Get Ready, Inflation Is On The Way

[Nordic]

[JackRiddler]

Dean Baker once again makes the case FOR inflation…

http://counterpunch.org/baker05042010.html
(Article reproduced here under fair-use provisions, with original link given, solely for non-commercial purposes of archiving, education and discussion.)

"Did Your Momma Tell You That?"
The Greek Crisis

May 5, 2010

By DEAN BAKER

Keynes quipped in the General Theory that the world is ruled by the ideas of long dead economists. I was reminded of this comment when I heard a member of Germany’s parliament scornfully dismiss the suggestion that the European Central Bank should target a somewhat higher rate of inflation. This suggestion had been put forward by Oliver Blanchard, one of the world’s leading macroeconomists. Furthermore, he had proposed a higher inflation target in his role as the chief economist for the International Monetary Fund.

There is nothing wrong with disagreeing with an economist, no matter how prominent they are or where they work. But what was striking was the nature of the dismissal. The parliamentarian just asserted that: “inflation never solved anything.”

That’s a strong statement. Did he get that information from his parents? Or, as we used to say growing up in Chicago, “Did your momma tell you that?”

Blanchard and others arguing for a higher inflation target actually have very good reasons as to why higher inflation might be very helpful in solving the world economic crisis. First, a higher inflation rate will erode the real value of debt. This will benefit all debtors, households, businesses and countries.

In the case of households, tens of millions of homeowners in the United States and elsewhere have seen much or all of their equity disappear with the collapse of the housing bubble. A modest rate of inflation should begin to lift house prices, restoring equity to these families. It will also reduce the burden of their monthly mortgage payments if wages rise in step with inflation. This will not only be beneficial to these families; a lower debt burden will allow families to spend more, helping to drive the economy.

The same story applies to many businesses that are now facing crushing debt burdens. Furthermore the knowledge the prices of the items they sell will be rising 3-4 percent a year will make investment more attractive to businesses.

Finally, a moderate rate of inflation can go far toward alleviating the debt burden faced by so many countries these days. After 10 years, a 3.0 percent rate of inflation will reduce the real value of a fixed debt by 26 percent; a 4.0 percent inflation rate will reduce it by 34 percent. The modest inflation of the 40s, 50s and 60s was a big factor in bringing down the huge U.S. World War II debt to a manageable level.

Inflation can also be enormously helpful in allowing the euro zone countries with excessive labor costs (e.g. Greece, Portugal and Spain) to get their costs more in line. If wages in more competitive countries keep pace or exceed average euro zone inflation, while wages in the troubled countries don’t rise as rapidly, then they should be able to restore their competitiveness more quickly.

These are the sorts of arguments that Blanchard and others have put forward for allowing a somewhat higher rate of inflation. But the German parliamentarian didn’t care, because he somehow already knew that “inflation never solves anything.”

Policy that rests on unexamined assertions (that emanate from the teachings of long-dead economists) will be every bit as destructive today as it was in the first Great Depression. In Europe, this drama seems to be playing out in the desire to really make Greece feel pain. Greece undoubtedly has to straighten out its fiscal mess. (Is there some reason that everyone is not pushing a tax amnesty program as a way to reduce the Greek debt and show that it is serious about ending wholesale tax evasion?) However, it can’t be expected to balance its budget in the middle of the worst downturn in 70 years.

The same applies to Portugal, Spain and other troubled European economies. Contractionary moves by these governments will worsen the downturn in these countries and in fact, make matters worse in the sound finance countries as well. Fewer imports in Spain and Greece mean fewer exports for Germany and France. Furthermore, enough downward pressure on these economies will likely require a debt restructuring at some point anyhow. The debt burden grows when economies shrink and that seems to be the plan coming from the economic center of Europe.

There might be some justice in the fact that the austerity plans designed by Germany will come back to bite them, but it would be much better to see the Germans design good economic policy. There was perhaps an excuse for bad policy in the 30s; after all Keynes didn’t publish the General Theory until 1937. But, there is no excuse today – the ideas of Keynes have long been known and widely disseminated. It is a tragedy and an outrage that the people deciding economic policy are mindlessly repeating tired clichés rather than seriously trying to design policies that address the crisis in front of our faces.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This column was originally published by The Guardian.

