The case for higher inflation

[Puppycow]

In the world of economics, there are a lot of trade-offs, and many economic clouds have silver linings. However, people don't always see the silver linings.
Take a weak currency for example: Most Americans assume that a weak dollar is bad for America. At the same time, most Americans assume that a trade deficit is bad for America. Outsourcing work to countries with cheaper labor is bad. But then so is paying high prices at the store for the things we need or want.

Inflation is one of those things that almost everyone thinks is bad. And of course, I should hasten to add, it certainly can be bad if there's too much of it. But what is the Goldilocks rate of inflation? Zero? One or two percent? Three percent? Four or Five? We know that negative inflation (deflation) is bad.

The Case For Higher Inflation

Olivier Blanchard, normally at MIT but currently the chief economist at the IMF, has released an interesting and important paper on how the crisis has changed, or should have changed, how we think about macroeconomic policy. The most surprising conclusion, presumably, is the idea that central banks have been setting their inflation targets too low:

Higher average inflation, and thus higher nominal interest rates to start with, would have made it possible to cut interest rates more, thereby probably reducing the drop in output and the deterioration of fiscal positions.

 

[Tippit]

In the world of economics, there are a lot of trade-offs, and many economic clouds have silver linings. However, people don't always see the silver linings.
Take a weak currency for example: Most Americans assume that a weak dollar is bad for America.

It is bad. It represents your hard earned purchasing power being stolen by institutional counterfeiters. Inflation is nothing more than a regressive tax.

At the same time, most Americans assume that a trade deficit is bad for America. Outsourcing work to countries with cheaper labor is bad. But then so is paying high prices at the store for the things we need or want.

They are bad. If you're not a beneficiary of the bailouts, you won't be paying for much of anything after you lose your job.

Inflation is one of those things that almost everyone thinks is bad.

That's because it is bad, see above.

And of course, I should hasten to add, it certainly can be bad if there's too much of it. But what is the Goldilocks rate of inflation? Zero? One or two percent? Three percent? Four or Five? We know that negative inflation (deflation) is bad.

Do we? Assuming the legalized counterfeiting of our hard earned money stopped, it would appreciate in value. Prices for goods (and assets) would decline, which is another way of saying they would be more affordable. The only reason why deflation can be problematic is when layoffs occur due to sticky wages, or when government regulation prevents wages from falling naturally. Of course, this isn't likely to happen given the perpetual looting of your purchasing power by the money masters.

The Case For Higher Inflation

Paul Krugman is a Keynesian hack.

 

[drkitten]

It is bad. It represents your hard earned purchasing power being stolen by institutional counterfeiters.

In a bizarro world that exists only in Tippit's ill-educated imagination.

Paul Krugman is a Keynesian hack.

And a Nobel laureate. Tippit is a Randroid hack and an incompetent one at that. I know who I would pay attention to.

 

[mhaze]

In a bizarro world that exists only in Tippit's ill-educated imagination.

And a Nobel laureate. Tippit is a Randroid hack and an incompetent one at that. I know who I would pay attention to.

Tippit!

 

[Puppycow]

It is bad. It represents your hard earned purchasing power being stolen by institutional counterfeiters. Inflation is nothing more than a regressive tax.

Not so much really, unless you keep your money in a mattress. When inflation is higher, so are interest rates including those for savings accounts. Wages also tend to increase faster to keep up with inflation. There are ways to save/invest to preserve your purchasing power.

They are bad. If you're not a beneficiary of the bailouts, you won't be paying for much of anything after you lose your job.

Both the trade deficit and the weak dollar are bad, you say? There's actually a tradeoff. A weaker dollar (if it stays weak for a long time) would make goods and services produced in America much more competitive. Americans and foreigners would spend more dollars on American-made goods, and there would be more jobs in America as a result.

That's because it is bad, see above.

I disagree. See above.

Do we? Assuming the legalized counterfeiting of our hard earned money stopped, it would appreciate in value. Prices for goods (and assets) would decline, which is another way of saying they would be more affordable.

Only if your wages stay the same or go up. If deflation also means that you salary goes down or you become redundant, goods will not be more affordable because you will have less money.

The only reason why deflation can be problematic is when layoffs occur due to sticky wages, or when government regulation prevents wages from falling naturally. Of course, this isn't likely to happen given the perpetual looting of your purchasing power by the money masters.

