Summary: How we handle our fears shows much about ourselves, our ability to see and think. Such as fear of inflation, a major obsession of Right since the crash. Here we look at the warning, see what actually followed, and briefly review the basis of these fears.
Contents
- The inflationistas’ story.
- What inflation?
- Warning: velocity.
- A lesson from the past: Weimar.
- Measuring inflation.
- For More Information.
- Giving Conservatives the last word.
(1) The inflationistas’ story
Few things pay as easily and well as feeding people’s fears (not nearly as much work as raising food to feed people’s bellies). It’s a simple process: tell a story that validates people’s political beliefs and gives a simple account of complex phenomena (otherwise people will see the con). Forecasts of hyperinflation do both quite well.
- Slamming those that conservatives don’t like: Obama and the Federal Research
- Slamming policies that your wealthy backers don’t like: anything that risks inflation (creditors love mild deflation, like that during the Gilded Age).
- Telling a simple story about the mind-bendingly complex dynamics of money.
During the past five years many people have ridden this horse. Let’s look at one example. Red emphasis added.
(a) “HYPERINFLATION SPECIAL REPORT“, Issue Number 41 by John Williams’ Shadow Government Statistics, 8 April 2008 — Excerpt:
- Inflationary Recession Is in Place
- Banking Solvency Crisis Has Opened First Phase of Monetary Inflation
- Hyperinflationary Depression Remains Likely As Early As 2010
The U.S. economy is in an intensifying inflationary recession that eventually will evolve into a hyperinflationary great depression. Hyperinflation could be experienced as early as 2010, if not before, and likely no more than a decade down the road. … The U.S. has no way of avoiding a financial Armageddon.
(b) “HYPERINFLATION SPECIAL REPORT“, Commentary Number 263 by John Williams’ Shadow Government Statistics, 2 December 2009 — Excerpt:
- Economy and Financial System Face Eventual Great Collapse
- Government and Fed Actions Have Narrowed Hyperinflationary Great Depression Timing to Next Five Years
- High Risk of Ultimate Dollar Crisis Unfolding in Year Ahead
The U.S. economic and systemic solvency crises of the last two years are just precursors to a Great Collapse: a hyperinflationary great depression. Such will reflect a complete collapse in the purchasing power of the U.S. dollar, a collapse in the normal stream of U.S. commercial and economic activity, a collapse in the U.S. financial system as we know it, and a likely realignment of the U.S. political environment.
… Before the systemic solvency crisis began to unfold in 2007, the U.S. government already had condemned the U.S. dollar to a hyperinflationary grave by taking on debt and obligations that never could be covered through raising taxes and/or by severely slashing government spending that had become politically untouchable. The U.S. economy also already had entered a severe structural downturn, which helped to trigger the systemic solvency crisis.
The intensifying economic and solvency crises, and the responses to both by the U.S. government and the Federal Reserve in the last two years, have exacerbated the government’s solvency issues and moved forward my timing estimation for the hyperinflation to the next five years, from the 2010 to 2018 timing range estimated in the prior report.
(c) “Hyperinflation Update .. By John Williams” at the Save America Foundation, 21 September 2013 — Excerpt:
THE END GAME NEARS. The United States faces a likely hyper-inflationary depression before the end of 2014. That forecast has been in place for years, and still remains. The ultimate, complete debasement of the U.S. dollar became inevitable in recent decades…
Only one year remains on the clock to this absurdly confident forecast. There were many people making such forecasts in 2010 and 2011. Now, three years later, let’s see the actual trends.
(2) Look at the numbers: inflation? collapse of the US Dollar?
(a) The Fed’s target for core Personal Consumption Expenditures Price Index is 2%, a floor that allows time for them to react before it falls into deflation. The inflationistas’ forecasts have proven false, with inflation now below the Fed’s target. If the economy slows (instead of the expected acceleration) this could become a serious problem. Click to enlarge.
Nope, not yet.
“‘How did you go bankrupt?’ Bill asked. ‘Two ways,’ Mike said. ‘Gradually and then suddenly.”
— Ernest Hemingway in The Sun Also Rises (1926). It also applies to inflation.
The fears of Right-wing economists about inflation and dollar weakness have been proven wrong — decisively wrong, as inflation has slowed, not accelerated. But these fears are not irrational.
Velocity is the speed with which money moves through the economy. It is the ratio of the money stock (in this case, M2) to GDP.
Falling velocity has more than offset the Fed’s monetary expansion, so inflation has fallen. Only drastic (perhaps) destabilizing action by the Fed could prevent an ugly burst of inflation if velocity should suddenly and rapidly reverse. There is zero evidence of this today. But who can say what the future holds, especially if the Fed does not start the taper in the next few quarters? See the posts listed at the end for more information about our great monetary experiment.
(4) A scary lesson from the past: the Weimar inflation
Large monetary expansions, like ours, have been done before. It’s a seemingly easy solution to potentially destabilizing government deficits and stagnant economies. Most often this results in inflation — sometimes hyperinflation. But not always, as Japan and the US have shown (so far, at least).
To see one example of how this arises, despite skilled central bankers, see this excerpt from Dying of Money: Lessons of the Great German and American Inflations by Jens O. Parsson (pseudonym for attorney Ronald H. Marcks), published 1974. A free online version is posted here.
