I apologize if this has been covered and I missed it, but what is everyone’s opinion on Gary North’s claim that the Fed is not inflating? I recall a recent Mises article about how the Fed cannot do what they wish at the moment because the markets will just not take the extra credit. But this does not seem to be universally accepted by Austrians at the moment. This has obvious implications on the booming commodities market and the dollar. Peter Schiff certainly thinks the Fed is still running the presses. So, is the Fed inflating, or do they wish to inflate and simply cannot?
The Fed would LIKE to inflate. But clearly they are not succeeding at it. The M1 money supply is clearly on the decline. The market clearly is saturated by credit, which is why the money supply is actually in a minor contraction.
So to answer your last question, NO, the Fed is NOT inflating, but they DO wish to inflate but cannot.
The whole argument appears to be based on M1/CPI, which is nonsense unless one assumes that wealth is a zero sum game, and that preferences don’t change. Economic growth causes price deflation, monetary expansion causes price inflation; if the former matches or outpaces the latter, that doesn’t mean there’s no monetary inflation. Also, the CPI is just a price basket, it only takes into account the price of some things, so it doesn’t even really measure price inflation; the CPI captures a little bit of price inflation, but mostly it captures changing preferences between the consumer goods it tracks and other goods which it doesn’t track.
I came to the Austrian tradition by way of the Supply Siders (Wanniski branch originally, then studied with Mundell at Columbia). One of the major criticisms of Austrian economics by the Supply Siders is that, allegedly, too much emphasis is placed on the “Ms” side of the P=Ms/Md equation (i.e. the various monetary aggregate figures, e.g. M1) and not enough on the “Md” side, which the Supply Siders feel is quite variable (and often severely altered by faulty fiscal policy). This IMO is the case here – North is equating lower Ms with deflation, and is apparantly not accounting for the slower economy’s reduced demand for money. Or maybe he is… I don’t want to put words into his mouth and I’m only marginally familiar with his argument. But IMO the only way to reconcile this rising “price level” (so to speak, as shorthand for the observed recent rise in many individual prices, e.g. commodities, foreign currencies) with a decrease in Ms is to assume an even stronger decrease in Md. Not a surprise, with the economy in recession.
Note that P=Ms/Md is revealed to be technically wrong when evaluated via methodological individualism, but it does show the proper conceptual relationship even though the “price level” doesn’t actually increase or decrease proportionately, as the “equal” sign implies.
From what I understand the Fed is injecting money over here while simultaneously removing it over there with here and there being relative terms.
The banks are also de-leveraging which is causing a drop in reserves and a resulting drop in the money supply.
I don’t agree with his assessment that there is no price inflation since prices didn’t keep up with the past monetary inflation and are doing so now. I read a piece that had a theory that there are three stages of price inflation with the last being people lose confidence in the dollar and drive the price of commodities up as they ditch the currency which seems to be happening now.
Maxpot, that is an odd criticism and one I was unaware of, given how much Mises emphasized that both demand and supply play a role in the value of money. Perhaps the Supply Siders have in mind particular theorists? It might pertain to the fact that Austrians consider Md very hard to measure.
Sorry, I didn’t mean that the Supply Siders criticize Mises for that error. Mostly that accusation was leveled at modern Austrians in their analysis of current events (e.g. about 4 years ago there was a disagreement between the Austrians and Supply-Siders, the former asserting that there was monetary inflation due to increase in monetary aggregates, the latter asserting there was a monetary deflation due to decrease in the price of gold). All of the Supply Siders whom I know personally hold Mises in extremely high regard (including Wanniski and Mundell). IIRC it’s mostly Rothbardian thinking that they have a problem with, as he asserts in his famous SWF paper that the government is ALWAYS a negative deviation from the best allocation of resources, whereas Supply Siders think it’s a matter of diminishing returns and that government does serve a purpose to a point.
The fact that Austrians consider Md very hard to measure is something the Supply Siders note, but for SSers the price of gold is the only really important measure of inflation/deflation precisely because of it (the thinking being that the current observed relationship between Ms and POG reveals Md). I should note that this is Wanniski’s position… Mundell thinks the POG is a VERY important measure but not the only really important one.