resist, the fact that you even mention core inflation tells me you have to hit the books a bit.
If you have a problem with core inflation, tell me what it is. When price inflation moves a great deal above or below core inflation, it tends to be temporarily at that level and will quickly move in the other direction.
- Problem with core:
http://www.lewrockwell.com/orig6/karlsson1.html
http://mises.org/daily/2302/media.aspx?action=author&ID=450
- A link, please, to elaborate on your last sentence?
I know what stagflation is.
The Nixon years did not have a depression. They had a recession. A depression is a more than 10% fall in economic activity. Depressions have been rare after the 19th century.
Nowhere did I deny that recession and inflation can’t happen together. And no, I do not expect hyperinflation to coexist with booming economy at all.
Depressions are quite rare. Hyperinflation is quite rare. Never ever have both taken place together. Show me one instance of both a >10% fall in business activity and >100% inflation happening in an industrial western country.
Hard to find the stats, Prateek. Wikipedia on Hyperinflation has a long list of countries that had hyperinflation, including first world countries, and very wealthy countries. Didn’t see the unemployments stats, and haven’t the energy to find them.
Ok, glad to see we agree on most points.
Of course, it’d be extremely unlikely to experience a (nominal) depression and hyperinflation if you keep measuring business activity in inflated currency. If inflation is 100% and business activity (measured in inflated currency) is flat then wouldn’t that be an actual “depression” of activity by 50%? Or am I missing something?
Prateek,
Even under Volker and Greenspan, the Fed was independent in name only. It has always been independent in name only because the president ultimately controls the make-up of the Board of Governors.
When Volker raised rates, he was not acting independently. He acted with the support of the Carter and Reagan administrations, as well as Wall Street. At the midpoint of his presidency, Carter changed course and wanted to tame the inflation he himself had exacerbated by appointing G. William Miller. Later, when some congressmen called for Volker’s impeachment because of their opposition to his tight-money policy, only the support of the Reagan administration kept Volker his job.
In the case of Greenspan, he partnered with Clinton because he wanted to be re-appointed. Greenspan pursued a relatively loose monetary policy to accommodate Clinton and in some cases advocated even looser monetary policy than Clinton’s own appointees. The myth that Alan Greenspan is a conservative perpetuates only because Greenspan calls himself a conservative. His actions illustrate the opposite. He is an opportunist who will pursue whatever actions expand his power.
In any event, I do believe that hyperinflation will most likely not ensue because before it does, as in the case of Carter in the 1970s, the government will finally see the folly of money printing and appoint a Fed chairman who will pull away the punch bowl. As in the case of government in the 1970s, the government will finally see this folly not because it will suddenly understand Austrian theory but because it will see incipient hyperinflation as a threat to its own power and the stability of Wall Street. At this point, however, pulling the punch bowl away will most likely result in a much worse depression than that of 1981-82 (and, yes, unlike you, I do consider that period a depression).
Therefore, though I agree that we will probably not see hyperinflation, I disagree with your assertion that the avoidance of hyperinflation will result because of Fed independence, and I also disagree with your peculiar definition of “depression.” The term “depression” is a euphemism for a bad economy. It has had several names throughout the decades – first, “panic” was considered too harsh, so it was changed to “depression.” Then, obviously, that term was too harsh, so it was called “recession.” Then, that term was too harsh, so we got “down turn.” Finally, “down turn” and even “slow down” became too frightening, so for the past three years of our miserable economy, we have been in a “recovery.” Yes, some depressions (or whatever you want to call them) are worse than others, but they are all bad, and quibbling over what to call them because of their severity is beside the point.
classic
So none of you guys believe the stuff Peter Schiff and Doug Casey are talking about?
- Just saw a great line in Hazlitt’s book on inflation, quoting Hans F. Sennholz:
If a government resorts to inflation, that is, creates
money in order to cover its budget deficits or expands
credit in order to stimulate business, then no power on
earth, no gimmick, device, trick or even indexation can
prevent its economic consequences. If by way of infla-
tion government spends $10 billion in real goods, capital
or labor, someone somewhere must forego $10 billion
in real resources. It is a fundamental principle of infla-
tion that there must be victims. Indexation may shift
the victimization; it cannot prevent it.
In other words, every QE is making us forego real resources. Since it’s not doing it by taking the dollars out of our pockets, it must be doing it by reducing the purchasing power of those dollars.
- All the posters here seem to agree on the economics involved. The question is one of trying to peer into the muddy depths of the minds of those people with their finger on the print money button. Will they try and save their skins by being responsible, or will they think they can lie their way out of it?
Dave- I think we can agree that in any outcome of the current circus, you want to make sure you have guns and gold…or maybe even golden guns.
Then you can eat and protect yourself!
It’s not that simple, really.
