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Tuesday, May 8, 2012

It's Time to Embrace Inflation

Posted by on Tue, May 8, 2012 at 8:43 AM

So, the Federal Reserve essentially has two missions—control inflation and control unemployment—missions that are often at odds, forcing the Fed to strike a balance in favor of one or the other. Loosen up on monetary policy to spur the economy and thus employment, and they risk upping inflation. Clamp down on the economy in order to fend off inflation, and they clamp down on job creation.

Nothing to link to here, but I'm thinking we could use a little more inflation.

I mean, if there's ever a time to print a little extra money and pump it into the economy it's now. You know, not Weimar Republic proportions, but enough to really give the economy a boost, even if it risks bumping the inflation rate into, say, the 5 percent range. A hotter economy means more job growth, and higher inflation means a weaker dollar which means more exports which means a hotter economy which means more job growth.

Furthermore, the real debt crisis in the US is personal debt, and it is disproportionately generational. Young people are graduating college with six-figure debt burdens and few job prospects. Young families are upside down on their mortgages. But higher inflation rate would eat away at the value of that debt, making it more manageable, and as incomes rise to match consumer prices, this lower debt to income ratio will also help boost the economy.

Of course, higher inflation hurts people with assets, particularly those on fixed incomes. Well, particularly those on fixed low incomes. But that's part of the balance the Fed always strikes, and for decades it has focused on low inflation at the expense of jobs and to the disadvantage of the young.

 

Comments (37) RSS

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1
Hmmm. Interesting points.
Posted by Bugnroolet on May 8, 2012 at 8:49 AM · Report this
Bauhaus I 2
Goldy...have you been to the market lately? I thought inflation was already here. And I don't know how people who depend on their automobiles are doing it these days. And rent, of course, keeps going up as home prices keep decreasing. I know that rent and food and gas are considered volatile commodities and aren't included in the Federal shopping basket of goods used to calculate inflation, but if your salary is at a standstill, your standard of living is definitely falling.
Posted by Bauhaus I on May 8, 2012 at 8:55 AM · Report this
seandr 3
As someone who makes $ exporting software throughout the world, I loves me a weak dollar.

But as someone who grew up middle class during the inflation run of the late 70's, I don't remember those as being especially good times. As you said, "higher inflation hurts people with assets", which means it hurts everyone with a bit of money in his/her pocket.

Inflation also takes a psychological toll, giving people the sense they are on a treadmill that's going too fast for them to move forward or even maintain their position.
Posted by seandr on May 8, 2012 at 8:55 AM · Report this
4
Interesting points, but there's an elephant in the room to address: higher inflation means higher interest rates. Higher interest rates mean higher debt service costs -- for both companies and consumers. For consumers, the issue would be credit card interest and... adjustable mortgages.

Despite the foreclosure crisis, there are plenty of people still just barely hanging on, who have ARMs, who could not afford even a modest increase in interest rates. Wishful thinking says these people would see their incomes rise with inflation, but reality says debt costs would rise more quickly than wages.
Posted by also on May 8, 2012 at 9:03 AM · Report this
Vince 5
Yeah, fuck the elderly living on fixed incomes.
Posted by Vince on May 8, 2012 at 9:03 AM · Report this
nixor 6
What do you mean by triple-digit debt burdens? Hundreds of dollars? Hundreds of percentage points of interest?
Posted by nixor on May 8, 2012 at 9:15 AM · Report this
Collin 7
This theory relies on the hope incomes that will keep up with inflation, which they haven't been doing for the last several decades.
Posted by Collin on May 8, 2012 at 9:17 AM · Report this
Fnarf 8
Generally speaking I agree with you, but there's a problem: inflation can be hard to control. If we let it slip up to 5%, there's no guarantee that we can easily bring it back down later, or even prevent it from running away to 10% or more.

Also, in the present economic climate it is unwise to assume that price inflation would automatically lead to wage inflation. Wage earners have less power today that at any time in the past hundred years; you probably won't get that raise that allows you to afford higher prices. It would move more people into some kind of a job at all, though.

