In Fed and Out, Many Now Think Inflation Helps | Hacker News Reader

In Fed and Out, Many Now Think Inflation Helps

nytimes.com

57 pointsapplecore231 comments

Absolutely no discussion of inflation is complete without recognition of the fact that inflation and inflation expectations are at historically low levels[1] right now. Economists aren't arguing that we should inflate our way out of debt--they are arguing that we should return to the historical norm. Of course, it's possible that these economists are secretly just pushing inflation as the "hidden tax" we're all up in arms about. But I find this unlikely. I find it far easier to believe that most economists actually believe that moderate inflation is good for the economy.

Why do economists believe this? Prices are sticky, and some prices are stickier than others. Prices for labor are especially sticky, which means that when growth expectations fall, it's very difficult to decrease wages, which in turn makes it difficult for supply and demand of labor to balance. In the Cliff Note version, inflation helps because people are willing to take real pay cuts when they're disguised as a nominal pay increase. There's a vicious cycle during a recession, where falling output causes the price level to fall, which in turn causes more imbalance in the labor market.

It's important to recognize that the standard argument for inflation has literally nothing to do with "the government printing money to pay for things." Does the US government make money from seignorage? Yes, it does. Is it a significant source of income? No, not in the context of US government spending or revenue--it's roughly $30 billion dollars a year. Are these crazy inflationary economists suggesting policies that would increase seignorage to a significant level? No, they're not.

Finally, most of these arguments are disputed by the so-called "Austrian school" of economics. It's important to recognize that this school is much, much, much more popular with laymen than with professional economists. This doesn't mean that the school's arguments are wrong, but it does raise questions about why the school's arguments which seem so utterly convincing to so many people, don't manage to gain many converts among people who research the subject professionally. Once again, I don't find "conspiracy" a particularly good argument.

[1] http://www.clevelandfed.org/research/data/inflation_expectat...

My (layman's) understanding of it is that central banks seek to keep inflation within a target range; in Australia this is between 2 and 3 percent [1].

The primary tool to manage inflation is interest rates, however interest rate movements also have other effects, positive and negative, so it's not as simple as turning on a tap.

It's important not to let inflation get too high because that makes new investment unattractive, the cost of living go up, and retirement savings worth less.

[1] http://www.rba.gov.au/inflation/

The other important thing is to reduce uncertainty as much as possible. You don't want your inflation rates to bounce around like crazy from day to day. Instead, you'd like to be able to keep them within certain limits so people can plan ahead to the future.

If I'm not sure what inflation will be day-to-day, I can't make an accurate prediction as to whether I should save my money or spend it.

And if inflation is really high and fluctuating everyone makes the decision to never save in cash which isn't healthy.

But a bit of low level inflation is generally seen as a good thing. The questions over the efficacy of monetary policy as a stimulus tool in all situations is certainly questionable though.

It's also worth noting that independent central banks are a fairly new thing. Inflation levels used to be set by politicians who would notoriously let short term interest over ride price stability.

The Bundesbank was the first independent bank drawing lessons from the horrors of hyper-inflation. Most (all?) developed countries now follow that model.

For your last point, I do wonder. How does high inflation make investment unattractive? It should do the opposite, since holding cash is very unattractive under high inflation.

As to the cost of living going up: in nominal terms, sure. But it depends on the type of inflation. Usually wages grow to keep up with inflation, so in the end, it's a wash.

I'm sure there are costs associated with extremely high inflation, e.g. restaurants having to print new menus all the time. However, I'm not aware of any serious work being done to quantify that effect. It seems that even at rates of inflation that we would consider very high - let's say 15% anually - those costs would still be irrelevant.

Volatile inflation would probably hurt more than merely high inflation as long as the latter is stable.

Well, simply put, we don't live in a single economic regime.

If inflation is much higher in one country than another, then exports from the country with lower inflation will be more competitive on the global market.

Inflation also alters consumer behaviour.

If inflation is very high people tend to buy goods way in advance for fear of further price increases. This "bringing forward" of consumer spending means less will be consumed in the months ahead.

The general uncertainty created by very high inflation undermines business confidence and reduces investment. Basically, you're money is better off in another country where inflation is lower.

If inflation is much higher in one country than another, then exports from the country with lower inflation will be more competitive on the global market.

Depends on what the inflation actually does. For global trade, it's only relative prices that matter. If relative prices did not change in the inflation, the exchange rate would adjust and that's all that would happen. This is because exchange markets react much faster (orders of magnitude) than export/import markets.

If the inflation reduces the real wages of workers in the country, then high inflation actually means that the country's exports will become more competitive. (But the workers in that country might not like it... so much for the benefits of "competitiveness").

As to the question about international investments, let me put the caveat that most of what people talk in that arena is nonsense. That said, even accepting some of the rather absurd premises: it is still a question of relative prices. If you have 0% inflation domestically, but also 0% interest, then perhaps you may want to put that money in an account abroad where you have 5% inflation but get 8% interest.

Again, it is not the high inflation itself that makes investment unattractive. Volatile inflation is another beast, but stable and high inflation has so far not been shown to be a problem.

Also note that in your last paragraph, you simply rephrased your original claim without giving an argument.

Austrian school not holding much weight with academics is like wondering why creationism doesn't hold much weight with academics. Lots of things can be explained with creationism, but it doesn't mean it's right. Many Austrian economists rail against the use of quantitative models and such. But without them, how can you measure the efficacy of your policies? Faith that the policy works... But most academics like to be able to test things.

I'm also not saying creationism isn't right. I can't prove anything.

I don't see the similarity.

Just edited my comment for clarity.

I'm not sure how this casts doubt on the Austrians or supports the Keynesians, or vice versa.

I'm saying calling something Austrian or Keynesian is inherently political. We should come up with economic models, whether they're Austrian, Keynesian, alien, or dumb, test them against data to see if they hold up, and refine until we get close. Aka, what scientists do.

Great article the other day from Krugman about this very topic. Economics might be a science, but economists are not being scientists about it. http://krugman.blogs.nytimes.com/2013/10/21/maybe-economics-...

You can make models all day, and I think it should be done in the pursuit of knowledge, but to imply these models can accurately predict behavior is a bit naive IMHO.