Which reminds me to refer once again to the two RI threads about…

INFLATIONISTS vs. DEFLATIONISTS
“a compendium in progress” (by ninakat)
viewtopic.php?f=5&t=22506

“Get Ready, Inflation Is On The Way”
viewtopic.php?f=8&t=27913







…ahem…







Want to go nuts rummaging through comparative macroeconomic stats for OECD nations?

Here you go:
OECD NATIONAL ACCOUNTS PORTAL
http://www.oecd.org/topicstatsportal/0, ... tml#500239

[JackRiddler]

Cross-posting relevant stuff from the "End of Wall Street" thread:

!

http://www.telegraph.co.uk/finance/econ ... mulus.html
(Article reproduced here under fair-use provisions, with original link given, solely for non-commercial purposes of archiving, education and discussion.)

US money supply plunges at 1930s pace as Obama eyes fresh stimulus

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.


By Ambrose Evans-Pritchard
Published: 9:40PM BST 26 May 2010

Comments 7 | Comment on this article
The stock of money in the US fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc Photo: AFP

The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.

"It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said.

The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.

Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to "grit its teeth" and approve a fresh fiscal boost of $200bn to keep growth on track. "We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said.

David Rosenberg from Gluskin Sheff said the White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4pc of GDP) this year and set up a commission to target cuts. "You truly cannot make this stuff up. The US governnment is freaked out about the prospect of a double-dip," he said.

The White House request is a tacit admission that the economy is already losing thrust and may stall later this year as stimulus from the original $800bn package starts to fade.

Recent data have been mixed. Durable goods orders jumped 2.9pc in April but house prices have been falling for several months and mortgage applications have dropped to a 13-year low. The ECRI leading index of US economic activity has been sliding continuously since its peak in October, suffering the steepest one-week drop ever recorded in mid-May.

Mr Summers acknowledged in a speech this week that the eurozone crisis had shone a spotlight on the dangers of spiralling public debt. He said deficit spending delays the day of reckoning and leaves the US at the mercy of foreign creditors. Ultimately, "failure begets failure" in fiscal policy as the logic of compound interest does its worst.

However, Mr Summers said it would be "pennywise and pound foolish" to skimp just as the kindling wood of recovery starts to catch fire. He said fiscal policy comes into its own at at time when the economy "faces a liquidity trap" and the Fed is constrained by zero interest rates.

Mr Congdon said the Obama policy risks repeating the strategic errors of Japan, which pushed debt to dangerously high levels with one fiscal boost after another during its Lost Decade, instead of resorting to full-blown "Friedmanite" monetary stimulus.

"Fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be increased easily by quantititave easing. If the Fed doesn’t act, a double-dip recession is a virtual certainty," he said.

Mr Congdon said the dominant voices in US policy-making - Nobel laureates Paul Krugman and Joe Stiglitz, as well as Mr Summers and Fed chair Ben Bernanke - are all Keynesians of different stripes who "despise traditional monetary theory and have a religious aversion to any mention of the quantity of money". The great opus by Milton Friedman and Anna Schwartz - The Monetary History of the United States - has been left to gather dust.

Mr Bernanke no longer pays attention to the M3 data. The bank stopped publishing the data five years ago, deeming it too erratic to be of much use.

This may have been a serious error since double-digit growth of M3 during the US housing bubble gave clear warnings that the boom was out of control. The sudden slowdown in M3 in early to mid-2008 - just as the Fed raised rates - gave a second warning that the economy was about to go into a nosedive.

Mr Bernanke built his academic reputation on the study of the credit mechanism. This model offers a radically different theory for how the financial system works. While so-called "creditism" has become the new orthodoxy in US central banking, it has not yet been tested over time and may yet prove to be a misadventure.

Paul Ashworth at Capital Economics said the decline in M3 is worrying and points to a growing risk of deflation. "Core inflation is already the lowest since 1966, so we don’t have much margin for error here. Deflation becomes a threat if it goes on long enough to become entrenched," he said.

However, Mr Ashworth warned against a mechanical interpretation of money supply figures. "You could argue that M3 has been going down because people have been taking their money out of accounts to buy stocks, property and other assets," he said.

Events may soon tell us whether this is benign or malign. It is certainly remarkable.

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Refer to this post on money supply and total debt:

viewtopic.php?f=8&t=21495&start=420#p337629

Sorry, I couldn't find a graphic representation of the long term M3 that goes all the way to 2010:


Perhaps because it's no longer an official stat.

