Friday, February 23, 2018

#3 A Non-Issue: Inflation

A common objection to the previous descriptions of money technology is that “B...but if you just print money, you’ll get [gasp!][hyper-] inflation!”--never mind that creating money out of nothing is the norm now for any money in the economy.

Government money creation could theoretically create inflation since real goods and services are limited, while government’s ability to create money is not. Government could bid up prices, competing with the private sector for limited goods and services, and win every bid even if it meant prices rose. In other words, theoretically, government spending could cause inflation. It just never happens in reality.

First, notice that the bidding process is absolutely necessary for the inflation to occur. Simply creating a lot of money then squirreling it away (or paying off loans with it) does not bid, and does not cause inflation.

If Treasury were to mint a few trillion-dollar coins--something it can literally and legally do--then deposit them at the Fed, the government’s balance sheet could move from “deficit” to “surplus” without any impact on the economy because there would be no spending--demonstrating that the panic about the “debt” level is overblown. Spending occurs at the beginning of debts, when they are initiated, in any case. Loan payoffs are, in effect, “un-spending” since they remove money from circulation in extinguishing the IOU.

Similarly, no inflation resulted from the $16 - $29 trillion the Fed produced in 2007-8 to rescue the financial sector from its own frauds. Why? That money mostly paid off loans (actually it provided overdrafts for counterparties of creditors no longer willing to believe their debtors had sufficient assets to pay their obligations).

Another non-inflationary policy: a job guarantee. Without raising taxes, government could employ everyone currently unemployed who wanted a job, and since no one else is bidding for the unemployed, by definition, no inflation would ensue. The U.S. has already done something like this with FDR’s WPA which was part of the recovery from the Great Depression.

In any case, no historic episode of hyperinflation was ever caused by printing lots of money.

"Not a single one of … 56 cases [of hyperinflation documented by a recent Cato study of such episodes] were caused by a central bank that ran amok. In virtually every case, the inflation was not caused by too much money but too few goods." Farming collapsed in Zimbabwe, France annexed the industrial Ruhr depriving Weimar Germany of goods.

"Inflation is overwhelmingly driven by cost-push variables... Printing money just doesn't do it. If it did, Japan would have exploded decades ago, because they've been trying quantitative easing for nearly 20 years, and they can't move the needle on inflation. We've been trying it here in the U.S. for about five years, and Bernanke can't even hit his 2% target." - Stephanie Kelton October 2013 (She is Bernie Sanders’ former Senate budget committee economics advisor, and cites a Cato Institute study. Cato is a libertarian think tank, funded by the Koch brothers, so no tree huggers here.)

Late breaking news: Ms. Kelton gets a NY Times op-ed.

Just so we’re clear: Weimar Germany did print lots of money during its 1920’s hyperinflation, but that did not cause the hyperinflation, just as the $16 - $29 trillion the Fed issued in 2007-8 didn’t cause a surge of inflation. Printing money alone doesn’t cause inflation. Typically, such inflation originates with a shortage of goods, perhaps even essential commodities (e.g. oil in the ‘70s). That’s true of the hyperinflation episodes cited by Cato above. For a comprehensive look at the mechanics of inflation by heterodox economics, here’s a highly recommended article. A little technical, but really the complete story.

Notice that the mainstream media narrative about inflation makes the population expect more inflation than actually appears (Stephanie Kelton calls the programmed reaction “Pavlovian”... and I agree.):


In my experience, it’s probably hardest to persuade the public to accept that, while it can potentially limit the fiscally-unconstrained spending of a monetary sovereign, inflation has not been a problem initiated by “printing” money. The current narrative sold by mainstream media and the advanced form of superstition promoted by orthodox economics is difficult to dislodge. Manufacturing that narrative is therefore extremely important in maintaining the status quo. The Kochs spent nearly a billion dollars in the 2016 elections promoting just that story.

If you, dear reader, retain some skepticism about what I’ve said above, You might ask yourself where are the warnings about deflation? It’s far closer to what’s happened recently--see oil prices, and house prices in 2007. Financial assets have been spared deflation by the Fed’s purchases (“Quantitative Easing”) that prop up asset prices, and the Fed still has $4 trillion of private assets on its books. The Fed does announce it’s going to sell those assets (called “the taper,” and the markets’ response was called “the taper tantrum”), and raise interest rates, but so far hasn’t done this.

Deflation is far more harmful to the economy than inflation--which, to be fair, harms creditors and savers--since inflation allows debtors cannot pay their debts off with cheaper money. Deflation is what we call the Great Depression and phenomena like it.

Inflation remains a non-issue when we have plenty of unemployed people and factories. Labor participation remains low, and factories are currently at about 76% of capacity. That means there is a lot of room for expansion before shortages of goods, and the accompanying upward price pressures occur.

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