Economics in a globally integrated economy are of similar complexity as weather, if not worse.

Keynesians have been driving the bus for quite some time now, if they have it all figured out as many seem to imply, why do so many things (deficits and debt plus extreme government interference in the bond market, as just a few examples) seem to continue to deteriorate.

I don't know if Austrians would do a better job, but to look down one's nose at them seems a bit delusional to me.

Economics forecasting is harder than the weather.

How do you build an economic model that can deal with the introduction of mobile phones? What about some new energy source that cut the cost of energy dramatically? What about the fall of Communism?

Also the weather doesn't have expectations that react to the weather forecast. Economic models get incorporated into people's expectations and this feedback can actually alter the economy. If you read up on The Phillip's Curve and stagflation you can see an example of this interaction.

Weather is actually decent for forecasting. You can constantly get new data to verify your model against. If you are forecasting for a week you have hundreds of tests to do per week.

Any forecasting where the predictions matter over the scale of decades is harder because the time span means you will have less data available for validation.

Austrians, for the most part, make no testable predictions. They essentially reject math as a tool, and insist that unless you implement their preferred systems 100%, then they won't work at all, and then explain all observed failures by claiming that it would have worked better if things had been pushed further.

Even if they're on to something, they don't give the unconvinced very much to work with. Most of their arguments push every economic dial in a single direction no matter the current state of the world, which says to me that there's no way that approach could lead to a reasonably balanced economy.

I think econ is messed up in all sorts of ways, but I don't think the Austrian school has the answers, they strike me as far too religious and unbalanced to be believable, and quite frankly I see way too many words and far too little math coming out of their camp to buy any of it. Every other science leans on math to great benefit, I refuse to believe that econ is somehow the one exception where it's not useful, especially since at its core it's about optimizing certain numbers.

> They essentially reject math as a tool, and insist that unless you implement their preferred systems 100%, then they won't work at all

What? What Austrian has ever said that?

Austrian's very rarely deal with absolutes in the real world and mainly deal with relative analysis (If you go with X bad policy, these negative things can occur).

> then they won't work at all, and then explain all observed failures by claiming that it would have worked better if things had been pushed further.

What occurrences are you referencing when an Austrian got policy control?

> and quite frankly I see way too many words and far too little math coming out of their camp to buy any of it.

They reject the idea that maths is a useful tool in economics due to it being a social science.

I'd suggest any unwillingness to make specific mathematically testable predictions is correct acknowledgement that the field is too complicated to do so. As I've said, you can make a model and tweak it by picking and choosing inputs until you can make it successfully back test with historic data, but any comprehensive correctness is likely tenuous if not specious.

Having a complex model that appears correct but is actually wrong is quite dangerous. Observe long term charts (debt, debt to gdp, etc) in various countries throughout the world. We're told by economists and the federal reserve in very serious tones using large words and complex models that everything is all figured out, but the charts continue to get worse. Even during the glorious Clinton years of supposed robust surpluses, debt increased every year. Hindsight being 20/20, we now know we were just in a bubble.

Austrians speak in broad principles rather than specific mathematical formulas, and in my opinion, their broad (vague) predictions of what will happen if you do <x> are far closer to honest reality than any other camp.

The basic problem is that the models are not testable in the way you think they might be. Economics is inherently a deductive discipline and anything you can think of as coming from economics that is valuable in any way came from someone's head and not from testing models. Economists get into trouble by trying to pretend they are physicists.

Krugman<-Spew

Economics is not a science. You can't test hypotheses rigorously. Which makes these debates 100x harder.

This is true, but it is also true for other sciences (eg meteorology, mentioned elsewhere).

I'm not sure what the solution to the untestable hypothesis problem is.

Academics being funded by Keynesian politicians has surely nothing to do with it.

Anecdotal but I would imagine it's similar in reputable state schools in red states: Texas has very few Keynesians yet economics professors at the University of Texas are overwhelmingly Keynesian.

Virtually everyone you encounter in the government subscribes to Keynesian economics to the degree that they understand anything at all about economics. When economics is explained in the media at all it is through the lens of Keynesian economics.

Yes, well, Keynesianism is an important piece of the neoclassical synthesis. To be droll: "mainstream theory is mainstream."

University of Chicago and the other "freshwater" schools show that non-Keynesian schools can get funded.

So far the predictive value of these models has been zero and Austrians tend to have a much clearer understanding of what is happening on a macro level. That's been my experience over the last decade or so. After awhile it helps to notice such things.

> ...the use of quantitative models and such. But without them, how can you measure the efficacy of your policies?

Here's a better question: if you measure the efficacy of your policies and find that they have not achieved the intended effect, on what would you base the extension and expansion of those policies? Faith? Insanity?

The reason I ask is that a few months ago, two senior economists at the SF and NY Feds published a letter, "How Stimulatory Are Large-Scale Asset Purchases?"[1]. Their conclusion:

"Asset purchase programs like QE2 appear to have, at best, moderate effects on economic growth and inflation."

Emphasis mine. For reference, QE2 involved $600 billion of Treasury purchases.

[1] http://www.frbsf.org/economic-research/publications/economic...

Right. There's no way to disprove theories that are tested in this way. Proponents of the theories being tested could always say that the attempt wasn't large enough, that the officials didn't believe enough in the policy, that the gods were angry that quarter, etc., etc. At some point you need a sound theory to draw back on that does not require this sort of testing to stand on its' own.

And strangely enough, nobody outside of neoliberal bank-interest lobbyists has actually wanted quantitative easing. Keynesians want the labor market and consumer demand propped up, social democrats want infrastructure investment towards those ends, and radicals are looking for a debt jubilee.

Indeed, the term Keynsian has been uselessly spread to cover both New Deal style stimulus spending and printing money and giving it to the banks.

The two are not the same, they are connected only by the theory of trickle down Reaganomics.

What is your argument exactly? You say, "If you measure the efficacy of your policies and find that they have not achieved the intended effect, on what would you base the extension and expansion of those policies?" But then your example, QE2, achieved the intended effect. As you say, it had a moderate effect on economic growth, and with only a moderate effect on inflation. Nobody claimed it would be a magic bullet. Monetary policy without coordinated fiscal policy can only have moderate effects.

