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November 16, 2010

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I think what he's saying is that the Fed *can't* lower unemployment (which we can see since quantitative easing hasn't led to full employment in the, oh, fifteen minutes or so it's been in effect), and therefore they should worry only about inflation. I wonder if he's ordered the "Repeal Humphrey-Hawkins!" buttons yet.

Wha huh?

I think the confusing part was the whole "monetizing our debt" thing, what does that mean?

The rest of it is just the general GOP strategic approach of "do everything to keep the economy from recovering to Obama is a one-termer without looking like that's what we're doing."

It's simple. Inflation is bad for rich people because they have more savings and inflation reduces the buying power of those savings. So inflation's bad. They have to sound like they're against unemployment, but the steps that they're worried about is something that could cause a measurable drop in the real if not nominal wealth of their wealthy masters.

Classic Orwellian Doublethink.

I wonder if this gets addition traction because enough people remember learning about Germany's hyperinflation in school (just enough to remember that inflation was bad and then there was Hitler).

Nah, that's probably over-thinking this.

I think most people are sympathetic to the "inflation bad!" argument simply because people hate change and you can get almost anyone going on and on about how X product used to cost five cents but now it's soooo expensive (when, adjusted for inflation, it's probably cheaper).

Not inflation, stagflation!

yes you right

I wonder if this gets addition traction because enough people remember learning about Germany's hyperinflation in school (just enough to remember that inflation was bad and then there was Hitler).

Glenn Beck's been screaming about America's Weimar Moment for a couple of weeks now.

The idea that inflation is bad for the rich is, my apologies for the directness, absurd. The rich own things, those things get more valuable. They only borrow when money is cheap. They don't typically "have" to buy anything.

One of the successes of Reaganomics was to bring broad based inflation under control. In a high inflation environment the people who live paycheck to paycheck are hurt the worst.

Inflation can be self-sustaining and/or self-accelerating, but there's no good reason to expect inflation as long as the economy is so far below potential output. And with interest rates so extraordinarily low, the Fed has tons of leeway to curb inflation with interest rate hikes without even taking us into the 10+% realm that it took to break inflation in the 70s/80s.

I do understand why people are so nervous about inflation. It's all very well to say that wages can increase to catch up, but that involves you personally negotiating a higher salary with your boss. And especially when unemployment is high and union membership is so low, it's easy to imagine being unable to negotiate a higher wage and therefore losing purchasing power to inflation.

That isn't, to me, sufficient argument against a little bit of minor inflation, and there are lots of good arguments in favor - like returning to nominal house price levels of 2007 sooner, and reducing the impact of American's debt load. But if you don't have much debt and you do have savings, or you're on a fixed income, inflation is pretty scary in any form.

I don't think it so much goes back to Weimar as it does to the 70s stagflation. The inflation of the 70s did grave damage to people on fixed incomes even as the economy as a whole actually did okay. Inflation feels like pain as your hard-earned pennies become worth less even if they don't become worthless. I don't blame people for worrying. But we have really big problems that are not going to be painlessly solved.

Just to be clear Jacob, the economy "as a whole" did not do ok in the 70's. 17% inflation and 17% mortgage rates were incredibly painful for the working class and the middle class. The standard became COLA adjustments every year that almost caught up with last years inflation.

One of the hardest things to communicate to people who didn't live through that time is how great the sense of stability was for the next 25 years. Being able to make a budget and not having to worry that your groceries were not going to be 30% more next year.

With whatever problems came with it, the economic policies of the "last thirty years" created a level of predictability and stability that we simply didn't have in the 70's.

"The idea that inflation is bad for the rich is, my apologies for the directness, absurd.

This is a claim that is, well, absurd. The rich hold financial assets as well as "real" assets. They hold mortgages and bonds (corporates, munis, treasuries). Inflation destroys that kind of wealth utterly. Why do you think the rich make all that noise about inflation? Are you telling me they are stupid?

Bobbyp,

The difference is they don't have to hold those assets. They exchange those assets for others in high inflation environments.

To be clear, businesses have other challenges, but wealthy people are not, in general, hurt by high inflation. Unless, as you aptly point out, they are stupid.

Marty,

The economy in the 70's was buffeted by unprecedented exogenous supply shocks as well as inflation. However, overall it didn't do too badly for most (stock market investors and Republicans excepted). Real GDP growth in the 70's was about 38%, for the 80's slightly LESS. Yes, true. Look it up.

I remember those times, and it was not that bad. Getting 20% on short term money was pretty nice--compare that to current rates, and we had disco.

You are oversimplifying and exaggerating. Please stop.

I suppose if you had short term money to get 20% on it was fine. If you lived paycheck to paycheck not so much. And disco [email protected]+ks.

The idea that inflation is bad for the rich is, my apologies for the directness, absurd.