But imagine the extension as follows: similar levels continue until Sep 2008, then it shoots up to about 100 percent of GDP, and is now declining from that much higher level.

Nevertheless, my tendency is to think the policy is deflationary, and thus supportive of general debt slavery and continued recession. I find it funny the article calls these bozos Keynesians. They are following the Hooverian strategy, 'tis true. (Hoover also ran some major monetary injections -- all oriented to pumping money into the banks.)

Apropos, here’s a write-up on a subscriber’s only Harper’s article on…

http://www.harpers.org/archive/2009/06/hbc-90005235
(Article reproduced here under fair-use provisions, with original link given, solely for non-commercial purposes of archiving, education and discussion.)

Barack Hoover Obama

By Ken Silverstein

Kevin Baker has an excellent piece in the July issue of the magazine (available to subscribers) about the similarities between our current president and our thirty-first, Herbert Hoover:

The comparison is not meant to be flippant. It has nothing to do with the received image of Hoover, the dour, round-collared, gerbil-cheeked technocrat who looked on with indifference while the country went to pieces. To understand how dire our situation is now it is necessary to remember that when he was elected president in 1928, Herbert Hoover was widely considered the most capable public figure in the country. Hoover—like Obama—was almost certainly someone gifted with more intelligence, a better education, and a greater range of life experience than FDR. And Hoover, through the first three years of the Depression, was also the man who comprehended better than anyone else what was happening and what needed to be done. And yet he failed.

Mind you, Baker is not (like the majority of the GOP) rooting for Obama to fail:

It is impossible not to wish desperately for his success as he tries to grapple with all that confronts him: a worldwide depression, catastrophic climate change, an unjust and inadequate health-care system, wars in Afghanistan and Iraq, the ongoing disgrace of Guant·namo, a floundering education system. Obama’s failure would be unthinkable. And yet the best indications now are that he will fail, because he will be unable—indeed he will refuse—to seize the radical moment at hand.

Every instinct the president has honed, every voice he hears in Washington, every inclination of our political culture urges incrementalism, urges deliberation, if any significant change is to be brought about. The trouble is that we are at one of those rare moments in history when the radical becomes pragmatic, when deliberation and compromise foster disaster. The question is not what can be done but what must be done.

Along comes the New York Times today with a piece by Joe Nocera about Obama’s financial regulatory “reform” plan that’s particularly interesting in tandem with Baker’s piece:

Three quarters of a century ago, President Franklin Roosevelt earned the undying enmity of Wall Street when he used his enormous popularity to push through a series of radical regulatory reforms that completely changed the norms of the financial industry. Wall Street hated the reforms, of course, but Roosevelt didn’t care. Wall Street and the financial industry had engaged in practices they shouldn’t have, and had helped lead the country into the Great Depression. Those practices had to be stopped. To the president, that’s all that mattered.

On Wednesday, President Obama unveiled what he described as “a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression.” In terms of the sheer number of proposals, outlined in an 88-page document the administration released on Tuesday, that is undoubtedly true. But in terms of the scope and breadth of the Obama plan — and more important, in terms of its overall effect on Wall Street’s modus operandi — it’s not even close to what Roosevelt accomplished during the Great Depression.

Rather, the Obama plan is little more than an attempt to stick some new regulatory fingers into a very leaky financial dike, and not rebuild the entire system. Without question, the latter would be more difficult, more contentious and probably more expensive. But it would also have more lasting value.

[smiths]

i am not quite sure, but i get the idea you are rubbishing the idea that inflation could occur jack?

based presumably on the idea that bullshit money that was created out of thin air is evaporating back into thin air

do you think that comparisons to the 1930's can really be credible when the monetary system is so different now
until very recently there had been a huge run up in demand for physical assets and commodities
that has dropped off again now
but how do we measure the prices of commodities, dollars, euros?
if the unsustainable debt burdens of almost all 'advanced' sovereign nations make the system insolvent they render the devalued currencies irrelevant as a measuring tool,
a billion dollars worth of debt is a hard thing to measure if the dollar is bouncing around all over the place
how does writing off a billion dollars of debt help the dollar as a currency?

are there measures of value that have had steady declines or rises over the last ten years?
gold has been the steadiest indicator over the longer term, steadily rising 324% since 2002

what does that say about fiat currencies, and the inversed debt/money pyramid
it says that real physical assets are appreciating and bullshit money is depreciating

and that means you need more pieces of paper to buy life essentials like food, petrol and clothes

thats what i call inflation

[JackRiddler]

i am not quite sure, but i get the idea you are rubbishing the idea that inflation could occur jack?