This text was popular in Summer 2010, when there were widespread forecasts of hyperinflation. Parsson’s explanation is only partially correct, but the phenomenon is real. Of course in 1923 money was a physical thing; they literally ran their printing presses to create money. Today’s e-money can be better controlled by the Fed.
Inflation is not a problem today. But fears of inflation are a factor driving the Fed governor’s to slow the rate of monetary expansion (“tapering” QE3), and eventually normalize both interest rates and the money supply. There is too-little experience of this on such a large scale in modern economies for certainty about the likely effects.
Excerpt from Chapter 17: “Velocity”.
{Discussing the German inflation of 1914 – 1923} Velocity took an almost right-angle turn upward in the summer of 1922, and that signaled the beginning of the end. An explosive rise in velocity thus accurately marks the point of obliteration of an inflated currency, but it does not cause itself. People cause velocity, and they only cause hypervelocity after prolonged abuse of their trust. The German mark had been undergoing massive dilution for over two years, and the people only at last realized it when they turned on the velocity.
… The fact that the collapsing German inflation rested mainly on velocity, a volatile and psychological phenomenon, is not reassuring and does not mean that the inflation was unique to its own circumstances. It is a warning never to inflate even distantly near the point of stampeding the people, and if they do stampede do not follow.
… Money velocity is thus much the more sluggish, in the beginning of an inflation, of the two partners in aggregate demand, quantity and velocity. Later on, it is much the more prone to explosion. But velocity presents us with still another obstacle to gauging inflationary potential accurately.
The problem is that it is not really actual velocity at all that we would like to know for our price equation, but equilibrium velocity. Actual velocity is no more than a rate of flow that happens to be occurring at the present moment. The price equation using actual velocity has often been criticized, and quite properly, as a tautology which discloses nothing about inflationary potential. The mathematical relationships are so inviolable that the equation using current velocity must balance out at the current price level, telling nothing about where the price level is bound.
On the other hand, people’s underlying liquidity preference is an equilibrium cash balance that people would like to arrive at, not what they have succeeded in arriving at to date. Equilibrium velocity is to actual velocity as a pressure is to a flow, or as voltage is to amperage in electricity. The rate of flow is always moving toward where the pressure is now. If we could know and substitute equilibrium velocity for prevailing velocity in our equation, we would have no tautology at all but an infallible calculation of equilibrium prices and inflationary potential.
… Unfortunately, if actual velocity is difficult to measure, equilibrium velocity is impossible. The best we can hope to do is to deduce equilibrium velocity from surrounding circumstances including the behavior of actual velocity. The usual relationships between money quantity and money velocity will also help considerably. Velocity is always a follower. As long as quantity inflation is continuous, moneyholders continuously hold more money than they want, however little that may be, and actual velocity is continuously lower than equilibrium velocity.
No matter how high or rapidly velocity may have risen, so long as monetary inflation continues it is always lower than it is going to be and therefore always understates inherent inflationary potential.
(5) Measuring Inflation
(a) Rebuttals to ShadowStats
“Addressing misconceptions about the Consumer Price Index“, John S. Greenlees and Robert B. McClelland, Monthly Labor Review, August 2008 — Excerpt:
“A number of longstanding myths regarding the Consumer Price Index and its methods of construction continue to circulate; this article attempts to address some of the misconceptions, with an eye toward increasing public understanding of this key economic indicator”
John Williams of Shadowstats admits to James Hamilton (Prof Economics, UC San Diego) that their numbers are bogus, just the CPI plus a fudge factor:
I’m not going back and recalculating the CPI. All I’m doing is going back to the government’s estimates of what the effect would be and using that as an ad factor to the reported statistics.
Also see “The Trouble With Shadowstats“, John Aziz, 1 June 2013.
(b) An alternative measure of inflation
Paul Krugman notes that the US billion price index closely matches the government data — disproving critics like Shadowstats. More precisely it measures the same prices as the goods-only CPI calculated by the Bureau of Labor Statistics:
- “The Billion Price Index“, 18 February 2011
- “Billion Price Update“, 2 June 2011
- “Billion Price Update“, 1 April 2012
(6) For More Information
If you liked this post, like us on Facebook and follow us on Twitter. See all posts about all posts about inflation, about economic statistics, about monetary policy, and especially these about the repeated claims of booming inflation…
- Can Obama turn America into something like Zimbabwe? — No.
- Is the US Government deliberately underestimating inflation? — No.
- The Fed is not wildly printing money, as yet no hyperinflation, we’re not becoming Zimbabwe.
- Why the U.S. cannot inflate its way out of debt.
- We can try to inflate away the government’s debt, but we’ll go broke before succeeding.
- More invisible signs of looming US inflation!, 22 February 2011
- Inflation is coming! Inflation is coming! — About repeated false warnings.
- Inciting fear of inflation in our minds for political gain (we are easily led).
- Update on the hysteria about inflation, the invisible monster about to devour us!.
- Conservatives were correct: we have record-breaking inflation! What’s next?
(7) Giving Conservatives the last but daft word
From that September 2013 article by the Save America Foundation:
