If We Give Up Our Cool, Then the Inflationists Will Have Already Won
UPDATE: Sorry, I forgot to include the money (ha ha) quote, to explain the purpose of Scott’s post.
Scott Sumner thinks he can play me like a game of classic Donkey Kong:
Some days I want to just shoot myself, like when I read the one millionth comment that easy money will hurt consumers by raising prices. Yes, there are some types of inflation that hurt consumers. And yes, there are some types of inflation created by Fed policy. But in a Venn diagram those two types of inflation have no overlap.
I know, I know…You had to re-read that a few times, just to reassure yourself that Scott is now saying that what people have in mind by the danger of inflation is literally impossible. You may even have spent 5 minutes trying to Google up a graph of Zimbabwe’s nominal GDP. (I tried already. No dice.)
UPDATE: Scott goes on in the post to say:
So here’s my plan. Beginning tomorrow, November 1st, I will ban all discussion of inflation from the comment section. I won’t respond to questions on inflation. (God knows how Bob Murphy will react to this—something tells me it won’t make me look good.)
Relax kids. As I’ve told you many times, Scott Sumner can’t possibly believe this stuff. He has to be laughing his head off that he actually has half of his commenters agreeing that we should stop using the term “inflation” on a blog devoted to monetary policy, indeed a blog literally named “Money Illusion.”
Don’t take my word for it. In the comments Scott–like a serial killer writing clues on the wall with the victim’s blood–comes out and admits this is all a big joke. One commenter said, “I’m very excited to see what Bob Murphy will say.” To this Scott replied, “The main reason I did this post, which was about 50% tongue-in-cheek and 50% serious, was to get his reaction. It better be good.”
I’m not falling for it, Sumner.
P.S. For those who want to pretend that Sumner is seriously advocating this idea, there’s this paper by Steve Horwitz on how infl–I mean, you-know-what, can lead to problems.
Bob, you have already explained that your house in underwater in mortgage debt, and the fundamental concept of all capitalism is that people should primarily be self interested, so surely you can see that inflation and Fed money printing represents wealth transfer from whoever loaned you the money, to you yourself.
Why do you try to stop these guys?
If you do succeed in stopping them, all that will happen it they will blame you for whatever goes wrong after that, and also ask you to pay back your mortgage without the pay rise you would inevitably get under an inflationary environment.
Don’t forget the termites in his mailbox.
😉
People aren’t primarily self interested. We are ONLY self interested.
But that is a corollary of the argument. The argument is: stealing is bad, always and everywhere – in spite of the state and their economists vehemently disagreeing.
The link doesn’t work, Dr. Murphy.
The link to Dr. Horwitz paper doesn’t work, Dr. Murphy.
20 seconds on WolframAlpha, is this what you’re looking for? http://www.wolframalpha.com/input/?i=zimbabwe+nominal+gdp
I think Murphy means in Zimbabwe dollars, not US dollars.
Zimbabwe simply chose the wrong NGDP target. We would tread a finer line — not too hot, not too cold. And hey, if it doesn’t work out, at least we tried.
Rick Hull: “Sorry your entire family was destroyed in an incalcuable mountain of sufferring, but at least we tried. We’ll do better with the next set of guinea pigs. Say, anyone know where the closest Jewish ghetto is?”
Heh, you get a sorta-replay of googling “french military victories” when you try asking for zimbabwe gdp in zimbabwe dollars.
Result: no data. Use US dollars instead.
Per Major_Freedom’s point, I’ve submitted feedback to Wolfram. Here’s what I said:
“I wanted to see Zimbabwe’s GDP expressed in its own currency (Zimbabwean dollar rather than USD), for which it returns no results. This information is important for understanding the impact of its monetary policies on its NGDP. Wolfram Alpha computational knowledge engine ™ only gives Zimbabwe’s GDP in USD, when it would be a simple matter to convert that value at each point in time, per the contemporary exchange rate, to Zimbabwe dollar value, but Wolfram Alpha computational knowledge engine ™ won’t do that.”
P.S. you need to add a “http://” to your “this paper” link
Firefox is killing me. They don’t show the “http://” anymore and this keeps happening when I quickly copy and paste links.
Really? Wow, they can never leave well enough alone, can they? I think they’re trying to copy Google’s proposal to remove the URL bar altogether! Which version, btw?
They should do what Windows 7 does with the directory explorer (i.e., not IE): show a more human-readable path at the top (thus taking off the http://), but if you actually select it to copy to someone else, you see the correctly formatted, communicable address (thus, with http://).
This is fairly easy to fix:
http://www.ghacks.net/2011/09/28/firefox-add-http-back-to-address-bar/
I find that, yes, FF URL bar omits the protocol spec. But when I copy/paste, the http:// protocol spec *is* pasted.
“People think it is the price rise that is making them worse off, but that’s an illusion; it’s really the drop in RGDP.”
Isn’t this guy supposed to be clever? Doesn’t he know that inflation is one of the two factors used to calculate RGDP? The “price rise” is the entire reason that NGDP and RGDP can differ. Maybe I’m overoptomistic, but I’m still not convinced that Sumner poses a serious challenge at the debate.