But the current rate, 2.7%, is low, I agree -- especially in a stagnant economy.

@2, shut up about gas. Gas is cheap (and falling).
Posted by Fnarf http://www.facebook.com/fnarf on May 8, 2012 at 9:20 AM · Report this
Looking For a Better Read 9
Or, we could get higher inflation and stagnated growth, just like the good-ol' Carter days. I'm sure that's the comparative legacy that the President is hoping that the R's continue to pin on him.

Higher inflation DOES NOT automatically result in job growth.
Posted by Looking For a Better Read on May 8, 2012 at 9:40 AM · Report this
Goldy 10
@6: I meant "six-figure". Was in a rush. Fixed it.
Posted by Goldy on May 8, 2012 at 9:49 AM · Report this
Goldy 11
@3: I remember the 70s too, and of course I'm not suggesting we return to run away inflation. But it's not an either or. We could support 4 to 5 percent inflation for a few years without repeating the 70s, and it might do us good. That's my point.
Posted by Goldy on May 8, 2012 at 9:52 AM · Report this
12
dividing between inflation and stagflation (which we're teetering towards) isn't really a conscious choice a government can make. Wages have been stagnant for awhile. Prices have been inexorably going up (although not due to inflationary reasons, mostly due to more internalization of costs). If you can figure out a way that the printed money goes towards hiring people (say, large public works projects like ARC) and not into savings accounts/small investments [tech firms are great, but they generally are low-employment; high wage firms that do little for the economy at large]
Posted by fetish on May 8, 2012 at 10:12 AM · Report this
13
I would also wager, increased inflation as a way to assauge your debt fears really just uh, a fuckwit idea.
Posted by fetish on May 8, 2012 at 10:13 AM · Report this
14
..the Federal Reserve essentially has two missions—control inflation and control unemployment..

You sure about that, are ya, Goldy?

The Forbidden Question: Who Owns What?


Steve Cole (New America Foundation, funded by the Peterson Foundation), author of the latest book on ExxonMobil, Private Empire: ExxonMobil and American Power, has been on the book tour, appearing on show after show, where repeatedly one question is never asked:

Who owns ExxonMobil?

Why is the most obvious question never – ever – asked?

Why won’t Amy Goodman, of Democracy Now!, and the various NPR show hosts ever ask this question?

Yes, ExxonMobil is a publicly traded corporation, but who or what owns the most stock in that corporation? Why is this always a mystery? Why should this be a mystery?

True, today with an endless number of holding companies and shell companies registered at offshore finance centers to obfuscate ownership – to make all things murky – it is difficult to ascertain, but knowing who owns stuff can be truly enlightening.

What if the same individuals or families own the controlling block of shares of both BP AND Transocean?

Who knows the answer to this question --- and why is it never asked?

When certain corporations and banks are mentioned, certain family names come to mind:

ExxonMobil (Rockefeller and Mellon), BP (Rockefeller and Rothschild), AT&T (Morgan and Rockefeller), GE (Morgan), JP Morgan Chase (Morgan and Rockefeller), Citigroup (Rockefeller), Morgan Stanley (Morgan), Royal Dutch/Shell (Rothschild), Rio Tinto (Rothschild), Northrop Grumman (the Bush family and James Baker), and Transocean (Rothschild).

Quite probably this is still the case?

When Louis Brandeis wrote the epochal book at the beginning of the 20th century, Other People’s Money and How the Bankers Use It, he exposed the true ownership and super-concentration of wealth; an exposé eventually leading to the New Deal.

It’s the 21st century: do you know who your owners are?
More...
Posted by sgt_doom on May 8, 2012 at 10:14 AM · Report this
15
Furthermore, the real debt crisis in the US is personal debt, and it is disproportionately generational.

Jaysus, you're always an effing idiot when it comes to economics and global finance, Goldstein!

