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Carbo
05-06-2009, 14:48
Well... OK, little bit of hubris there. Just a teeny bit. I've just always loved Kvarty's use of the term -- honoured, as I am, to be the only forum poster to found a whole branch of economics.

But, anyway, here's Paul Krugman explaining why inflation really isn't the major concern. Obviously Krugman is a Nobel Laureate and, perhaps as importantly for an economist, the John Bates Clark Medalw winner and allround smarty pants, so I hope that those who find my arguments unpersuasive will at least see that I'm not the raving loon that I fear I often appear.


The Big Inflation Scare

Suddenly it seems as if everyone is talking about inflation. Stern opinion pieces warn that hyperinflation is just around the corner. And markets may be heeding these warnings: Interest rates on long-term government bonds are up, with fear of future inflation one possible reason for the interest-rate spike.

But does the big inflation scare make any sense? Basically, no — with one caveat I’ll get to later. And I suspect that the scare is at least partly about politics rather than economics.

First things first. It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.

So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.

The first story is just wrong. The second could be right, but isn’t.

Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.

But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.

Still, don’t such actions have to be inflationary sooner or later? No. The Bank of Japan, faced with economic difficulties not too different from those we face today, purchased debt on a huge scale between 1997 and 2003. What happened to consumer prices? They fell.

All in all, much of the current inflation discussion calls to mind what happened during the early years of the Great Depression when many influential people were warning about inflation even as prices plunged. As the British economist Ralph Hawtrey wrote, “Fantastic fears of inflation were expressed. That was to cry, Fire, Fire in Noah’s Flood.” And he went on, “It is after depression and unemployment have subsided that inflation becomes dangerous.”

Is there a risk that we’ll have inflation after the economy recovers? That’s the claim of those who look at projections that federal debt may rise to more than 100 percent of G.D.P. and say that America will eventually have to inflate away that debt — that is, drive up prices so that the real value of the debt is reduced.

Such things have happened in the past. For example, France ultimately inflated away much of the debt it incurred while fighting World War I.

But more modern examples are lacking. Over the past two decades, Belgium, Canada and, of course, Japan have all gone through episodes when debt exceeded 100 percent of G.D.P. And the United States itself emerged from World War II with debt exceeding 120 percent of G.D.P. In none of these cases did governments resort to inflation to resolve their problems.

So is there any reason to think that inflation is coming? Some economists have argued for moderate inflation as a deliberate policy, as a way to encourage lending and reduce private debt burdens. I’m sympathetic to these arguments and made a similar case for Japan in the 1990s. But the case for inflation never made headway with Japanese policy makers then, and there’s no sign it’s getting traction with U.S. policy makers now.

All of this raises the question: If inflation isn’t a real risk, why all the claims that it is?

Well, as you may have noticed, economists sometimes disagree. And big disagreements are especially likely in weird times like the present, when many of the normal rules no longer apply.

But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.

Needless to say, the president should not let himself be bullied. The economy is still in deep trouble and needs continuing help.

Yes, we have a long-run budget problem, and we need to start laying the groundwork for a long-run solution. But when it comes to inflation, the only thing we have to fear is inflation fear itself.

Carbo
08-06-2009, 13:00
Well, I thought somebody might have bitten on this. Kvarty, Astro or someone.

Anyway, here something else on the matter.

Everyone agrees with me.

(Well, relaly, I just listen to people who actually know about this stuff and agree with them, but the first way sounds better.)


Chancellor Angela Merkel lashed out last week at quantitative easing by the Fed, the Bank of England, and the European Central Bank, repeating the silly mantra that this will set off an inflationary storm.

How can it do so when the velocity of circulation has collapsed, and unemployment is rising everywhere? The Fed's "monetary multiplier" ended last week at 0.867, half its average of 1.7 over the last decade. The credit mechanism is still broken. This is what happened in Japan in its Lost Decade.

The ECB says the eurozone economy will contract until mid-2010, at best. Germany's trade association (Wirtschaftsverbände) warned Mrs Merkel last week that the credit drought threatens to become "life-threatening by the summer at the latest".

The list of countries in deflation is growing every month: Ireland (-3.5), Thailand (-3.3), China (-1.5), Switzerland (-1), Spain (-0.8), the US (-0.7), Singapore (-0.7), Taiwan (-0.5), Belgium (-0.4), Japan (-0.1), Sweden (-0.1), Germany (0).

Yet markets seem to think otherwise, and this has its own awful consequences. Inflation fears have driven 10-year US Treasury yields to 3.86pc, a full point above levels in March when the Fed intervened to force rates down. US mortgage rates have jumped to 5.29pc. Gilts have reached 3.92pc, and French 10-year bonds are at 4.05pc.