Austrians distinguish between theory and "history" and Hayek has argued that you can at best make "trend predictions" due to the uncertainty of the world.

I do not understand why there seem to be no Austrian quantitative models and the like as part of the "history" (bad name as it includes both application of theory towards historical periods and predictions). Predicting the future is an entrepreneurial act in the Austrian sense and if the Austrian model is good/better one would expect better predictions from someone working from these foundations.

I agree that there's quite a few laymen and not all that many pure Austrian theorists (and the few that exist seem to be working in management science and the like not in economics).

I'm not sure what defines a proper science in the science theoretical sense these days but if you take something like Lakatos (which is basically what I'm roughly comfortable with don't know about newer developments) I'm not sure mainstream and Austrian economics would differ all that much (probably both non-science by his criteria)

The most tilting thing about Austrians in general (and I'd certainly say I sympathize with their core ideas alas I don't have enough time to investigate properly) is that they attack "mainstream economics" based on a view that is pretty far removed from current mainstream economics. Most are stuck at thinking "ZOMG Keynes" at least I haven't met all that many that knew what a DSGE model is for example.

"it does raise questions about why the school's arguments which seem so utterly convincing to so many people, don't manage to gain many converts among people who research the subject professionally."

I think it would be easier to convince people with no physics knowledge that a bowling ball falls faster than a golf ball. Intuitively, it seems that bowling ball should fall faster. Austrian economics seems to follow a similar thread. It's more intuitive and easier to grasp than the economics taught in the textbooks, but doesn't have much data to validate it.

Most Austrians understand mainstream economic theory much better than mainstream economists understand Austrian theories. Evidence being Krugman's disastrous attempts to discredit Austrian Business Cycle Theory. It isn't a perfect theory but Krugman can't even explain it let alone criticize it.

> data to validate it.

You've accidentally illustrated the disconnect. Because the fundamental disagreement between the Austrians and the more mainstream academic schools of thought is epistemological. Data can only settle differences when both sides agree on the epistemological ground rules.

I have an advanced science degree. I'm not afraid of math, and I've plowed through Keynes "General Theory". It doesn't come close to passing the sniff test for basic scientific rigor. It can't.

Economists can't control their variables, and they have no way of knowing what their error bars are. They can make empirical models that work most of the time, but they can't know what regime those models are valid for, and where the breaking point is. There is every indication that economic systems are chaotic, and prone to sudden discontinuous phase changes.

Worse, unlike a chaotic system like weather, the underlying primitives are not at all primitive. We can say very precisely how a cubic meter of air (for example) behaves under widely varying conditions. This is why our weather and climate models keep getting better -- you can use more processing power and better algorithms and use the basic laws of physics to get the right answers, despite a system of incredible complexity.

But economists have nothing like that to work with. There is no meaningful sense in which we have good statistical models of human economic behavior. We have very limited snapshots, that are invalidated the moment customs or conditions change beyond the originally observed regime.

All of this means that you can't even build empirical models unless you have a preexisting, a priori theory of economic cause and effect, and you have no experiments strong enough to falsify bad a priori assumptions. The Austrian argument is simply that all economists are actually engaged in a priori theorizing, despite their protestations claiming to be empiricists.

I find the assertion that the Austrian school is more "intuitive" and accessible to be silly. Nobody who has actually tried to study the primary texts would claim so. It takes a pretty strong background in philosophy just to follow the first several chapters of Human Action -- precisely because they focus on epistemological issues.

It doesn't require a conspiracy theory to explain the popularity of econometrics. Lots of social sciences spent the whole 20th century pretending to be as rigorous as physics and chemistry, to bask in the reflected glow of progress. Nobody likes to admit that their field has no experimental lodestone, and so drifts along as a popularity contest.

The whole problem with Austrian economics is that they reject scientific epistemology entirely by waving a big flag on which is written, "Human Free Will makes everything unpredictable!"

And then they go ahead and make predictions anyway, out of sheer ideology.

If Keynes is epistemologically worthless, fine, but so are von Mises and Hayek. More so, in fact, because they adamantly refuse to employ an empirical method.

> "Human Free Will makes everything unpredictable!"

Well in practice it currently does. That's not to say that in principle we won't eventually develop a real quantitative science of human behavior -- but it's going to require some major advances in neurobiology.

> And then they go ahead and make predictions anyway, out of sheer ideology.

Yes, but the Austrian response is that all other economists are doing the same, while deceiving themselves that they have no ideology at all. So most economists' axioms and deductions remain unexamined and unchallenged.

> I think it would be easier to convince people with no physics knowledge that a bowling ball falls faster than a golf ball. Intuitively, it seems that bowling ball should fall faster.

Do you have any reason to believe that their intuition is wrong? If the bowling ball and golf ball were both spheres, so they differed only in size and mass, the bowling ball would have a higher terminal velocity. The golf ball's dimples reduce its air resistance, and I have no idea how to calculate if they reduce it enough to let it have the same terminal velocity as the bowling ball.

Perhaps I should have used a different example, but the main point was that Galileo's supposed Leaning Tower experiment (http://en.wikipedia.org/wiki/Galileo's_Leaning_Tower_of_Pisa...) is counter intuitive and it's harder to convince laypeople of counter intuitive ideas especially when the "competing" idea is more intuitive.

there is no data to validate either model. there are far far too many variables, and you can't test both of them side by side by definition. If one fails in a certain environment, you can't say the other would have succeeded. We've been doing keynes for quite awhile now, and it has mostly been going poorly. There is no way to say that doing the opposite would have gone better though. It might have, it might have gone the same, it might have done worse. We don't know, and we can't know, because we can't go back to 2008 and try it.

We could switch tomorrow, and again it wouldn't matter if it succeeded or failed. You couldn't say that doing the opposite would have a different total outcome.

Here's a question: how many "professional" economists sounded the alarm about the last bubble?

Zero unless they are rewriting history to claim they saw it 6 months to a year out when it was obvious to anyone who wasn't drunk on soaring home and equity prices.

https://en.wikipedia.org/wiki/Nouriel_Roubini

http://en.wikipedia.org/wiki/Peter_Schiff

He saw it in 2007

That was immediately before the crash.

