Economics. Are you bored yet? That is the problem. So few people know anything about economics that it seems any one can say anything and get away with it. Economics is a science that makes no judgments about good or bad and that has no goals. It is just a tool for understanding the world we live in. Just as a hammer does not care if it is used to build a beautiful home or a gallows or bash some ones head in, economics can be used for a variety of purposes.
The July 19 issue of Forbes magazine has an article, Where Inflation Lurks. It is unremarkable except that it may be the most inane piece of garbage I have read in a year where a great deal of inane garbage has been written. I will get to that later but for now I would like to talk about why the article was written.
The short answer is politics but the long answer is hearts and minds. Toward the end of WW2 there was great concern that the world’s citizens were dissatisfied with capitalism. A series of summits were held, the most famous Bretton Woods, to revive both the image and structure of capitalism.
Economics became a tool in defeating the communist. Naturally it was necessary to purge academics who disagreed with the new party line. This led to a purity of American thought. Thus economics ceased being purely a science and became a philosophy. People learned economics, free trade, unfettered markets as a prophylactic against communism.
The Communists are gone but the battle continues. In hard economic times the people might be tempted to embrace government regulation of the markets and they may even consider socialism, so the capitalist propaganda machine is fighting back. “Fear of loss is a greater motivator than possible gain.” Every student of human behavior is aware of this maxim. So if you really want to change people’s behavior you must inspire fear.
In September of 08 the US experienced a massive contraction of the money supply. The natural result of such a contraction is deflation. Deflation is the loss of value of every asset and of labor. It results in an inability to place a value on anything, (remember mark to market?), when the value is determined anyone owing money is upside down and it makes wages prohibitive and results in massive unemployment. Both Presidents George W Bush and Obama were aware of these realities and reacted appropriately with emergency measures. There was no time for Monday morning quarterbacking and today’s critics do so with the benefit of ample time and hindsight. (How much money disappeared is unknown. An important fact)
The first example of irrational reporting I saw was Erin Burnette on
CNBC. Reporting that Obama had ordered the Treasury to print one billion dollars in cash. She lamented this was going to set off massive inflation. Now I assume that Ms. Burnette knows that cash is an extremely small part of the money supply. I am guessing she also knows that printing money does not increase the money supply but it does allow people to change one form of money for another. Further I expect that Ms. Burnette also understands that most money is credit and that when credit defaults money disappears and we lost trillions not billions. So what the hell was she talking about?
The Wall street Journal that bastion of journalistic excellence was next to join in. June 11,2009 http://online.wsj.com/article/NA_WSJ_PUB:SB124458888993599879.html. I hope Mr. Laffer invested in gold because he set off the most irrational gold rush in history. To summarize Obama was going to create massive debt so large that the U.S. would have no choice but to print massive amounts of cash and pay the debt with the cash. As proof he pointed to the Wiemar Republic and Zimbabwe. In defense of the Wiemar Republic it had problems not of its own making and economics was not at the time well understood and Zimbabwe is a country dictated by a madman. Mr Laffer predicted that Obama would inevitably make completely irrational decisions and that inevitably an economic holocaust would follow. Forget that for over two hundred years the US has enjoyed an excellent credit rating. It was all coming to an end. This was reinforced by the National Inflation Association http://inflation.us/awashedwithdollars.html. I have always assumed that the Inflation Association is funded by people who once but no longer own gold stocks.
For over two years the business media have been beating the drum. So where is the inflation? Currently as inflation is measured there is a low rate, possibly 2%. That is high, the “basket” has always been inadequate. There is evidence that real estate is still depreciating, unemployment is very high which puts downward pressure on wages. That is the opposite of inflation. The U.S. is still largely a deflationary economy.
That brings us back to the Forbes article.” It is coming “the article says and here is why:” Cost of shipping, regulation and health care are rising.” –Inflation you may remember is an excess of money supply. If the cost of the things listed rise and the number of dollars remains constant (certis paribus for all you economics geeks)There will be a shortage of dollars. Then economic activity decreases. That means a recession, rising unemployment and falling prices which is again the opposite of inflation.
To the credit of the Business Press the fear they have instilled has made it very difficult for the Obama administration to deal with the crisis. In the first place the stimulus was far too small. Health care reform was limited by frugality, and Wall Street Reform was watered down. So though they have done nothing but lie to us it has been successful.
100 Covert Operations by the US, Per Jeffrey Sachs
13 hours ago
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This person chose not to comment on the blog so lets call him annonymous.
ReplyDeleteYou mischaracterize the Bretton Woods system; its main goal was to prevent currency warfare between nations because in the 30s that behavior contributed to the... depression and the war. It was an acknowledgement of the failure of top down economics, like communism.
I checked the M1 and M2 numbers of the US money supply, and neither experienced a “massive contraction” in September of 2008.
The problem with mark to market was not deflation or inflation. If the value of something goes up 3% or down 3% you know what the value is. The problem was of uncertainty. Many CDO (Collateralized Debt Obligation) were backed by loans that had values far from stated, but because of the way they are put together no one could tell which ones were good and which ones were bad. They became untradeable until a value could be put on them.
Inflation is better described by the money chasing good increasing or the supply of goods being chased decreasing; the relative change of money to goods. The Forbes article focuses not on a change of volume but a change of type of goods. Because of new taxes, new regulations, and new fees; a trucking company is buy new trucks, new gas, new employee hours that cost more but perform the same as the old. This is inflation like enough, to be called inflation.
The economy has been experiencing strong inflationary and deflationary pressures, which have mostly counterbalanced each other. As the economy improves the deflationary pressures will subdue. We will then be left with inflation.
My response:
ReplyDeleteThank you Annomyous it is good to be challenged
I was aware that there was more than one summit. The one I had in mind was I believe in the Swiss Alps something Lake. Since I could not find it I tried to write my sentence broadly. It was a cheat I should have gone to the library and consulted with the reference person.
I have not checked the M1 and m2 but if nationwide defaults on loans, failing banks and existing institutions tightening credit is not a contraction of the money supply in a credit economy what the hell is?
To make matters worse the new Wall Street Reform calls for increased reserves which again is a contraction of the money supply and a brilliant imitation of Hoover in 1930.
Add to that the calls for austerity and one has Roosevelt 1937. It seems there is no mistake the Obama administration will not make in order to escape Murdoch's and the rest of the business press invective.
More response: Regarding inflation;I think you and I have a fundamentally different idea of what inflation is. First of all inflation is a macro not a micro concept. The factors listed do not create a right or left shift. When increased cost result in higher prices for certain goods this results in monies being transferred from one activity to another and causing a lowering of activity along the existing Production Possibilities Curve. That is a recession.
ReplyDeleteThat is not inflation. Inflation exist when there is an excess of production and it is in excess of the PPC causing a shortage in labor and spiraling labor cost.
In this case what we have is an exceptional recession and in fact a realignment. The fact is we were far in excess of our PPC. In a nation which had not invested in infrastructure, that had little production ability we had a consumer economy run primarily on credit and that based on inflated values.
Not only will there be no inflation but we have not come any where near the bottom of our asset values. Wages have been traveling downward for decades and as a result of capital friendly citizen hostile economic policy will continue to fall.
Without massive investment in energy and technology we are on our way to third world status. But at least we can thank Ronald Reagan for canceling energy research and development. The blame for Free Trade must lie primarily with Presidents Bush and Clinton although Ronald sold it.