An increase in inflation is usually good for existing debtors and bad for existing creditors, because it reduces real interest rates. Because poor people are far more likely to be net debtors and rich people are far more likely to be net creditors, this is usually summarized as inflation being bad for the rich and good for the poor. It's slightly imprecise, but it gets the message across.

The difference is they don't have to hold those assets. They exchange those assets for others in high inflation environments.

But that exchange is unlikely to be free. If lots of people are trying to sell their financial assets at the same time, prices will be depressed and the sellers will take a loss on the sale. Similarly, prices on hard assets will be driven up by all the money rushing in.

I suppose if you had short term money to get 20% on it was fine. If you lived paycheck to paycheck not so much.

As Jacob has already acknowledged, this is a real concern. The point, though, is that there is no easy way out of this pickle. Otherwise, it wouldn't be a pickle, now would it? If we could possibly be smart about policy, there would be plenty of ways to address the problems of people on fixed incomes and living paycheck to paycheck.

And, as Jacob has pointed out, there's a whole lot of room to address inflation with properly targeted interest rates. The worse problem now is that we're pushing on a string with monetary policy. I don't really even see that QE2 will be very effective, knowing that firms are sitting on lots of cash already. We need targeted spending, not just more cash in the system for people to stuff into their mattresses (figuratively speaking, of course).

I should add, as bobbyp more or less pointed out, that saying the economy did reasonably well isn't the same thing as saying that things were great for everyone. The converse (or inverse?) is true as well. Plenty of short-sellers killed when things went to sh1t for lots of other people and the economy in general very recently.

Because poor people are far more likely to be net debtors and rich people are far more likely to be net creditors, this is usually summarized as inflation being bad for the rich and good for the poor.

See, e.g., William Jennings Bryan and the "Cross of Gold."

The problem being that the fed has ALSO failed in its 2% inflation target. QE2 is a move towards our price stability target.

What people seem to forget about Weimar is that the hyperinflation was a deliberate policy to get rid of the war reparations for WW1. It got ended with the strike of a pen.
Hitler rode to electoral success when the government went full austerity and deflationary in reaction to the world economic crisis. The instigator of this policy, Heinrich Brüning, was also (if his own words are to believed) part of a cabal preparing a conservative coup with the intent to reinstall an emperor. Things turned out slightly differently.

Marty, think about it: a period high inflation is either, ceteris paribus,

a) bad for the rich and the poor (where rich=net creditors and poor=net debtors, as is normally the case)
b) bad for the rich but good for the poor
c) good for the rich and bad for the poor
d) good for everyone

Which do you believe and why? I should point out that there are some real philosophical problems with a) and d).

How about: inflation (over maybe 2%) can make life difficult for the people (usually more so for those living on low or fixed incomes) but it serves a debtor government well by allowing the equivalent of a tax increase (again on all the people, but which the well-to-do can skirt by making alternative decisions for financial assets), and allows the incumbent politicians not to be forced to raise taxes to cover their profligate spending.

ajay:

'a) bad for the rich and the poor (where rich=net creditors and poor=net debtors, as is normally the case)
b) bad for the rich but good for the poor
c) good for the rich and bad for the poor
d) good for everyone

Which do you believe and why? I should point out that there are some real philosophical problems with a) and d).'

I believe c, mostly, but perhaps it's best for the incumbent politicians, since they don't have to pass legislations raising taxes to curtail government debt.

One more observation. One need not be rich as the period of increasing inflation begins. If one sees what is happening, can leverage to acquire the right assets, is willing to sacrifice and take some risks (beyond what one may be accustomed to), one can do quite well. This is what helped me succeed in residential rental real estate from the mid-sixties to the late seventies.

Of course, you want to be out before 2006, but that was easy to see. And the market situation is looking attractive again for investment, but credit will be hard to get.

Marty's recall of that period leading up to Reagan's election is close to mine.

GOB,

I'm not clear on why inflation lets the governemnt get away with profligate spending, as you put it.

The markets are quite smart enough to price inflation expectations into the interest rates they chareg on governmnet debt, and the tax schedules are indexed as well.

One more observation. One need not be rich as the period of increasing inflation begins. If one sees what is happening, can leverage to acquire the right assets, is willing to sacrifice and take some risks (beyond what one may be accustomed to), one can do quite well.

True enough, but essentially no more than saying that if one accurately anticipates economic conditions it is possible to make a lot of money. If you anticipate less inflation than the market, or even deflation, you can become wealthy by lending, for example.

I'm not trying to minimize your success. You made a good call and profited. I'm just saying that predicting inflation is not the only posssible good call.

"I'm not clear on why inflation lets the governemnt get away with profligate spending, as you put it."

Nothing allows a government to overchieve tax receipts quicker than high inflation.

With whatever problems came with it, the economic policies of the "last thirty years" created a level of predictability and stability that we simply didn't have in the 70's.

Everybody's got their own memories of the time, of course. Depending on what it was you did for a living, there was instability a-plenty between 1980 and now.

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