much they would have gone down and how much they have actually gone up is theft/price inflation/stealth-taxation. I don't really care what word you use to describe it.

[bill woolsey]

You are holding demand constant.

As productivity increases, real income increases. For normal goods, that increases demand.

In a progressing economy, the improving productivity increases the supplies of various goods.

The growing real income raises the demands for various goods.

This leaves the prices of goods unchanged. Or rather, some rise and others fall. Prices of goods that are necessities or with more than average productivity improvements fall, prices of goods that are luxuries or with less than average productivity improvements rise.

But in truth, basic supply and demand determines relative prices. It is impossible for all prices to rise relative to one another.

Your "labor hour" standard would work if all prices were quoted in labor hours.

With growing productivity, the demand for labor rises faster than the supply of labor raising real wages. (That is an important factor in the increases in real incomes which raise demand.)

If the quantity of money is constant, then growing real income raises real money demand. Deflation of prices is necessary for the real quantity of money to rise with the growing demand.

This is the source of deflation. With falling prices, constant wages imply growing real wages. And growing real demands too.

There is nothing "natural" about deflation. The effect of technological improvement, population growth, and saving, investment and capital accumulation on the price level just depends on monetary institutions.

[Fluffy]

It's much simpler than that.

Economy X has:

100 workers making widgets
Those workers can make 3 widgets a year
There are 300 units of metal currency available.

That means each unit of metal currency available should be able to purchase 1 widget a year.

Now the worker productivity doubles, so that each worker can make 2 widgets a year.

That means that each unit of currency should now be able to buy 2 widgets a year.

More goods + same amount of money = lower prices.

This is the whole reason the fiat guys DON'T LIKE metal currencies. Because they favor savers and "impale debtors on a cross of gold" with their natural deflation.

The total amount of metal available is not constant, of course. We're still mining all the precious metals. That mitigates the natural deflation of metal currency by allowing the amount of it to increase. But without that additional metal production, it's naturally deflationary if productivity rises.

[Brandybuck]

To the die-hard Rothbardian (of which Paul is one), every increase in the money supply instantly turns into inflation. But Mises, Hayek, and other Austrian economists did not share in that belief. Actually, neither did Rothbard.

The economy is not a deterministic macro machine where a 1% increase in the money supply causes an automatic 1% increase in prices.

The lack of significant price inflation is easily explained. Businesses would rather hold onto cash than borrow the new money the banks are sitting on. After all, we are in a recession! But regardless, anyone who has been to the grocery store recently knows that there is some price inflation already going on.

[CrackertyAssCracker]

The economy is not a deterministic macro machine where a 1% increase in the money supply causes an automatic 1% increase in prices.

can you show me where Paul said this?

[Sam Grove]

To the die-hard Rothbardian (of which Paul is one), every increase in the money supply instantly turns into inflation.

I haven't heard anything like this from Ron Paul. Can you cite?

[Brandybuck]

I actually meant to type "automatically" instead of "instantly".

With that fix, it is easy find numerous instances of him saying that. Here's a quote from one of the article linked to above: "Inflation comes from the Federal Reserve printing money.", and a sentence later: "all of this injection of money (from the Federal Reserve) raises prices."

Without nerdish quibbling over the exact meanings of words, isn't that saying essentially the same thing? That increases in the money supply lead to price inflation? Yes it is.

The economy is much more complex than that, and Paul knows it. So I presume this is just a simplification for rhetorical purposes.

Increases to the money supply generally lead to price inflation, ceterus parabus. But the world isn't that nice and neat. First, there is a demand for money, so increases in the money supply that are LESS than the demand for money will not cause price inflation. Second, extra reserves languishing in bank vaults and ledgers are not circulating and so have no effect on the price level. Third, the natural deflation of increased productivity also has to be taken into account.

[Bill Woolsey]

This is sound, but reserves languishing on bank ledgers are demanded by the banks. This is an example of increased supply of a type of money matched by increased demand for a type of money.

[Brandybuck]

Except when the banks don't have a choice in the matter, and it's left up to "top men" in the Fed.

