12 ms·

In Fed and Out, Many Now Think Inflation Helps

57 points by applecore 13y ago

netpenthe 13y ago
https://www.youtube.com/watch?v=30DGoRz1rLo#t=41 https://www.youtube.com/watch?v=30DGoRz1rLo#t=41
hannibal5 13y ago
No shit sherlock. US has been in liquidity trap half a decade. There is need for inflation or it turns into decade.
nwj 13y ago
Scott Sumner over at http://www.themoneyillusion.com/ http://www.themoneyillusion.com/ has played a big part in changing peoples's views on this. He is definitely worth reading regularly if you are interested in or want to learn more about monetary policy.
- hudibras 13y ago
  I think some people would say that Paul Krugman might have helped out a bit, too. http://krugman.blogs.nytimes.com/2013/10/27/the-economics-of-rip-van-winkle/ http://krugman.blogs.nytimes.com/2013/10/27/the-economics-of...
- clarkm 13y ago
  A good overview of his viewpoint can be found here: http://en.wikipedia.org/wiki/Market_monetarism http://en.wikipedia.org/wiki/Market_monetarism
- nazgulnarsil 13y ago
  Actually, noticing that inflation and the quantity of dollars in the system have a non-linear interaction is the core of his point if I understand him correctly. He preaches de-emphasizing inflation in favor of NGDP, but this is not the same as saying that inflation should be higher. Rather, he says that NGDP and inflation are more orthogonal than previously thought.
drakaal 13y ago
If the value of the dollar buys less stuff, that is only good for the economy if the economy benefits from this. While that may be a "well-duh" statement it is counter intuitive in cases where it also means that it means that "Stuff" becomes more expensive than "Labor". Often inflation means more people do things because it becomes cheaper to do things that are labor intense than it is to do things that are material intense. Inflation can be driven by an increase in the cost of labor too however. If we raise the minimum wage then "Labor" will cost more and "stuff" may also cost more an inflation will not be a good thing. But because so many people can't afford this affordable health care there is a push to up the minimum wage. Doing so will raise the cost of labor at the bottom of the wage pool, which will mean someone who was making 25% more than minimum wage will be barely making minimum wage, and likely won't get a wage increase for several years, so for those people they will live closer to the poverty line. For things which are more "stuff" than "labor" the price will go up because people earn more and they will raise to match inflation which will mean more profit margin, as a result the companies that do more "stuff" with less "labor" will get richer. Inflation by its definition means $1 buys less than it did previously. This is almost never a good thing over anything but the shortest of terms. Stagnation is good. Deflation is better.
- thaumasiotes 13y ago
  Well, deflation sounds like it would be good for anyone with a positive net worth, but the empirics are awful.
  - netpenthe 13y ago
    a small amount of inflation (2-3%) is generally seen as good and the target of reserve banks around the world... you think they have this target because inflation is BAD? inflation encourages investment (better invest to beat inflation) deflation is bad unless you already have a lot of money. it discourages investment (why invest? i can just sit here and the value of my money goes up) you can call inflation bad, but it is still better than the alternatives.
    - nerfhammer 13y ago
ams6110 13y ago
I guess nobody remembers the Jimmy Carter era? "Stag-flation" (Inflation and no growth), 16% interest rates on mortgages, the "misery index" in the news every day?
- yetanotherphd 13y ago
  only the people who wrote the article.
- trimbo 13y ago
  Or Japan.
- jswinghammer 13y ago
  What you are describing is exactly why Keynesian economics fell out of favor in the first place. For a time it was thought that the business cycle was a solved problem and only a historical memory. Oops.
- MaysonL 13y ago
  Study the career as Fed chairman of Arthur F. Burns, chairman from 1970 to 1978, appointed by Richard Nixon, before you blame stagflation on Carter.
greenyoda 13y ago
"Rising prices help companies increase profits" I don't see how that could be true. If prices are rising, all of a company's expenses rise along with their revenues: raw materials, salaries, benefits, rents, etc. (Unless the company wants to screw their employees and give them raises that are less than the rate of inflation.) Inflation does benefit debtors, the biggest being the U.S. government: they can repay their debts with dollars that are worth less than the dollars that they borrowed.
- ams6110 13y ago
  Exactly. Inflation is a painless (for the government) way out of the debt problem the government itself has created. That's why they favor it, nobody has to make any hard choices, and the middle and lower income families get screwed, again, because everything now costs more.
  - nerfhammer 13y ago
    The price of labor is a price and should rise with everything else. Average income should track inflation.
    - snowwrestler 13y ago
      Average income grows faster than inflation because of real economic growth. In the U.S. we've had positive inflation numbers for most of the last 80 years, which has coincided with significant across-the-board improvements in standard of living.
      - jswinghammer 13y ago
        Tell me again about that across the board improvement: http://www.bloomberg.com/news/2012-10-02/top-1-got-93-of-income-growth-as-rich-poor-gap-widened.html http://www.bloomberg.com/news/2012-10-02/top-1-got-93-of-inc...
        13y ago
jswinghammer 13y ago
Given that the entire point of the Federal Reserve is to promote inflation it's probably good that they think it's a good idea-otherwise why do they think that they exist? The whole problem is that inflation is theft. You are basically having your property taken out from under you without realizing it. It's historically been very popular as a means of taxing the public without them realizing that's what you're doing. This probably not the space to get into all this but reading "The Creature From Jekyll Island" is a good start. That the major players in the banking industry got together in secret to write the Federal Reserve Act suggests who the system really benefits.
- yetanotherphd 13y ago
  Your theory lacks predictive power. There is huge debate about what inflation should be, and all you can say is "all the bad guys like inflation". The argument for inflation is very old, and goes back to Milton Friedman at least (who was no Keynesian).
