It seems that the madness among at least some economists is not abating. Harvard University apparently is vying with Princeton to see who can create the most outrageous policy prescriptions. While Paul Krugman has been leading the pack, it is disheartening to see Greg Mankiw (who at one time made sense once in a while and was George W. Bush’s chief economic advisor) and also Kenneth Rogoff, the former chief economist at the International Monetary Fund. Apparently, they like what has happened in Zimbabwe so much that they believe we need a dose of the same thing: inflation.
What the U.S. economy may need is a dose of good old-fashioned inflation.
So say economists including Gregory Mankiw, former White House adviser, and Kenneth Rogoff, who was chief economist at the International Monetary Fund. They argue that a looser rein on inflation would make it easier for debt-strapped consumers and governments to meet their obligations. It might also help the economy by encouraging Americans to spend now rather than later when prices go up.
“I’m advocating 6 percent inflation for at least a couple of years,” says Rogoff, 56, who’s now a professor at Harvard University. “It would ameliorate the debt bomb and help us work through the deleveraging process.”
This falls into the OMG category of policy prescriptions. Note that what they really are advocating is the repudiation of debt via monetary debasement. Now, when you and I receive debased products, such as lower-quality food and other goods, we don’t like it and believe we are being cheated.
However, now the Great Minds of the Ivy League are claiming that if we do the same thing to money, we will have prosperity. Somehow, I think we are dealing with an economic non sequitur, not that it matters at the Ivies.
Makiw and Ben Bernanke claim that the Great Enemy is deflation:
For the moment, the Fed’s focus is on preventing deflation — a potentially debilitating drop in prices and wages that makes debts harder to repay and encourages the postponement of purchases. The Labor Department reported May 15 that consumer prices were unchanged in April from the previous month and were down 0.7 percent from a year earlier.
“We are currently being very aggressive because we are trying to avoid” deflation, Fed Chairman Ben S. Bernanke told an Atlanta Fed conference on May 11.
Keep in mind that deflation is nothing more than money regaining previously lost value and the re-aligning of the economic fundamentals into lines of sustainable production. What Bernanke and company are saying is that they are going to do everything they can to prevent economic recover — all in the name of putting the economy back on the road to recovery.
This is not economics, folks. It is madness.
(Hat top to Matt Moselle! Thanks!)
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“It would ameliorate the debt bomb and help us work through the deleveraging process.”
Yeah that’s a great idea! Lenders have already been devastated by the housing collapse, so let’s kick them while their down by devaluing any good loans they might have left.
“We are currently being very aggressive because we are trying to avoid” deflation…”
How is that different from advocating inflation? I don’t get it?
A problem with these mainstream guys is that they think monetary pumping works the same at all times for all people. It doesn’t. Remember Greenspan’s “pushing on a string.” That’s what’s happening to the Feds now. Monetary pumping has different results during a depression, a recovery, and a boom. In fact, it tends to work best during the boom phase. Even then, the lag between policy creation and price inflation is about 4 years. So if the Feds started now, they could produce the price inflation they want in four years, but not this year or next. And by then, we wouldn’t want it.
How about this: What the planet needs is a dose of good old fashioned genocide to reduce our carbon output and impact on the environment. I’m advocating a 6% slaughter rate for at least a couple of years.
What a bunch of idiots.
It is disturbing how little concern for the productive folks these guys in the intellectual elite have.
Apparently it is the people’s job to make — and keep — the economy better, instead of the economy trying to make the lives of people better. Twisted.
Cheers on the ride down…
Upcoming next semester: Brand new introductory textbooks with massive citations of Silvio Gesell and Robert Mugabe!
Get them now!
“Keep in mind that deflation is nothing more than money regaining previously lost value and the re-aligning of the economic fundamentals into lines of sustainable production.”
What is the deal with all these LvMI people referring to inflation/deflation as a price phenomenon, implicitly or explicitly?