By the same token, the only reason why inflation can be problematic is when wages and interest rates don't increase as fast as inflation. If your wages keep page with inflation and your savings account pays enough interest to keep pace with inflation, where's the harm exactly? You can't say that deflation isn't a real problem but inflation is a real problem, can you? They are both just psychological problems really (extremes levels aside).

 

[The True Scotsman]

Tippit, inflation is a reaction to raises in price. If you want to blame something for the lose of the dollar's value, I'd start with raises in price, not inflation.

 

[Tippit]

Not so much really, unless you keep your money in a mattress. When inflation is higher, so are interest rates including those for savings accounts. Wages also tend to increase faster to keep up with inflation. There are ways to save/invest to preserve your purchasing power.

No. You don't have to have your money in a mattress to suffer from negative real interest rates. And what about the teeming masses that don't have bank accounts, or discretionary capital to invest? They get absolutely slaughtered by inflation, hence the "regressive" part. Not everyone has the means to offset inflation, and not all assets are inflation-proof. The simple fact of the matter is, if counterfeiting money to finance deficits weren't exhorbitantly profitable, it wouldn't be done. It's a regressive tax, a flat levy on monetary wealth.

Both the trade deficit and the weak dollar are bad, you say? There's actually a tradeoff. A weaker dollar (if it stays weak for a long time) would make goods and services produced in America much more competitive. Americans and foreigners would spend more dollars on American-made goods, and there would be more jobs in America as a result.

It's not a "tradeoff" so much as it's relatively bad for different classes of people. When we indebt ourselves and trade jobs to maintain our consumption of imports, it's generally a bad thing for us. When the dollar is "weakened" it hurts all of the people who hold dollars worldwide, as well as affecting dollar denominated investments and income streams. It benefits the recipients of inflationary dollars, as well as exporters whose costs are denominated in dollars, but whose top line is denominated in foreign currencies.

Only if your wages stay the same or go up. If deflation also means that you salary goes down or you become redundant, goods will not be more affordable because you will have less money.

That's right, and absent government manipulation, this is precisely why the productivity norm, a rate of deflation that mirrors the rate of productivity growth, is not a bad thing, but a normal thing that would occur absent monetary manipulation.

By the same token, the only reason why inflation can be problematic is when wages and interest rates don't increase as fast as inflation. If your wages keep page with inflation and your savings account pays enough interest to keep pace with inflation, where's the harm exactly? You can't say that deflation isn't a real problem but inflation is a real problem, can you? They are both just psychological problems really (extremes levels aside).

No, they aren't just psychological problems, they are typically the results of central bankers meddling with the money supply. Try telling someone who is on a fixed income that the fact that they may now have to choose between food or medicine is a "psychological problem" because their income stream is now debased, and the government is understating their cost of living adjustment.

If monetary inflation were somehow an equitable transaction, that is, if every instance of it represented a check being issued to every dollar holder for some proportional amount of productivity growth, then it wouldn't be problematic. But the real world more closely resembles a game of monopoly where most players have relatively fixed amounts of money, but a select few players have full access to unlimited funds from the banker. Do you see the subtle difference? When price deflation is represented by economic growth that occurs given a static supply of money, it doesn't represent an inequitable transaction, everyone benefits from lower prices. When price inflation is represented by an increase in the money supply (which may or may not be offset by economic growth), it represents a tax on everyone who didn't benefit directly from that new money.

I will directly address the idiocy in Krugman's NYT Opinion article, as well as the economist he quotes, later on.

 

[The Central Scrutinizer]

It is bad. It represents your hard earned purchasing power being stolen by institutional counterfeiters.

Do you at least understand why intelligent people laugh at you? Or should I explain it?

 

[mhaze]

Utterly amazing.

People here argue "The benevolent government printing money and debasing the monetary supply is GOOD FOR YOU".

Just listen up, chumps. We da Gubbermint. We help yous, sees? And yous betcha better like it. We gonna tax yous, and we gonna print up cash too. Cuz we gotta help you a lot. Not a little. Got it now, Chumpie?

 

[MikeMangum]

Tippit, inflation is a reaction to raises in price. If you want to blame something for the lose of the dollar's value, I'd start with raises in price, not inflation.

That's like saying acceleration is a reaction to change in velocity.

 

[The True Scotsman]

.....wow, looking back at it....yeah....what was I smoking....

 

[lomiller]

Both the trade deficit and the weak dollar are bad, you say? There's actually a tradeoff. A weaker dollar (if it stays weak for a long time) would make goods and services produced in America much more competitive. Americans and foreigners would spend more dollars on American-made goods, and there would be more jobs in America as a result.