  - jswinghammer 13y ago
    Friedman was a Keynesian heretic. Instead of looking at aggregate demand he was looking at the total money supply. The basic problem is that he lacked an understand of the boom itself and focused entirely the bust's mechanics. The argument for inflation goes back much further than Friedman. Emperor Diocletian tried it and failed. Despots throughout history have attempted it as well and failed (eventually). Inflation "works" in the short term but eventually you pay the price for it in the form of a bust. I guess that the bad guys liking something isn't entirely sufficient but it should be fairly damning evidence.
  - nazgulnarsil 13y ago
    The argument goes back to ancient Rome at least, with the devaluing of the denarius.
- dwrtz 13y ago
  Higher inflation also means that it's cheaper for the U.S. government to borrow money. In fact, higher inflation is good for anyone who borrows money (people with mortgages, student loans, etc.) because they're effectively paying back less than they borrowed.
noonespecial 13y ago
Sometimes inflation is good. Sometimes deflation. Sometimes even stagnation. Its all circumstantial. The starter motor in your car is very good for getting the engine running but pretty terrible if you try to drive around with it engaged all the time. We seem tragically bad at predicting what we need when and then doing it.
aortega 13y ago
Inflation is a tax. Its the result of somebody creating money from nothing (usually it's the government). Also, it's a great way for an employer to lower your salary by actually increasing it, by doing it at a lower rate than inflation. My country has a 25% inflation rate, that's going on for the last 4 years. Not pretty.
- jswinghammer 13y ago
  It is a tax. It actually occurs the moment anyone takes out a loan in a fractional reserve system. The money is created from nothing at that moment. Government just tends to borrow huge sums of money through this mechanism.
  - nazgulnarsil 13y ago
    Thinking that loans are evil is where misean ideology really breaks down. If you give me a piece of paper that says you will pay me X dollars a month for Y months, that piece of paper has value depending on how likely you are to honor the obligation.
    - jswinghammer 13y ago
      Loans are not evil and I will challenge anyone who suggests that Mises or any other Austrian believes so. That loans under a fractional reserve constitute fraud is something that is debated a bit. I think at this point the consensus is that it does constitute fraud and should be illegal.
    - retrogradeorbit 13y ago
      In exchange for that piece of paper (promising money later), you have given me money now. The difference in what you have given me and what will be repaid is interest. It is the price of money and its purchasing power transferred through time, and it is the reward for lending. Now imagine your scenario where you go with your saved money looking for borrowers (people willing to write you that promissory note). But no one is willing to write you that promissory note, because the banking system is willing to lend to them whatever they want with a value of X so low that you find it not worth the risk. In fact the value of X is presently less that the pace of inflation (negative real interest rates). So now all the baby-boomers with their life savings can't earn a penny on it while bankers with printed fiat front run them in the money market. Inflation may be good for those excessively leveraged in debt, but it is equally bad for all those who have saved and are investing their earnings. It perversely rewards the over indebted and punishes the prudent saver. Interest rates ideally should be set by the market. In times of excess capital to invest, rates would be low. In times of capital tightness, rates would rise. In this way rates are a measure of the health and state of the capital and investment markets. Interest rate mechanisms are now so completely corrupted that there is not market mechanism left. Rates are not a measure of the economy any more, they are miss-set centrally and then the entire market distorts around them.
pasbesoin 13y ago
My personal opinion going into this mess was that, sooner or later, the U.S. was going to inflate its way to a lesser impact of existing obligations. As it became clear that the big banks would remain... "sacrosanct", I figured that the inflation would start once they were out from under their own balance sheet woes with particularly with respect to lower performing loans and paper built thereon. Et voilà. TL;DR: They've given the "big boys" time to prepare and position themselves. Now the screws get put to everyone else. P.S. By the by, have you been watching e.g. the price of many staples in the supermarket? (Not to mention gasoline, and a few other things.) For many "everyday" folks, inflation showed up already some years ago.
- philwelch 13y ago
  That's not inflation, that's the economic effect of the world starting to run low on petroleum.
Mikeb85 13y ago
Inflation encourages spending, rewards investment, and discourages hoarding of cash. Inflation leads to all the positive outcomes that economists want. Not to mention, inflation is necessary in a society with a growing population, since there needs to be enough currency to spread amongst the population, otherwise it will be held in a finite amount of hands, and increase inequality.
- jayfuerstenberg 13y ago
  You have a lot of learning to do my friend. Inflation steals purchasing power away from people who contributed their labor to the market in exchange for the money they received. The cash hoarding that inflation is supposed to solve continues because people want to hold on to their money in risky times. Smart people are moving away from cash assets and into precious metals and real estate. These are tangible things, unlike fiat currency that keeps losing value over time. The US dollar in particular has lost more than 90% of its value since abandoning the gold standard in the early 70s.
  - Mikeb85 13y ago
    Really? Is this a joke or one of those terrible 'end-of-the-world' advertisements you hear on Bloomberg radio? Precious metals and real estate haven't done very well compared to equities in the last year or two... Yes, inflation reduces purchasing power if you assume that wages don't track inflation, but historically they do.
    - emperorhadrian 13y ago
      > Yes, inflation reduces purchasing power if you assume that wages don't track inflation, but historically they do. This is not only factually false, but if it were true it would invalidate the argument being made by the economists quoted in the NYTimes article. I strongly recommend that you read The Creature from Jekyll Island or other materials on the history of the Fed and its role in US monetary policy.