It is personal debt, because they super-rich who pumped up their billions from selling hundreds of trillions of worthless credit derivatives based upon the endless packaging and repackaging of debt, then piled their debt onto the rest of us.

It is only partially generational, dood, and even then you're falling for those oil guys' propaganda via the Pew Research Center (funded by the oil money from Pew Charitable Trusts, dood) which always works to skew the issues.

You are so effing f**ked up in the head about real issues, sonny.

Get a clue, dood......

And, BTW, the Federal Reserve, from its outset, is simply been a speculation-bubble-machine, working to pump up the bubble du jours --- when the Federal Reserve Act was first passed, it substantially reduced capital requirements on the banks, leading to the bubbles of the 1920s and the Great Crash of 1929.

The Fed has always simply been the front office for the banksters.
Posted by sgt_doom on May 8, 2012 at 10:23 AM · Report this
16
@14: What in the world does the lengthy tinfoil hat bit have to do with the Federal Reserve's mission? Yes, yes, secret societies and all that, but If the Fed has some secret mission other than keeping inflation around 2%, they must suck at it. Because inflation has been within or around their stated goal for a long, long time.
Posted by also on May 8, 2012 at 10:28 AM · Report this
malcolmxy 17
The FED has one goal - make money for its members. The FED Chairman, who is the public face of the FED does tend to focus strictly on interest rates and how the slight manipulation of those rates keeps inflation in check (a think that Greenspan was obsessed with, which is more of a function of the time in which he was chairman than anything else), but in the end, each bank of a large enough size has a 3% stake in the FED and together they are able to manipulate monetary policy such that they always come out on top. It's complicated, and it would take more than an article or comment to explain, but it's equivalent to racketeering, except we call it legal. It shouldn't be.

(and, no, I don't believe we should move back to the gold standard, simply prosecute criminals for their criminal activity)
Posted by malcolmxy on May 8, 2012 at 10:35 AM · Report this
Original Andrew 18
@ Goldy,

You're looking at the sympton--a collapsed economy with few opportunities for 80% of the people--but not the real problem. There's tons of money in the US right now, but it's being hoarded by the sadistic psychopaths and greed-crazed kleptomaniacs that control our political, business, and economic "systems."

The only sustainable solution to both severe wealth inequality and huge public debt is higher taxation on the rich and corporations, combined with investments in education and infrastructure which will alleviate both problems by circulating existing money through the economy.
Posted by Original Andrew on May 8, 2012 at 10:36 AM · Report this
19
This is something Krugman is always harping on and I think the danger is, as has been pointed out above, we know that a state is possible with low growth and high inflation as this has occurred before.

One reason some progressive economists like inflation that is rarely mentioned is that in a country where it is next to impossible to raise taxes inflation can act as something like a de facto tax increase by 'inflating away' public debt. Trouble is inflation in this sense means an equal tax increase on everyone and therefore hits those who can least afford it hardest.
Posted by Rhizome on May 8, 2012 at 10:44 AM · Report this
20
@16, also, --- is this Frederic Mishkin? Former vice chairman of the Fed under the crook, Greenspan (as in should be in jail for violating Glass-Steagall in favor of Travelers-Citigroup merger, etc.) who receive several hundred thousands of dollars for a study he titled, Financial Stability of Iceland, then after Iceland's meltdown two months later, Mishkin renamed on his CV to Financial Instability of Iclenad?

You can't be a complete idiot and a liar, now can you? What's all this bullcrap about "secret societies" and the Fed, moron? There's never been anything really secret about the Fed, except what becomes of their money flows, and former ace reporter (RIP, Mark), Mark Pittman of Bloomberg, did an FOIA so we'd find out about that, chump!
Posted by sgt_doom on May 8, 2012 at 11:07 AM · Report this
21
Plenty of money has already been printed and is being slowly released into circulation so that the inflation is slow but steady...

http://www.uncommonwisdomdaily.com/the-n…
Posted by subwlf on May 8, 2012 at 11:10 AM · Report this
Sir Vic 22
@21 I was wondering when someone would mention the QE2 that just ended. It was the talk of the town a year ago. I guess it didn't trend sharply enough to matter.
A lot of money was pumped into the central banks, which then loaned it out to major private banks at zero percent. Those banks then loaned it back to cash-strapped governments at ~ 3%. The money went to the infamous 1%. It's one of the sweetest deals in big banking history.