This bond revolt is enough to bring any global recovery to a shuddering halt. The irony is that those fretting loudest about inflation may themselves tip us into outright deflation, with all the perils of a debt compound trap. It is Angela Merkel who plays with fire.

AstroNoodle
09-06-2009, 08:36
Carbo, your arguments are quite persuasive: you do a good job of articulating the myths that have deceived every nation which has fallen into the dilusional free-trade fallacy and the empire it spawns.

Rome, England, and now the US -- just three of the biggest examples.

Kvarty and I have already ridden the free-trade merry-go-round along with you and (diclaimer: without consulting to speak for Kvarty as well as myself) feel that we have already addressed these myths.

Free-trade lies make for compelling propaganda, but both the actual workings of international economics and indisputable history tell the true story of of the total, repeated failure of free-trade as some new global paradigm. Free-trade signals the start of an end, not a new beginning.

No single man ever epitomized the struggle to save one nation from the disintegrating effects of free-trade than Joseph Chamberlain.

Enjoy reading about him:
Joseph Chamberlain (http://www25.uua.org/uuhs/duub/articles/josephchamberlain.html)

Carbo, we would just refer you to our previous posts. There is no reason to repeat.

Carbo
09-06-2009, 10:25
Carbo, your arguments are quite persuasive: you do a good job of articulating the myths that have deceived every nation which has fallen into the dilusional free-trade fallacy and the empire it spawns.

Rome, England, and now the US -- just three of the biggest examples.

Kvarty and I have already ridden the free-trade merry-go-round along with you and (diclaimer: without consulting to speak for Kvarty as well as myself) feel that we have already addressed these myths.

Free-trade lies make for compelling propaganda, but both the actual workings of international economics and indisputable history tell the true story of of the total, repeated failure of free-trade as some new global paradigm. Free-trade signals the start of an end, not a new beginning.

No single man ever epitomized the struggle to save one nation from the disintegrating effects of free-trade than Joseph Chamberlain.

Enjoy reading about him:
Joseph Chamberlain (http://www25.uua.org/uuhs/duub/articles/josephchamberlain.html)

Carbo, we would just refer you to our previous posts. There is no reason to repeat.
I actually know a bit about Joseph Chamberlain, having worked on the Boar War for my dissertation for college.

Anyway, the post, which I was hoping Kvarty especially would bite on, is about inflation and inflationary pressures.

Free trade, I guess, is tied up with this whole argument somewhere.

I think that tariffs are fine for a country like America. It has a large and growing population, energy supplies, water, food, still a massive heavy industry and manufacturing sector, etc, etc. America, probably, could go it alone, I suspect.

But I really don't get what the argument against free trade is.

Anyway, I might start another thread on that if you're interested. This one, though, I'd like to keep on inflation.

AstroNoodle
09-06-2009, 10:57
William J. Gill in Trade Wars Against America shows that historically free-trade causes inflation. This is the opposite of what free-trade propaganda teaches.

Inflation and free-trade go hand and hand, and I agree that tariffs are fine for America. Higher tariffs for subsidized imports would solve the global lack of confidence in the dollar overnight. But it could also cause a big war.

You are right to consider that all-out protectionism for small countries, the equivalent of an American state in economic terms, is not always the best solution.

In America, free-trade propaganda has led us down a path of inflation, debt, and deindustialization.

I hate to say it, but even though I am protectionist ideologically, I don't think that the future holds much hope for its implementation or that the US dollar will ultimately prevail against inflation and the special ingredient of the massive amounts of foreign-owned dollars the world is starting to say that they do not need.

The only thing that you can do with dollars is to exchange them for other currencies, save them to back up your national currency, or spend them in America. What happens when the world figures out how to cut ties to the American dollar? The American economy will suffer hyperinflation, and people's savings will be wiped out.

Internationalizing currency is a bad idea all around. The gold standard is a much better idea as nobody's currency is directly compromised through the international markets and the likelihood of international oversupply which could be returned to the host country.

Kvartiraokhotnik
09-06-2009, 17:36
What need do we have for such long and persuasive arguments when Gogol Bordello sum it up perfectly with the poetic slogan ''f@ck globally, think locally''?

