Inflation is not currently a menace

Great Debates
1

I’ll take the initiative to restart Kropotkin’s thread on inflation.

I can think of only one thing to say about the article. Duh. Inflation can be an economic problem, and has been a few times in American history. However, it hasn’t been a problem for the last few decades, including all the times when politicians, mostly on the right, have tried to make it so to try to kill any liberal successes that might actually help people and might them want to vote for liberals.

Kirshner’s article is not merely correct, but so absolutely basic and obviously right that it is an embarrassment that such a stance is controversial. That inflation could go out of control but can be staved off by proper economic policies and will probably be alleviated by the normal course of the markets is astonishingly little different from saying that COVID could now get out of control but can be staved off by vaccines and masking and will probably be alleviated by the normal course of pandemics ebbing.

Yes, no doubt these paragraphs conveys the reasons few people think rationally about the subject.

Many years ago, I asked a senior Federal Reserve Bank officer why the Fed was so aggressively suppressing any hint of inflation, when the costs of moderate inflation to the economy were impossible to show, but the costs of their disinflationary disposition were so significant and clear. “Because people don’t like inflation,” he explained. That answer was not grounded in high economic theory, but it was probably right.

People’s visceral aversion to increasing inflation is disproportionate to its real effects on their economic wellbeing. In some ways, rising inflation rates are like rising crime rates—they provoke feelings of anxiety, uncertainty, and a loss of control over one’s destiny. Such feelings of insecurity are extremely powerful motivators. When crime is rising, people often demand that authorities “do something” about it—anything—even if that “something” is unwise, harmful, and barely relevant to solving the problem. Similarly, the anxiety provoked by moderate levels of inflation will lead people to support, and even demand, that urgent steps be taken to suppress it—even if, when all the math is done, those measures leave them worse off.

People understandably latch onto a few prices going up and extrapolate those globally. No excuse exists for economists doing so. From all I’ve read, the responsible economists are carefully gauging financial moves that will try to ensure that inflation remains at around the 2% level it has maintained for decades after the current supply chain and other COVID-related crises subside.

That reality will not matter to many people. When they trot out the same old nonsense, therefore, they should be treated like anti-maskers until and unless reality says otherwise.

2

Inflation is a problem for those who don’t have a money printer and need to pay bills and buy goods. Folks who downplay inflation are mostly trying to take heat off the sitting President. Furthermore, linking the concerns of the downsides of higher prices to higher crime rate and then dismissing each with ridicule is remarkably tone deaf.

3

On the contrary; inflation is mostly a problem for those who do have money printers. If you spend money nearly as quickly as you earn it, then your money will lose only a trivial amount of value between when you earn it and when you spend it. It’s only a big problem for those who have large amounts of money they’re just sitting on.

This is especially true of the sort of inflation we have right now, which is mostly marked by rising wages. People can buy more goods now with an hour’s wages than they used to be able to. That’s a very good thing.

4

Most of it was uncontroversial, but there was one whopper in there that makes a lot of difference.

This is true:

This is nonsense:

(bolding mine)

What a ridiculous assertion. The US has been going through a period of extremely loose monetary policy since 2007, with endless rounds of ‘quantitative easing’ and interest rates held artificially low. Then that was followed by a ‘helicopter drop’ of printed money totalling something like 4 trillion dollars for Covid relief - more than all the money then in circulation, and much more inflationary than the standard QE mechanism of injecting liquidity into the banking system. The Fed is still printing and injecting 70 billion dollars per month into the money supply. Their big ‘taper’ they keep promising is to reduce that to $60 billion per month.

The author also neglected to mention some of the downsides of both loose monetary policy and inflation. For example, malinveatment. Loose monetary policy drives asset bubbles. So long as the loose money continues, the assrts remain inflated. But if inflation runs away, raising interest rates will collapse the bubbles, causing a lot of pain. But that pain is coming in some form or another anyway, as asset bubbles do not reflect the real value of the things being pumped. You can only deny reality for so long. The real culprit isn’t the rising interst rates, but the fact that the bubbles were allowed to form and grow in the first place with continuing loose monetary policy.