The book he wrote about the coming crash was published by Wiley in February 2007, which means he must've been formed the idea some years before to have written it early enough for that publication date. A quick Google search turned up CNBC interviews with him in 2005 and 2006 about the topic.

This has him here as far back as 2006 http://www.youtube.com/watch?v=2I0QN-FYkpw

He's an Austrian economist and yes he like all of them saw this coming in 2001 and maybe earlier.

How would an economist get information about a bubble? Magic? Until they burst, anything you could say about them is speculative. Everyone talks about how education is the next big one, but education and real estate are such different markets they might as well be on different planets. It's impossible to know what's going to happen until it happens.

The housing bubble caught a lot of really smart people off guard. Housing was overpriced, but it's been overpriced for years. You had to have special, insider information about just what sorts of crazy tricks were being pulled behind the scenes, and you had to understand that it wasn't sustainable and what would happen once people started defaulting. Looks easy in hindsight, but you go out there and try to predict what's going to happen in two years.

Interesting comment. If I am to understand it correctly, and follow it to its logical conclusion:

1. Economists have no tools for studying the topics that they're supposed to study, such as asset prices.

2. They are unable to make predictions because doing so would be "speculative."

3. Because we can't know what is going to happen until it happens, we might as well do away with professional economists because they can provide no input of practical (read: forward-looking) use. They can only try to explain why what happened happened.

As for the requirement that one have "special, insider information" to have predicted the housing bubble, this is simply not true. There were a number of people from a variety of professions who recognized the housing bubble. One, Robert Shiller, to answer my own question, is an economist who also predicted the .com collapse[1].

There were also politicians[2] and market participants who predicted a collapse. Some of the latter, like John Paulson, who made billions betting against subprime, didn't publicly promote their beliefs, but others, like Peter Schiff[3], did.

[1] http://www.nytimes.com/2005/08/21/business/yourmoney/21real....

[2] http://www.youtube.com/watch?v=mnuoHx9BINc

[3] http://www.youtube.com/watch?v=jj8rMwdQf6k

The vast majority of economics is about how to avoid past mistakes, not necessarily how to avoid making new ones. This doesn't mean the science isn't valuable. There are plenty of terrible mistakes I hope we never make again.

According to the first article, Shiller said in 1996 that stock prices were at irrationally high levels. In 2005, he predicted a real estate bubble. Noticing that a bubble is developing, I would say, is the relatively easy part; predicting when it will collapse is the difficult part. As Keynes said, "Markets can remain irrational longer than you can remain solvent", so there is limited value in betting against bubbles. Paulson may have made billions, but undoubtedly there have been people that followed similar shortly before he did, but lost it all. The reason we know Paulson is because of the survivorship bias.

The more interesting question is: How many "professional" economists lost their jobs, or at least the esteem of their industry, for not seeing the housing bubble?

Clearly meant as a rhetorical question, what do you really mean by it?

How many auditors caught the problems with Worldcom, Enron or Tyco? Extremely small minorities did, and yet people don't question whether 'accounting works, but they may question the incentives for companies to provide honest books to auditors, and the compensation awarded independent auditors.

Let's say that you need someone to think that it will be sunny tomorrow, and you believe that it will be sunny tomorrow. The meteorologist's forecast is for 20% chance of a thunderstorm. You tell your investor that meteorology is not a science. The real probability of a thunderstorm, given the conditions and the most accurate model possible is 18%, or maybe 4% or 93%.

What does any of this mean? Have you ever heard someone say that economics is not a science? Unfailingly, it comes from someone who has a bias toward a specific conclusion, and has no method explaining how they arrived at their conclusion other than something like "common sense".

There was a renaissance for economic data collection in the wake of the 1929 crash, and the collapse of classical economics (How could the same capital equipment and human capital in 1932 produce about 48% of the industrial output it had in early 1929?). That was when most of the data collection programs were created, and the industrial classifications that were only revised again in the late 90s and early 2000s.

It is about as difficult to imagine the world of 7B people without modern economics as it is without integrated circuits or container ships or antibiotics or industrial and agricultural advances of the past 70 years.

Often in medicine, advances have met strong resistance from the respected people and overwhelming expert consensus (a very long list including how to prevent Pellagra, Yellow Fever, stomach ulcers, etc), and yet that is not a sane argument for abandoning medical research funding, condemning the practice of medicine as unscientific, or for choosing folk or "traditional" remedies instead.

And yet, that is what has happened over the past six years. To understand the value of this proposition regarding inflation requires an understanding of the mechanisms and justifications they describe, and then an attempt to assess the most likely outcomes of a course of action. In other words engagement, not people throwing up their hands and stating that it is impossible to choose any actions as better than any other, as though defeatism and fatalism are wise.

> Clearly meant as a rhetorical question, what do you really mean by it?

I think he means, out of the establishment economists (eg: Federal reserve members, Columnists, Government economists, etc.)

Dean Baker called the housing bubble as early as 2002:

http://www.cepr.net/index.php/reports/the-run-up-in-home-pri...

By 2004 he even sponsored a $1000 contest for whoever could make a good case that there wasn't a bubble:

http://www.nytimes.com/2004/01/18/business/personal-business...

That means he was at least partly if not mostly wrong. As far as markets go, you have to be right in both direction and timing. He was 4-5 years early, and frankly 2002 prices weren't that insane. Especially compared to 2006-2007 prices. He was really early, and if bet against housing at that point, he likely went bankrupt before the crash.

That's really neither here nor there though. What's the famous saying, something to the effect of "economists have predicted 10 of the last 3 recessions". Somebody is always calling for a crash, and somebody is always calling for a bull market. After the fact you can always find someone who was right about it, but that doesn't mean they were right about the why, and it doesn't mean they are going to be right about the next thing.

That means he was at least partly if not mostly wrong.

I don't agree. You'd have to look at his reasons for calling it the way he did.

Your "betting" objection is a red herring. To identify a bubble does not require predicting exactly when it will pop.

Look at my comment above. Prices weren't even close to bubble levels. They were lower than anything we've seen post crash.

Also I was clearly not talking about "betting" but rather investing. It's just not useful for someone to say something is happening far before it actually is happening. Perhaps he could have said the conditions are right for a bubble to start in the near future. In which case the correct play would be to make a lot of money in housing in 2002. There was no bubble then though.

http://us.spindices.com/indices/real-estate/sp-case-shiller-...