In most cases that would be correct, but the US is somewhat unique. Consider how much of the US trade deficit is directly related to importing dollar denominated raw materials. US imports of crude oil will continue to increase regardless of what the US dollar does. When the dollar drops the price of oil goes up pumping even more US dollars into the international market.


If you want to shift production back to the US from China US producers still need to pay the inflated cost of raw materials. Again this increases their costs as the dollar drops, and means more $ on the international market driving down the dollar further.

 

[IchabodPlain]

Inflation is nothing more than a regressive tax.

Do you know what a regressive tax is? Inflation (if it strikes you to call it a "tax") would be proportional. Inflation goes up by 10%, the guy with $1,000,000 loses the same amount (10%) as the guy with $10 (10%).

 

[MikeMangum]

Do you know what a regressive tax is? Inflation (if it strikes you to call it a "tax") would be proportional. Inflation goes up by 10%, the guy with $1,000,000 loses the same amount (10%) as the guy with $10 (10%).

Not if the guy with $1,000,000 has that wealth in largely non cash assets. Someone who has a total net worth of a mil probably has a substantial portion of his/her wealth tied up in a primary residence, amongst other non cash assets.

Inflation also has the effect of pushing more people into the range of the AMT.

 

[daenku32]

Not if the guy with $1,000,000 has that wealth in largely non cash assets. Someone who has a total net worth of a mil probably has a substantial portion of his/her wealth tied up in a primary residence, amongst other non cash assets.

Inflation also has the effect of pushing more people into the range of the AMT.

As someone who is well below the $1,000,000 level, my cash reserves are extremely low. Comparatively speaking.

I'd imagine a richer person would have $50,000 in the safe, just in case they need to skip the country for some strange reason.

 

[Tsukasa Buddha]

I've been reading more economists who have quietly found "hey, moderate inflation isn't the devil!"

 

[Loss Leader]

Do you know what a regressive tax is? Inflation (if it strikes you to call it a "tax") would be proportional. Inflation goes up by 10%, the guy with $1,000,000 loses the same amount (10%) as the guy with $10 (10%).

I don't know if I agree with that completely. Inflation benefits producers and investors first. Any benefit to the consumer is secondary, based on the growth of business. Unless the minimum wage is tied to inflation (which it never is), the buying power of those without savings will decrease.

Inflation is by no means a "tax," and there are ways to ameliorate its negative effects, but it does disproportionately burden those at the lowest income levels.

I've been reading more economists who have quietly found "hey, moderate inflation isn't the devil!"

In fact, through the 200-odd year history of economics, it was considered synonymous with economic growth. Economists were a bit shocked in the 1970s to see a situation where high inflation was coupled with a stagnent economy. I just wish I remembered what that was called ...

 

[lomiller]

.....wow, looking back at it....yeah....what was I smoking....

well you did address the post to someone who doesn't define inflation as an increase in prices...

 

[BeAChooser]

Paul Krugman is a Keynesian hack.

... who forgets what Keynes actually said about inflation.

http://www.richmondfed.org/publications/research/economic_review/1981/pdf/er670101.pdf

Keynes On Inflation

Thomas M. Humphrey

... snip ...

First, only profit inflation has the power to stimulate output and growth. "It is the teaching of this treatise," he said, "that the wealth of nations is enriched, not during income inflations, but during profit inflations ... at times, that is to say, when prices are running away from costs" [9; p. 137]. More precisely, profit inflation stimulates both current and long-term real output. It stimulates current output by raising prices relative to wages thus lowering real wages and increasing employment. And it stimulates long-term real output by shifting income from wages to profit thereby permitting faster capital accumulations and a higher rate of economic growth. In short, the effects of profit inflation include "the spirit of buoyancy and enterprise and the good employment which are engendered; but mainly the rapid growth of capital wealth and the benefits obtained from this in succeeding years" [9; p.144]. These benefits, however, are only when prices are outrunning costs, leaving a substantial margin of profit to finance investment and growth. They cannot occur in income inflations where wages rise as fast as prices and thus annihilate the very profits that constitute both the means and the inducement to economic growth. ... snip ... In this connection, he advanced the hypothesis that the early industrialization of England and France had been powered by profit inflation. "It is unthinkable," he declared, "that the difference between the amount of wealth in France and England in 1700 and the amount in 1500 could ever have been built up by thrift alone. The intervening profit inflation which created the modern world was surely worth while if we take the long view.