      - 13y ago
ndesaulniers 13y ago
Too bad my pay check is sticky. [0] [0] http://en.wikipedia.org/wiki/Sticky_%28economics%29 http://en.wikipedia.org/wiki/Sticky_%28economics%29
hudibras 13y ago
Any comment in this thread that doesn't contain the words "liquidity trap" can safely be ignored. I know that a lot of HNers don't believe that economics is a real science and would rather go with gut feelings or whatever Ron Paul says, but please take a few minutes to read the seminal paper on liquidity traps: http://www.brookings.edu/~/media/projects/bpea/1998%202/1998b_bpea_krugman_dominquez_rogoff.pdf http://www.brookings.edu/~/media/projects/bpea/1998%202/1998... You may not agree with it, but at least you can understand what the other side of the argument is. EDIT: Wow, this thread really brought out the goldbugs, bitcoin-ers, and the "FIAT MONEY!" crowds. Just need some mentions of Zimbabwe and wheelbarrows-full-of-Weimar-Republic-marks and I'll win this round of Economics Crackpot Bingo.
- 001sky 13y ago
  I respectfully disagree. The purpose of inflation in this context is to "kill the debt", because the US cannot pay out $17T or even maintain interest payments, with "non-inflated" dollars. That is why all of this is just hand-waving and subversive, mis-directing PR. The reason Japan is such a bad example is precisely inflation. But its death-nell was asset inflation, not cpi. Housing stocks and Bank loans were massively overinflated and never allowed to correct. The notion that this "inflation" should have been corrected with "other inflation" is one of those laughable bits of rediculousness. Likewise, the US in a funk caused by Asset inflation. Fighting it with price inflation will be interesting. Take a look at the London property market. Do you think raising the price of consumer goods will help? Wont people just be encouraged to park their cash in property (ie, real goods?). Right now, they are trying to "make housing more affordable" by interest rate subsidies (inflationary). Doesn't seem to be making anything more affordable, though.
- jayfuerstenberg 13y ago
  I live in Japan and the Japanese government, under its Abenomics movement, decided on another round of QE and injected 20% more currency into the market earlier this year. I get that the yen is too strong and needs to weaken in order to protect the trade balance between itself and other countries. But the inflation eventually reached us consumers and every day items have gotten that much more expensive. Now my 10,000 yen only gets me ~8333 yen worth of stuff. If I could go back in time and not contribute the lost 1/6th of my savings in labor I might not be angry, but I can't. My salary isn't going up either and there is even talk of pay reduction due to a worsening economy. So to protect myself my choices seem to be: 1. Buy things up before the inflation reaches me as a consumer, passing the purchasing power theft on to the merchants. (possible, but I blow all my money away) 2. Convert that currency to something else that hedges against inflation (and retains its value over time) if I want to not spend it. I chose #2 in the form of gold. If you want to call me a goldbug, go ahead. I'm getting into REITs soon too so maybe you can come up with clever derogatory name for that as well. I'll try to help you win your bingo round.
emperorhadrian 13y ago
Great news for bitcoin owners.
enoch_r 13y ago
Absolutely no discussion of inflation is complete without recognition of the fact that inflation and inflation expectations are at historically low levels[1] right now. Economists aren't arguing that we should inflate our way out of debt--they are arguing that we should return to the historical norm. Of course, it's possible that these economists are secretly just pushing inflation as the "hidden tax" we're all up in arms about. But I find this unlikely. I find it far easier to believe that most economists actually believe that moderate inflation is good for the economy. Why do economists believe this? Prices are sticky, and some prices are stickier than others. Prices for labor are especially sticky, which means that when growth expectations fall, it's very difficult to decrease wages, which in turn makes it difficult for supply and demand of labor to balance. In the Cliff Note version, inflation helps because people are willing to take real pay cuts when they're disguised as a nominal pay increase. There's a vicious cycle during a recession, where falling output causes the price level to fall, which in turn causes more imbalance in the labor market. It's important to recognize that the standard argument for inflation has literally nothing to do with "the government printing money to pay for things." Does the US government make money from seignorage? Yes, it does. Is it a significant source of income? No, not in the context of US government spending or revenue--it's roughly $30 billion dollars a year. Are these crazy inflationary economists suggesting policies that would increase seignorage to a significant level? No, they're not. Finally, most of these arguments are disputed by the so-called "Austrian school" of economics. It's important to recognize that this school is much, much, much more popular with laymen than with professional economists. This doesn't mean that the school's arguments are wrong, but it does raise questions about why the school's arguments which seem so utterly convincing to so many people, don't manage to gain many converts among people who research the subject professionally. Once again, I don't find "conspiracy" a particularly good argument. [1] http://www.clevelandfed.org/research/data/inflation_expectations/archive.cfm?dyear=2013&dmonth=9 http://www.clevelandfed.org/research/data/inflation_expectat...
- ra 13y ago
  My (layman's) understanding of it is that central banks seek to keep inflation within a target range; in Australia this is between 2 and 3 percent [1]. The primary tool to manage inflation is interest rates, however interest rate movements also have other effects, positive and negative, so it's not as simple as turning on a tap. It's important not to let inflation get too high because that makes new investment unattractive, the cost of living go up, and retirement savings worth less. [1] http://www.rba.gov.au/inflation/ http://www.rba.gov.au/inflation/
Mikeb85 13y ago
