Austrian economists have been crying doom over inflation fears for 3 years now, but none of it has materialized. They've also been insisting that bond yields were going to go through the roof any day now due to the Fed's inflationary policies, yet many years later, the yield for 7 and 10 year teasuries was *negative*. People have been paying a premium to park their money in U.S. Treasuries long-term.

The idea that nobody saw the collapse coming is preposterous. Many prominent Keynesians saw the housing collapse coming a long time before it happened -- Nouriel Roubini and Paul Krugman chief among them. They were called Cassandras at the time, but they ended up being right, and they weren't alone.

So yeah, guys like Schiff got it right too, but Cassandras don't get credit for being right if the methods they used to arrive at their correct conclusion are ultimately proven wrong, and time and time again, inflation hawks have predicted dire consequences of the Fed's actions that have not actually happened. At some point, one loses patience taking their arguments seriously. I probably could have used a more artful term than "crank", but, seriously, the Austrian guys are trying my patience about as much as climate skeptics these days. (BTW, bad week for those guys.)

Prices are rising because the Fed is pursuing a long-term inflation target of around 2%. There will be individual months where prices rise faster than that, but that's the target they're aiming for. So yes, prices are on a long-term rise, and that's not by accident -- the Fed *wants* inflation, and it's gettting about the rate it wants.

I do think for myself, and I've got a coworker who feeds me with a lot of thoughtful, well-argued stuff from the Austrian perspective -- but while Austrians start out with principles that make sense in the gut, they don't end up with models that match up with the real world. Keynesians don't always get it right, either, but in a choice between letting one out of every ten Americans sit idle or borrowing money cheaply to pay them to work, I'm going to choose the latter.

(And you still haven't backed up your "nearly 50%" statement.)

Okay, who are you, and what have you done with the usual lunatic we call "TigerJimmy" ?

I did, actually, but you dismissed it as volatility and too short a time sample.

The new money does not enter the system simultaneously, that's the problem with inflationary monetary policy. At least we agree it is deliberately persued by the government. You don't yet realize that this deliberate policy is theft. Please read that short book by Murray Rothbard.

I shall tackle "climate change" on my next post, tomorrow. :-)

Love it, Mark! At least it's interesting, I hope.

I really don't think you did.

You said prices are "up around 50%" for food, gas, clothing etc. I asked you for evidence of this specific claim, and you told me to do my own googling to find it, providing only a single link from a news story that cited exactly two annual number for price increases, those being a 10.2 rise in dairy prices and a 33.3% rise in gas prices.

In what universe does that count as support for an increase of "around 50%" over three years? Suppose I offered you an investment opportunity and promised you a rate of return of 50% over three years. You give me some money, and I come back in a few years and say "well, I got you 33% from oil company stocks and 10.2% from dairy industry stocks, but the overall rate of return was in the single digits." You'd say I over-promised and under-delivered on the investment.

My core argument is simpler than just volatility and cherry-picking the time window -- you have also provided no support for your 50% number, and have only shown double-digit rises in prices within a very small number of commodities (gas and dairy products.)

I totally concede the point that prices are rising higher within certain sectors and commodoties, but you significantly overstated your claim of a much greater rise within those volatile sectors. Further, I do think the volatility argument has merit, especially with the gas prices.and you've provided no evidence to the contrary.

I'm happy to engage in a higher-level discussion of the relative evils of inflation and deflation with you, but before we do that, we need to at least agree on the problem we're trying to solve. It's widely understood that the Fed is pursuing an inflation target in the low single digits, and all evidence now points to them meeting that target, even if it spikes higher within specific months in specific sectors.

Our economy has a LOT of problems. Inflation barely makes the list.

I think you may be confusing the effects of inflation with the actuality.

As TigerJimmy stated, inflation is not rising prices. It is an increase in the money supply that will eventually, inevitably, cause prices to rise. With the trillions of dollars that the Fed has dumped into the money supply, the inflation is already a done deal. Now we're just waiting on the effects.

Things cost pretty much the same today as they did 50 years ago. In 1962 a man earning good wages could buy an entry-level car for about eight weeks wages, say $2,000. In 2011, a man earning good wages can still buy an entry level car for about eight weeks wages, say $20,000.

The car hasn't become more expensive, at least not in the only currency that counts: how many man hours did it take to buy it. The money has become worth less. That's inflation.

If I were smart enough to be an economist, perhaps I wouldn't have this nagging suspicion that there is a basic flaw in our whole economic system. Apparently in order to sustain itself the economy has to grow at an annual rate of 4% or so. If it doesn't, then bad things happen. Well, we're living on a finite planet with finite resources, and open-ended growth like that is simply not sustainable. What is going to happen when it's time to "pay the piper"?

I have this dreadful suspicion that we're about to find out.

tanstaafl.

