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.

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.

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.

INFLATION

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.

Dunderheads

Bernanke-Fed won't keep rates too low for too long
2009-04-14 19:08 (UTC)

WASHINGTON, April 14 (Reuters) - Federal Reserve Chairman Ben Bernanke said on Tuesday that the U.S. central bank, which has cut interest rates almost to zero, will definitely reverse its monetary policy at some stage to prevent inflation.

The Fed will 'make sure we do raise rates at an appropriate time and make sure we don't leave rates too low for too long, because it can have adverse effects, at least on inflation,' Bernanke told students at Morehouse College in Atlanta.

quoted from http://www.xe.com/news/2009/04/14/356969.htm

So if everything works out according to plan, we restore the economy back to where it was a year or two ago, before everything fell apart.

Well, then we'll be in trouble. Because if we get back to that time again, we will only be ripe for economic collapse again. Bernanke must know this. Central to the concept of fixing the economy is the notion of fixing the problem that created the problem. Not just fixing consequences we don't like.

Ben Bernanke has the most thrilling job in America, and I think he's the right man for the job. But I hope he's keeping secrets. Because the things he said at Morehouse College are just more of the same numb-brain, defunct-economist crap that got us into this mess in the first place.

The Big T

How to prevent inflation when the Fed prints a trillion dollars.

• NPR reports that "...in the U.K., the ... latest attempt to goose the economy ... calls for the Bank of England to create 75 billion pounds" in new money. And NPR quotes the BBC: "These actions are unprecedented in the Bank's 315-year history but are now considered necessary...." [From NPR's "Planet Money" blog, 11 March 2009]
• Under the headline "Fed Prints a Trillion," on 20 March 2009 Chris Martenson reported: "In a shocking development that I frankly hoped we'd never actually see, the Federal Reserve dropped a bombshell yesterday and announced that it is going to create an extra $1 trillion dollars out of thin air...."
• The Seattle Times reports that the Fed's trillion-dollar decision was unanimous. [Seattle Times, 20 March 2009]

Well, it's happening. And the Internet response to these printing press releases is largely what you'd expect: Inflation, inflation, inflation. I have a different take. 

The $787B Stimulus

A Context for Obama's $787,000,000,000.00 Stimulus Package

In the June 10, 1934 edition of The New York Times there appeared an article by John Maynard Keynes. Keynes wrote in part:

• "For six months at least, and probably a year, the measure of recovery to be achieved will mainly depend on the degree of the direct stimulus to production deliberately applied by the administration."
• "The aggregate emergency expenditure is now declining. If it is going to decline to $200,000,000 [$200 million] monthly, much of the ground already gained will probably be lost. If it were to rise to $400,000,000 [$400 million] monthly, I should be quite confident that a strong business revival would set in by the Autumn."
• "Four hundred million dollars monthly is not much more than 11 per cent of the national income...."

I don't know how Keynes came up with his $400 million figure. But it is easy enough to scale his number up to fit the current national income.

A Continuous Dribble

Here are some bold words originally from 5/25/09; my first blog post.