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The Austrian School seems to have been wrong about the last 15 years' money printing causing inflation. In particular, the general Austrian school would have p

The Austrian School seems to have been wrong about the last 15 years' money printing causing inflation. In particular, the general Austrian school would have predicted a lot more inflation by now. The prediction on this has fared so poorly that the last 15 years has given rise to a school nearly diametrically opposite to the Austrian school: modern monetary theory. (My understanding of the Austrian response to this is some amount of semantic contorting: "well... let's define inflation this way and there is inflation... or will be... lots of it!") Also, current consensus, of course among mainstream economists, is that countries that more believe the Austrian school, like Germany, has caused unneeded pain on themselves/their neighbors by advocating of austerity versus stimulus during downturns. If you want the mainstream steelman against the Austrian school, you can search Paul Krugman's take on them.

ghastmaster 7y ago
Are you aware of the stock market, housing market, bond market, precious metals? Asset price inflation absolutely is happening. The FED up until now was able to keep the CPI increases fairly low even though they were creating trillions of dollars, because the money was locked into assets. This has had a severe effect on anyone in the market for these assets that have risen.
- eru 7y ago
  How do the assets lock up money? The stock market, no matter how enormous it's market cap, doesn't lock up any money. When I pay through the nose for Tesla stock, the other fellow then has some money that he either has to spend or park somewhere.
  - ghastmaster 7y ago
    Leverage and subsidies. The money did not exist to begin with, hence the FED balance sheet and gov't debt. The money is funneled into these assets by regulatory incentives 401k, HUD, federal student loans, etc. The seller's money goes toward that as well.
    - eru 7y ago
      I still don't understand. After all those assets have increased in price, the money is still not 'locked up'.
  - ghastmaster 7y ago
    I forgot to mention that China sells us consumer goods at a very low price, keeping CPI down. With the dollars we give them for their goods they purchase US companies, bonds, and real estate. This pushes up prices of the assets they purchase. If the Chinese did not devalue their currency, americans would not be able to afford their products and we would see a rise in the CPI.
    - eru 7y ago
      Cheap Chinese goods are indeed a boon to the rest of the world. Very nice of China.
- RobertoG 7y ago
  I though that, from the Austrian perspective, the stock market would be one of the last things to see inflation. Are not suppose the prices of stocks reflect the aggregate infinite wisdom of the market?
  - ghastmaster 7y ago
    If the money supply was increased across the board this would likely be the case. However, the FED bank no longer operates in the way it was statutorily mandated originally. The FED purchases assets that inflate the stock market indirectly. The Federal subsidies and regulations combine with this to keep the money propping up the assets mentioned(gold only because of it being a historic hedge).
chrisco255 7y ago
If you're talking about the U.S. that's mainly due to our reserve currency status and nothing else. And the money printing has driven certain sectors higher even in the face of low / stagnant growth. Stocks, real estate, etc being some of them. But you gotta understand that we export a great deal of our inflation. One day those dollars will come home to roost, but until then, Germany's balance sheet looks a hell of a lot better than the U.S.'s. going into this recession. Our deficit is already $3 trillion this year and climbing rapidly, with debt levels reaching their highest in relative terms since World War 2. And we haven't even scratched the surface of this deep recession yet.
- eru 7y ago
  The American Dollar was the world's reserve currency in the 1970s as well. They still managed high inflation. The subdued American inflation despite QE has a more technical and contingent explanation: the Fed started paying Interest on Excess Reserves (IOER) in 2008. Ie they reward banks for keeping the money they are printing out of the economy. Most of the time since then, the interest on short term US government bonds hasn't been much higher than the interest on excess reserves. So there hadn't been much aggregate economic impact when the Fed bought government bonds with new money. The banks slightly preferred excess reserves over government bonds, because they regulators preferred them. The QE was 'sterilized' by IOER.
  - chrisco255 7y ago
    We decoupled from the gold standard in 1971, so there was quite a bit of digestion that had to occur with the switch to fiat. I agree the Fed has acted to keep a lot of money out of the economy but our M1 money supply is still only just over $4 trillion. However, if you look at dollar denominated debt in the world it is probably more than $100 trillion...so ironically there's more demand for dollars than there ever has been (as those debts must be paid in dollars), which has caused deflationary pressure on the USD.
- RobertoG 7y ago
  That sounds like a very ad hoc explanation, what about Japan then?
Qasaur 7y ago
This kind of rebuttal to the Austrian school is often based upon a misguided idea of monetary neutrality. Inflation does not happen everywhere in the economy at the same time - this is called the Cantillon effect and is a central pillar of Austrian Business Cycle Theory. You are right, there is very little inflation in the consumer price index (at least nominally), but there is a significant amount of inflation in assets and other parts of the economy that are relatively close to the central bank/printing press. Inflated Silicon Valley salaries, maintained by an influx of VC money bidding up the price of labour, are a great example of this.
hutzlibu 7y ago
"is that countries that more believe the Austrian school, like Germany" As a german, this is news to me. Austrian school stands mostly for a free market without or as little as possible state interventions and regulations: a idea very frowned upon here generally and usually rather associated with the US
jeffreyrogers 7y ago
I think there is a lot of inflation if you measure it properly. We say inflation is low because we adjust for quality. So they say sure, a car costs more now than in 2000 but it has more features so if you adjust for quality it is cheaper. Same goes for other goods like computers, smartphones, etc. The problem is, the cheaper versions of these goods don't exist anymore, because the more expensive version is effectively required to not handicap yourself. Similarly, things like housing, healthcare costs, schooling costs, etc. are not well captured by the inflation metric, but have grown wildly in the last few decades. The purchasing power of the average person is probably worse now than it was in 2007 if you look at what people actually have to spend money on versus the artificial basket of quality adjusted goods used to measure inflation.
- jennyyang 7y ago
  The government changed the way they measured inflation to purposefully downplay it. For example, if they were measuring the cost of Levi's jeans, and they went up too high, they would replace them in their index with cheaper non-name brand jeans to show that inflation didn't occur. And same thing goes with groceries. When ice cream used to be a pint, it's now 14 oz. They have decreased the size of things like food packages over the last 15 years, and I don't think that's taken into consideration in the inflation index. Recently they decreased the size of orange juice by 15% but kept the price the same. That is the definition of inflation.
- vertak 7y ago
  I recently read of an alternate measure of inflation called the "Cost of Thriving Index" which aimed to capture the astute point you're making. See page 18 of this document: https://media4.manhattan-institute.org/sites/default/files/the-cost-of-thriving-index-OC.pdf https://media4.manhattan-institute.org/sites/default/files/t... I'm not economist but I've found this captures the feeling that although we're more productive and wealthier, it still feels harder to get ahead and live an average life.
AnimalMuppet 7y ago
Krugman's going to supply your steelman? Sorry, no. Krugman has a Nobel, but when he writes (at least for the last decade or two), he does so primarily as a propagandist, and secondarily (if at all) as an economist. There's plenty of actual mainstream economists that can give you steelman responses to Austrian Economics. Don't go get them from Krugman. You won't get good steel from him; it will have too much straw in it.
- TheColorYellow 7y ago
  Who would you point out as a steelman? I'd love to find a proper, thorough critic of the Austrian school.
  - AnimalMuppet 7y ago
    Ah, um, well... I don't actually have one in hand. There have to be some (I assume), but I can't point you to one. My point was, Krugman may have a response, but don't think of it as a steelman response.