No, it’s a fair point: if real factors do make people worse off, and the immediate evidence is in rising prices (e.g. because of massive crop failures that make food more expensive), then yes, people are worse off, and yes, they call it inflation, but it’s not the kind that can be pinned (directly) on central bank monetary policy, so in this respect it would be wrong to say that the Bernank was too loose with money, and thus misleading to call it “inflation”.
That’s what I was saying – the lower output and higher prices are two sides of the same coin, whereas Sumner’s quote implies that they’re two separate phenomena.
But to get to your point, it’s not necessarily the case that a supply shock will raise prices across the board. The good that has experienced the “shock” will certainly rise in price, but (assuming a fixed money supply) the money used to prop up this price is coming from other sectors. So for example, if a field of wheat is wiped out by bad weather, the price of wheat will certainly rise, but in order to afford the wheat at the new price consumers will have to cut back on other goods, such as clothing, energy usage, etc… and the prices of these other goods will fall accordingly. Interest rates would also spike in the midst of a supply shock, so that will put downward pressure on prices as well.
Austrians would never deny that a real supply shock lowers living standards, but only increases in the money supply can raise general prices.
and the prices of these other goods will fall accordingly
in which universe?
any universe in which lower demand yields lower prices, AKA any universe in which supply curves slope upward due to the law of diminishing marginal returns?
You mean in textbooks? I thought you were talking about the real world.
In all sincerity, I’d be seriously interested to hear a refutation of the law of diminishing marginal returns if you’ve got one
“Austrians would never deny that a real supply shock lowers living standards, but only increases in the money supply can raise general prices.”
That is not correct – the same money supply and velocity and less goods (due to supply shock) will also lead to the phenomenon formally known as inflation.
I originally thought that too, but you have to throw interest rates into the equation. After a supply shock, people will want to revert to the original situation – although physical capital will have been destroyed, the technological know-how and human capital will still be there. Entrepreneurs will want to borrow money to restore the infrastructure, thus raising interest rates. At the higher interest rates, consumers will cut back on spending and save more of their income, putting downward pressure on prices. It’s not obvious that the two forces would keep cancel out and keep prices level, but you can see that it’s more complicated than the MV=PQ equation implies
Unless I’m missing something then even if time preferences changed and caused a shift in investment patterns then this would mean that the prices of capital goods would increase more than the prices of consumer goods.
I can think of a scenario where prices may not rise. That is where expectation of future inflation beyond the supply-shock remain low. People may then hold onto cash to avoid paying higher prices and defer purchases until after supply has recovered.
I guess it depends on whether or not one includes the price of money (interest rate) in their calculation of the price level.
I always thought that capital prices move inversely with the interest rate, to kindof keep the “real” price on capital relatively fixed (since capital purchases are often financed with at least some credit)? Like how housing prices jumped when interest rates were lowered, but then fell after the Fed raised interest rates – theoretically, at least, financing an expensive house at a low interest rate should be equal to financing that same house with a higher price but lower interest rates
Simple solution: do a find/replace of “inflation” with “inability of consumers to purchase as many goods with their savings as before”.
For those of you who like regexing, that would be
s/inflation/”inability of consumers to purchase as many goods with their savings as before”
How about “money diluted by the government through stealing and illicitly transferring your purchasing power”. Or something short and snappy like that.
Don’t forget to include the graph!!
This is quite sufficient:
http://www.flickr.com/photos/bob_roddis/4163003939/in/set-72157623413687847/
People who believe that two things can be in the same place at the same time (like you) are never going to understand economics anyway.
I thought my ubiquity power was a secret.
Anyway, it’s good you admit you think the economy is a zero sum game. It just shows how ignorant you are.
Show of hands, who wants to see Mammoth and Roddis start another fight? Me neither.
Just call me Ndamukong Suh. I request a meeting with the commissioner about what amounts to dirty play.
http://tinyurl.com/434h6zb
Just go back to using what was used before “inflation” was a suitable replacement – debasement.
Its interesting that Scott Sumner is trying to eliminate this I-word from discussions on NGDP-targetting.
Close observers of various Market-Monetarists blogs may have noticed a division (especially in the comments sections) between those who think that NGDP-targetting will simply shift the AD curve to the right and cause supply to move along the AS curve with (given the current perceived under-utilization of resources) a big boost in real output and a smaller amount of (undesirable) inflation, and those who think a good dose of inflation is a good thing in itself. It will reduce debt , discourage saving and allow real interest rates to go negative – all of which will cause spending to increase.
At a time when Market Monetarist ideas are gaining traction I suspect a lack of desire to bring this divide out into the open.
Which is a shame. as in my opinion the first line of thought is consistent with Austrian-based MET while the second is just a branch of Keynesianism (hence Krugman’s recent endorsement) and I’m not sure of what to make of the fact that they are apparently all united under the NGDP-targetting umbrella these days.
I’m looking forward to the upcoming Sumner v Murphy debate where I hope Bob will focus on the supply-side issues that caused the initial crash, are hampering the recovery , and do not appear much on the agenda on the MM blogs these days.
I enjoyed this paper by Professor Horwitz very much, “Why Inflation Matters” http://mercatus.org/sites/default/files/publication/why%20inflation%20matters.horwitz.10.7.10_1.pdf