Banks do want to increase their reserves during a recession. They do this by slowing down their lending. Thus the tendency for deflation. But we have a case here where the central bank, which is not a market actor, forcing reserves on the banks to prevent this deflation. The knee jerk doomsayer only sees the level of reserves, and cries DOOOOoOoOooooooooom!

[BoscoH]

Here's what I know "on the ground" about this. A lot of wealthy people made the obvious bet that inflation would kick in by the end of 2011 and lost a lot of money in obscure options and securities. I know a few who did. I know one who still is. There is apparently a real cottage industry in financial management built on this bet. I know of a few million here and a few million there, but what if there are tens of thousands of these high net worth investors making these bets? Wouldn't that tend to prop up those factors that are really keeping interest rates low despite the obvious textbook macro math Dr. Paul presents?

[squarooticus]

Yep: it's the same dynamic that causes large short positions in the stock market to be bullish. And that's why we're likely to get high inflation only when the vast majority has ruled it out. It's yet another example of contrarianism at work.

[RandomJerk]

The expansion in the money supply has gone into a stock bubble and into bank capital reserves. So we probabky don't see an impact on inflation right now because these extra dollars aren't chasing consumer goods, which is where we measure inflation.

[Proprietist]

Isn't this answer kind of obvious? Because we keep racking up debt we are able to procrastinate the full onslaught of inflation somewhat. We are unwilling to raise taxes or cut spending, so the inflation will hit when the bills come due and monetary devaluation is our choice to fund our debt servicing - or when China stops buying dollars and we have no other mechanism to fund the military, entitlements, etc.

We're also somewhat propped up by the fact that alternative currencies are even less stable than the dollar, so banks in those countries are holding our comparatively less devalued currency.

[twv]

Brandybuck is right. Ron Paul often talks (or used to talk) about how an increase in the money supply INEVITABLY leads to inflation, in a mechanistic, Newtonian way, with soaring prices and hyper inflationary spirals etc etc. But this is not to be found in Mises or Hayek or (most of the time) in Rothbard - and certainly not in the better Austrian-influenced professors of monetary theory, today. It's just not there.

I remember Ron Paul predicting massive CPI inflation in the EARLY 80s. It was so embarrassing.

I like Ron Paul. He's one of the few politicians I almost admire. I hazard to guess that he's a good human being, a virtuous man. But he's no economist. He gets some things right, and he's gotten better over time (as information and events falsified past prophecies), but the gold-buggism often trumps good monetary theory in his verbal barrages. Too bad.

By the way, his gold-buggery and its counter-factual/sub-intellectual aspects does not repudiate the idea of returning - perhaps by way of denationalized money, precisely as he has suggested - to metal-based money.

[Isaac Bartram]

I am not entirely sure that predicting massive CPI inflation in the EARLY 80s was really that crazy.

If Reagan had not "stayed the course" with the Volcker treatment, God only knows what might have happened.

[Isaac Bartram]

IIRC, most of the hardmoney folks in the early 80s (Harry Browne, Howard Ruff etc as well as Ron Paul) were doing freehand extrapolations from what had happened 1972-80. If those trends had continued, who knows wher the CPI could have gone.

My guess is that the Fed, in fact, has been successful in warding off runaway price inflation. The question still lurking in the back of my mind is have they just built more structural distortions into the markets leaving chickens that have yet to come home to roost?

[Libertymike]

Don't forget the first executive order Reagan signed upon taking office on january 20, 1981.

[Isaac Bartram]

I had forgotten:

His first act as president was to issue an executive order ending certain price controls on domestic oil, which had contributed to the 1973 Oil Crisis and the 1979 Energy Crisis.

Actually, I'm not sure I ever knew to forget. I knew he accelerated the end of price controls (which had been ordered by Carter, but to take affect much later) but I didn't realize he did it that soon.

Reagan was not ideal but, on balance, I tend to think he made things better than another Carter term would have.

[Brandybuck]

To be fair Wirkman, Ron Paul is downplaying the full reserve gold standard, and emphasizing competing currencies. He's almost a free banking advocate on that score.

