Thursday, February 20, 2014

The Problem For Inflationists

I figured out the error that inflationists are making. They think that since the central bank can print any amount of money, it can cause inflation, i.e. an increase in the price index. That part is technically true.

But what they actually want is something much more specific than "inflation": a gentle, restrained, gradual increase in prices that is basically even across all categories. House prices, waiters' tips, silver, oil, paper towels all going up 2% a year.

Unfortunately, that doesn't seem to be possible, here or in Japan. At the first sign of easing (a Hilsenrath article in the WSJ) people bid up speculative assets. But nobody bids up the amount that truck drivers are paid per mile. Nobody bids up the hourly wage of Best Buy employees.

They can have inflation but it's lumpy and shows up in the least desired places. True, you get construction bubbles (horrifically wasteful but "job creating") but you also choke off probably just as much legitimate economic activity through higher commodity costs and energy prices.

You could print so much money that an ounce of silver goes to $1,000 before the average low skilled wage would increase 50%. Central bankers gradually discover this. They "taper" and try to figure out what's next.

"Stagflationary Mark" has some good thoughts on this as well.


Stagflationary Mark said...

But nobody bids up the amount that truck drivers are paid per mile. Nobody bids up the hourly wage of Best Buy employees.

Epiphany! Yes! Bingo! :)

December 29, 2010
The Amazingly Twisted Logic of Paul Krugman

Krugman wants inflation. He claims quantitative easing will give us inflation. He's then surprised that anyone would think oil prices would rise based on quantitative easing? Perhaps he expected all that awesome inflation to magically appear in wages and housing prices instead? How else could anyone possibly explain his twisted logic?

Can't you just picture it. On a Friday afternoon the Fed announces that it WILL create enough monetary printing over the weekend to force up all prices by an average of 10%. Let's say Krugman is your boss. He calls you into his office. He says...

"I know your review isn't for 6 months, but based on what the Fed is doing today I have no choice but to give you a 10% raise immediately. I'm also sending you home early so that you can go to the mall and do a bit of shopping to help this economic recovery. You must promise me that you won't hoard though. The last thing this country needs is a panic at the grocery stores."

Let's all embrace Krugman's utopian dream. Although that is not how the real world works now, it could happen if we all wish hard enough. I'm sure of it!

And for what it is worth, I'm not even all that convinced that QE is money printing. Seems to be more of a con job to get people into riskier assets and spend more before the inflation really hits (not that it is by any means guaranteed to do).

Stagflationary Mark said...

As a side note, if you can convince the majority that serious inflation is coming soon (whether it is true or not), then people would be more willing to buy houses and borrow more money (which is exactly what the Fed wants).

Bernanke cracks wise: The best QE joke ever!

The problem with QE is it works in practice but it doesn't work in theory," Bernanke said to a round of laughter—rare for an audience of economists gathered to discuss monetary policy.

We may someday find out that it didn't work in practice or theory. Just saying.

Mr Slippery said...

The government could more even inflation using the Bush stimulus method of dropping money.

If would be even more effective if they did it every month until they met their inflation targets. But they are clearly not determined enough, so now resort to Jedi mind tricks AKA forward guidance.

C said...

Are interest rates really that low, or were they just really high when the baby boomers were squeezing through the python?

Anonymous said...

Treasuries (TLT) Are Rallying Because Ben Bernanke is Throwing the Inflation Game!

This speech also confirms one of my favorite principles, never believe anything until it has been officially denied, when Ben says, "I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small."

CP said...

Meanwhile, Mr. Mises comes into your office. He says, "I know the Fed's plan was to raise all prices by an even 10 percent. But instead our energy cost doubled and we sell our widgets under a fixed price contract. The only way we can honor the obligation is to shut down this division and move the production to a more labor intensive, less energy intensive factory overseas. I'm being transferred and today's your last day."

Stagflationary Mark said...

And then Mr. Mankiw offers his infamous currency crisis solution, which Mr. Mises sprays out through his nose with thunderous laughter!

CP said...

These economics professors are charlatans. Just by having tenured jobs they steal from us, and they compound it with this savagely bad advice.

CP said...


You should have a personal dislike for this guy:

He wants you to pay more taxes on your illusory TIPS winnings. (Higher nominal yields -> lower real after tax yield.)


CP said...

Oh gosh!:

In my previous post I suggested that a nominal hourly wage target has a great deal of appeal from a theoretical perspective.

Mr. Mises' boss comes in and tells him that the entire company is folding up because the Fed decided to raise prices by 20% because employment and wages dropped when they raised them by 10%!

CP said...

That Hatzius plan is like landing a plane by pointing it at the ground and flying it until the airspeed indicator reads zero.

CP said...

If you lend freely to Wall Street speculators and convince them you're going to debase the currency... then surely WalMart employee wages will go up, right?

Stagflationary Mark said...


He wants you to pay more taxes on your illusory TIPS winnings. (Higher nominal yields -> lower real after tax yield.)

Believe it or not, I heckled Romney for not wanting me to pay any income tax.

Anonymous said...
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CP said...

"Nominal wage targeting"!

A futures market for nominal wages!

CP said...

"The sale of $9 billion in 30-year Treasury Inflation Protected Securities yesterday drew bids 2.34 times the amount of securities on offer, the weakest since October 2001 amid stagnant inflation and as the Fed reduces its bond buying."

CP said...


Look what Bullard said in 2008:

BULLARD: In sum, I think we are moving to a Japanese-style deflationary, zero nominal interest rate, situation at an alarming pace.

Are we crazy for thinking what these people are saying in private, only to release 5 years later?!

CP said...