Another problem with runaway inflation is that it plays havoc with efficient pricing. No one knows what the cost of production will be tomorrow. People are induced to spend savings they otherwise wouldn’t spend because they don’t know what they will be worth next year. If interest rates don’t rise, people are induced to borrow more money than they otherwise would, knowing they will be paying it back with inflated dollars. If the fed-determined interest rate remains, say 2% for a prime borrower but inflation runs 7%, the loan has a negative rate of -5%, meaning the bank is paying you to borrow money. That is completely unsustainable, and it’s one of the reasons the banks will have to raise rates if inflation remains unchecked.

The effect on working class people who don’t own assets is terrible. Asset prices like houses and cars go up, while retirement savings get inflated away. Wage increases always lag the real inflation rate, meaning workers take a wage cut. People on fixed retirements without COLAS get absolutely destroyed, and most COLAS have a cap. If inflation is higherbthan the cap, your retirement income declines. When the inevitable correction comes, trillions of dollars of ‘wealth’ vanish, sometimes bankrupting perfectly viable companies.

Also, the loose money has gone on for so long that everyone from individuals to businesses to city, state and federal government are over-leveraged, making them all extremely sensitive to interest rate increases.

Monetary policy isn’t the only cause of inflation - his other four causes are all true. But monetary inflation is certainly part of the mix, and why this round of inflation isn’t ‘transitory’.

5

Yeah, not so much. Real worker wages are declining.

6

My take-away is that there is vast difference between what we are experiencing and “runaway inflation” (Sam_Stone’s term), and that the problem, if there is one, is the chicken little nature of seeing ANY inflation, no matter how small, as THE SKY IS FALLING!

7

Which is exactly why they said exactly the same things during the Trump and Bush administrations, right?

8

Not much to add to the OP, other than a “Yup sounds about right.”

and a note that my father-in-law who while an otherwise highly intelligent guy has drunk deeply of the right wing flavor-aide, is convinced that under Biden Socialism we are going to be seeing Venezuela levels of inflation.

9

Thanks, Exapno Mapcase, for doing this properly. I agree: that an article like this has to be written is the embarrassing part. That it is so illustrates that inflation is a political issue, not a matter economic theory. Quick example: we can take care of people on fixed incomes by indexing pensions and creating stronger government pensions, instead of hoping monetary policy will do the trick.

10

By ‘runaway inflation’ I don’t mean hyperinflation. Inflation, when left unchecked for a while tends to feed on itself, because when people assume there will be inflation in the future, they raise prices NOW. For example, let’s say I sell you a product that I built for X amount, so I charge you X amount plus profit margin. However, my replacement cost to re-stock that good is assumed to be higher because of persistent inflation, so I am actually going to raise the price of the current inventory to reflect its future replacement value.

The same goes for rent, for labor, etc. Expectations of inflation feed inflation, which makes it harder to stop. That"s what I meant by ‘runaway’ inflation, and it’s why central bankers keep saying inflation is transitory (except they stopped saying that last week).

You can fix the structural problems eventually, but you also have to convince people that you have long-term inflation in hand before they will act that way. It becomes somewhat of a wicked problem, which is another reason why persistent high inflation is bad.

11

Very briefly, the problem with Sam’s argument is that it is an “eventually” argument. “Eventually” all this money pumping will hurt us; “eventually” persistent high inflation is bad.

What does history actually tell us? The M0 money supply did increase sharply at the end of the Bush administration. It then more than doubled during the Obama administration and stayed at that level until COVID hit, when it doubled again.