Does Goldy want round 3 of Qualitative Easing?
Posted by Sir Vic on May 8, 2012 at 11:40 AM · Report this
CBSeattle 23
Until I got to @21 and @22 I wondered whether anyone here actually followed the news and had a clue of what was going on. Is it really possible people were not aware that we have been dropping money from helicopters (Helicopter Ben is Bernanke's nickname) for years?

We are part of a global economy and our money is the world currency. So you have think about the fact that when we print more money it can easily go anywhere in the world since that is, in effect, their currency too. And it has, we have arguably caused inflation in many emerging economies.

It is also in the interest of the government to keep reported inflation down because it has a direct impact on things like national debt, social security, etc. It makes our ridiculous debt crisis even worse (although ultimately the only way we will get out of it is by carefully inflating it away).

Despite the under-reported inflation numbers, common sense and everyday experience will easily demonstrate that inflation is already underway. Don't use the complex calculations of the government market basket - look at how much your basket cost and tell me it isn't getting much more expensive.

The only thing you seem to have glanced at getting right is that net debtors (almost everyone, and esp. anyone that owns a house with a mortgage) usually benefit from inflation if they have fixed interest rates. Obviously the asset values rise with inflation, but fixed interest rates don't change.

It's a complex subject, but I have rarely seen it put worse or less correctly. It does you, The Stranger, and your readers a serious disservice to just spout whatever you think without having a clue, or at least backing up an opinion that is at odds with virtually anyone who has a basic understanding of the economy.
More...
Posted by CBSeattle http://www.yousaidit.com on May 8, 2012 at 12:03 PM · Report this
pdonahue 24
#18 you have identified the crux of the problem; the people who have accumulated all the money don't want to loose it by seeing it devalued, hence put the screws on Big Ben to keep interest rates low, quantitative easing I and 11, things that protect the cash horded by Amazon and Microsoft.

What Goldy is offering here is letting inflation hike up through increased spending by government to create jobs, not the Helicopter drops of cash like TARP, which did diddly to incentivise industry to create new markets, because people stop buying things when their broke.

The FED and its managers have simply decided its more important to keep the value of the dollar high than put people back to work, people like CBSeattle keep telling me its too complex for me to understand, that Harvard trained economists know what they are doing, now its starting to dawn on me that yes, they do and they have decided I am expendable.
Posted by pdonahue on May 8, 2012 at 12:50 PM · Report this
25
...for decades it has focused on low inflation at the expense of jobs...

Decades? As in, since 1992 or earlier? Are you aware that for much of that period the US had some of the lowest unemployment rates in its history? Are you aware that the long-term constancy of the Phillips curve, which would be required to use the inflation/unemployment trade-off over such a period, has been discredited since the 1970s? Are you aware that, outside of a recession, this trick depends on a disconnect between inflationary expectations and reality, the fed must not just maintain a constant higher level of inflation, but regularly increase that level?

There is a decent argument to be made that, in order to bring the labor market back into equilibrium by reducing real wages, the fed should have been more inflationary over, say, the last 4 years. But I am not aware of any economist, even to the left of Paul Krugman, who thinks that the fed should have been trying to jack up inflation in order to reduce unemployment for the last 20+ years.
Posted by David Wright on May 8, 2012 at 1:02 PM · Report this
malcolmxy 26
There is no public debt. The government doesn't actually pay 3% interest to the FED, and they never have and they never will. If they did, this would end up with the government nationalizing the FED, which they know and don't want.

The National Debt, sans debt owed to foreign countries, is settled at the end of the day with the price of currency. This is one, among many, ways these assholes are able to suck the economy dry (as member banks, they are aware of large influxes of cash entering the market before it does so, and are able to, in essence, sell short on US currency just before it happens.).