>He was 4-5 years early, and frankly 2002 prices weren't that insane.

Define "weren't that insane", please. Were they sane when compared with the incomes being leveraged to buy them? Compared with some shortage of supply that would naturally push prices up?

Because the story I've heard is that the mid-late 2000s housing bubble was just the peak of a vast secular inflation in real-estate values that had little to no tie to the actual feasibility of housing purchases for real families, and was fuelled largely by speculative lending.

Well, in 2002 the prices were not even remotely close to the peak, and they were lower than anything we've seen post crash to this point. I guess you could try to argue that we are still in a bubble, but I don't think most would agree. Now, suggesting things needed a correction in 2002 might have been reasonable, but it was bubble like yet.

http://us.spindices.com/indices/real-estate/sp-case-shiller-...

Krugman, Schiller, Roubini were the prominent ones.

There was long main article in the Economist about housing bubble few years before the bubble bursted. I remember reading it and being somewhat worried because arguments were convincing. I then forgot it because it was not in other news.

It would be nice to find it again. The issue in question had picture of green? man/gigant weighted down with heavy weights.

Here in the UK, Gordon Brown claims he foresaw it all. Mysteriously tho', as the Chancellor of the Exchequer of the then-4th-largest economy in the world, he did nothing whatsoever about it.

They're journalists more than economists, but the folks at The Economist were talking about a housing bubble in the US and elsewhere.

Also, this kind of article adds little to this site: it's basically round 4348388282998271193 of "mainstream economics vs Austrians and other heterodox schools of thought" on the internet. It's all been said.

Economics is not about predicting the movements of asset prices. In fact, the unpredictability of asset prices is one of the more fundamental findings of economics. Criticizing economics for not identifying a bubble is a little like complaining that physicists haven't built us a faster-than-light spaceship.

It wouldn't surprise me if many did. Certainly anyone with a little common sense would have known that when housing prices rise so dramatically so quickly, it can't possibly be sustainable (even if in the long run prices return to that level).

But as is the case in all bull markets, the naysayers are always drowned out by the crowd. Voicing a contrarian opinion is always frowned upon.

Many.

Here is multiple lists with sources:

http://investorhome.com/predicted.htm

Inflation is fine as long as salaries maintain an appropriate growth ratio. I see too many companies take advantage of the relative uncertainty of the last 5-7 years as an opportunity to continue to eek out profits at the expense of compensating the average worker.

More and more I am convinced that a purely capitalistic model for companies does not work.

>Finally, most of these arguments are disputed by the so-called "Austrian school" of economics. It's important to recognize that this school is much, much, much more popular with laymen than with professional economists. This doesn't mean that the school's arguments are wrong, but it does raise questions about why the school's arguments which seem so utterly convincing to so many people, don't manage to gain many converts among people who research the subject professionally.

It doesn't automatically mean the Austrian School arguments are wrong, but it does make it much more probable that they are wrong. When trained and educated economists think something is bullshit economics, we should consider it to probably be bullshit.

So why don't we? Because for so many of "us" on Hacker News, deflation is a class interest: "we" hold "our" assets mostly in cash and land. An Austrian-style neofeudal economy thus suits "our" portfolios.

Personally, this reminds me that I need to call Vanguard about my actual investments today. Fuck cash and land, I want my wealth in something productive, and a productive investment will have more to gain from inflation eroding away private debt and a steady pick-up in demand from a stronger labor market than from Austrian-style deflation.

Inflation does not hurt land values only cash and cash equivalents like debt and fixed income annuity's.

That would be a pretty good point, except that the real-estate market is currently gunked up with private debt. Eroding private debt with inflation can unlock a whole lot of markets that some asset holders don't want unlocked, because they're using the assets as a store of value (which can be transformed into other people's debt) rather than as a means of production.

Upvoted, but with a note that you are wrong about deflation being good for land owners. Generally speaking land is a good hedge against inflation.

On third thought, I partially retract the comment about land. I've been confusing credit-backed conventional real estate markets with cash-backed land investing.

> When trained and educated economists think something is bullshit economics, we should consider it to probably be bullshit.

On the other hand, well-trained and educated economists could perhaps be incentivized to call something bullshit for reasons outside of academia. Like let's say, hmmm, I don't know, for personal gain?

Let's imagine what happens in a world where Austrian Economics is true, but economists are lying to the rest of us for personal gain.

First prediction: the economists will tell us that Austrian economics is wrong, but then use the Austrian theories they secretly know are actually true to invest their own assets.

Anyone got an economist's portfolio to look at?

http://en.wikipedia.org/wiki/Glenn_Hubbard_(economist)#Insid...

http://www.youtube.com/watch?v=CaXNqGgIc-g

It's also worth noting that economics is arguably a pseudo-science, as the theories themselves cannot be reproduced independently by external parties. So it's really hard to argue whether Austrian economics is "right" or "wrong".

I find it pretty hard to count him as evidence for anything, considering that he comes from the supply-side school. They're kind of known for being paid propagandists for particular business and political interests. Hell, he doesn't even seem to use Austrian Economics, or any other economics, himself, if he mixes himself up with entirely conventional financial firms like Blackrock and MetLife.

"we" hold "our" assets mostly in cash and land.

I suspect more HN readers likely hold their assets in future income and earning potential. Which is fairly immune to inflation (as it rises with prices).

Cutting real wages is in no way the intended desirable effect of inflation. Inflation is a disincentive to sittin on imaginary cash, am incentive to productive activity/investment.

In an inflationary stimulus theory, wages rise with inflation, and cash-rich spend cash to move a worker to produce.

Given that the entire point of the Federal Reserve is to promote inflation it's probably good that they think it's a good idea-otherwise why do they think that they exist?

The whole problem is that inflation is theft. You are basically having your property taken out from under you without realizing it. It's historically been very popular as a means of taxing the public without them realizing that's what you're doing.

This probably not the space to get into all this but reading "The Creature From Jekyll Island" is a good start. That the major players in the banking industry got together in secret to write the Federal Reserve Act suggests who the system really benefits.

Your theory lacks predictive power.