No, not at all. I'm looking at the problem from various angles, I hope empirically. The question is of great interest to me (though sometimes I wonder why since I have no assets or money, ha ha ha).

If I see something interesting, I post it.

I'm also trying to decide what "inflation" really means, since that's not as clear as dictionary definition would suggest.

what does that say about fiat currencies, and the inversed debt/money pyramid it says that real physical assets are appreciating and bullshit money is depreciating

Prices of real physical assets (and of theoretical shares in such, like equities) have been in a decline since the crisis began. Generally speaking.

Do you mean prices of goods? I guess so.

I lean currently to the idea that those are more affected by supply, demand and the ability of well-placed "players" to extract rentier income than by absolute money supply.

All currency is "fiat" or rather, by convention. Including gold. People decide something is money, or it's not money.

That being said, I knew gold, a commodity and not a currency for the most part, would go up back in 2002, and why. Just as I was running out of money to buy it. Damn.

[smiths]

i agree jack that it is weird to be obsessed with finance when you have no money or assets

i am including four graphs for your interest, all cover the last 18 months, most of the period following the initial drops of late 2008,
all of them are important commodities for economics and industry,
and all of them until very recently have been inflating in value as measured in the dodgy dollar

[mentalgongfu2]

I'm no economist, but Dean Baker is full of shit.

"Did Your Momma Tell You That?"
The Greek Crisis

May 5, 2010

By DEAN BAKER

Keynes quipped in the General Theory that the world is ruled by the ideas of long dead economists. I was reminded of this comment when I heard a member of Germany’s parliament scornfully dismiss the suggestion that the European Central Bank should target a somewhat higher rate of inflation. This suggestion had been put forward by Oliver Blanchard, one of the world’s leading macroeconomists. Furthermore, he had proposed a higher inflation target in his role as the chief economist for the International Monetary Fund.

There is nothing wrong with disagreeing with an economist, no matter how prominent they are or where they work. But what was striking was the nature of the dismissal. The parliamentarian just asserted that: “inflation never solved anything.”

That’s a strong statement. Did he get that information from his parents? Or, as we used to say growing up in Chicago, “Did your momma tell you that?”

Blanchard and others arguing for a higher inflation target actually have very good reasons as to why higher inflation might be very helpful in solving the world economic crisis. First, a higher inflation rate will erode the real value of debt. This will benefit all debtors, households, businesses and countries.

Except that inflation will erode the real value of debt only because it erodes the real value of money, which is addressed briefly in the author's following paragraph with a mighty big IF statement. Secondly, that list of people who will benefit is flawed in that it imagines four categories instead of the actual one - debtors - in order to exaggerate the supposed benefit. The three latter categories all fall within the first. Countries are debtors, businesses are debtors and households are debtors. The residents of those countries, owners of the businesses and members of the households are debtors.


In the case of households, tens of millions of homeowners in the United States and elsewhere have seen much or all of their equity disappear with the collapse of the housing bubble. A modest rate of inflation should begin to lift house prices, restoring equity to these families. It will also reduce the burden of their monthly mortgage payments if wages rise in step with inflation. This will not only be beneficial to these families; a lower debt burden will allow families to spend more, helping to drive the economy.

Show of hands - whose wages have been rising at a rate equal to or exceeding inflation? Not mine.


The same story applies to many businesses that are now facing crushing debt burdens. Furthermore the knowledge the prices of the items they sell will be rising 3-4 percent a year will make investment more attractive to businesses.


The business owners I know, though they are capitalists, tend to be happy with their established profit margins and only raise prices out of necessity due to increased cost. When they raise prices, they risk losing business, and there is nothing attractive about that.


Furthermore - "Did your Momma tell you that?" Seriously, Baker? You're a fucking "economics expert?"
Did your Momma teach you any manners?
Is she proud that you're bravely carrying the flag of sophistry and insults posing as intellectualism in order to better serve Mammon?
And since when was a live economist better than a long dead one? There are lots of arguments against both, but not so many in favor.