This is distressing me…
What? human action? What does that have to do with Economics? I believe You’re confusing me with that Steven Pinker guy. You’re in the wrong building.
–Greg Mankiw
Well gold is always a good alternative in these cases. Even if the IMF dumps theirs there is no way the IMF has $10 trillion in gold to cover the current inflation.
The worst part is that when these Keynesians inflate like crazy they create their own hole that they then blame on individuals by calling them hoarders. Their own hole is the “Paradox of Thrift”. Simply as money becomes less valuable, people save more nominal dollars to keep the same spending power in savings.
Of course this paradox is complete crap as it ignores individual preferences to keep cash instead of spending it. Furthermore this savings is the only capital available to entrepreneurs trying to improve the economy.
“Their own hole is the “Paradox of Thrift”. Simply as money becomes less valuable, people save more nominal dollars to keep the same spending power in savings.”
Is there already a counter-term we can use for this? Something like “The Paradox of Spending”: As more money is printed to stimulate spending, more money is saved in order to retain purchasing power.
This is hilarious! It fully demonstrates that they have no earthly idea that spending more now (or, rather, printing more money to be spent now) is what will cause prices to rise. They see inflation and “inflation” as two entirely separate phenomena. I don’t get it…are they really that stupid, or are we being purposefully mislead?
the point of the mankiw article seems pointless, after all the government is doing everything they can to inflate the money supply as we speak. what else can they do? interest rates are close to 0 and the Fed is buying treasuries as fast as they can. A “looser rein on inflation”? How can it be any looser?
Excellent article and points made. I dialogued with Greg Mankiw recently and it went well until we got to the concept of the fed and inflation. An excellent book that ties the parallels of the great depression and today and why it seems governments and the ‘ivy leaguers’ act irrationally is Murray Rothbard’s ‘America’s Great Depression’. He shows how during the Great Depression as today that central banks act in the interest of Governments and specific big businesses at the expense of the general public.
@Taylor:
“What is the deal with all these LvMI people referring to inflation/deflation as a price phenomenon, implicitly or explicitly?”
The comment you quote came after a quote of Bernake, where he talks about deflation – I believe Anderson is commenting on deflation in Bernake’s terms, which is always as prices as opposed to money supply.
This is why I carry a $1 billion Zimbabwe reserve note in my wallet everywhere I go so I can clearly explain fiat money and inflation to people.
It’s funny that their money is worth more on eBay as a novelty then as real currency.
Bill
Surely Matt is right. If we use the (correct) Austrian definition of inflation as an increase in the money supply relative to the supply of goods, then the damage has already been done. I assume that Krugman and Mankiw are using the (incorrect) definition of inflation as “rising prices”.
I have a Zimbabwe currency presentation on my cube wall that is similar the German Mark one that Dr. Paul has on his wall. It is a great conversation starter, but people still look at me like I am nuts when I tell them that we are headed that way. The hundred trillion dollar bill is a real gem.
It is sad to see Rogoff making statements like these. He has done a good job bringing awareness of dollar weakness and realistic expectations for nations undergoing financial crises. What’s the deal, Ken?
I’m really feeling sorry for you, americans. Soon you shall learn what it means to live under hyperinflation.
When it happens, unless your government suddenly becomes reasonable, or your Supreme Court does the same it did when Roosevelt tried to push its limits, you may get acquainted with another economic marvel: the PRICE CONTROLS!
Yes, for the sake of the poor or the average american consumer, your government will start thinking about setting a maximum price limit on merchandises. Imagine, everything, from diapers to meat, will have its prices fixed by the government, monthly.
When that happens, I strongly advise that you start getting ready for shortage of goods. Yes, the maximum price fixed will not be enough for the greedy merchants and companies. They will start hiding their goods. Not good, isn’t it?