[Isaac Bartram]

How are food and energy not "core"? Almost everyone buys them on a regular basis. They are as core as core comes.

As I understand it food and energy are not included in the CPI because their prices fluctuate on a largely seasonal basis while othe items tend to increase in price on a more linear basis. I understand this justification but I don't necessarily endorse it.

The problem with it, it seems to me, is that food and energy also increase in price over the long term as well as fuctuating in price over shorter terms. On the other hand I can see that including food and energy might badly distort short term CPI estimates by including price increases or drops that were out of line with longer term trends.

IOW, the bottoms of the valleys and the tops of the peaks tend tend to get higher with each cycle, but nowhere are thes price increases accounted for in CPI numbers.

[Drake]

It's been one long expensive season.

[CrackertyAssCracker]

You should just do more smoothing on the more volatile components. That'll introduce a lag, but would still be better than what they do now. "They" all know this. But the real point isn't to get a decent measure of "price level". The objective is to obfuscate the amount of wealth confiscation taking place.

[robc]

And to avoid increasing payments for social security and other cola based increases.

If SS was tied to monetary inflation, it might already be broke. Or at least closer.

[Isaac Bartram]

I agree with both CAC and robc.

[bill woolsey]

The CPI does include food and energy.

There is a separate measure called "core" inflation that doesn't include them.

As others explained above, it is because food prices will rise very fast for a couple of months, and then fall back. And sometimes, they fall.

Energy does the same.

The Fed believes (rightly, I think) that acting to offset temporary increases in food prices by forcing down other prices is a bad idea.

[Isaac Bartram]

Thanks for the correction.

[Canman]

One thing that is often pointed out as a sign of inflation is the sub half gallon ice cream boxes. If there is no inflation or expectation of inflation, why did they reduce the size of the boxes?

One thing I just noticed when I bought one of those oblong square boxes of soda crackers with the four wrapped stacks of square crackers inside. While the box was still square, the crackers were slightly rectanguler in shape!

[David]

Paul's obsession with gold is a bit scary, and he's obviously got some blinders on when it comes to inflation as it exists today. That said, I do think we'll see significant inflation if the economy ever starts to legitimately recover. Velocity has dropped precipitously and banks have also been keeping extraordinary amounts of reserves due to uncertainty and the fact that the Fed is paying interest on them. When all of that starts flowing into the economy, we'll be in trouble.

[robc]

Velocity has dropped precipitously and banks have also been keeping extraordinary amounts of reserves due to uncertainty and the fact that the Fed is paying interest on them. When all of that starts flowing into the economy, we'll be in trouble.

I dont think so. When it starts flowing into the economy, inflation will go thru the roof, which will drop us back into a recession, killing velocity.

[Chris]

I believe Scott Sumner has a few things to say about this: http://www.themoneyillusion.com/?page_id=3443

Also, Charles Mann, in his book "1493", an account of the post-Columbus "Columbian exchange", has an interesting section about China's and Spain's use of silver as a currency and the inflation that resulted when tons of silver was discovered in the Americas. A hard currency does not a stable currency make. Yet another reason why Gary Johnson is more appealing than Ron Paul.

[Isaac Bartram]

Likewise, IIANM, there were bouts of price inflation (both local and more widespread) following major gold discoveries in the USA, Australia and Canada in the 19th century.

[CrackertyAssCracker]

So which fiat currencies from 1490 (just before the massive silver "discovery" which will probably never be repeated) would have been a better store of wealth than silver over the intervening time period?

[yonemoto]

Not yet. 2013-2015 is when it gets really bad.

[David Rairigh]

I know less than zero about monetary theory. However, I do know that when I go to the grocery store now I pay much higher price per unit than a year ago. Prices for building materials are substantially higher than a year ago. Is that not inflation? I get the feeling that we're just cruising along on everyone else's credit and pretty soon its going to come tumbling down.