[JackRiddler]

smiths, actually I don't think it's at all weird to be interested in these issues even if you don't have much money yourself. They affect everyone and we of the majority classes need a better understanding of them, in our own self-defense. That being said, very few questions about how economies really work are settled or understood reliably, even by those who do the best job of appearing to know.

Your charts on four selected commodities (out of many that matter) show trends since 2009, when a spike began.

Here for example is the copper price over a slightly longer trend, already a different picture:


Hm, looks like a short, doesn't it?

Historical copper prices in straight dollars and adjusted to 1998 dollars:


Which makes me think commodity prices over short terms are hazardous as data for macro conclusions about long terms, though of course even small changes from day to day mean millions to speculators, and dramatic shifts in key commodities (above all oil) can change pretty much everything overnight.

While looking for data on copper prices, I ran into this fascinating quote, apparently from the 1990s, that echoes what I've been thinking on the inflation-deflation question:

Betting on inflation has been the winning strategy since the bottom of the last [1930s] depression, but a financial accident could change all that overnight. The inflationists will certainly be right in the long run, but they may get wiped out in the short run. In any event, the moment of truth is approaching, and there likely will be a titanic struggle between the forces of inflation and the forces of deflation. Each will probably win, but in different areas of the economy. As a result, we’re likely to see all kinds of prices going up and down like an elevator with a lunatic at the controls. It will not be a mellow experience.

From http://www.bearishbull.com/

metalgongfu2, everyone's aware of the bad side of inflation that you detail and you may have noticed I gave Dean Baker a semi-ironic headline as the guy who supports inflation. He earned my respect when I found an article of his from mid-2004 in which he described exactly what was happening and would happen with the housing market bubble. I think his view is an important corrective to the usual panicky talk about inflation as the evil beast unleashed by the "elites," guaranteed to come and guaranteed to destroy the world. Strict monetarism has arguably caused more damage than inflation and I'm not convinced by those who take it as faith that the "elites" prefer inflation, when there have been periods of great economic inequality associated with deflationary trends. What about the bad side of deflation? ("Show of hands - Who makes more money when unemployed?") Baker's multiplication of categories and cute rhetoric aside, when public and private debt burdens get insurmountable, economies get out from under them either by default or by inflation, and the results cannot be generalized as always good or always bad.

[smiths]

As a reminder I do not subscribe to the pure hyperinflationary outcome yet, which I think is not likely in the US at least. For my way of thinking, organic hyperinflation is a function of a currency with an external reference point. At the moment, the US dollar has no legitimate external standard as a reference point, except something soft, indicative, like gold. This is a truly fascinating and almost unprecedented historical development. I cannot think of a comparable economic example.

I suspect we will see powerful deflationary forces that will be countered by monetary inflation and devaluation that is not quite sufficient to break it, because quite frankly Bernanke is no Volcker, and the monied interests will resist a deterioration of their inordinate share of the dollar wealth of the world. That is not to say that various countries and even regions will not be economically 'trashed' in the process by a predatory financial sector based largely in New York, Zurich, and London.

Within eight years I would see the US dollar financial system resolving into a currency collapse and the issuance of a new dollar with a few zeros, two or three, knocked off as was seen with the rouble. It will look somewhat similar to the collapse of the former Soviet Union, not with a bang, but a whimper.

from jesse at http://jessescrossroadscafe.blogspot.com/

i agree that this is basically unprecedented, firstly because of the global hyper-speed nature of it,
and second because the level of dodgy-dud-dollar-debts in the global system is so insanely mega high
to have a country default on their debts or institute a new currency and wipe out their middle class savings is pretty common,
for the entire advanced economies of the planet do it all simultaneously is scary and new


i agree with you jack that to get any meaningful information you need to look at loger term trends, i only posted those graphs in respose to your comment

Prices of real physical assets (and of theoretical shares in such, like equities) have been in a decline since the crisis began. Generally speaking.

personally i think most of the big money is now short on china, whether china will deflate in the next 6 months or six years is anyones guess,
but i think they are all positioned for ht e end of the great chinese stockpiling,
that in itself will destroy commodity prices over the near term whatever else happens

inflation is also something that can be quite localised for a while,
i live close to the heart of the australian mining bubble, Perth Western Australia,
we basically have not a had a recession, our house prices are still at insane record prices,
morons can still head north to work as a truck driver and earn hundreds of thousands a year,
everything, without exception, has gone up significantly over the last five years here, relentlessly
so for us at the moment price inflation is indisputable