There is huge debate about what inflation should be, and all you can say is "all the bad guys like inflation". The argument for inflation is very old, and goes back to Milton Friedman at least (who was no Keynesian).

Friedman was a Keynesian heretic. Instead of looking at aggregate demand he was looking at the total money supply. The basic problem is that he lacked an understand of the boom itself and focused entirely the bust's mechanics.

The argument for inflation goes back much further than Friedman. Emperor Diocletian tried it and failed. Despots throughout history have attempted it as well and failed (eventually). Inflation "works" in the short term but eventually you pay the price for it in the form of a bust.

I guess that the bad guys liking something isn't entirely sufficient but it should be fairly damning evidence.

The argument goes back to ancient Rome at least, with the devaluing of the denarius.

Higher inflation also means that it's cheaper for the U.S. government to borrow money. In fact, higher inflation is good for anyone who borrows money (people with mortgages, student loans, etc.) because they're effectively paying back less than they borrowed.

Except that the risk is asymmetric in that the bank gets bailed out if you can't pay and you don't. They loaned out the phony money and you paid it back with your labor.

Which is a problem of politics, not economics. There's a broad agreement that the bank bailouts should not have happened across most of the actual political spectrum. Only the vulgar neoliberals serving the interests of the capitalist class in government actually want to print money as bailout loans to banks, and yet Austrian "economists" and their Believers pretend that's the only alternative to a deflationary gold standard and total privatization of everything ever.

Evidence suggests that it they are correct but the part you are missing is that the whole point of the system is to bail out the large banks when their bets go bad. All in the name of the people. Whoever they ever are.

Which system?

> Given that the entire point of the Federal Reserve is to promote inflation

I can't tell if you're being sarcastic, but the Fed has three mandates [1], one of which is to stabilize prices:

"maximum employment, stable prices, and moderate long-term interest rates."

[1] http://www.law.cornell.edu/uscode/text/12/225a

I am not. The real purpose is to inflate the monetary supply for the benefit of the large banks. On those supposed goals they have entirely failed anyway.

And even a minimal knowledge of history would suggest that the Federal Reserve works very hard to minimize inflation, even at the expense of high unemployment.

Poster's statement is along the lines of "Given that the entire point of firefighters is to promote fires".

It's nonsense.

So much to learn, you still have. A most basic study of the Federal Reserve would lead you to the exact opposite conclusion. They try to keep interest rates as loan as possible until price inflation gets out of control. I spend a lot of time caring about this issue and all the hype about what the Federal Reserve cares about is just that-hype. They want to inflate the monetary supply all day every day and that's why they buy debt every month as part of QE-infinity. That it hasn't worked does not mean that they do not desire inflation but rather that they have no clue as to what they're doing.

I'd recommend Peter Schiff or Max Kaiser for an interesting look into the Fed's QE policy minus Mainstream Media hype/

The problem with the FED, and every Keynesian economist is that they think the US will indefinitely be the world currency reserve, and that 5,000 years of gold based monetary policy is less stable than the post war economics that have given us rising inequality, lowering employment, indefinite QE, China calling for a de-Americanized world, and an interest rate ceiling of 1% (look it up, Bernanke said it!) that was the bottom rate of Greenspan.

I just love when current economists tell me I'm naive, and that government debt isn't the same a debt debt... Or that there isn't a borrowing limit. The limit, is when other governments stop buying your currency. See China-Australia trading deal, China's ease on buying bonds, and look up an interesting theory on how Japan will soon stop buying US bonds, due to it's self-inflicted inflationary policy, which will force it do invest in it's own money supply soon.

Recent history would seem to indicate the US can somehow simply buy their own debt. It seems impossible to me but its been working so far.

You're right, however things can take a long time to run out of steam. Also, it's very interesting how much of economics relies on everyone believing in the system.

I'd recommend checking this video out: http://www.youtube.com/watch?v=BH9YPtk5VB4. This is what many people think. While some can definitely brush it off, many aren't.

Well the US is exporting its debt (counterintuitive as that sounds) overseas by buying goods made abroad.

If I recall correctly 40% of US currency is actually outside the country.

Peter Schiff has been calling for hyper inflation and dollar collapse any day now for at least the last 5 years.

Check out this article on mobilization and money: http://neweconomicperspectives.org/2013/08/mobilization-and-... no other governments buying our bonds were needed. Nor are they needed now.

As for replacing the US dollar with something else as world currency reserve, Mike Norman gives his views: http://www.youtube.com/watch?v=m5fTV4bGO0w

Low interest rates is exactly what you want in a normal, non-inflationary environment. It encourages lending for investment into projects that allows a rise in economic activity.

The only time you don't want low interest rates is when an excessive amount of loans fuels demand-pull inflation. (Though, interestingly, high interest rates can also fuel inflation via wealth effects. Overall, I tend to think interest rates are the wrong lever, and fiscal policy should be used at all times, but that's a whole other can of issues.)

So the behavior is describe is exactly what is reasonable.

Now, the whole QE thing is obviously pushing on a string. The zero lower bound means it's not going to help economic activity. QE is like going to a witch doctor because all the people who could really help - in this case, the people in control of fiscal policy - can't get their heads out of their proverbial asses.

Stable prices is a euphemism for inflating just enough to keep nominal prices the same even as productivity in the economy dramatically increases.

I would say it's a euphemism for debasing just enough to keep a small minority enriched without the masses discovering it via overt price inflation and/or without the masses outside the US realizing that the value of their goods and services are being debased for the same reason.

I never thought of inflation in that way. That's rather interesting. I guess a simple way of describing this would be to say that if you are the sole printer of money, and existing money becomes worth less over time, then you can simply continue to print more money every year in order to cement yourself as the person with the most money.

To elaborate... I suppose it's more about being the person with the most wealth, and you are actually causing a net motion of wealth away from everyone's pockets and toward yourself.

> existing money becomes worth less over time, then you can simply continue to print more money

Only, the act of printing more money. deepens the problem of your currency losing value. The US thinks it's impervious to inflation, but many including myself see it simply postponing the inflationary event, which will most likely coincide with a currency crisis.

"You are basically having your property taken out from under you without realizing it."

If your definition of property is US fiat currency, then OK, but if you're concerned about it, you have options such as commodities, non-US currencies, and hard assets like real estate.

