The Specter of Inflation? No, The Reality

Germany’s Der Spiegel has an excellent feature by Ferdinand Dyck, Martin Hesse and Alexander Jung about inflation caused by infusions of cash from central banks. It’s pretty meaty, but I’m not an economist and I enjoyed reading it. The gist: “The truth is that inflation isn’t some specter. It’s already here — still halting, but unmistakable and insidious.” 

Two more great bits:

• “It is evident at gas pumps in Germany, where the price of gasoline reached a new record high in September of €1.70 per liter (about $8.35 a gallon). It’s evident in real estate ads, which reveal considerable price increases in major cities like Munich, Hamburg and Berlin. And it’s also reached the precious metal markets, where gold is currently being traded at the record price of $1,775 per ounce.”

• “The US government debt has just exceeded the $16 trillion threshold. Inflation could help reduce this enormous mountain of debt. ‘The alternative is to reform and save — and to accept higher unemployment as a short-term consequence,”‘says Bosomworth. ‘But that isn’t as attractive politically.’
• “Instead, the US government is behaving the way governments have always behaved when their debts have gotten out of hand. The history of money is a history of almost constant devaluations.”
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3 Comments / Post A Comment

Nope nope nope nope.

Inflation results when you pump extra money into a market that is already running at full capacity. No economy in the world is running at anywhere near full capacity right now, as evidenced by the millions and millions of people who are out of work. Both the US and EU inflation rates are pretty low, from a historical perspective (there is a reason central banks and serious economists use CPI, flawed as it may be, rather than anecdata about gold and gas prices) and there is no noticeable upward trend so far. When you have 2% inflation and 10+% unemployment, any serious economist would suggest the same policy response: expansionary monetary and fiscal policy.

One of the best indicators of long-run interest rate expectations is bond yields — how much The Market, in its infinite wisdom, charges governments to borrow its money. Sort of like how credit card companies look at my credit rating and charge me a higher interest rate than they would, say, Mike Dang.

Bond markets care a LOT about long-run inflation because bond yields are fixed, meaning if I buy a US or German bond today, I get a certain amount of dollars or euros back in 10 or 20 years. If there’s a lot of inflation in the meantime, those dollars and euros are worth less than the ones I used to buy the bond with, and I essentially lose money.

Now bond buyers are pretty much the biggest, most sophisticated, most CAUTIOUS group of investors in the world. And guess what? They’re willing to lend money to governments like the United States, Japan, and Germany at what are essentially ZERO real interest rates. They are saying: “take our money, please!”

Furthermore, devaluing a currency is a natural response to an economic crisis, especially for a small country, since it whittles down debt and makes exports more competitive. If Spain and Greece weren’t in the euro, this would have already occurred more-or-less automatically. Imports would be more expensive but their exports would be cheaper, and thus more competitive, and they would settle into a new equilibrium — much like the Asian countries and Russia after the 1998 crisis. It would be painful, but not nearly as painful as forced austerity.

There is a big caveat, though, which the Germans are right to point out: if EVERYBODY does that it can have disastrous consequences, as during the Depression. Those “beggar-thy-neighbor” policies led directly to German hyperinflation and, indirectly, Hitler. But the reason such competitive devaluation fucks over everyone else is because it reduces demand for other countries’ products. That’s EXACTLY what German/Republican-style fiscal austerity does — except it does so by reducing AGGREGATE demand, rather than shifting demand from imports to domestic consumption, so it’s actually even worse!

Germany’s approach to this financial crisis is beggar-thy-neighbor all over again, and I won’t be surprised if it has an equally disastrous outcome.

siege91 (#1,738)

Ugh. Stuffisthings has it right. Central banks create money in attempt to stimulate demand – ie, to make people spend it. When an economy is still running below potential (as, in all of the developed world right now, with the possible exception of some export-dominated countries like Germany), and people refuse to spend regardless of the central bank’s policy, there’s no inflation. That’s why US inflation is still running below the central bank target. The tea party gold hoarders who talk about how Ben Bernanke is ruining the county and warn of hyperinflation are paranoid nutcases and nothing more – just look at the actual data on inflation it the US.

Why does it matter? Two things. First: in Europe the specter of inflation is raised (particularly by Germans, who have a hereditary fear of hyperinflation dating from the Weimar Republic) to warn against central bank actions that will create money, which will hopefully stimulate the dreadful economies of southern Europe. This will also have the effect of inflating away some of southern Europe’s debt, much of which is held by – guess who – Germans. But look, it’s either the European Central Bank helps stimulate the economies of southern Europe (look at unemployment in Spain, Italy, Portugal, and Greece, it is seriously necessary, especially in the face of German demands on fiscal policy in bailed-out countries) or the Euro zone collapses. Those are your choices. So raising inflation worries when there IS NO ACTUALN INFLATION PROBLEM is zero-sum regional Euro politics at its worst.

Second, for the US: the central bank has two mandates – to keep inflation low and to keep unemployment low. They basically only really try to keep inflation low, partially in reactions political pressure from the goldbug crazies I mentioned above, who demand that hyperinflation is on its way and prevent any more constructive action. So far the bank is trying, but already Mitt Romney has promised to appoint a new Fed president tht will follow a much more conservative route. The fears of inflation, in the face of, again NO ACTUAL INFLATION, restrict central bank policies politically in ways that will prolong the recession and result in higher unemployment for longer.

So, please: just go listen to some planet money. They have said all of this, and interviewed economists who say it, for months and months, and they’re an awful lot more entertaining to listen to than this extended comment. Regards,

I meant to come back to this post after writing my screed to say: I’m glad Logan posted this article, because it’s a very clear expression of what Germans are thinking right now, and also quite thought-provoking (even though I think it’s wrong).

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