"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.
It's all a matter of emphasis. The central bankers emphasize the word chasing. Just about everybody else emphasizes too much money. The bankers know that printing money causes inflation when the excess money causes spending to increase faster than output: "Money chasing goods" is spending. Everyone else got the simple version: Printing money causes inflation, period, and everything else is bull.
When people expect inflation, they try to get the jump on it. They try to get more for the products they sell. They try to get more for their time and effort. These things make wages and prices go up.
Inflation is inflation. Rising prices are rising prices. However, there are different forces that drive prices up. One is spending, or demand, or (you know) too much money chasing too few goods. And then there's expectations.
Excessive spending, resulting from an excess of money in circulation, is an economic force with mathematical roots. The other one, expectations, is not based on numbers. It is a psychological force. That's why I say now is the time for wage and price controls. Controls can prevent inflation that is caused by expectations -- because it's not driven by mathematical imperatives. But we cannot wait. If we wait, expectations will get the ball rolling, and then people will be spending more, because prices are higher. And people will be spending more quickly, to beat price increases. And the increased spending will get us started using that newly printed money. And once that money gets circulating, we've got too much money chasing goods. And at that point, wage and price controls will not work.
We need wage and price controls, and we need 'em now.
Update: 13 July 09
I've been browsing TheMoneyIllusion. Scott Sumner's post of 10 July 09 includes some thoughts on Ben Bernanke, including this:
He and I have very similar views on the Great Depression, and did very similar research on gold ratios and what Bernanke called “multiple monetary equilibria” during the Depression. That’s when the same money supply might be compatible with two very different price levels, depending on expectations. Want an example? Think about what would happen if the monetary base stayed at this level and inflation expectations started rising.
Again: We need wage and price controls, and we need 'em now.