> you have options such as commodities, non-US currencies, and hard assets like real estate.

True, except that buying and selling of these is taxed. If the govt. had said, "buy and sell as much glass as you want, and you won't get taxed for its trade", I's switch to glass in a heartbeat.

I found this video to be quite helpful in explaining what I believe you are describing: https://www.youtube.com/watch?feature=player_embedded&v=iFDe...

"Given that the entire point of the Federal Reserve is to promote inflation"

No, that's not what they do. Too much inflation is bad, but you need a little bit. So they seek to maintain a "healthy" amount of inflation. Typically around the world this is something like 2-3%.

http://en.wikipedia.org/wiki/Inflation_targeting

Real monetary expansion is much greater than 2-3% on average. The price inflation they calculate might be 2-3% but look at college or healthcare costs. That new money finds a home somewhere and I'll tell you now that that's where it ends up these days.

I don't know about the cost of healthcare or college in the US, but those are affected by other non-inflationary factors.

Eg: political changes, supply and demand, changes to the definition of the service. i.e. Imagine the difference in what treatments are covered by healthcare today as opposed to say 25 years ago.

Don't forget the "new money" also finds a home through population increases and export of actual money (black and white market).

> they seek to maintain a "healthy" amount of inflation.

An ounce of gold was $21 in 1920 and $1410 in 2010. http://www.wisegeek.com/what-is-the-historical-price-of-gold...

Gold is a commodity that is used as a defensive investment asset, that's very different to inflation.

Going from $21 to $1410 in 90 years would be about 4.8% price increase aka inflation in a year.

Exactly. Continuous inflation is frankly the only plan the government has to deal with the national debt. Borrow now, and in the future when your currency is weaker and less valuable, the amount borrowed will seem smaller (and in pragmatic terms will be by that point).

Of course it's destructive to the average person / taxpayer, but who cares about them? Nobody does who's in charge, that's for sure.

I think you may have this flipped.

Inflation is, more than anything else, a tax on cash (and last time I checked, your average person didn't have a whole lot of cash on hand). Practically speaking, it helps debtors at the expense of creditors by shrinking the value of liabilities on the books.

The debt hysteria we see isn't because the elite don't care enough about inflation - it's because the costs of it fall more heavily on those who write big checks to political campaigns.

Most of the elites spend their money on buying more influence. They hold debt instead of cash if they hold anything at all outside of whatever they consider to be balanced portfolio.

Except the average person sees the exact same benefit, ideally. It's the same platform William Jennings Bryan campaigned on way back in 1896 - expanding currency helps people who have debt.

Inflation makes the past matter less. It erodes both the wealth of the super-rich and the debt of everyone else (the farmers who had to mortgage their farms in 1896; the normal family now who has a home mortgage as the norm). That's very attractive to a lot of people, not just those managing the national debt.

The basic problem is that you're playing the devil's game when it comes to debt. You might think you are getting the upper hand but the house always wins. The banks always win in this scenario because they get bailed out when they lose and they collect your interest when you "win". It becomes difficult to see how this scenario helps the common man.

Economic growth is the only plan to deal with the debt. If your debt financing costs you 1% of GDP/year but your GDP grows at 3%/year eventually the debt will become insignificant vs. GDP even if it is never paid off.

Inflation is only theft if you insist on storing value in cash--a financial instrument that is not designed to hold value.

A major reason to manage for low, consistent inflation is to train people to put their money into real assets.

Where do you think cash goes if not into someone else's hand? It's like a game of hot potato constantly tossing it around to someone else so they hurt from it losing value, and not you. But in the end everyone handles it for some amount of time and gets burned the same amount.

In the U.S., the Fed creates and destroys dollars to manage the inflation rate.

Look where that got us...

I agree that people should get into real assets but this sounds a lot like it's okay to beat your kids in order to train them to run faster.

Beating a kid is obviously wrong, but parenting (and coaching and managing) does involve creating incentives to encourage desired behaviors, and discourage undesirable behaviors.

No it isn't. It is theft if you are making wages at X price with the understanding that X bought you Y goods in return. If inflation drives up the costs for Y goods so you get Y-Z goods in return then suddenly you got less than you intended for your labor. In a free market prices generally fall.

In the current market they rise at random rates across sectors. Currently we have people spending a lot of time figuring out how to pay for medical care and higher education because that's where the inflation has hit the hardest.

> Currently we have people spending a lot of time figuring out how to pay for medical care and higher education because that's where the inflation has hit the hardest.

That's also because of the American Government's idiotic policies on those two "items", in my opinion.

> In a free market prices generally fall.

[citation needed]

If you have X amount of money and Y goods/service, the ratio of money per unit of good/service is X/Y. Economic growth increases the amount of goods/services provided; tractors dig more holes than shovels, and so on. This means Y increases, and thus X/Y must decrease: the cost per unit of good/service decreases.

>In a free market prices generally fall.

If we take the far-right Austrian definition of "free market" (meaning: a market in which the only functions of government are property and contract enforcement) then we have zero empirical evidence for much anything about free markets.

They've never existed.

Further, we don't even have solid evidence that hypothetical markets of that kind would be Pareto-optimal. They serve literally no function except that of ideology.

19th century America is close enough and the results astounded the entire world.

19th century America was a rabid, rampant employer of slavery, indentured servitude, and debt peonage. And when it comes to it, 20th century America was far more impressive.

Sure, if you have some money to start with. If you're at the lower rungs of the ladder, inflation hurts you even worse.

Right now, at least in the United States, if you belong to, IIRC, the bottom 75% of the population by net worth, then you are in fact a net debtor, and inflation helps you more than it hurts.

>The whole problem is that inflation is theft. You are basically having your property taken out from under you without realizing it.

Property is theft. If we're going to be ideological, I'm throwing my Marxism into the ring, too!

No, you are _not_ having your property taken away; you are suffering a loss in its market value.

For most people, a reduction in the market value of their job or house makes more difference than the market value of their cash per se. Hence the need to keep an eye on the composition of inflation, as some parts may be going up and down more than others.

"The whole problem is that inflation is theft"

That is like saying that if you run a lemonade stand and someone else opens a lemonade stand next to you, they stole from you. A reduction in the value of what you own is not theft by any stretch of the word.

