The one question I have had the most trouble with in my studies of economics is the medium term prospects for inflation in the US. Here’s how I see it so far - feel free to shoot me down on anywhere you think I’ve gone wrong.
For the past couple of years the rate at which new loans have been taken out is far exceeded by the rate of existing loans being paid back or defaulting. This on its own will naturally cause a big drop in the money supply (for the sake of argument lets call this “natural deflation”). Ben Bernanke believes (rightly or wrongly) that a reduction in the money supply is a bad thing and is doing everything he can to stop it. He essentially has two tools to do this:
Trying to encourage (force?) more lending.
printing money (increasing M0?).
At the moment many people are saying that the size of the “natural deflation” phenominon is so gargantuan that Ben can not possibly succeed. While others may say “but Ben can print as much money as he likes, so he can virtually guarantee to succed”.
My question now is: can Ben politically get away with printing so much money. i.e. won’t there come a time in the future when the rate of creation of new money by Ben will be so conspicuously large that even the mainstream neo-classical guys, and the population at large, will start saying “hey, this is embarrassing - this can’t be right - it feels like zimbabwe - this is going to end badly”. Is there any chance that Ben will be forced to turn off the printing press before the “natural deflation” has been fully played out thereby leading to deflation?
So presumably you’re saying that Austrian economists have no idea whether we’re heading for inflation or deflation… Unless of course the determining factors are different to the ones I’ve discussed.
There is still something you have not made clear. You could be saying one of several things:
This thing about bernanke’s likely action is the crux of the inflation/deflation debate and Austrian school economists have no clue what he will do so nobody knows the answer.
This thing about bernanke’s likely action is irrelevant because there is a tidal wave of other factors which are much more important and the Austrians know all about these other factors and know that there will be inflation.
This thing about bernanke’s likely action is irrelevant because there is a tidal wave of other factors which are much more important and the Austrians know all about these other factors and know that there will be deflation.
Something else.
By the way, I note that Peter Schiff seems pretty confident that Ben will “go all the way” with the money printing and will create very high inflation somewhere down the line.
Marc Faber agrees. However, neither of these guys are right 100% of the time.
No one has any clue what he will do, not just the Austrians. To claim otherwise, would be a claim to prescience. Respect the boundaries of knowledge. All of this guesswork is just mental masturbation by millions of online investors who treat the command economy like a sporting event.
AE will help you understand what the consequences of his action may be, but they in no way claim to be able to predict the future. On the contrary, AE supports the notion that it is impossible to ascertain the exact actions of individual actors, and hence central planning and command economies are prone to failure due to cumulative calculation errors.
I don’t understand. How can a set of economic ideas be of any use if it makes no predictions? If it makes no predictions then how can it guide descisions about what to do? To say “the economy will work better if you do X” implies a prediction about the future state of the economy. Your position seems preposterous.
“Is there any chance that Ben will be forced to turn off the printing press before the “natural deflation” has been fully played out thereby leading to deflation?”
As liberty student was saying, no one can answer this question as phrased with any certainty.
Is there a chance Ben will be forced to “turn off the printing press?” Sure, there is a chance that anything could happen. But I don’t see how this is helpful.
I suppose what you are really asking is something along the lines of… If ben were forced to stop increasing the money supply would this lead to deflation? Or, if ben wasn’t stopped would this lead to inflation?
As far as I’m aware the fed isn’t increasing m0 but is increasing m1 on up through demand deposits.
If Ben did stop increasing the money supply would there be deflation? Yes
If Ben doesn’t stop increasing the money supply will there be inflation? Yes
Economics isn’t a guide as to “what to do” because value is subjective. If value were objective, then it would be a guide as to “what to do”. Since different people want different ends, they can use the theory to try to reach a certain end, or they can use the theory to help in predicting the future of the economy.
It doesn’t say “A person should do X if the situation is Y to reach end Z because Z is the best” but rather “A person should do X if the situation is Y to reach end Z”. It all depends on subjective value theory.
Maybe I’m answering my own question here, but let me express my thoughts in another way…
At the moment the US is printing money (M0? M1?) in huge chunks while at the same time the other part of the money supply (the debt componant) is shrinking dramatically. Right now they two rates are approximately equal (I think)… but the rate of fall of the debt componant will, at some point in the future (not sure when), slow down and eventually stop (by definition it has to stop completely when all debts are paid back - but I don’t think it will ever get to that point). Now the crunch comes when the rate of fall of the debt component becomes small. The problem is that in order to keep the money supply constant Ben will have to slow down the rate of printing new money (M0 M1?) … but I think he can not slow down! He has to keep printing new money at a high rate to make up for the annual budget deficit. So eventually inflation will hit.
Wow… I thought that mises.org would be full of 9th dan black belts in monetary theory. I thought that was one of the major things that Austrians paid attention to (correct me if I’m wrong). And yet there seem to be a staggering lack if interest in this burning issue
Your last post before this one showed that you have such a terrible inapt knowledge of monetary theory that even if you were our opponent you wouldn’t even know how to defend your own case. It’s obvious that your extremely ignorant on the topic, no offense. Your posting on a forum whos site contains probably terabytes of data regarding the subject of monetary theory. Rather then using the tools we provide for free you come here to critisize us because people are at work and won’t immediately respond around your schedule.
If your are not literate and cannot read a little of the material we have provided than you will just have to sit tight and wait.
You would be doing us all a favor if you actually researched the material first then posted your confusion here after you have a solid grasp of what monetary theory is.
Your like trying to pick apart parts of the quadradic equation with no concept of the Order of Operations.
