The Big Inflation Scare - Oooooh, How Scary; Prove Him Wrong

Discussion in 'Wall St. News' started by ByLoSellHi, May 29, 2009.

  1. I've made the same case Krugman is making and I think he's right about deflation trumping inflation (b/c the money being 'printed' is not entering the real economy, but recapitalizing banks and a few companies - plus consumer prices are low and wages actually declining or stagnant). I don't agree with him about how Obama Admin should redouble the same tactics it's employing in addressing our economic malaise (basically, more Keynesianism), but on the central point of deflation winning the battle that lay ahead, he's right, and I said the exact same thing months ago.

    The Big Inflation Scare

    Published: May 28, 2009

    Suddenly it seems as if everyone is talking about inflation. Stern opinion pieces warn that hyperinflation is just around the corner. And markets may be heeding these warnings: Interest rates on long-term government bonds are up, with fear of future inflation one possible reason for the interest-rate spike.

    But does the big inflation scare make any sense? Basically, no — with one caveat I’ll get to later. And I suspect that the scare is at least partly about politics rather than economics.

    First things first. It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.

    So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.

    The first story is just wrong. The second could be right, but isn’t.

    Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.

    But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.

    Still, don’t such actions have to be inflationary sooner or later? No. The Bank of Japan, faced with economic difficulties not too different from those we face today, purchased debt on a huge scale between 1997 and 2003. What happened to consumer prices? They fell.

    All in all, much of the current inflation discussion calls to mind what happened during the early years of the Great Depression when many influential people were warning about inflation even as prices plunged. As the British economist Ralph Hawtrey wrote, “Fantastic fears of inflation were expressed. That was to cry, Fire, Fire in Noah’s Flood.” And he went on, “It is after depression and unemployment have subsided that inflation becomes dangerous.”

    Is there a risk that we’ll have inflation after the economy recovers? That’s the claim of those who look at projections that federal debt may rise to more than 100 percent of G.D.P. and say that America will eventually have to inflate away that debt — that is, drive up prices so that the real value of the debt is reduced.

    Such things have happened in the past. For example, France ultimately inflated away much of the debt it incurred while fighting World War I.

    But more modern examples are lacking. Over the past two decades, Belgium, Canada and, of course, Japan have all gone through episodes when debt exceeded 100 percent of G.D.P. And the United States itself emerged from World War II with debt exceeding 120 percent of G.D.P. In none of these cases did governments resort to inflation to resolve their problems.

    So is there any reason to think that inflation is coming? Some economists have argued for moderate inflation as a deliberate policy, as a way to encourage lending and reduce private debt burdens. I’m sympathetic to these arguments and made a similar case for Japan in the 1990s. But the case for inflation never made headway with Japanese policy makers then, and there’s no sign it’s getting traction with U.S. policy makers now.

    All of this raises the question: If inflation isn’t a real risk, why all the claims that it is?

    Well, as you may have noticed, economists sometimes disagree. And big disagreements are especially likely in weird times like the present, when many of the normal rules no longer apply.

    But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.

    Needless to say, the president should not let himself be bullied. The economy is still in deep trouble and needs continuing help.

    Yes, we have a long-run budget problem, and we need to start laying the groundwork for a long-run solution. But when it comes to inflation, the only thing we have to fear is inflation fear itself.
  2. Pascal


    Oil going from 40 dollars a barrel to 65; That is very inflationary. We are going to see higher prices as a result. Higher oil prices filter into every area of the economy. So, to say that inflation is under control is highly contradictory to what we are seeing right in front of our eyes. The second part is the dollar. The dollar index has basically fallen from 87 to 80 within a month. The chart looks as though it could break hard to 75 very shortly. If that's not inflation, I don't know what is. A weak currency by definition is inflation.
  3. LVMises


    Funny how someone who spews more rhetoric than Obama himself, is concerned about fear mongering inflation.

    Krugman is a voice of the elite liars. There is no value in what he writes, no substance, no principle. He comes from the progressive camp where "things" have changed, and we need "change" as a result.

    Absolutely wrong.
  4. If the dollar is going down against the basket is inflationary, that implies the basket going up against the dollar is deflationary in the "basket" economies. Since those economies aggregate to something much larger than the US economy, your argument must then conclude the net outcome is deflationary.

  5. Pascal


    Since the dollar is the reserve currency and most commodities are priced in US dollars worldwide, the strong dollar deflates commodity prices. The falling dollar inflates commodity prices worldwide.
  6. A weak currency doesn't cause inflation. Inflation causes a weak currency.
  7. Faber > Krugman. :)
  8. I'm not sure I can agree with that. I would argue that the by-product of inflation is a stronger currency, through the eventual rising of interest rates to combat price instability.

    Regardless, if we go through the same passed on costs via a spike in oil once again, then consumer goods WILL rise. I work for a large CPG company and we're already talking about looking at price increases based on forecasts with oil, tin, aluminum, etc. We don't want to get caught behind the ball like the last time. I suspect this is true with MANY CPG companies.

    Since we (our company) have at least one or more food items in every single isle of the grocery store, I can assure you that consumer prices will go up on food, should we decide to take price.

  9. He has called it so far, hasn't he.
  10. Oil going from 40 dollars a barrel to 65; That is very inflationary. We are going to see higher prices as a result. Higher oil prices filter into every area of the economy.

    Imo, under normal circumstances inflationary. Currently, I'd say higher oil prices are anti deflationary.
    #10     May 29, 2009