[Michael Suede]

Libertarian News has responded to this article:

http://www.libertariannews.org.....inflation/

[protefeed]

Inflation of the monetary supply is not exactly the same thing as prices for goods rising -- i.e. price inflation. The two are related, but different.

We've definitely had enormous inflation of the monetary supply, but much of that sea of new money is parked in banks because the federal government started paying interest on reserves, and in a down economy they are essentially outbidding much of the economy for that money.

Some significant price increases, but mostly not captured due to fake government measures of price inflation.

But, once the economy heats up despite the best efforts of Congress to destroy economic recovery via brain-dead laws, that money will start flooding the marketplace, and the monetary inflation will finally start to translate into really big price increases that even the best efforts of the feds will not be able to hide.

[Daniel]

Riiight, because once money velocity goes up ... the Fed will never take money out of circulation.

Or maybe the Fed are bunch of conservative bankers who actually care about their inflation-fighting credentials (misguided as they may be) ...

[CrackertyAssCracker]

Well, Volker certainly did. Bernanke hasn't shown any inclination to ever do anything except inflate.

[Daniel]

I take it you are either ignorant or retarded (or both)

In the 1980s, when inflation was at 4%, conservatives were screaming that money is too tight and it's killing the economy.

Nowadays, with inflation slightly below 2%, you morons are yelling that Bernanke is causing a disaster (when, in reality, money is TOO TIGHT ! )

What planet do you mouth-breathers live on ???

[protefeed]

I appreciate the civility and diplomatic tact of your reply, and would like to subscribe to your newsletter.

[Vanmind]

Inflation hasn't shown up yet in (phony CPI-measured) consumer prices because it is still earmarked for shiny new r*ghead-killing equipment to replace that which the MIC is destroying daily.

[To the tune Rock Me Amadeus]: "Broken window broken window, broken window..."

[Tom Tebow]

There is massive inflation in all of the things that the government doesn't count in their index, which by the way are all of the things that everybody has to buy. I see the inflation every day in all of thing that I buy. Daily observations about the things that you buy every day are completely in line with what Dr. Paul says about inflation, and if the economy ever heats up, the problem will increase exponentially.

[Chris]

Funny how selective that inflation is, completely avoiding everything on the government's index while at the same time "massive"-ly attacking all those off-index products and services. It sure knows how to avoid the detection of economists.

[Anon]

inflation using the 1980's model is 11%. its convenient though that the government can change the CPI at will. so yeah, anyone with half a brain should realize the absurdity to claim that inflation is actually falling.

http://www.shadowstats.com/alt.....ion-charts

and Lamia is right that AEI arent Keynesian shills. but they are bloodthirsty chickenhawks who are desperate not to end the senseless wars. they have just as much at stake lying to prove Ron Paul wrong.

[Thaddeus S. Kaczor, Jr.]

Forget all the abstractions about 'Economic Theory', all the phony and thoroughly baked Government statistics, and all the high-minded international Bankster Propaganda spin. Has anyone been grocery shopping over the last ten years? Has anyone been paying their electric, gas or oil bills? How about Health-Care premiums? Tuition? (well, that;s a WHOLE 'nother kettle of fish!). The point is, semantic pedantics and arguments over economic abstractions and theories based on skewed statistics pale in relation to what the real-world is offering to the average man and woman in America. A shrinking dollar that evidences itself with every purchase of real-world staples that coincidentally fail to find their way into the CPI belies the insane notion that everyone from Ben Bernanke to many 'leading economists' cling to to justify their failed analyses and cognitively dissonant rationale for keeping their jobs. Ask ANYONE who is raising a family on wages at or below the medium American income, and you will get a different and much more accurate reading than you will get from some insular government bureaucrat or well-paid economic spin-meister.

[Bill Woolsey]

The Fed has planned a 2% inflation for the last 12 years (at least.) Actual inflation varies, but it has been close. This planned inflation is caused by money creation.

The failure to hit 2% exactly all the time has many causes.

The Fed has recently come out and said that it is aiming for 2% inflation in the future and that it will use the consumer expenditures index. It includes food and energy.

However, this is a "flexible target" aimed at the medium term. They won't worry much if inflation is more or less than 2% in the short term. Often, they look at "core" inflation when the make these judgements about the short term and the medium term.

Headline inflation is up, but core inflation is under control. And they do the opposite--frequently. Headline inflation is down, but core seems stable.

Consumer prices are not a good measure of inflation, there are capital goods and residential housing as well as consumer goods and services. These are measured with the GDP deflator, along with all consumer prices. It has been growing about 2% as well.

Resource prices, like wages, are also part of the inflationary process. Money creation raises those as well. The 2% inflationary plan means wages grow 2% more than otherwise.

Even if the "true" price level is stable, it is completely possible that your grocery bill would rise and your pay would stay the same!!!!!

One of the problems with focusing on the CPI, a measure of the "cost of living" which is all we have to make estimates of changes in people's standards of living in the long run, is that monetary institutions have next to no direct effect on that.

Even if the quantity of money were fixed, it would be very possible for the prices of gasoline and food to shoot up and your income would stay the same, and you would just be poorer.

When I read, "I can see inflation in the grocery store and the pump," to me it just suggests confusion. If we had a gold standard or a fixed quantity of money, food and gas prices could never rise? The "cost of living" would not rise? Wrong.

Changes in the monetary base tell us very little about what will happen to inflation because they can and almost certainly will be reversed.

[robc]

Actual inflation varies, but it has been close.

No, it hasnt.

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.

Not even fucking close to 2%. How you can seriously say they are doing a good job keeping it close is beyond me.

[robc]

they can and almost certainly will be reversed.

And bullshit. We will never see 2007 monetary base levels again.

[Bill Woolsey]

I agree that we will not see 2007 monetary base levels again. I think we will come close to returning to the growth path they were on. And that will be much lower than today.

What possible reason would you think that M2 is a good measure of the quantity of money, much less "inflation?"

The Fed isn't targeting a 2% growth rate for any measure of the quantity of money, much less M2. It is targeting a 2% growth rate for the consumer expenditure price index.

I don't favor their approach at all.

[Bill Woolsey]

The Fed has planned a 2% inflation for the last 12 years (at least.) Actual inflation varies, but it has been close. This planned inflation is caused by money creation.

The failure to hit 2% exactly all the time has many causes.

The Fed has recently come out and said that it is aiming for 2% inflation in the future and that it will use the consumer expenditures index. It includes food and energy.

However, this is a "flexible target" aimed at the medium term. They won't worry much if inflation is more or less than 2% in the short term. Often, they look at "core" inflation when the make these judgements about the short term and the medium term.

Headline inflation is up, but core inflation is under control. And they do the opposite--frequently. Headline inflation is down, but core seems stable.

Consumer prices are not a good measure of inflation, there are capital goods and residential housing as well as consumer goods and services. These are measured with the GDP deflator, along with all consumer prices. It has been growing about 2% as well.

Resource prices, like wages, are also part of the inflationary process. Money creation raises those as well. The 2% inflationary plan means wages grow 2% more than otherwise.

Even if the "true" price level is stable, it is completely possible that your grocery bill would rise and your pay would stay the same!!!!!

One of the problems with focusing on the CPI, a measure of the "cost of living" which is all we have to make estimates of changes in people's standards of living in the long run, is that monetary institutions have next to no direct effect on that.

Even if the quantity of money were fixed, it would be very possible for the prices of gasoline and food to shoot up and your income would stay the same, and you would just be poorer.

When I read, "I can see inflation in the grocery store and the pump," to me it just suggests confusion. If we had a gold standard or a fixed quantity of money, food and gas prices could never rise? The "cost of living" would not rise? Wrong.

Changes in the monetary base tell us very little about what will happen to inflation because they can and almost certainly will be reversed.

[Vote Prohibition]

http://www.prohibitionparty.org/index.html

[Bill]

Before you get into economics, the first and primary argument for the gold standard is an issue of metaphysics: gold is real, paper is not. Gold is a symbol of the principle that wealth, like every human value, must be produced by man's effort. Giving a bureaucrat a printing press is akin to assigning to him metaphysical primacy over nature and existence, like that assumed by the "living god" pharoahs of antiquity; when their whims failed to produce a rainstorm or a bumper crop of wheat, it was the people who suffered the resulting famine and starvation (as they now suffer the effects of having their money destroyed by Bernankuntamun).

For the same reason and by the same principle that I cannot wish a ZR1 Corvette out of thin air, the government cannot wish wealth out of thin air.

In 6000 years of human civilization, fiat money has failed every time and in every place that it was tried, because the only way to (temporarily) support a fiat currency is by destroying its value. It will never work, but not because I said so--because reality says so. Reality says you can't wish a value out of thin air, regardless of whether you are an individual man or a national government of individual men.

Oh, and the government statistics are utter bullshit, does anyone actually take the CPI seriously? They have a racket to protect, but sooner or later reality will call in the chips; it always does.

[Bill Woolsey]

Bill:

Shares of stock are just pieces of paper. They are not real, like drill press machines. So, shares of stock can have no value, right?

But, of course, they do have value, because they are claims to drill press machines, and many other capital goods. More importantly, they are claims on the profits that can be earned from the output produced by those drill press machines.

A corporate bond is just a piece of paper. It has no value, right? Well, it does. It is also a claim against the value of the output the corporation will produce.

Most money takes the form of bank deposits. They aren't even paper, but electronic records. They don't have value, right?

Well, they are claims against the bank, which has claims against borrowers, who will produce output in the future.

With a gold standard, bank deposits are tied to gold. But the gold doesn't have to be used as money. It can be used for jewelry, dental work, and circuitry. But the gold standard keeps banks from issuing too many deposits.

Paper (or electronic records) can serve as money, but there needs to be some rule to restrain the amount issued to the amount poeple want to hold. Redemption in a fixed amount of gold is one, simple rule.

The sort of inflation rule that central banks follow today is an alternative approach.

[Bill]

You are equivocating. Stocks, bonds, deposit slips, etc. are, as you imply, legal representations of existential assets, the base and value of which is the value of their work and product (which is frozen in the form of money).

I did not say or imply that we should be exchanging gold coins in our modern economy, but the dollar has to be based on gold (which means: based in reality). I personally like Steve Forbes' idea to just fix the value of the dollar to a weight of gold and let it trade up and down in that range, but the "competing currency" idea is compelling as well.

[Jesubub]

Paul's predictions are mostly tied to the dollar losing its reserve currency status. He understands that as long as we can export our monetary inflation, the effects at home can be delayed or minimized. If the world starts dumping dollars en masse, they'll lose their value at a much faster rate. It's premature to dismiss Paul's warnings because the facade is still fairly intact.

Does anyone who's attempting to debunk Paul's position really want to subject the purchasing power of their 401k accounts to the conditions created by those $trillions in foreign reserves coming home to roost?

[Paull]

The United States has been the most stable growing country in the world for a long time

Many other countries have grown, but do not have the stability. Europe was poor but stable, then rich but in transition to socialist, now poor and socialist. Likewise Japan due to it's banking crisis

This is the ONLY reason that the US can act as irresponsibly with its debt and Federal reserve as it has with few repercussions.

To the Point: rampant inflation is prompted only when a competitor (even a friendly one) is truly showing one up.

Look at Japan vs. United States in the 70's. The Japanese had a better model, so the dollar went down, along with its purchasing power. the US and its citizenry were not used to this notion, so they panicked and so we have the stagflation of the the 70's.

So it takes a spark to start a fire and that spark hasn't happened yet.

If tomorrow (July 2, 2012) Germany said it had 250 Billion to spare from its rainy day fund and would use it to bail out the EU as long as Greece was excised from the EU, the US dollar would be worth $.50 by winter.

If Germany did the right thing, it would make the US look like morons and likewise the dollar and its worth.

It takes someone opening a window, letting in a stiff breeze to start the house of cards a-falling.

BTW: is the lending of $ to banks the only way that the Fed releases its greenbacks? No other means comes to mind. Please let me know