This is not the canonical definition of inflation, nor has it ever been. An increase in the money supply is an increase in the money supply. Inflation is a rise in the prices of goods and services in an economy.

Austrians have tried to redefine the term, but referring to my aunt as my uncle doesn't cause her to grow facial hair and take an interest in football.

You guys are more than welcome to bring your own evidence, theories, and arguments to the table, but if we can't use the agreed-upon vernacular of the field of economics, we're not going to have a very productive discussion.


The price of the car is higher, therefore, there has indeed been inflation. But the rise in the price of the car does *not* track in any meaningful way with the increase in the supply of money.

In your particular example, you've not used the correct numbers, and your example assumes that the rate of increase in car prices tracks with the rate of increases of other prices of goods, which isn't the case.

$2,000 in 1962 is worth about $15,000 today, or an annualized rate of increase of about 4.25%. Econonists generally believe that inflation at this level can be useful to an economy, because it encourages people to put money into capital, investments, etc. rather than hoarding cash, which doesn't help an economy grow.

Obviously, runaway inflation is a bad thing, but we're not seeing that now, and the overall rate of inflation in the last 50 years is manageable.

Regarding the supposed need to "pay the piper", Paul Krugman addresses this very well in this piece.







Just because we're borrowing cheaply and injecting money into the economy doesn't require that there be an equal and opposite reaction later. Economics isn't physics where the laws of motion need to be obeyed, nor is it religion where actions are understood to be inherently good or evil. Sometimes borrowing a lot and spending a lot is the moral action, and sometimes saving a lot and spending very little is the immoral action. It's all about context.

Yes, those are in a single year. Compound over 3 years.



33% in one year is considerably more than 50% in 3 years. For dairy, 10.6% CAGR is 35% over 3 years, which is "about 50%". Prices on commodities are up substantially over the last 3 years. I don't really understand how anyone could argue that point. Gold is up around 100% in that same period. Cotton is up almost 400%.



Well, those are just the first couple that came up. Commodities are up substantially across the board, like I said, and it doesn't take much looking to see that.



OK. You know what? I just don't know what to say to this. I really don't.

There is no dispute that money supply has expanded dramatically. Even the Federal Reserve admits that it has done that deliberately.

So I guess your argument is, "so what? inflation is a good thing." Inflation is a mechanism by which the government and its cronies (wall street banks and other preferred industries) get an unfair advantage by using what is essentially counterfeit money. The effect of this is to diminish the value of savings in federal reserve notes or US dollar-denominated assets. It is literally stealing from people who have saved.

We've seen several decades of expansionary monetary policy and artificially-low interest rates and we're now (just barely starting) to reap the results. The problems with our economy are directly related to these misguided ideas and the central planning which seeks to manipulate markets by inflating bubbles (.com, housing, and now commodities).

I don't understand how someone can stand on the brink of economic apocalypse (where we are right now) and call a group with different ideas "Cassandras".

Edit: I guess to a certain extent, you're right. IF the extra money entered the system uniformly, there would be no issue. In that sense, inflation doesn't really matter. It doesn't matter if we all added a zero to the money in our pockets. But when SOME people do, and not others, then it matters a great deal. It's stealing.

The problem isn't inflation, per se. The problem is central planning as opposed to a free market in money. When the government controls the money, they can and will manipulate it to the destruction of the economy. This has been the case repeatedly throughout history, and it's the case here, too.

While I don't agree with the "literally stealing" hyperbole, I totally agree with this. In fact, that's the point. We don't want people saving. We want them investing. The more people put cash in their mattresses, the less money is moving around to employ people. This isn't merely printing more money to pay off loans at an artificially discounted rate; it's encouragement to put your money elsewhere.

Would you buy an investment from me that you plan to hold on to for three years if the only thing I told you about it was that it's gone up 33.3% in the last year? No -- you're a smart guy, so you'd want to know the long-term performance, and if you look at gas prices -- and I even gave you a link to the chart so you could look yourself -- you see that they were even higher than they are now in mid-2008, then they tanked (ha!) all the way down to $1.61, before rising again over the next few years:



Choosing the nadir of that wild swing as your starting point for the price of a commodity that's known to be far more volatile than others is a flat-out masterpiece of cherrypicking, but even with that cherrypicking, you're wrong. Let's look at the 36-month chart:




The price of gas on October 25, 2008 was in the $2.60 range. It's $3.46 today. That's... a 33% increase over 3 years -- or nearly the same growth rate over 3 years as over the past year -- in other words, there was no growth at all in the two years prior.

It looks like you're trying to get away with the same sleight-of-hand with the dairy prices. I don't have those handy, but simply taking the one year price increase and extending it back 2 years is just plain wrong.