Now isn't that an amazing assertion given how anti-profit Obama and the democrats seem to be? They rail against profit at every turn. So do many of Obama's supporters on this forum. They seem to disagree with Keynes about the goodness of profit, don't they.

But there's more …

Lest one wrongly conclude from the foregoing that Keynes of the Treatise was an out-and-out inflationist, three cautionary observations should be made. First, he was referring to gently rising prices and not to the rapid double-digit inflation that is unfortunately so common today. More precisely, he was referring to slow creeping secular inflation of no more than 1 to 2 percent per year. Today such mild inflation would be viewed as constituting virtual price stability. Second, his analysis of beneficial inflation refers chiefly to capital-poor preindustrial societies and not to wealthy modern capitalist economies. ... snip ... Under these conditions it is conceivable that slowly-creeping profit inflation might indeed have spurred industrialization not only by diverting resources from consumption to capital formation, but also by breaking feudal bonds, stimulating enterprise, encouraging market-oriented activity, and widening the scope of the market. These latter benefits, however, are no longer available in wealthy, market oriented modern capitalist economies that are more likely to find secular inflation a curse rather than a blessing. For this reason Keynes refrained from recommending even slightly inflationary policies for modern economies.

In short, Keynes said inflation over 1 to 2 percent a year is bad.

But there's more …

Finally, it should be remembered that Keynes was referring to profit inflation characterized by prices persistently rising faster than wages and not to modern inflations in which wages sometimes rise ahead of prices or at least follow them without delay thereby wiping out the profits generated by the price increases. As previously mentioned, Keynes held that inflation stimulates growth only if wages lag substantially behind prices leaving a large and persistent margin of profit to finance capital formation. This wage lag, however, is hardly characteristic of modern inflations in which wages rise swiftly not only to restore real earnings eroded by past inflation but also to protect real earnings from expected future inflation. The clear implication is that Keynes would have opposed these modern inflations, which according to his analysis are income rather than profit inflations.

Accordingly, it is not surprising that Keynes, at the end of a long passage extolling the historical accomplishments of profit inflation, nevertheless declared, "I am not yet converted, taking everything into account, from a preference for a policy today which, whilst avoiding deflation at all costs, aims at the stability of purchasing power (BAC - i.e., zero inflation) as its ideal objective" [9; p.145]. There is no reason to believe that he ever changed that position. On the contrary, there is strong evidence that he remained a determined foe of inflation and an adamant proponent of price stability even to the extent of warning of the potential danger of inflation in 1937 when the unemployment rate was in excess of 10 percent of the labor force.

Articles in The Times (1937)

The most convincing evidence of his continuing strong opposition to inflation in the 1930s, even after his publication of his celebrated General Theory, appears in four articles he wrote for The Times in early 1937. There in discussing policies for dealing with unemployment at the business cycle peak of 1937, he made it abundantly clear that his primary concern was preventing inflation. In particular, he argued that the 1937 unemployment rate, although very high ("indeed, as high as 12.5 percent"), was nevertheless at its minimum noninflationary level at which demand pressure must be curtailed to prevent inflation. Accordingly, he recommended a sharp cutback in government expenditure on the grounds that the economy was rapidly approaching the point where further increase in aggregate demand would be purely inflationary. "I believe," he said, "that we are approaching, or have reached, the point where there is not much advantage in applying a further general stimulus at the centre" [4; pp. 11, 44, 56].

In short, Obama supporters have it wrong. Keynes wouldn't have agreed with Obama's inflationary policies. Far from it.

 

[Tippit]

Do you know what a regressive tax is?

Yes, I do. Apparently you don't, or you don't understand why it applies.

Inflation (if it strikes you to call it a "tax") would be proportional.

It doesn't "strike" me to call it a tax, it is a tax. Every dollar they create out of thin-air represents a dollar's worth of purchasing power lost by everyone else, including those who actually work for a living. The fact that it's proportional is irrelevant to the fact that it's regressive, due to the difference in asset allocation between rich and poor.

Inflation goes up by 10%, the guy with $1,000,000 loses the same amount (10%) as the guy with $10 (10%).

Except, the guy with $10 has a far larger proportion of current assets (checking accounts paying negative real returns, cash, and cash equivalents) than the millionaire. He is affected far more adversely than people with hard or financial assets.

Perhaps if more self-proclaimed liberals understood this, they would be more opposed to "stimulus" plans financed by monetary inflation. There is no free lunch.