By how much do you think that interest rates have to be raised? Do you really believe that investors will start buying US debt again if they raise it by 1%? What happens if they have to raise it by 6; 7 or 10%? How that much interest will be paid if not by inflating more?
Hey, did you hear about how they want to raise the debt ceiling again? How much you wanna bet they’ll play the “no unemployment/welfare benefits” card? It is such marvelous fun to watch this country eat itself alive sometimes. However, I have not yet made the hyperinflation proclamation, so no worries there. Single digits for the time being. Possibly double, if you all behave.
Because I am a consumer, and as we all know, this problem is the consumer’s fault.
We are already at the beginning of a stagflation period. It remains to see what will happen next but if nobody can possibly know.
There are so many variables to be considered in a world economy. For example take Japan: last year they stepped up their purchases of US Treasury bonds and were set to overtake the People’s Bank of China (PBC) as the first holder of dollar denominated junk bonds in June-July. They also promised the EU to buy a whooping 20% of the new “eurobonds”. But the past earthquake put everything on hold. Will Japan keep on buying at this rate? They don’t need to stop buying bonds altogether: a slight decrease will be enough to send both the US and Europe into serious troubles given the sums involved. That would mean either budget cuts or (much more likely) more “quantitative easing” if China, Russia and India don’t agree to take Japan’s place beside their “normal” purchases.
And then there’s China. The housing bubble is ready to burst. I personally believe China can take the hit financially but I have doubts about its social stability. Even if China wants to give the impression of a monolithic police State ready to squash any sign of uprising its stability depends far too much on being able to supply its inhabitants with constantly improving living conditions. Despite the PBC raising interest rates, price inflation is heating rapidly in China. A housing bust could easily create millions of unemployed in a matter of weeks. And given the fact most Chinese industries (especially the ones more involved in the housing business like steel mills, cement factories etc) already have a huge overcapacity… well you take the hint. Given how fragile the present financial system is the shockwaves would be felt all over the world.
But ultimately the fate of the West lies with the West. It’s still not too late to take extreme measures to avert the incoming slow slide into oblivion (“This is the way the World ends, not with a bang but with a whimper”) but I see no signs of somebody willing to pull the brake. French and US politicians may be ready to start a war at minute’s notice but completely lack the will to slash budgets or increase interest rates, the two only things that could save us right now. Their careers depend on it: their voters expect, nay, demand “free stuff” and it’s even unthinkable to touch the omnipotent public sector workers.
Last time we had a stagflation it took a drastic interest rates hikes, a double digit recession and the iron will of Paul Volcker and the Bundesbank to get us through. Given how bad the present situation is I say we would be lucky if we get off that easily this time.
No.
Peter Schiff predicted there would be hyperinflation last year and before.
I generally write “Discredited” next to the name of any person who predicts imminent hyperinflation, and that includes Marc Faber.
US has been in minimal price inflation compared to most of the world, for a decade, for heaven’s sake. You Americans might consider worrying about hyperinflation AFTER you reach double digit inflation and AFTER it shows no signs of subsiding. But not right now at <3%.
Sure, there has been minimal price inflation. But that’s because the Dollar is the reserve currency and foreign countries have been swallowing all the newly created Dollars. It’s like there’s this artificial demand for Dollars. But once they loose faith in the Dollar, it is just going to implode unlike anything we have ever seen before. At least that’s what the internet says. The US government needs to print like a trillion every year just to service it’s debt and keep the machine running. But with the loss of the status as the reserve currency, there’s just no market for all those Dollars. The only thing that currently keeps the Dollar afloat is foreign governments buying our debt so the world economy won’t disintegrate.
Look at what Robert P. Murphy, economist with the Mises Institute, wrote on March 27, 2009:
It would not surprise me at all if the national unemployment rate and the annualized rate of consumer price inflation both broke through into double digits by the end of 2009.
Seems like he’s been proven wrong.
Unemployment rate, December 2009: 9.7% Source:http://www.google.com/publicdata?ds=usunemployment&met=unemployment_rate&tdim=true&dl=en&hl=en&q=current+unemployment+rate+usa
Inflation rate, December 2009: 9.68% Source: http://www.shadowstats.com/article/272-december-cpi-industrial-production?hldiv=cpi_3#cpi_3 [In section "Alternate Consumer Inflation Measures].
So yes, he was wrong by a third of a percent.
A third of a percent is a lot.
It’s 33 basis points, to use financial markets terminology.
33 basis points is a difference of ~300,000 workers being employed or unemployed.
33 basis points is a difference between a DVD being priced at $17.99 and a DVD being priced at $18.06.
Good call, Sukrit.
The future is almost completely uncertain, and predicting it is as hard as it is for Austrian economists as it is for any other orthodox or heterodox economist.
It’s a bad idea to make any bold prediction, and I feel that distinguished Austrian economists can not both a) emphasise uncertainty as being central to their ideas, and b) not recognize the same uncertainty when they try to predict the near future.