By the way, for those who believe wages don't track inflation, they do. http://en.wikipedia.org/wiki/Household_income_in_the_United_States http://en.wikipedia.org/wiki/Household_income_in_the_United_... http://www.advisorperspectives.com/dshort/updates/Household-Income-Distribution.php http://www.advisorperspectives.com/dshort/updates/Household-... http://en.wikipedia.org/wiki/File:Median_US_household_income.png http://en.wikipedia.org/wiki/File:Median_US_household_income... Argue about the merits of inflation all you want, but I see a ton of 'facts' being thrown around which simply aren't supported by historical numbers...
codex 13y ago
Mild inflation promotes growth by encouraging money to be put to use rather than sit idly in savings. Banks make more aggressive loans to keep yields high.
- jayfuerstenberg 13y ago
  Inflation can take a long time to trickle out from the major banks and lending institutions and down to businesses and finally down to average consumers. What no economist can tell you though is how those irrational consumers will truly behave. If you throw more money at me, I'm not going to spend more money, I'm probably hold on to it and invest it in other assets. I guess I'm breaking the system.
Houshalter 13y ago
>Rising prices help companies increase profits I don't get this. It's people spending more because they have more money through inflation that increases profits. Not prices themselves getting higher, that's just the affect. In any case what does it matter since you have more money, but money is worth that much less. The total wealth is the same. >rising wages help borrowers repay debts. Right but it's a zero-sum game. The borrower benefits but the lender loses. Also only works once. If lenders know there is a chance of inflation they will proportionally raise their interest rate they are willing to lend at to make up for the risk. Inflation is just a tax on the entire economy as everyone that owns money loses some of the value of their money. In the case of printing money, all that value goes to whatever group receives the printed money.
acslater00 13y ago
I'm happy to see this article written, and it will hopefully start to change the attitude of evaluating central bank actions through the lens of 'high inflation bad, low inflation good'. This whole debate is an unfortunate example of what's called "Partial Equilibrium Reasoning" (as opposed to "General Equilibrium Reasoning"). All things being equal, higher inflation is bad. That's clear. But all things aren't equal, and so appeals to logic about how inflation is a hidden tax on 'the people' and so forth are essentially worthless when applied to real-world situations. Here's why. One weird thing about inflation is that inflation expectations become a self-fulfilling prophecy, because when people predict inflation, they demand escalating prices on things like 10-year leases and labor contracts, and when they don't predict inflation, they don't. The situation today, in 2013 America, and not fake-year hypothetical-country in your economics textbooks, is that inflation expectations are extremely low. They are low because inflation is essentially a by-product of economic expansion, and most people predict that economic expansion will be weak for the foreseeable future. As it turns out, the reverse of this is true. If people expected the economy to start growing strongly, their inflation expectations would likely rise, which would probably be enough all-on-its-own to cause inflation to rise. Weird, right? So it turns out that if the economy were to strengthen, one thing you'd notice in the data would be slightly higher inflation. And you'd go, "Well that's no good, but at least the economy is improving!" And you would be looking at a General Equilibrium in which most people are better off even though inflation is slightly higher, because many other things (Nominal Growth, Real Growth, Unemployment, Long-Term Interest Rates for savers) would be moving in the _good_ direction. This dynamic is why the Fed needs to break the attitude that its job is to keep inflation as low as possible. The worst thing that could happen in the above scenario is for people to think 'Uh oh, inflation is going up, that means the Fed will probably raise interest rates', which would have the (expected) effect of reducing economic growth. But we need growth! And we need to accept that a few percentage points of inflation will be a by-product of that in a healthy economy. So to summarize, the issue here is not that inflation is good. It's that there is more to this picture than inflation, and that if you have a dogmatic belief that inflation is evil in all situations and should be avoided, you've probably read too much Hayek and it has melted your brain. [sorry, had to drop a snipe]
- clarky07 13y ago
johnnyg 13y ago
Debt is not prosperity. QE Infinity policies will devastate the US economy and cost us our reserve currency status.
dpatru 13y ago
The big-picture argument this piece is making is that counterfeiting money is good for society. In this case, a central authority (the Fed) is doing the counterfeiting, but nothing in the article explains why the beneficial effects would not also accrue when individuals do the counterfeiting.
dgregd 13y ago
It seems that FED is clueless why inflation is low even after QE3. The real question is how FED is going to stop inflation increase after they reach the goal of 2-3%.
kriro 13y ago
I've always wondered about the relation of inflation and innovation. As long as a society is sufficiently innovative inflation is not a big deal because innovation tends to outpace it. This is especially interesting if you measure inflation in relation to some basket of goods that contain a good chunk of "hightech" items. But it's also relevant for more traditional items like bread due to improvements in agriculture tech etc. The interesting question is of course if a policy that tends to favour inflation also tends to favour innovation. It should because (artificially) low interest rates should c.p. lead to more long term R&D type projects being funded. (all imo, I'm not an economist) I am aware that the Austrian School gets a pretty bad rep these days but as a curious citizen of the world I have read a couple of Austrian books (Human Action, Competition and Entrepreneurship) and even if you disagree on the content I find them very pleasant...aesthetically if that makes any sense.
penguindev 13y ago
"Economists aren't arguing that we should inflate our way out of debt--they are arguing that we should return to the historical norm" The historical norm IS inflating your way out of debt. You just contradicted yourself. Seriously, do you think debt gets REPAID?

57 points by applecore 13y ago

netpenthe 13y ago

https://www.youtube.com/watch?v=30DGoRz1rLo#t=41 https://www.youtube.com/watch?v=30DGoRz1rLo#t=41

hannibal5 13y ago

No shit sherlock. US has been in liquidity trap half a decade. There is need for inflation or it turns into decade.

nwj 13y ago

Scott Sumner over at http://www.themoneyillusion.com/ http://www.themoneyillusion.com/ has played a big part in changing peoples's views on this. He is definitely worth reading regularly if you are interested in or want to learn more about monetary policy.

hudibras 13y ago
I think some people would say that Paul Krugman might have helped out a bit, too. http://krugman.blogs.nytimes.com/2013/10/27/the-economics-of-rip-van-winkle/ http://krugman.blogs.nytimes.com/2013/10/27/the-economics-of...
clarkm 13y ago
A good overview of his viewpoint can be found here: http://en.wikipedia.org/wiki/Market_monetarism http://en.wikipedia.org/wiki/Market_monetarism
nazgulnarsil 13y ago
Actually, noticing that inflation and the quantity of dollars in the system have a non-linear interaction is the core of his point if I understand him correctly. He preaches de-emphasizing inflation in favor of NGDP, but this is not the same as saying that inflation should be higher. Rather, he says that NGDP and inflation are more orthogonal than previously thought.

drakaal 13y ago

If the value of the dollar buys less stuff, that is only good for the economy if the economy benefits from this. While that may be a "well-duh" statement it is counter intuitive in cases where it also means that it means that "Stuff" becomes more expensive than "Labor". Often inflation means more people do things because it becomes cheaper to do things that are labor intense than it is to do things that are material intense. Inflation can be driven by an increase in the cost of labor too however. If we raise the minimum wage then "Labor" will cost more and "stuff" may also cost more an inflation will not be a good thing. But because so many people can't afford this affordable health care there is a push to up the minimum wage. Doing so will raise the cost of labor at the bottom of the wage pool, which will mean someone who was making 25% more than minimum wage will be barely making minimum wage, and likely won't get a wage increase for several years, so for those people they will live closer to the poverty line. For things which are more "stuff" than "labor" the price will go up because people earn more and they will raise to match inflation which will mean more profit margin, as a result the companies that do more "stuff" with less "labor" will get richer. Inflation by its definition means $1 buys less than it did previously. This is almost never a good thing over anything but the shortest of terms. Stagnation is good. Deflation is better.

thaumasiotes 13y ago
Well, deflation sounds like it would be good for anyone with a positive net worth, but the empirics are awful.
- netpenthe 13y ago
  a small amount of inflation (2-3%) is generally seen as good and the target of reserve banks around the world... you think they have this target because inflation is BAD? inflation encourages investment (better invest to beat inflation) deflation is bad unless you already have a lot of money. it discourages investment (why invest? i can just sit here and the value of my money goes up) you can call inflation bad, but it is still better than the alternatives.
  - nerfhammer 13y ago

ams6110 13y ago

I guess nobody remembers the Jimmy Carter era? "Stag-flation" (Inflation and no growth), 16% interest rates on mortgages, the "misery index" in the news every day?

yetanotherphd 13y ago
only the people who wrote the article.
trimbo 13y ago
Or Japan.
jswinghammer 13y ago
What you are describing is exactly why Keynesian economics fell out of favor in the first place. For a time it was thought that the business cycle was a solved problem and only a historical memory. Oops.
MaysonL 13y ago
Study the career as Fed chairman of Arthur F. Burns, chairman from 1970 to 1978, appointed by Richard Nixon, before you blame stagflation on Carter.

greenyoda 13y ago

"Rising prices help companies increase profits" I don't see how that could be true. If prices are rising, all of a company's expenses rise along with their revenues: raw materials, salaries, benefits, rents, etc. (Unless the company wants to screw their employees and give them raises that are less than the rate of inflation.) Inflation does benefit debtors, the biggest being the U.S. government: they can repay their debts with dollars that are worth less than the dollars that they borrowed.

ams6110 13y ago
Exactly. Inflation is a painless (for the government) way out of the debt problem the government itself has created. That's why they favor it, nobody has to make any hard choices, and the middle and lower income families get screwed, again, because everything now costs more.
- nerfhammer 13y ago
  The price of labor is a price and should rise with everything else. Average income should track inflation.
  - snowwrestler 13y ago
    Average income grows faster than inflation because of real economic growth. In the U.S. we've had positive inflation numbers for most of the last 80 years, which has coincided with significant across-the-board improvements in standard of living.
    - jswinghammer 13y ago
      Tell me again about that across the board improvement: http://www.bloomberg.com/news/2012-10-02/top-1-got-93-of-income-growth-as-rich-poor-gap-widened.html http://www.bloomberg.com/news/2012-10-02/top-1-got-93-of-inc...
      - 13y ago

jswinghammer 13y ago

Given that the entire point of the Federal Reserve is to promote inflation it's probably good that they think it's a good idea-otherwise why do they think that they exist? The whole problem is that inflation is theft. You are basically having your property taken out from under you without realizing it. It's historically been very popular as a means of taxing the public without them realizing that's what you're doing. This probably not the space to get into all this but reading "The Creature From Jekyll Island" is a good start. That the major players in the banking industry got together in secret to write the Federal Reserve Act suggests who the system really benefits.

yetanotherphd 13y ago
Your theory lacks predictive power. There is huge debate about what inflation should be, and all you can say is "all the bad guys like inflation". The argument for inflation is very old, and goes back to Milton Friedman at least (who was no Keynesian).
- jswinghammer 13y ago
  Friedman was a Keynesian heretic. Instead of looking at aggregate demand he was looking at the total money supply. The basic problem is that he lacked an understand of the boom itself and focused entirely the bust's mechanics. The argument for inflation goes back much further than Friedman. Emperor Diocletian tried it and failed. Despots throughout history have attempted it as well and failed (eventually). Inflation "works" in the short term but eventually you pay the price for it in the form of a bust. I guess that the bad guys liking something isn't entirely sufficient but it should be fairly damning evidence.
- nazgulnarsil 13y ago
  The argument goes back to ancient Rome at least, with the devaluing of the denarius.
dwrtz 13y ago
Higher inflation also means that it's cheaper for the U.S. government to borrow money. In fact, higher inflation is good for anyone who borrows money (people with mortgages, student loans, etc.) because they're effectively paying back less than they borrowed.

noonespecial 13y ago

Sometimes inflation is good. Sometimes deflation. Sometimes even stagnation. Its all circumstantial. The starter motor in your car is very good for getting the engine running but pretty terrible if you try to drive around with it engaged all the time. We seem tragically bad at predicting what we need when and then doing it.

aortega 13y ago

Inflation is a tax. Its the result of somebody creating money from nothing (usually it's the government). Also, it's a great way for an employer to lower your salary by actually increasing it, by doing it at a lower rate than inflation. My country has a 25% inflation rate, that's going on for the last 4 years. Not pretty.

jswinghammer 13y ago
It is a tax. It actually occurs the moment anyone takes out a loan in a fractional reserve system. The money is created from nothing at that moment. Government just tends to borrow huge sums of money through this mechanism.
- nazgulnarsil 13y ago
  Thinking that loans are evil is where misean ideology really breaks down. If you give me a piece of paper that says you will pay me X dollars a month for Y months, that piece of paper has value depending on how likely you are to honor the obligation.
  - jswinghammer 13y ago
    Loans are not evil and I will challenge anyone who suggests that Mises or any other Austrian believes so. That loans under a fractional reserve constitute fraud is something that is debated a bit. I think at this point the consensus is that it does constitute fraud and should be illegal.
  - retrogradeorbit 13y ago
    In exchange for that piece of paper (promising money later), you have given me money now. The difference in what you have given me and what will be repaid is interest. It is the price of money and its purchasing power transferred through time, and it is the reward for lending. Now imagine your scenario where you go with your saved money looking for borrowers (people willing to write you that promissory note). But no one is willing to write you that promissory note, because the banking system is willing to lend to them whatever they want with a value of X so low that you find it not worth the risk. In fact the value of X is presently less that the pace of inflation (negative real interest rates). So now all the baby-boomers with their life savings can't earn a penny on it while bankers with printed fiat front run them in the money market. Inflation may be good for those excessively leveraged in debt, but it is equally bad for all those who have saved and are investing their earnings. It perversely rewards the over indebted and punishes the prudent saver. Interest rates ideally should be set by the market. In times of excess capital to invest, rates would be low. In times of capital tightness, rates would rise. In this way rates are a measure of the health and state of the capital and investment markets. Interest rate mechanisms are now so completely corrupted that there is not market mechanism left. Rates are not a measure of the economy any more, they are miss-set centrally and then the entire market distorts around them.

pasbesoin 13y ago

My personal opinion going into this mess was that, sooner or later, the U.S. was going to inflate its way to a lesser impact of existing obligations. As it became clear that the big banks would remain... "sacrosanct", I figured that the inflation would start once they were out from under their own balance sheet woes with particularly with respect to lower performing loans and paper built thereon. Et voilà. TL;DR: They've given the "big boys" time to prepare and position themselves. Now the screws get put to everyone else. P.S. By the by, have you been watching e.g. the price of many staples in the supermarket? (Not to mention gasoline, and a few other things.) For many "everyday" folks, inflation showed up already some years ago.

philwelch 13y ago
That's not inflation, that's the economic effect of the world starting to run low on petroleum.

Mikeb85 13y ago

Inflation encourages spending, rewards investment, and discourages hoarding of cash. Inflation leads to all the positive outcomes that economists want. Not to mention, inflation is necessary in a society with a growing population, since there needs to be enough currency to spread amongst the population, otherwise it will be held in a finite amount of hands, and increase inequality.

jayfuerstenberg 13y ago
You have a lot of learning to do my friend. Inflation steals purchasing power away from people who contributed their labor to the market in exchange for the money they received. The cash hoarding that inflation is supposed to solve continues because people want to hold on to their money in risky times. Smart people are moving away from cash assets and into precious metals and real estate. These are tangible things, unlike fiat currency that keeps losing value over time. The US dollar in particular has lost more than 90% of its value since abandoning the gold standard in the early 70s.
- Mikeb85 13y ago
  Really? Is this a joke or one of those terrible 'end-of-the-world' advertisements you hear on Bloomberg radio? Precious metals and real estate haven't done very well compared to equities in the last year or two... Yes, inflation reduces purchasing power if you assume that wages don't track inflation, but historically they do.
  - emperorhadrian 13y ago
    > Yes, inflation reduces purchasing power if you assume that wages don't track inflation, but historically they do. This is not only factually false, but if it were true it would invalidate the argument being made by the economists quoted in the NYTimes article. I strongly recommend that you read The Creature from Jekyll Island or other materials on the history of the Fed and its role in US monetary policy.
    - 13y ago

