3 ms·

>For price rises to be the case, the economy must be both at full capacity and full employment. Who's using intuition now? Stagflation in the 70's is a pretty

>For price rises to be the case, the economy must be both at full capacity and full employment. Who's using intuition now? Stagflation in the 70's is a pretty jarring counter-example. We're living in an interesting economic time where Keynesian policies seem intuitively more effective than Austrian economics. Afterall, the Fed has been printing money like mad for the last 20 years, and there's no worrying inflation to be found. But there's an argument to be made that prices should be much lower than they are - that the scale of automation and globalization that we've seen has put enormous downward pressure on prices, and the currency devaluing effects of Fed monetary policy have put upwards pressure on prices without resultant inflation. So we can still afford a loaf of bread without having to push a wheelbarrow full of greenbacks up to the register, but the problem has manifested itself in different ways. Most obviously in the growing wealth gap, where those who are most capable of taking advantage of the Fed's cheap currency (the financial industry) have gotten all of the gains from automation and globalization, while the rest of us are stuck with a devalued currency.

colorint 9y ago
Stagflation was associated with two things: high spending on the Vietnam War, and OPEC oil price hikes. To illustrate this, let's take for granted that inflation is "too much money chasing too few goods." That's really a statement about two things: inflation very much can be driven by having fewer goods with the same amount of money. This is why Germany and Zimbabwe are bad examples, because both of them involved a real goods collapse. Likewise, oil supply shock can easily drive large inflation. In other words, the way to reconcile stagflation with the text you quoted is, "full capacity" was lower in the 70s, so we had inflation without full employment. And to be fair, the text you quoted should be "full capacity OR full employment." Quantitative easing is also very different from what you might think, but in a sense, QE was also the ultimate refutation of, at least, the money multiplier view. The Fed injected far more base money than necessary to maintain the prime rate, and what happened? The money multiplier fell. So really the Fed had the story backwards there, or else they were trying to invoke some voodoo magic.
stephen_g 9y ago
> Who's using intuition now? Stagflation in the 70's is a pretty jarring counter-example. My wording wasn't clear. I meant for price rises to necessarily be the case for any rise in the monetary supply, by the PY = MV identity. Of course inflation is still still possible when the economy is not at full capacity or full employment.

colorint 9y ago

Stagflation was associated with two things: high spending on the Vietnam War, and OPEC oil price hikes. To illustrate this, let's take for granted that inflation is "too much money chasing too few goods." That's really a statement about two things: inflation very much can be driven by having fewer goods with the same amount of money. This is why Germany and Zimbabwe are bad examples, because both of them involved a real goods collapse. Likewise, oil supply shock can easily drive large inflation. In other words, the way to reconcile stagflation with the text you quoted is, "full capacity" was lower in the 70s, so we had inflation without full employment. And to be fair, the text you quoted should be "full capacity OR full employment." Quantitative easing is also very different from what you might think, but in a sense, QE was also the ultimate refutation of, at least, the money multiplier view. The Fed injected far more base money than necessary to maintain the prime rate, and what happened? The money multiplier fell. So really the Fed had the story backwards there, or else they were trying to invoke some voodoo magic.

stephen_g 9y ago

> Who's using intuition now? Stagflation in the 70's is a pretty jarring counter-example. My wording wasn't clear. I meant for price rises to necessarily be the case for any rise in the monetary supply, by the PY = MV identity. Of course inflation is still still possible when the economy is not at full capacity or full employment.