Tuesday, November 05, 2013

The inflated menace

I'm no economist, but I've done some reading in that area, and I remain flummoxed by the right's continual focus on inflation. We've faced all sorts of problems since 2007 -- but inflation? As I keep asking: Do you see any inflation around here?

Krugman has a fine post up about inflation hysteria. Not long ago, Senator Pat Roberts (a tea partier) castigated Janet Yellen's "inflationary" policies of "pouring billions of newly printed money every month into our economy, and artificially holding interest rates to near zero."Krugman thinks Roberts is full of it.

He provides a chart which proves that inflation has remained absolutely static since the crisis began in 2007. "It’s not often," says Krugman, "that you see an economic theory fail so utterly and completely."

I would add this: Inflation manifests as a wage-price spiral. As long as wages remain depressed and more-or-less immobile, inflation isn't a problem. Of course, libertarian-minded individuals seem incapable of understanding this basic point.

Let's quote Krugman again:
I can, in a way, understand refusing to believe in global warming — that’s a noisy process, with lots of local variation, and the overall measures are devised by pointy-headed intellectuals who probably vote Democratic. I can even more easily understand refusing to believe in evolution. But the failure of predicted inflation to materialize is happening in real time, right in front of our eyes; people who kept believing in inflation just around the corner lost a lot of money. Yet the denial remains total.

I guess it’s a matter of who you’re gonna believe — Ayn Rand or your own lying eyes.
As I've noted more than once, a Libertarian is a magician who keeps reaching into an empty top hat because he won't give up on the theory that a rabbit must be in there somewhere.

One of Krugman's readers offers this:
Ayn Rand, like a violent video game, compels by catering to our gut desires. Doom became legend by allowing nerds to blast everything with a shotgun. Rand entices the same ineffectual teenage minds with thoughts of unlimited license.
Krugman's post fails in only one area: He doesn't complete the right-wing cliche. Allow me to fill in the rest:

"Inflation's gonna getcha, ladies and gentlemen -- so pour all of your money into gold and silver! Pretty soon, gold and silver are gonna be the only things worth anything!"

The first time I heard someone spout that line was around the time Bobby Kennedy decided to run for president.

Earlier this year, a lot of people lost a lot of money by following the advice given by gold bugs: See here and here. Y'know who promulgates gold buggery? People who have shares in gold and silver mines to sell. Like these guys.

Why do I get the feeling that the same people who natter on about the menace of inflation are also the people who fixate on this Cannonfire post? (It still gets about a hundred hits a day.)
Comments:
it is interesting juxtaposing this article back to back with your previous - the big bust theory...
my thought has always been that when the value of your money goes down and everything else goes up - that is inflation.. maybe i have the wrong description for it, but i think it explains how things are different now then they were in your dad's time - nice house btw..
james
 
I feel so sorry for those ignorant Chinamen who have been importing several hundred tons of gold annually for the past several years instead of investing their hard-earned money in the valuable paper issued by Krugman's friends at the Federal Reserve Bank. They started out ok, buying a couple of trillion dollars' worth of US paper, but then they went wrong and started buying gold like primitives. I wonder what would happen if they started cashing in all that paper so they could buy more gold. Maybe people in other parts of the world would start wondering if pieces of paper are really "money."
 
There are many many "independent" tea baggerish blogs on the internet that promote hoarding a few years worth of dried foods along with gold and silver.

I asked somebody once, just how would one buy a loaf of bread with gold? "That wouldn't cost more than a bit of gold dust", right, I asked?

"Than that's how you would pay, with gold dust" was the response I got. It seems to me that gold by it's very nature would cause inflation since smaller items could not be purchased with the proper amount of gold.

 
What do you think would happen if the Chinese decided to cash in their gold? Perhaps people would start asking, what's valuable about the shiny-shiny?

Of course, the real wave of the future is Vanadium.

Inflation isn't a wage-price spiral, though. Thatcher got elected to defeat inflation. She did a good job of keeping wages down, but price inflation rocketed up. In any case, as long as wages grow faster than prices who cares about inflation? People are still getting better off.
 
Stephen, inflation causes hardship to those on fixed incomes. It also discourages saving, because money in the bank just turns to crap.

It discourages lenders, because they will be paid back in currency that is worth much less than that they loaned out, so lenders charge huge interest rates. This discourages businesses from investing in new enterprises and new infrastructure, and thus reduces employment opportunities. It is very difficult to make plans for production when you don't know what the pricing environment will be, and you don't know whether consumers will be inhibited by higher prices or will engage in panic buying of your products.

Inflation encourages rampant and parasitic real estate investment that is often mere "flipping" with no real value added. This was the basis of the Savings and Loan crisis of the 1980s--the lenders backed very questionable enterprises based on the promise of high returns.

Inflation is a disincentive for young people to save for their future, and to live entirely in the moment--whether this means making lots of money and spending it, or dropping out of the workforce to pursue private interests.

While those who have good secure jobs and live paycheck to paycheck may weather a bout with inflation with minimal pain, inflation has very bad effects for old people, young people, investors, entrepreneurs, and lenders. It's very disruptive to the economy.









 
We haven't used gold as currency for well over a thousand years. The Anglo-Saxons used silver, and even then a penny was a day's wage. Later we had paper backed with the theoretical promise of gold. Then just paper. Money has value because the government says so. The Romans used iron. Other places have used salt or conch shells. Silver was most common, then gold-backed paper. What it all has in common is that the government will take taxes in it.
 
Have you never heard of the paradox of thrift? You don't want people saving up all their money, that'll wreck the economy.

As for lenders worrying about interest rates, and investors about prices, rubbish. Lenders will just charge higher interest rates, but higher only by the rates of inflation. Which is to say that the real-terms ROI will be the same either way. It's deflation that discourages consumer spending, as it results in decreasing prices. You seem to be assuming that people will otherwise just sit on their money. Obviously, that is heavily discouraged by inflation.

Inflation is pretty harmless, as long as it's accompanied by real-terms growth. Trying to make the economy healthier by tackling inflation is like making yourself stop smoking weed by chopping your hands off.
 
This comment has been removed by the author.
 
Gold has value because of petroleum. If petroleum becomes scarce and no viable replacement is found, gold will become almost irrelevant.
 
To anonymous. Many elderly homeowners are easily victimized by the reverse mortgage insurance requirement.

Lets say an elderly homeowner wanted to take out 300 dollars a month on a paid off home now worth 150,000 dollars. Mortgage insurance premiums might equal what the homeowner is taking out for themselves. A one for you, one for the government sort of deal, a monumental rip off. Many elderly would be a lot better off if the government simply respected their ability to pay off a home once without having to gouge that homeowner with mortgage insurance.

This in turn would help the local economy as well as that equity would most likely be re-spent locally.
 
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