dagblog - Comments for "Inflation and the Dragon"

Because it matters.

Peter Schwartz — Tue, 21 Jan 2014 02:35:31 +0000

In reply to Which is just a fancy way of

Because it matters.

Which is just a fancy way of

mofo. — Tue, 21 Jan 2014 02:19:43 +0000

Which is just a fancy way of saying increasing the amount of money in circulation. Your just arguing about how it gets injected into the economy.

"...there really is a limit

Peter Schwartz — Mon, 20 Jan 2014 23:07:00 +0000

In reply to Thats a good article, id like

"...there really is a limit to the number of factory expansions that are needed and additions on your house that people want to undertake. Eventually, you reach the end, and when you do, all the economic 'growth' that build up around your borrowed money starts to unwind."

There are a lot of issues mixed up in your post and I'm not sure I can tease them all out, but I'll address this.

I think it's wrong. Even if it's right, no one knows when that limit is reached. But it's wrong because, even in a mature economy, new people are always being born, and they need all the stuff existing people need. And existing stuff needs replacing. This is why the economy always needs to add new jobs. Why new houses are demanded.

Even if we could line up all the people on one side and all the goods and services on the opposite side and determine that there are enough houses for everyone, enough cars, enough food, enough school rooms...right now...something that we can't really do...we'd still have to reckon with the new generations arriving.

I think you're confusing growth with unsustainable price bubbles (which some would argue can't be identified beforehand.)

What was unsustainable prior to the crash was the rise in prices...housing prices specifically. Debt was taken on based on those prices and to take advantage of those prices. When the prices dropped, people with debt were left holding a very expensive bag with less in it than they and their lenders thought was in it. But it wasn't so much that too many houses were built...though maybe there were in too short a time...but that the prices of those houses were rising in an unsustainable way.

Not sure what sort of firm foundation you want for the economy, but from where I sit, we met ALL our REAL needs a looong time ago.

Sorry, don't get how your

Peter Schwartz — Mon, 20 Jan 2014 22:36:50 +0000

In reply to There is no reason to believe

Sorry, don't get how your first comment is responsive, so I'll leave it aside.

I'm not assuming they're linked, though I haven't proven it here. However, there is a huge body of thinking and experience that points in this direction.

It may not be, as DC suggests, that everyone thinks this is so, but it isn't the crazy idea with no supporting evidence or thought that you want to portray it as.

The idea that removing all "manipulations" will allow the economy to "work properly" is itself a theory and one that hasn't been proven.

AFAIK, all economies have had manipulations built into them; the idea that there's this Platonic Idea of a pure economy free of all manipulations and it works the best is unproven.

In fact, back in the day when we had something closer to laissez-faire, our economy regularly went into the ditch.

I would argue that there's more experience backing up the need to help/manipulate the economy when it runs into trouble (and more evidence that economies inevitably run into these ditches) than there is evidence supporting the case for a pure, unmanipulated economy.

Of course there's a

Peter Schwartz — Mon, 20 Jan 2014 22:26:20 +0000

In reply to There is no real difference.

Of course there's a difference.

Monetary stimulus increases the amount of money in circulation.

With fiscal stimulus, the government hires people, buys things, starts projects and so on. It becomes an employer.

With the money they get, these "employees" then buy products from the "real" economy which gears up to meet this demand and hires other people. And so on.

A virtuous cycle is begun and eventually starts running on its own.

Well then also get rid of the

Donal — Mon, 20 Jan 2014 20:14:51 +0000

In reply to There is no reason to believe

Well then also get rid of the monetary policy that keeps inflation (not counting stuff that costs more of course) at 2%, which is more or less what I read Doc as advocating.

There is no reason to believe

mofo. — Mon, 20 Jan 2014 19:49:22 +0000

In reply to First, rent seeking IS low

There is no reason to believe that the money gained from rents wont increase along with inflation. In the example you give of Taxi medallions, if inflation goes up, so does the cost of a cab ride.

With inflation up (a bit) and growth up, creating new wealth becomes more attractive in part because you can make more money that way.

You are simply assuming your conclusion, that inflation and growth are linked.

You are claiming, through various devices, a larger share of already created wealth. You aren't creating any new wealth, which necessarily involves some risk. That you are re-dividing existing wealth also tends to cap the gains you can make this way.

For example, maybe you change the laws, e.g., taxi licensing, to restrict the availability to new licenses to limit competition and hog more of the taxi proceeds for yourself. You aren't expanding your fleet or modernizing it. You aren't expanding your territory. You aren't hiring new drivers or buying new cars or serving more people. You're simply redividing the existing pie. This is what rent seeking is.