ghastmaster 7y ago

Are you aware of the stock market, housing market, bond market, precious metals? Asset price inflation absolutely is happening. The FED up until now was able to keep the CPI increases fairly low even though they were creating trillions of dollars, because the money was locked into assets. This has had a severe effect on anyone in the market for these assets that have risen.

eru 7y ago
How do the assets lock up money? The stock market, no matter how enormous it's market cap, doesn't lock up any money. When I pay through the nose for Tesla stock, the other fellow then has some money that he either has to spend or park somewhere.
- ghastmaster 7y ago
  Leverage and subsidies. The money did not exist to begin with, hence the FED balance sheet and gov't debt. The money is funneled into these assets by regulatory incentives 401k, HUD, federal student loans, etc. The seller's money goes toward that as well.
  - eru 7y ago
    I still don't understand. After all those assets have increased in price, the money is still not 'locked up'.
- ghastmaster 7y ago
  I forgot to mention that China sells us consumer goods at a very low price, keeping CPI down. With the dollars we give them for their goods they purchase US companies, bonds, and real estate. This pushes up prices of the assets they purchase. If the Chinese did not devalue their currency, americans would not be able to afford their products and we would see a rise in the CPI.
  - eru 7y ago
    Cheap Chinese goods are indeed a boon to the rest of the world. Very nice of China.
RobertoG 7y ago
I though that, from the Austrian perspective, the stock market would be one of the last things to see inflation. Are not suppose the prices of stocks reflect the aggregate infinite wisdom of the market?
- ghastmaster 7y ago
  If the money supply was increased across the board this would likely be the case. However, the FED bank no longer operates in the way it was statutorily mandated originally. The FED purchases assets that inflate the stock market indirectly. The Federal subsidies and regulations combine with this to keep the money propping up the assets mentioned(gold only because of it being a historic hedge).