The result? Inflation, as I have pointed out in the past, took no notice. It has stayed at around the “desired” rate of 2% throughout. Kirshner addresses this when he says, “Recall the conservative pundits’ confidence that President Obama’s stimulus measures would lead to runaway inflation. In fact, from 2009 to 2016, inflation averaged about 1.4 percent.”

No evidence of high inflation can be found, except in some goods families for mostly temporary periods, especially over the last year. The last time monthly, let alone annual inflation, topped 7% was in 1982!

Obviously, that same chart shows that monthly inflation is flirting with that number now. Equally obviously, your feelings toward that upward trend will condition how you see the future. Kirshner’s article is an argument - one that I agree with - that the current numbers do not foretell a high inflation future any more than the several months of 5% inflation during the summer of 2008 did. Moreover, Kirshner also writes that “Setting aside hyperinflationary episodes, reams of studies—often undertaken by scholars eager to demonstrate the perilous dangers of inflation—have failed to show any real economic cost to inflation below levels of 20 percent per year, if not more.”

“Eventually” all this history may come back to bite us in the ass. I can’t deny the possibility. But it does remind me of the stock market bears who insist year after year that the market will collapse as a result of the, ahem, inflated stock prices. Seeing Tesla worth more than the world’s several largest car companies combined is seeming testimony to their pessimism. Yet the markets keep hitting record highs.

A world cataclysm might destroy everything and send stocks plunging and inflation soaring. But that would not be predictable from history, as Sam insists does forecast disaster.

12

The loss of value of savings is only part of the problems with inflation. The other is the loss of purchasing power now. It also hurts domestic manufacturing if prices of labor continue to rise that is further incentive to cut quality, cut product size, automate, remove services, or offshore.

Getting an extra dollar an hour isn’t that great when rent goes up 20% to reflect uncertainty in the rental market due to knowingly unconstitutional acts like extending the rent moratorium and because there are trillions of more dollars in circulation.

My house value went up in the past year, supposedly, by about 15%. My Vanguard account by 20.9% in the same time frame. Does that make me feel good? No. Because my viewpoint is that asset prices should more or less grow at the pace of the economy. Did we have 15% or 20.9% real growth in the past year? No. No we didn’t. So where did that growth come from? Is it short term speculation or is it asset inflation? My guess is that it’s asset inflation.

13

Correct. It’s been so long since we saw any inflation whatsoever that people have lost all perspective on the meaning of 2% vs 5% vs 10%. They have some dim misunderstanding of high school history that inflation always goes to 5 digits when it appears, or at least they act that way.

This round of inflation is pretty clearly a transitory case of pent-up demand combined with supply chain bottlenecks (and let’s not forget that Trump’s idiot tariffs are still in the mix, raising prices on imports). When these issues resolve, inflation will decrease. In the meantime, 5-6% is just on the high side of normal.

14

Inflation is not yet much of a problem but people are quite concerned about it. This concern is not in relation to debt, which is an enormous problem that we are assured is not really a problem at all.

15

Well, it’s vitally important whenever Democrats hold the presidency. Except for military spending, of course.

16

Inflation is not a menace.

  • If it stays below 7%, which is its expected value for the next two months.

  • If you do not have large debts.

  • If you have large debts, they are to your own citizens in a currency you control.

  • If you have not been wildly printing money to deal with Covid or you have but people still want your investments and think you will honour them

  • if you ignore history in countries with huge debts, no real ability to lower interest rates, have more foreign liabilities than assets and do not deal with the problem assuming it will go away despite increasing domestic conflict and natural disasters

17

But others say it is due to supply chains and will sort itself out. Perhaps, but timing is everything.

18

We’re now into six straight months of inflation over 5% and the last time this happened was in late 2008. Make of that what you will.

19

The phrasing of that title is perfect, because it mimics the school shooting refrain of “Now is not the time to talk about gun control.” Raising interest rates is a perfectly viable economic solution - but it’s never time to raise interest rates.

20

Of course, resisting interest rate and taxation rises likely means printing more money.