Kvartiraokhotnik
09-06-2009, 17:46
Top Chinese banker Guo Shuqing calls for wider use of yuan - Telegraph (http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5473491/Top-Chinese-banker-Guo-Shuqing-calls-for-wider-use-of-yuan.html)

Heheheh.....everything is going according to plan, soon Kvarty will squeeze that beer out of Carbo.....:evilgrin:

Carbo
09-06-2009, 17:57
Top Chinese banker Guo Shuqing calls for wider use of yuan - Telegraph (http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5473491/Top-Chinese-banker-Guo-Shuqing-calls-for-wider-use-of-yuan.html)

Heheheh.....everything is going according to plan, soon Kvarty will squeeze that beer out of Carbo.....:evilgrin:
Well, they may say that, but they've been buying dollars in bigger quantities than ever, as you will see on another thread.

Actions speak louder than words.

Carbo
09-06-2009, 17:58
What need do we have for such long and persuasive arguments when Gogol Bordello sum it up perfectly with the poetic slogan ''f@ck globally, think locally''?
Sorry, but the arguments are about inflation, not free trade.

You've been predicting hyper inflation by the end of the year.

Ain't gonna happen.

Kvartiraokhotnik
09-06-2009, 18:07
Sorry, but the arguments are about inflation, not free trade.

You've been predicting hyper inflation by the end of the year.

Ain't gonna happen.

Lets be precise. I've been predicting that the US dollar will no longer be the world reserve currency by the end of the year....

Look at what Medvyedev's been saying

Medvedev: single world reserve currency pre-conditioned the crisis | Politics from 2009-06-06 | RT (http://www.russiatoday.com/Politics/2009-06-06/Medvedev__single_world_reserve_currency_pre-conditioned_the_crisis.html?page=2)

And China seem to be voicing the same concerns with the US dollar....even the Germans are sticking their beaks in...

New reserve currency idea needs work-German minister | Currencies | Reuters (http://www.reuters.com/article/usDollarRpt/idUSN2754209520090327)

All of the above says my Kronenburg is as safe as the gold investment :trampoline:

Carbo
09-06-2009, 18:19
Lets be precise. I've been predicting that the US dollar will no longer be the world reserve currency by the end of the year....

Look at what Medvyedev's been saying

Medvedev: single world reserve currency pre-conditioned the crisis | Politics from 2009-06-06 | RT (http://www.russiatoday.com/Politics/2009-06-06/Medvedev__single_world_reserve_currency_pre-conditioned_the_crisis.html?page=2)

And China seem to be voicing the same concerns with the US dollar....even the Germans are sticking their beaks in...

New reserve currency idea needs work-German minister | Currencies | Reuters (http://www.reuters.com/article/usDollarRpt/idUSN2754209520090327)

All of the above says my Kronenburg is as safe as the gold investment :trampoline:
If we're going to have this discussion, then can we have it on the thread linked below?

http://www.expat.ru/forum/current-affairs/152734-dollars-days-numbered-long-live-dollar.html

And keep this one to inflation?

AstroNoodle
10-06-2009, 08:45
Interesting that you dodge key points Carbo. I don't think that you are dishonest which means that you have failed to grasp interrelated economic themes, i.e. free-trade causes inflation as per post above.

You want to discuss a donut shop by focusing only on jelly donuts. It doesn't work that way.

Carbo
10-06-2009, 09:01
Interesting that you dodge key points Carbo. I don't think that you are dishonest which means that you have failed to grasp interrelated economic themes, i.e. free-trade causes inflation as per post above.

You want to discuss a donut shop by focusing only on jelly donuts. It doesn't work that way.
OK then, let's hear how free trade causes inflation.

AstroNoodle
12-06-2009, 09:51
Read William J. Gill's Trade Wars Against America (published 1990), and it will help you a lot. The publisher killed the book by raising the price five times to about $60 and then let it go out of print without issuing a paperback, even though the book had an influential reading in Washington, DC at a critical time in the once-and-for-all undoing of any semblance of traditional American trade structure.

There are still a few copies which you can find for sale on the internet at any given time however.

I think that I have already posted on free-trade causing inflation before. A lot of times I have noticed that you have ignored my best rebuttals. I'll look through and see what I have already posted first.

Carbo
12-06-2009, 16:41
Read William J. Gill's Trade Wars Against America (published 1990), and it will help you a lot. The publisher killed the book by raising the price five times to about $60 and then let it go out of print without issuing a paperback, even though the book had an influential reading in Washington, DC at a critical time in the once-and-for-all undoing of any semblance of traditional American trade structure.

There are still a few copies which you can find for sale on the internet at any given time however.

I think that I have already posted on free-trade causing inflation before. A lot of times I have noticed that you have ignored my best rebuttals. I'll look through and see what I have already posted first.
I suspect what you might be talking ab out is free capital flows, because from what I can tell, free trade tends to be anti-inflationary.