This state tends toward stasis. Little new hiring. Little raising of salaries. Yes, the poor have lower prices, but they also have many fewer opportunities (as does everyone else).

Here you inadvertantly hit upon the real solution to our economic problems, real, structural reforms. Get rid of the rents, the cronyism, the corporate welfare and, especially, the fucking bailouts. Let the economy work properly and stop trying to manipulate it with monetary and fiscal policy. All this talk about inflation as some kind of cure is nonsense that saves us the trouble of dealing with the harder issues, the core issues that need to be addressed. Tweaking the inflation rate, or interest rate or whatever macro policy tool you use, is just a way of saying "we can fix everything and you wont feel any pain, and no one can complain"

There is no real difference.

mofo. — Mon, 20 Jan 2014 19:33:37 +0000

In reply to But some of us have been

There is no real difference. You are fooling yourself if you think otherwise.

Thats a good article, id like

mofo. — Mon, 20 Jan 2014 19:31:59 +0000

In reply to This article by Jared

Thats a good article, id like to highlight what i think is the core argument in favor of higher inflation:

In fact, there are various ways in which higher inflation can help at a time like this. Most importantly, it lowers the real rate of interest. True, interest rates are low right now—the one controlled by the Fed is about zero. But last I checked, if you look at historical relationships between economic variables and interest rates, we actually need borrowing rates to be less than zero, and that’s where higher inflation comes in.

The real interest rate is the actual, or nominal rate, minus the rate of inflation. So the only way to jam the real rate down to where it needs to be—i.e., in negative territory—is through higher inflation. That could motivate investors to undertake new projects, from factory expansions to a home loan for an addition on your house.

In short, what macro economics figured out is that lowering interest rates is a 'lever' that they could pull to rev up a sagging economy. The problem is that this lever is subject to political influence and, because of that, eventually it got pulled down as far as it would go and left that way, because who wouldnt want lasting economic growth? As a politician, thats the sort of thing that gets you re-elected and the opposite is what makes you lose your job. For decades, interest rates have been very low and the result was decades of economic good times.

But all good things come to an end, and the macro guys and the politicians they enabled never contemplated that there really is a limit to the number of factory expansions that are needed and additions on your house that people want to undertake. Eventually, you reach the end, and when you do, all the economic 'growth' that build up around your borrowed money starts to unwind. The housing glut is a classic example of this, low interest rates combined with other factors to encourage home buying, which in turn encouraged home building, which spurred job creation in the construction sector. However, eventually there was an end to the credit worthy buyers, the boom couldnt last forever. Once they buying slowed down, people in the housing sector started losing thier jobs. Why? Because the boom wasnt sustainable. It was the product of cheap money and distorted policy.

What we are experiencing now, the prolonged recession, is, in my opinion, that same phenomina economy wide. There are only so many productive places you can put your money, eventually you end up fueling a boom that has to bust out.

What the macro guys are really trying to do is simply pull the interest rate lever farther down. When interest rates go to 0 the only solution they have to offer is to make it so the rates can be negative, make it so not borrowing money punishes you, i.e. increase inflation.

This is not the path to sustanable economic growth. Its a formula for bubble after bubble with a few bank bailouts in between. No thank you.

He did mention the US in the

Donal — Mon, 20 Jan 2014 17:58:59 +0000

In reply to I think they [the US] have

He did mention the US in the previous sentence, but that sounded like a contrasting aside. I think they meant Europe, which does have near-zero rates right now. US is at 1.5%.

Euro Zone Must Defeat Deflation Ogre
Europe’s low inflation rate has become the new focal point for those who believe the euro zone is doomed to disaster. Inflation in the zone fell to just 0.8% in December, well below the European Central Bank target of “close to but below 2%.” In Greece, inflation is already negative, while in Spain, Portugal and Ireland it ranges between 0.2% and 0.3%. That is fueling fears the currency area could tip into outright deflation, as Japan did in the 1990s when falling prices led to prolonged stagnation. Consumers held off purchases as they waited for goods to become cheaper, causing growth to stall and the debt burdens to rise.

The latest to lend its voice to the chorus of anxiety is the International Monetary Fund. Last week, IMF chief Christine Lagarde warned that deflation was a rising risk for the global economy, which could be disastrous for the recovery. “If inflation is the genie, then deflation is the ogre that must be fought decisively,” she said.