This is infuriating. I know you're smarter than this, but the reality of the situation belies the point you're trying to make, so you play dumb and suggest you can simply take a one year growth rate and extend it back three years.



Everyone knows what historical inflation rates look like, and everyone knows that the Fed targets an inflation rate in the low single digits -- it's not officially written anywhere, but it's well-understood by those who plan their investment strategies. If you're putting money in a non interest-bearing account and expecting it to keep up with an inflation number that anyone can look up at any time, you're a sucker.

By and large, governments have controlled the money in the manner you're referring to (via a central monetary policy) only since the late 19th century. There are a few that predate that. The Sveriges Riksbank and the Bank of England, generally considered the first central monetary regulators in modern history, were established in 1668 and 1697, respectively. As far as I know, they're still running just fine. There was a serious period of hyperinflation in at least one period in medieval China that would tend to meet your expectations. I can't really come up with many central banks that have failed, but I'm totally willing to be wrong. I searched for that, but the only failures of well-established central banks I found were the ones of the former Central Power banks in the Interbellum, and there were significant external factors involved there.

Anyway, what I'm getting at is: can you show me some documentation of economic destruction as a result of central planning? Because I can't seem to find any.

I probably should have said "to the detriment of the economy". I would argue that what we're seeing with the sovereign debt crisis in Europe or the runaway government spending in the US are examples of that. Certainly the Weimar Republic and Zimbabwe are examples. The total economic collapse of the Soviet Union is another example of failed central planning. North Korea vs. South Korea? Central planning is bigger than simply fiat money, but fiat money is a boon to central planners, and possibly a prerequisite. I probably didn't articulate my point very well.

It is certainly true, however, that governments with control of the money supply can spend as much as they want on whatever they want (up to currency collapse), and this is not possible with a commodity-backed currency. The great thing about a hard currency, whether gold or otherwise, is that it's beyond the reach of greedy politicians.

Would the collapse of the Soviet Union in 1991 qualify?

tanstaafl.

I guess I'm not going to get an answer on where evidence of this mythical runaway 50% inflation is, but I came across an interesting post today that lays out a moral case for a non-zero level of inflation to respond to recessions and depressions, a case that seems in tune with (or at least not entirely incompatible with) elements of Austrian economic theory.

The post itself is a bit heavy in Econ speak, but there's one section that really jumped out and reminded me of our discussion here about the perils of inflation, bailouts, etc.



The portion I highlighted gets to the heart of the matter, which is that just as foolish borrowers get in over their head, lenders don't have a perfect record either, and it's only the lender in a loan transaction who's required to be trained in matters of finance and to recognize credit risks. Lenders ought to do their job, and if they don't, they ought to absorb a good portion of the financial penalty that comes from not doing their job. Inflation ends up being a convenient way to do this.

Oh, and by the way, the retaining wall and walkway turned out pretty nice:

I give up on providing you with evidence. You don't want to accept commodity prices as evidence, though probably nothing is a better measure of inflation than the price of silver, gold, and currency exchange vs. the Swiss Franc (less so know as they are mistakenly devaluing that). All these are hugely up in price since the bailouts began. It's fine with me if you don't believe that inflation is happening. You asked a question about mortgages and financing, and I thought you might find this hedge strategy interesting.



This "justification" is basically saying that when the banks lower their lending standards too far, thus assuming too much risk, we should bail them out by devaluing the currency rather than letting them go out of business as they should. Of course, when things go well, we'll let the banks keep all the profits. Its another way of socializing losses and privatizing gains, which is the exact kind of corruption we have today. Calling it "moral" is appalling.

Inflation steals from people who have saved by reducing the value of their savings. I don't think an Austrian-school economist would find this acceptable, nor would a libertarian find it moral. In fact, I think they would argue that this kind of thinking is exactly the problem with fiat currency. It allows the government to preferentially protect some market participants (banks) at the expense of the others (savers).

Very nice!

Wait, didn't we both agree earlier in the thread that inflation is happening, and that the Fed is deliberately pursuing it? I've acknowledged from the very beginning of the thread that we are in an inflationary period, so much so that I agree with your statement that leveraging my house is a wise financial play. So why are you now suggesting that I don't believe it exists?

I really feel like you're not being straight with me in this discussion if we can't even agree on what we've already agreed on!



Why are those items better than measuring the things people actually need to buy in order to live? American families don't eat, live in, or drive to work in gold, silver, or Swiss francs. Looking at the dollar relative to those commodities is certainly a fair way of judging which of those two certain segments of the market think is a better thing to hold on to at any given time, but their prices are not measures of what it actually costs to live in the country, because they aren't goods that people use or need in any appreciable way. If you pick a few items out of a basket of millions of things people can buy, you're not measuring the price of anything other than those few items.