Someone mentioned US Currency being the currency of the world. One reason that is, is because of how stable it is/was (the other, it belongs to the largest economy in the world, and it is back by the world's faith in the US, a country which has only been late on any real debt payments a couple of times in its existence, and even then because of strange circumstance).

I think this is gonna change, anyway, because China is likely to overtake the size of our economy in 20 years of less, but add in periods of wild, random and persistent inflation and you can be absolutely sure the world will start dealing in Yen (because despite some issues in the 90s and today, Japan is still standing as an economic power and always will, until we nuke them again), Yuan or whatever salt covered piece of terra cotta passes for money in China these days.
Posted by malcolmxy on May 8, 2012 at 1:07 PM · Report this
27
@24, you're interpreting things exactly backwards. Lowering interest rates is inflationary, as is quantitative easing. When inflation sets in, the Fed raises interest rates to pull cash out of the economy and slow things down. What they're desperately doing now is, in fact, everything they can to stimulate the economy.

Sadly, all they can do is economic manipulation that indirectly stimulates, i.e. "quantitative easing," or pumping money into the economy by competing with the financial markets and buying up safe debt instruments, leaving financial institutions with money they then have to invest elsewhere.

Goldy, I'm no financial wiz or anything, but when I look at the Fed balance sheet announcements, I see them dumping money into the economy in mountainous piles. They've been buying up every piece of paper they're allowed to hold, injecting trillions into our moribund economy.

The real danger here, and what the Fed is rowing hard against to keep from getting pulled over the falls, is deflation. Unemployment and deflation are very closely tied. Our stubbornly high unemployment rate, in the face of zero short-term interest rates, means we're fighting hard to barely keep breathing. If the Fed loses this battle, we crash, big time, into serious Depression. We're on the cusp of it now.

There's nothing else the Fed can do. They're holding so much paper now, it will take years to unwind the positions. That is, years after the recovery takes place. That unwinding can be quite recession-inducing if not done slowly enough.

We need direct stimulus, not from the Fed, but from the Treasury. That is, the government needs to actually spend money, hire more employees, subsidize state and local governments, pay for public works projects. But, the Republicans have staked out a position and would rather see this country in misery than allow a Democrat to succeed at anything.
More...
Posted by Brooklyn Reader on May 8, 2012 at 1:25 PM · Report this
DavidG 29
"Nothing to link to here"? You might start with Krugman, Ezra Klein, or Matt Yglesias who have been beating the inflation drum pretty steadily the last few years, see:

http://www.slate.com/blogs/moneybox/2012…

Linking to (and quoting) a real wonk with real, economic bonafides is going to help buttress your argument a lot better than off the cuff "this makes sense to me, so..."
Posted by DavidG http://portableshrines.com on May 8, 2012 at 1:30 PM · Report this
pdonahue 30
woah, Brooklyn, havn't interest rates been keep in the basement for a solid 10 years now, wouldn't that mean we would have experienced runaway inflation by now, thus causing the FED to raise interest rates again?
Posted by pdonahue on May 8, 2012 at 1:51 PM · Report this
31
@30 No, it only seems like ten years. If you look at a graph, you can see that it's only been effectively zero for the last 3 years or so.

The Fed lowered the rate for a period to try to help the economy recover after the 9/11/01 attack, but it soon was raised back over 5%. Not until the 2008 crash have we ever been in such dire straights that they've lowered the rate to zero.

If you want to see the Fed funds rate used to drive the economy down, look at the period around 1982, when inflation was high and the Fed tried to clamp down on it by raising the short term rates to over 19%.
Posted by Brooklyn Reader on May 8, 2012 at 2:20 PM · Report this
CBSeattle 32
I just want to say how great it is that this discussion has become one based on people who have differing opinions (albeit with the same objective) who are offering up actual information to support their opinion. The original post and the earlier comments made me think that The Stranger had gone to hell in a handbasket. Thanks for restoring my faith.