chrisco255 7y ago

If you're talking about the U.S. that's mainly due to our reserve currency status and nothing else. And the money printing has driven certain sectors higher even in the face of low / stagnant growth. Stocks, real estate, etc being some of them. But you gotta understand that we export a great deal of our inflation. One day those dollars will come home to roost, but until then, Germany's balance sheet looks a hell of a lot better than the U.S.'s. going into this recession. Our deficit is already $3 trillion this year and climbing rapidly, with debt levels reaching their highest in relative terms since World War 2. And we haven't even scratched the surface of this deep recession yet.

eru 7y ago
The American Dollar was the world's reserve currency in the 1970s as well. They still managed high inflation. The subdued American inflation despite QE has a more technical and contingent explanation: the Fed started paying Interest on Excess Reserves (IOER) in 2008. Ie they reward banks for keeping the money they are printing out of the economy. Most of the time since then, the interest on short term US government bonds hasn't been much higher than the interest on excess reserves. So there hadn't been much aggregate economic impact when the Fed bought government bonds with new money. The banks slightly preferred excess reserves over government bonds, because they regulators preferred them. The QE was 'sterilized' by IOER.
- chrisco255 7y ago
  We decoupled from the gold standard in 1971, so there was quite a bit of digestion that had to occur with the switch to fiat. I agree the Fed has acted to keep a lot of money out of the economy but our M1 money supply is still only just over $4 trillion. However, if you look at dollar denominated debt in the world it is probably more than $100 trillion...so ironically there's more demand for dollars than there ever has been (as those debts must be paid in dollars), which has caused deflationary pressure on the USD.
RobertoG 7y ago
That sounds like a very ad hoc explanation, what about Japan then?

Qasaur 7y ago

This kind of rebuttal to the Austrian school is often based upon a misguided idea of monetary neutrality. Inflation does not happen everywhere in the economy at the same time - this is called the Cantillon effect and is a central pillar of Austrian Business Cycle Theory. You are right, there is very little inflation in the consumer price index (at least nominally), but there is a significant amount of inflation in assets and other parts of the economy that are relatively close to the central bank/printing press. Inflated Silicon Valley salaries, maintained by an influx of VC money bidding up the price of labour, are a great example of this.

hutzlibu 7y ago

"is that countries that more believe the Austrian school, like Germany" As a german, this is news to me. Austrian school stands mostly for a free market without or as little as possible state interventions and regulations: a idea very frowned upon here generally and usually rather associated with the US

jeffreyrogers 7y ago

I think there is a lot of inflation if you measure it properly. We say inflation is low because we adjust for quality. So they say sure, a car costs more now than in 2000 but it has more features so if you adjust for quality it is cheaper. Same goes for other goods like computers, smartphones, etc. The problem is, the cheaper versions of these goods don't exist anymore, because the more expensive version is effectively required to not handicap yourself. Similarly, things like housing, healthcare costs, schooling costs, etc. are not well captured by the inflation metric, but have grown wildly in the last few decades. The purchasing power of the average person is probably worse now than it was in 2007 if you look at what people actually have to spend money on versus the artificial basket of quality adjusted goods used to measure inflation.

jennyyang 7y ago
The government changed the way they measured inflation to purposefully downplay it. For example, if they were measuring the cost of Levi's jeans, and they went up too high, they would replace them in their index with cheaper non-name brand jeans to show that inflation didn't occur. And same thing goes with groceries. When ice cream used to be a pint, it's now 14 oz. They have decreased the size of things like food packages over the last 15 years, and I don't think that's taken into consideration in the inflation index. Recently they decreased the size of orange juice by 15% but kept the price the same. That is the definition of inflation.
vertak 7y ago
I recently read of an alternate measure of inflation called the "Cost of Thriving Index" which aimed to capture the astute point you're making. See page 18 of this document: https://media4.manhattan-institute.org/sites/default/files/the-cost-of-thriving-index-OC.pdf https://media4.manhattan-institute.org/sites/default/files/t... I'm not economist but I've found this captures the feeling that although we're more productive and wealthier, it still feels harder to get ahead and live an average life.

AnimalMuppet 7y ago

Krugman's going to supply your steelman? Sorry, no. Krugman has a Nobel, but when he writes (at least for the last decade or two), he does so primarily as a propagandist, and secondarily (if at all) as an economist. There's plenty of actual mainstream economists that can give you steelman responses to Austrian Economics. Don't go get them from Krugman. You won't get good steel from him; it will have too much straw in it.

TheColorYellow 7y ago
Who would you point out as a steelman? I'd love to find a proper, thorough critic of the Austrian school.
- AnimalMuppet 7y ago
  Ah, um, well... I don't actually have one in hand. There have to be some (I assume), but I can't point you to one. My point was, Krugman may have a response, but don't think of it as a steelman response.