But don’t worry. At that point, your government will surely come up with another card on its sleeve. It will prohibit stores from keeping their goods. Everything, by force of law, will have to be put on sale, for the price previously fixed by the government. There will be a mass rally against the greedy merchants and stores. Some people, without anything better to do, will start inspecting all the stores and supermarkets in their neighborhoods for non-abiders.
The economy of your country will be completely devastated by then. But, in a last effort to fix it, your government will change your currency. More than once, most likely. You will have, in the lenght of time of a decade, the New Dollar, the Reformed Dollar, the New Reformed Dollar, and the Reformed New Dollar.
Each one will last less than two years, of course.
On the good hand, you will be able to start breathing after that. Maybe by then people will be already using gold, or any other substitute, for their daily economic affairs. And your government will be completely discredited, as will be its mad economists.
If you think none of those things could happen in America, think again. Yes, they did happen in a lot of third-world countries a few decades ago, but they also happened in Germany in the mid-wars period.
Besides, what for a long time kept America on its tracks wasn’t the “enlightenment” of its population, for the average american economic knowledge is laughable (you know it), but the fact that freedom and liberty, including ECONOMIC freedom and liberty, were incrusted in your society’s core ethic values.
Please mind that I said “were”. Not anymore, at least for a considerable amount of the population. That malady can be cured with the ressurection of those core values, or through the enlightenment of the population about economic affairs.
None of which, I’m afraid, will or could happen in the short-term. So, be prepared for the worst.
There is no such thing as “the economy”; there is only economy, i.e., the acts of millions of individuals economizing scarce resources. It is precisely the thinking in terms of concepts as useless and disconnected from reality as “the economy” that leads those who do to advocate profilgacy and the squandering of resources as the road to prosperity. Then again, most who do think in such aggregate terms conceive the ultimate economic good as welfare not prosperity, which is to be acheived through war, the great consumer and squanderer of resources, not peace.
This is madness.
This is SPAARTAAAAAAAAAA!!!
Please send me a valid address so I can write to these bloody clowns (with all due respect for decent hard working circus clowns) what us savers think about their genius plan.
Here inflation is starting to kick in (read: the billions of Euro dumped last summer to help out bankers are starting to be felt heavily): fuel, tea, snacks, vegetables… and we still have people worrying about deflation!
Like the careful archaeologist, The Natural Lawyer has begun brushing at the sand that obscures the mystery.
“…no such thing as ‘the economy’; there is only economy, i.e., the acts of millions of individuals…”
Your comments are profound and shed light upon the challenge for libertarians. Many intellectuals prefer the employment of Merriam-Webster’s fourth definition rather than second; consequently, it becomes generally accepted that this “thing,” this… this “economy,” can be molded and manipulated, crafted and configured.
It would be far more ominous to discuss molding and manipulating millions of individuals.
The policy maker enjoys arguing over “the economy.” At that point, it is a fait accompli; the economy is an “it”, which the electorate wants “fixed.”
It would be discomfiting to the bureaucrat and voter alike to acknowledge a disquieting reality:
We are not dealing with an it.
We are dealing with free beings. Lots and lots of them.
The Zimbabwe comparison is a bit rich – we won’t be seeing hyperinflation anytime soon.
“Hyperinflation is impossible” – from an Austrian perspective:
http://futronomics.blogspot.com/2009/03/hyperinflation-is-impossible.html
Lib: “The world’s coming to end through Global Warming! If things don’t change then get a bomb shelter and food cans and prepare for the worst!”
“Yeah, right, whatever!”
Libber: “The world’s coming to end through Hyperinflation! If things don’t change then . . .”
How about this: What the planet needs is a dose of good old fashioned genocide to reduce our carbon output and impact on the environment. I’m advocating a 6% slaughter rate for at least a couple of years.
Don’t joke…some of them really do think that way!
If deflation is defined as monetary contraction, then we do have deflation in the Austrian sense of the word.
Mises and Rothbard argued against reflation; Hayek, Ropke, Selgin were supportive of it. But the mechanisms by which you reflate is important, and no human could possibly know how to reflate “correctly” (so to speak) without inducing further economic distortion.
Mises agreed that once the bust has occurred, it affects even solid businesses – and this is not (solely) because of a weak pool of (real) savings.
I don’t know enough to comment – I don’t think there is much Austrian theory on recovery and recessions.
If deflation is defined as monetary contraction, then we do have deflation in the Austrian sense of the word.
Mises and Rothbard argued against reflation; Hayek, Ropke, Selgin were supportive of it. But the mechanisms by which you reflate is important, and no human could possibly know how to reflate “correctly” (so to speak) without inducing further economic distortion.
Mises agreed that once the bust has occurred, it affects even solid businesses – and this is not (solely) because of a weak pool of (real) savings.
I don’t know enough to comment – I don’t think there is much Austrian theory on recovery and recessions.
the Fed is buying treasuries as fast as they can
The Fed has no choice — Congress is bent on spending more than it has, the Treasury will issue the bonds necessary — someone has to buy them.
At this point the only one standing is the Fed.
Is there a precise term for ‘prices coming down to due increased production efficiency’ (the best kind of lower prices)? Consistency can only mean that ‘deflation = money exiting the economic system’ if ‘inflation means more money entering the system’.
I think Natural Lawyer and Franklin hit on a very fundamental point here: “the” economy vs economy.
The thing that we habitually call “the economy” necessarily refers to the Macroeconomy, the subject matter of macroeconomics that, some say, was invented/formalised by statists like JM Keynes in the early part of the 20th century. Before this pernicious “invention” I believe such subject matters were treated under labels such as the “national economics” e.g. Adam Smith’s Wealth of Nations.
But whatever the history of macro-economics as a subject that warrants serious study, and that which demands the constant attention of the state and its oversight and perennial “management” it became the lifelong vocation of people like Mises to disentangle the fallacious policy prescriptions of the socialists, fascists, inflationists, interventionists… you name it. Hasn’t that been the main challenge for libertarians and Austrians?
And as a corollary to this, can we then suggest that people like the eminent management guru Micheal Porter, who wrote the highly popular textbook “Competitive Advantage of Nations” are also, by necessity, statist academics? Isn’t his Diamond Model another macroeconomic framework that facilitates the formulation of government interventionist policies?
Just thinking out loud. Appreciate any feedback.
Porter’s book is definitely statist.
He assumes that the nation is just a big corporation where you must invest and cut back. And citizens are like employees who we must tempt by incentives to do what the CEO (government) wants done.
Of course, like all statists, it works well until it doesn’t.
Please, someone perform citizen’s arrests on these people.
anon – thank you for the citation. I also recently published a link to Tyler Durden who pointed toward Hayek’s reference to “shadow money” as fiduciary media that has been created outside of the bounds of what any of our monetary aggregates consider as “money” (ie. M3, M2, etc). Austrians claimed for many years that inflation was far higher than what we were being told by the Bureau of Lies and Statistics (BLS). And they were correct. If money were properly defined as anything that was accepted without question as a medium of exchange, then it was likely rising in mid double digits for much of the last 10 years – which would explain how inflation “felt” for the average person.
Now that much of what was considered money is no longer, we are in a rapid deflation – unless we were to change the definitions.
My site is not for profit (as of now). I invite anyone here to come and join myself and others attempt to unravel this mess from a common sense perspective.
Over $20 Trillion wealth has been wiped out during the crash of the markets. We are in a severe deflationary period. Deflation can cause collapse of the system just as can hyperinflation. The Fed must pump in money into the system to prevent further deflationary forces from taking hold on the economy. The Dollar will remain king for a long time to come. At least until such time that the deleveraging is reversed.
Maybe I am too late for this discussion? What does Anderson of the japan lost decade. Is the deflation in this country just “… nothing more than money regaining previously lost value and the re-aligning of the economic fundamentals into lines of sustainable production”? Where is the recovery in Japan since the 80s?
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