@24 You are quite right other than in suggeting that what you are saying is what Goldy said. He said nothing of the kind and that was the problem.

@29 Thank you!

Generally speaking, direct stimulus would appear to be a decent alternative but experience (see Great Depression followed by stimulus) is probably not effective in getting us out unless it is massive beyond anything anyone could imagine (see Great Depression followed by WWII which is what snapped it).

Ultimately some longer term sensible financial management (the kind that virtually anyone could understand) is probably the best formula. Control spending better and increase revenues from people who are least harmed by the increase and who have benefitted most by living in this country ( i.e. don't swing for the fences and don't score a home run, don't steal bases, just work on that "on base" %).
Posted by CBSeattle http://www.yousaidit.com on May 8, 2012 at 3:06 PM · Report this
malcolmxy 33
@32

Spending is the only way out of a recession/depression. This is why, normally, I wouldn't care what kind of deficit we were running at this time, as long as the capital being outlaid was being applied to jobs in the short term and infrastructure in the long term (along with other investment that had a long tail on its productive life).

Currently, we're spending, but we're not spending on anything useful (and, we're also paying for the portion of the wars that Bush left off the books in the 1st 5 years, so it's not all true deficit, nor even part of the true Obama budget).

We're running the deficits one would expect during a time like this, but we're not using the money to position ourselves to get out of this economic mess we're in, nor to set ourselves up once we get out of it. And, there is no regulation of any sort to try to ensure that the exact same thing can't happen again in the near future (and, these uber-financial institutions are gaming the oil market the same way they gamed the mortgage market and will soon destroy that market with no consequence to themselves either).

We're building an economy of destruction and corporate welfare, and no monetary policy will make a bit of difference until we shift from blowing shit up and allowing these criminals running financial institutions to take wild-ass risks with no consequence for the failure of their decisions, to productively using capital and applying it to a future state economy based on actual production of long-term assets/ideas and not conspicuous consumption of shit that goes boom.
Posted by malcolmxy on May 8, 2012 at 3:23 PM · Report this
34
I recommend the book "Secrets of the Temple" by William Greider. (http://books.google.com/books/about/Secr…) It is a very detailed insight looking back on how the Federal Reserve responded to the inflation of the late 1970's, including a comprehensive historical perspective on the institution.
Posted by Julian in Seattle on May 8, 2012 at 5:46 PM · Report this
treacle 35
Yeah Goldy, cheerleading about inflation isn't a welcome thing. With wages stagnating, inflation is only going to suck value out of the pocket books of us little people.

Also, inflation is already happening... Check this interview with Jim Rickards, he knows what he's talking about.

I'll see if I can find the video interview where he talks about the "four cylinders" of the economy.

Positive interest currency has some fundamental problems that need to be addressed... by implementing complementary currencies that don't have the same critical flaws that systematically fuck over the people at the bottom.
Posted by treacle on May 8, 2012 at 7:39 PM · Report this
treacle 36
Check this, more recent interview with Rickards. He really lays it out clearly.
Posted by treacle on May 8, 2012 at 7:49 PM · Report this
Bauhaus I 37
8: Gas is cheap from a global prospective, but cars are becoming a luxury item to own and operate. And you know I don't have one, right? I still have a little empathy for those who have to drive 50 miles a day each way to their jobs and back. They - in some cases - drive to where there is work after losing their local jobs but cannot afford to live where the new one is. It happens.
Posted by Bauhaus I on May 8, 2012 at 9:34 PM · Report this
38
We've had gargantuan inflation for the past 30 years. The Fed has been paper hanging like crazy. The problem is that the money has not "trickled down" as expected, hence creating the 1%.

It would be better to hold the money supply steady, and force the people who have accumulated to start spending, rather than waiting for further disproportionate gains without the associated risk.
Posted by Supreme Ruler Of The Universe http://_ on May 9, 2012 at 10:56 AM · Report this

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