ndesaulniers 13y ago

Too bad my pay check is sticky. [0] [0] http://en.wikipedia.org/wiki/Sticky_%28economics%29 http://en.wikipedia.org/wiki/Sticky_%28economics%29

hudibras 13y ago

Any comment in this thread that doesn't contain the words "liquidity trap" can safely be ignored. I know that a lot of HNers don't believe that economics is a real science and would rather go with gut feelings or whatever Ron Paul says, but please take a few minutes to read the seminal paper on liquidity traps: http://www.brookings.edu/~/media/projects/bpea/1998%202/1998b_bpea_krugman_dominquez_rogoff.pdf http://www.brookings.edu/~/media/projects/bpea/1998%202/1998... You may not agree with it, but at least you can understand what the other side of the argument is. EDIT: Wow, this thread really brought out the goldbugs, bitcoin-ers, and the "FIAT MONEY!" crowds. Just need some mentions of Zimbabwe and wheelbarrows-full-of-Weimar-Republic-marks and I'll win this round of Economics Crackpot Bingo.

001sky 13y ago
I respectfully disagree. The purpose of inflation in this context is to "kill the debt", because the US cannot pay out $17T or even maintain interest payments, with "non-inflated" dollars. That is why all of this is just hand-waving and subversive, mis-directing PR. The reason Japan is such a bad example is precisely inflation. But its death-nell was asset inflation, not cpi. Housing stocks and Bank loans were massively overinflated and never allowed to correct. The notion that this "inflation" should have been corrected with "other inflation" is one of those laughable bits of rediculousness. Likewise, the US in a funk caused by Asset inflation. Fighting it with price inflation will be interesting. Take a look at the London property market. Do you think raising the price of consumer goods will help? Wont people just be encouraged to park their cash in property (ie, real goods?). Right now, they are trying to "make housing more affordable" by interest rate subsidies (inflationary). Doesn't seem to be making anything more affordable, though.
jayfuerstenberg 13y ago
I live in Japan and the Japanese government, under its Abenomics movement, decided on another round of QE and injected 20% more currency into the market earlier this year. I get that the yen is too strong and needs to weaken in order to protect the trade balance between itself and other countries. But the inflation eventually reached us consumers and every day items have gotten that much more expensive. Now my 10,000 yen only gets me ~8333 yen worth of stuff. If I could go back in time and not contribute the lost 1/6th of my savings in labor I might not be angry, but I can't. My salary isn't going up either and there is even talk of pay reduction due to a worsening economy. So to protect myself my choices seem to be: 1. Buy things up before the inflation reaches me as a consumer, passing the purchasing power theft on to the merchants. (possible, but I blow all my money away) 2. Convert that currency to something else that hedges against inflation (and retains its value over time) if I want to not spend it. I chose #2 in the form of gold. If you want to call me a goldbug, go ahead. I'm getting into REITs soon too so maybe you can come up with clever derogatory name for that as well. I'll try to help you win your bingo round.

emperorhadrian 13y ago

Great news for bitcoin owners.

enoch_r 13y ago

Absolutely no discussion of inflation is complete without recognition of the fact that inflation and inflation expectations are at historically low levels[1] right now. Economists aren't arguing that we should inflate our way out of debt--they are arguing that we should return to the historical norm. Of course, it's possible that these economists are secretly just pushing inflation as the "hidden tax" we're all up in arms about. But I find this unlikely. I find it far easier to believe that most economists actually believe that moderate inflation is good for the economy. Why do economists believe this? Prices are sticky, and some prices are stickier than others. Prices for labor are especially sticky, which means that when growth expectations fall, it's very difficult to decrease wages, which in turn makes it difficult for supply and demand of labor to balance. In the Cliff Note version, inflation helps because people are willing to take real pay cuts when they're disguised as a nominal pay increase. There's a vicious cycle during a recession, where falling output causes the price level to fall, which in turn causes more imbalance in the labor market. It's important to recognize that the standard argument for inflation has literally nothing to do with "the government printing money to pay for things." Does the US government make money from seignorage? Yes, it does. Is it a significant source of income? No, not in the context of US government spending or revenue--it's roughly $30 billion dollars a year. Are these crazy inflationary economists suggesting policies that would increase seignorage to a significant level? No, they're not. Finally, most of these arguments are disputed by the so-called "Austrian school" of economics. It's important to recognize that this school is much, much, much more popular with laymen than with professional economists. This doesn't mean that the school's arguments are wrong, but it does raise questions about why the school's arguments which seem so utterly convincing to so many people, don't manage to gain many converts among people who research the subject professionally. Once again, I don't find "conspiracy" a particularly good argument. [1] http://www.clevelandfed.org/research/data/inflation_expectations/archive.cfm?dyear=2013&dmonth=9 http://www.clevelandfed.org/research/data/inflation_expectat...

ra 13y ago
My (layman's) understanding of it is that central banks seek to keep inflation within a target range; in Australia this is between 2 and 3 percent [1]. The primary tool to manage inflation is interest rates, however interest rate movements also have other effects, positive and negative, so it's not as simple as turning on a tap. It's important not to let inflation get too high because that makes new investment unattractive, the cost of living go up, and retirement savings worth less. [1] http://www.rba.gov.au/inflation/ http://www.rba.gov.au/inflation/

