Mr. Samuelson had an intresting post “Inflation is not the Answer” in the Washington Post. I have long been pondered as to why we have had perpetual inflation. Over the past couple of years that has become obvious, the FED has promoted inflation. But, I am not making my comments here in opposition to the FED. My interest, is embedded in Samuelson’s analysis that inflation can be “good” as an economic stimulus.
Mr. Samuelson correctly identifies that inflation can stimulate the economy since it promotes the use of debt where the debtor can payback the loan with ever “cheaper” dollars. While that is true, it is akin to being a drug addict, you need continued “doses” to keep moving forward. Furthermore like a Ponzi scheme, what happens when the music stops?
I will advocate that under (blame) Bush the music stopped as expressed by the financial bubble that Bush and the supply side economists created by over stimulating the economy.
Basically, society can only consume so much. When society consumes whatever that consumption value is, they will stop buying. Furthemore there are aslo structural issues, older people buy less. Many pundits have mentioned this on both FOX and CNBC but they never ever seem to relate the concept of consumption as an explanation for our current economic malaise. I cover this in my post “The Source of Our Economic Malaise”.
Basically, I am opposed to a money policy that would encoourage inflation. Deflation is also a normal economic event. Want affordable housing, let housing prices fall!!! Don’t keep them artificially high. So what is thought of Austrian Economics on whether inflations is desirable or not?
I would assume that anything that distorts the true value of money would be frowned on.
This is not true. Demand for goods is unlimited. By definition, people always prefer more of a good to less.
The problem is not that “people can only consume so much” the problem is that private individuals can only take on so much consumer debt, even at artificially low interest rates. As this limit is reached, the central bank and the commercial banks have nowhere to hide the continual expansion of credit, so more and more of the credit expansion comes in the form of purchasing public debt, which is a form of naked money-printing. As long as consumers take on more debt while the banking system is expanding credit, the inflationary effects of the credit expansion are less noticeable but when consumers can no longer take on more debt, the credit expansion begins to have a noticeable effect on price levels (aka “inflation”).
Clayton -
With increasing population, it can be argued that consumption has no limit. To a degree, since I did use the word “society”; I was not clear.
If you have unlimited money you might think that you can buy buy buy. To a degree that is true, but think of it this way : You can only consume so many calories, so that constitutes an upper limits of a sort. You might like to buy one car, maybe two, but a third car even with unlimited money? Maybe not.
The so-called stimulus that (blame) Bush and Obama have pushed, I believe are failing for that very reason. You are correct that credit expansion/printing money creates inflation.
An individual’s demands (irrespective of population) are unlimited. With enough wealth, you could buy the state of Rhode Island and turn it into your own personal park/preserve. The point is that there are no limits to what people demand. There are no limits to what people can and will consume if they can afford it.
Your language makes it out like we’ve all been stuffed full of too many burgers and, since we just can’t bring ourselves to eat one more burger, demand begins to decrease. Recession is not the result of feelings of guilt or satiation from an excessive binge - it is the result of the unwillingness of borrowers to continue loading themselves up with debt. In other words, borrowers are acting rationally. Yes, even the unwashed masses understand that there is a limit to how much debt they can reasonably take on. Credit begins to contract as old loans begin to be paid off faster than new loans are being made. This unwinding process causes a contraction in the money supply which revaluates the currency. This makes the government’s debt more costly as it begins to have to mail out bigger checks to private bondholders (the Fed holds and rolls over bonds for free) and causes a reduction in wages and other prices. This puts the government’s cashflow in a vice as tax revenues from paychecks get smaller in nominal terms while their interest payments increase and their other expenditures (e.g. military, SS, medicare) remain fixed or gradually increase. Even worse, many investments made during the boom turn out to have been mistakes and a process of “bitter-end liquidation” begins if the central bank does not intervene. This causes jobs to be lost as businesses are shuttered and surviving businesses cut labor costs as a precautionary measure in preparation for bad economic weather ahead. Government revenue now takes a double hit as not only are paychecks smaller in nominal terms but there are fewer of them to tax.
Clayton -
At least we can agree that once a certain level of debt is reached, the focus in on servicing the debt rather than increased consumption.
“More ominously, the once sturdy optimism of Americans appears to have crumbled, according to one key measure. Breaking from precedent, Americans no longer believe they will make more money next year than this year, according to the University of Michigan’s Surveys of Consumers. These expectations used to rebound after recessions; this time they didn’t.” (Emphasis added).