If you define inflation as "increasing the money supply" or "debasing the currency," then you can pretty much call anything we've done since we went off gold "inflation", in which case we just can't have a meaningful conversation, because you're using your own definition of the term, not the one economists use. If, however, we try to talk about it in rising prices as we've been doing here, we really do need to be precise about what prices we're measuring, and you showed a remarkable lack of precision in your numbers above, and seem to be latching on to items that we all know have skyrocketed in value against the dollar, while leaving out much more important things that have stayed much flatter.

Peanut butter prices just spiked like 30% because it was a bad peanut harvest. Do we say we're headed for 30% inflation? No, of course not. You need to look at things in aggregate, and when you do (whether it's the CPI number you claim is misleading, or the MIT index which looks at the price of nearly everything) you see somewhere between 2-4% for this year. In good times, that would be unacceptable, and a drag on our economy. Right now, it's the only thing that's keeping some people at work, feeding their families, and participating in our economy.



No, that's not what the author was saying at all. Read the last paragraph I quoted, which states that nothing about the fed targeting a nominal GDP number (which will implicitly target a moderate inflation number during economic downturns) prevents us from liquidating bad lenders when necessary. He elaborates on this in the following paragraphs, which I didn't quote above:



The argument being made is that having the Fed as the lender of last resort makes it an excellent check on the power of large banks, who can no longer claim that they're too big to fail. I wouldn't expect someone who fears government control of money the way you do to agree with the wisdom of this, but it certainly makes economic sense that once individual borrowers and businesses have somewhere else to go for emergency credit if their bank goes under, the moral case for bailing out those bad banks is significantly weaker, and we can limit the losses mostly to just the bank that goes into default or bankruptcy.



There might be a grain of truth to this statement if banks just kept peoples' money in vaults, but they also lend it out so that the money can do something productive in the economy, and inflation has a positive effect on one side of that transaction that you completely ignore when you focus exclusively on savings accounts. Simply saying the ones who make bad loans should fail doesn't address the problem of what happens when the losses cause a systemic shock to the economy. Given that we're not ever going back to gold or abandoning fractional-reserve banking, we need tools to deal with these things when they happen, and inflation is one such tool to balance the distribution of losses between creditors and debtors.

Inflation makes "saving", in the sense of stuffing your money under your mattress, less appealing than "saving" a.k.a. "investing" by putting your money into other enterprises in the hope of an above-zero return. The former removes value from the economy, and the latter adds value, so incentivising it that way round is a Good Thing.

Notice that inflation does not "steal" any value from savings that are not money: property, for instance, or art. It encourages the ownership, and thus production, of things that are real things, and not things that are just money. How is the opposite of this desirable?

Peter

Until the loss of purchasing power of the money (aka: inflation) is greater than the appreciation of real value of the property...

For lack of a better metric, I define real value as "How many hours of work did/does it take to obtain the property."

tanstaafl.

Unfortunately, that leads to a divide by zero error in the case of Paris Hiltons and Donald Trumps who (a) inherit their property or (b) gain property through investment income. Unless the number of people in the economy who gain income primarily through wages remains constant, your metric is flawed. "Real" versus "nominal" simply means "with or without inflation adjustments." We can bicker over exactly how those adjustments are measured and applied, but simply trying to boil things down to how many hours of work the average person has to work in order to buy something ignores the realities of our economy.

The opposite is less desirable for people who have insufficient funds to bury their money in property.

It's also less desirable for people who are retired from the workforce and trying to live from their savings, which must be kept in a more liquid form than property. Their savings must be kept as low-risk as possible for the short-term, since they aren't likely to be around long enough for the "long-term" to even things out.

Other than that, I agree.

Cheers

But the "real value", thus defined, isn't affected by the work:money ratio or the house:money ratio, as long as they change in sync. So your "until" isn't really the case. As long as "the appreciation of the real value of the property" isn't a negative number, inflation isn't "stealing" any of the property's value.

If what you're saying is that you have a mixed portfolio, with some of your savings in property and some in money, then yes of course, as in any portfolio, the losses on your poor long-term investment (money) can outweigh the gains on your good long-term investment (property). Like I said, the reason that (a small amount of) inflation acts to increase prosperity and productivity, is that it makes money look like a poor long-term investment.

Peter

Those are excellent points, both of which speak to (a) the fact that we ought not to have any inflation during the good times when it's a drag on the economy, and (b) why we ought to have a strong safety net to help the poor (who can't afford to invest money) and the elderly (who live on a fixed income.)

Generally, they don't, at least not in the short term. Wages are inherently sticky, so it's quite possible for the real value of investments to freeze or decline relative to one's salary during an inflationary period. They'll eventually catch up, but not necessarily when any given person will need to cash out. This, again, is a reason why we don't pursue inflation for inflation's sake -- it's not a universally good thing.