Mikeb85 13y ago

By the way, for those who believe wages don't track inflation, they do. http://en.wikipedia.org/wiki/Household_income_in_the_United_States http://en.wikipedia.org/wiki/Household_income_in_the_United_... http://www.advisorperspectives.com/dshort/updates/Household-Income-Distribution.php http://www.advisorperspectives.com/dshort/updates/Household-... http://en.wikipedia.org/wiki/File:Median_US_household_income.png http://en.wikipedia.org/wiki/File:Median_US_household_income... Argue about the merits of inflation all you want, but I see a ton of 'facts' being thrown around which simply aren't supported by historical numbers...

codex 13y ago

Mild inflation promotes growth by encouraging money to be put to use rather than sit idly in savings. Banks make more aggressive loans to keep yields high.

jayfuerstenberg 13y ago
Inflation can take a long time to trickle out from the major banks and lending institutions and down to businesses and finally down to average consumers. What no economist can tell you though is how those irrational consumers will truly behave. If you throw more money at me, I'm not going to spend more money, I'm probably hold on to it and invest it in other assets. I guess I'm breaking the system.

Houshalter 13y ago

>Rising prices help companies increase profits I don't get this. It's people spending more because they have more money through inflation that increases profits. Not prices themselves getting higher, that's just the affect. In any case what does it matter since you have more money, but money is worth that much less. The total wealth is the same. >rising wages help borrowers repay debts. Right but it's a zero-sum game. The borrower benefits but the lender loses. Also only works once. If lenders know there is a chance of inflation they will proportionally raise their interest rate they are willing to lend at to make up for the risk. Inflation is just a tax on the entire economy as everyone that owns money loses some of the value of their money. In the case of printing money, all that value goes to whatever group receives the printed money.

acslater00 13y ago

I'm happy to see this article written, and it will hopefully start to change the attitude of evaluating central bank actions through the lens of 'high inflation bad, low inflation good'. This whole debate is an unfortunate example of what's called "Partial Equilibrium Reasoning" (as opposed to "General Equilibrium Reasoning"). All things being equal, higher inflation is bad. That's clear. But all things aren't equal, and so appeals to logic about how inflation is a hidden tax on 'the people' and so forth are essentially worthless when applied to real-world situations. Here's why. One weird thing about inflation is that inflation expectations become a self-fulfilling prophecy, because when people predict inflation, they demand escalating prices on things like 10-year leases and labor contracts, and when they don't predict inflation, they don't. The situation today, in 2013 America, and not fake-year hypothetical-country in your economics textbooks, is that inflation expectations are extremely low. They are low because inflation is essentially a by-product of economic expansion, and most people predict that economic expansion will be weak for the foreseeable future. As it turns out, the reverse of this is true. If people expected the economy to start growing strongly, their inflation expectations would likely rise, which would probably be enough all-on-its-own to cause inflation to rise. Weird, right? So it turns out that if the economy were to strengthen, one thing you'd notice in the data would be slightly higher inflation. And you'd go, "Well that's no good, but at least the economy is improving!" And you would be looking at a General Equilibrium in which most people are better off even though inflation is slightly higher, because many other things (Nominal Growth, Real Growth, Unemployment, Long-Term Interest Rates for savers) would be moving in the _good_ direction. This dynamic is why the Fed needs to break the attitude that its job is to keep inflation as low as possible. The worst thing that could happen in the above scenario is for people to think 'Uh oh, inflation is going up, that means the Fed will probably raise interest rates', which would have the (expected) effect of reducing economic growth. But we need growth! And we need to accept that a few percentage points of inflation will be a by-product of that in a healthy economy. So to summarize, the issue here is not that inflation is good. It's that there is more to this picture than inflation, and that if you have a dogmatic belief that inflation is evil in all situations and should be avoided, you've probably read too much Hayek and it has melted your brain. [sorry, had to drop a snipe]

clarky07 13y ago

johnnyg 13y ago

Debt is not prosperity. QE Infinity policies will devastate the US economy and cost us our reserve currency status.

dpatru 13y ago

The big-picture argument this piece is making is that counterfeiting money is good for society. In this case, a central authority (the Fed) is doing the counterfeiting, but nothing in the article explains why the beneficial effects would not also accrue when individuals do the counterfeiting.

dgregd 13y ago

It seems that FED is clueless why inflation is low even after QE3. The real question is how FED is going to stop inflation increase after they reach the goal of 2-3%.

kriro 13y ago

I've always wondered about the relation of inflation and innovation. As long as a society is sufficiently innovative inflation is not a big deal because innovation tends to outpace it. This is especially interesting if you measure inflation in relation to some basket of goods that contain a good chunk of "hightech" items. But it's also relevant for more traditional items like bread due to improvements in agriculture tech etc. The interesting question is of course if a policy that tends to favour inflation also tends to favour innovation. It should because (artificially) low interest rates should c.p. lead to more long term R&D type projects being funded. (all imo, I'm not an economist) I am aware that the Austrian School gets a pretty bad rep these days but as a curious citizen of the world I have read a couple of Austrian books (Human Action, Competition and Entrepreneurship) and even if you disagree on the content I find them very pleasant...aesthetically if that makes any sense.

penguindev 13y ago

"Economists aren't arguing that we should inflate our way out of debt--they are arguing that we should return to the historical norm" The historical norm IS inflating your way out of debt. You just contradicted yourself. Seriously, do you think debt gets REPAID?