Friday, June 26, 2009

Between Three and Four Percent

One way to measure inflation

In 1983 I bought a new little car for $5000. In 2007 I bought a new little car for $12,000. That's 240% of the 1983 price, an increase of 140% in 25 years. I worked it out in Excel: With compounding, it's a 3.715% annual rate of increase.

That reminded me of something Milton Friedman said in Money Mischief:

As Forrest Capie points out in a fascinating paper, it took a century for the inflation in Rome, which contributed to the decline and fall of the empire, to raise the price level "from a base of 100 in 200 AD to 5000... -- in other words a rate of between 3 and 4 percent per annum compounded."

Fall of Rome.

Thursday, June 25, 2009

Understated Urgency

"Too much money chasing too few goods"

Printing money causes inflation. Know what? Expectation causes inflation, too.

Central bankers and I say that in this economic crisis, printing money will not cause inflation because nobody is spending. But we forgot about expectations.

Suppose the central bankers are right: Suppose there isn't enough "chasing" for inflation to be caused by "too much money chasing goods." Well, if people don't buy that story, we can get inflation anyway. If people insist on thinking we're gonna get inflation because the Fed is printing money, then we'll get inflation even if the central bankers are right. But it won't be printing that drives prices up. It'll be expectations.

Thursday, June 18, 2009

Beyond Krugman's Inflation

At least he's not a politician.

I admire Paul Krugman because he is so much more reasonable than most of his critics. We are here today to review an opinion piece of his, something my wife found in our local paper. You can find it here.

Krugman says we've been in this situation twice before, and says both times policymakers "stopped worrying about depression and started worrying about inflation" much too soon. He says that's happening again now. He says there's no need for worry about inflation, because "a rising monetary base isn't inflationary when you're in a liquidity trap."

Krugman also says something I totally agree with: "What about all that government borrowing? All it's doing is offsetting a plunge in private borrowing -- total borrowing is down, not up. Indeed, if the government weren't running a big deficit right now, the economy would probably be well on its way to a full-fledged depression."

Now I'm gonna be explicit about this, so read slow: I agree with Krugman that "all that government borrowing" is not the problem right now. But of course it's a problem. It's part of the central problem: All that borrowing... All that lending... All that debt. The central problem -- debt -- is the problem that got us where we are today. But now that we're here, we have a new problem: namely, the threat of depression. The moment this new problem arose it became a thousand times more significant than debt.

Saturday, June 13, 2009


I take it back. I take it all back. I was wrong.

If something isn't done, and done soon, there's gonna be one wicked inflation. It's already trying to break out. A bag of Milky Way bars was 99 cents last week. This week it's $2.50. That's jaw-dropping wrong.