"It's historically been very popular as a means of taxing the public without them realizing that's what you're doing."

Ah, but inflation is not truly a tax, because it is driven by market forces and not by the law. Actual taxes reduce the rate of inflation by increasing demand for money.

No but if you reduce the quality of my lemons then yes you did do something akin to theft. That's what inflation does it. It debases the quality of money.

Inflation can't continue in a free market forever because eventually a crash occurs because inflation kicks off a boom bust cycle. Taxes have nothing to do with inflation and don't change anything on their own. They may reduce the pool of capital and may force people to the credit markets but we need more information before saying such a connection exists.

Inflation is a tax. Its the result of somebody creating money from nothing (usually it's the government). Also, it's a great way for an employer to lower your salary by actually increasing it, by doing it at a lower rate than inflation. My country has a 25% inflation rate, that's going on for the last 4 years. Not pretty.

It is a tax. It actually occurs the moment anyone takes out a loan in a fractional reserve system. The money is created from nothing at that moment. Government just tends to borrow huge sums of money through this mechanism.

Thinking that loans are evil is where misean ideology really breaks down. If you give me a piece of paper that says you will pay me X dollars a month for Y months, that piece of paper has value depending on how likely you are to honor the obligation.

Loans are not evil and I will challenge anyone who suggests that Mises or any other Austrian believes so. That loans under a fractional reserve constitute fraud is something that is debated a bit. I think at this point the consensus is that it does constitute fraud and should be illegal.

In exchange for that piece of paper (promising money later), you have given me money now. The difference in what you have given me and what will be repaid is interest. It is the price of money and its purchasing power transferred through time, and it is the reward for lending.

Now imagine your scenario where you go with your saved money looking for borrowers (people willing to write you that promissory note). But no one is willing to write you that promissory note, because the banking system is willing to lend to them whatever they want with a value of X so low that you find it not worth the risk. In fact the value of X is presently less that the pace of inflation (negative real interest rates).

So now all the baby-boomers with their life savings can't earn a penny on it while bankers with printed fiat front run them in the money market.

Inflation may be good for those excessively leveraged in debt, but it is equally bad for all those who have saved and are investing their earnings. It perversely rewards the over indebted and punishes the prudent saver.

Interest rates ideally should be set by the market. In times of excess capital to invest, rates would be low. In times of capital tightness, rates would rise. In this way rates are a measure of the health and state of the capital and investment markets. Interest rate mechanisms are now so completely corrupted that there is not market mechanism left. Rates are not a measure of the economy any more, they are miss-set centrally and then the entire market distorts around them.

Counterfeiting money is evil not because it hurts the counterfeiter, but because it takes away wealth from everybody else. Whatever the counterfeiter buys that is in limited supply, the rest of the people have to do without.

To the extent that debt resembles counterfeiting, it is evil. Here's an example: suppose you want to buy a prime waterfront property which is offered for auction. You've worked hard, saved your money in the bank, and you finally have enough deposited to make a substantial offer. At the auction, you meet Joe. Joe also wants the property. Joe hasn't saved as much money as you have, but he has a line of credit from the bank, a line of credit made possible because the bank is using your on-deposit money as a reserve against which it can loan out new money. Whether or not you win the auction, the price of the real estate is higher than it would otherwise be because of Joe's ability to bid against you. This seems wrong. Why should the fact that you saved money enable a non-saver to drive up your prices?

Note that without fractional reserve banking, Joe's line of credit would be backed by money deposited for a term. So the saver's prices should not be affected by the borrower, because the while the borrower is using the money, the saver has agreed not to use it. Under 100% reserve banking, a depositor never has to bid against his own deposits.

So the seller of the home deserves to sell for a lower a price because you want to ban certain types of private contracts between the seller, the bank, and joe?

The seller of the house can choose between X dollars, or more dollars that are worth less in purchasing power anyway. The price changes but the value is the same. You can't spend dollars for which there are no goods, nor can you sell goods for which there are no corresponding dollars, so price and value always converge.

No, the value that Joe wishes to exchange for the home is higher.

I would rather not use terms like "evil" in a discussion of policy.

With that out of the way, counterfeiting does not necessarily take wealth away from anybody. In a depressed economy, it could just activate unused resources and stimulate production so that the overall amount of wealth increases by at least the amount represented by the counterfeit money.

That said, counterfeiting is still wrong for the same reason it is wrong for you to hack into your bank's computer systems to increase the amount of money in your account: Society has agreed upon a set of rules that underlie the distribution system of our economy, and both the hacking and the counterfeiting go against these rules.

Addendum: In a way, forbidding counterfeiting is a slippery-slope situation. A single act of counterfeiting does not necessarily take wealth away from anybody. But if counterfeiting were allowed, the whole system could not possibly work.

> Also, it's a great way for an employer to lower your salary by actually increasing it, by doing it at a lower rate than inflation.

This is extremely valuable for an economy. This is just about the only way people will accept a pay cut. Employers need to be able to reduce the amount they pay their employees sometimes.

By the way, for those who believe wages don't track inflation, they do.

http://en.wikipedia.org/wiki/Household_income_in_the_United_... http://www.advisorperspectives.com/dshort/updates/Household-... http://en.wikipedia.org/wiki/File:Median_US_household_income...

Argue about the merits of inflation all you want, but I see a ton of 'facts' being thrown around which simply aren't supported by historical numbers...

My personal opinion going into this mess was that, sooner or later, the U.S. was going to inflate its way to a lesser impact of existing obligations.

As it became clear that the big banks would remain... "sacrosanct", I figured that the inflation would start once they were out from under their own balance sheet woes with particularly with respect to lower performing loans and paper built thereon.

Et voilà.

TL;DR: They've given the "big boys" time to prepare and position themselves. Now the screws get put to everyone else.

P.S. By the by, have you been watching e.g. the price of many staples in the supermarket? (Not to mention gasoline, and a few other things.) For many "everyday" folks, inflation showed up already some years ago.

That's not inflation, that's the economic effect of the world starting to run low on petroleum.

Inflation encourages spending, rewards investment, and discourages hoarding of cash.

Inflation leads to all the positive outcomes that economists want.

Not to mention, inflation is necessary in a society with a growing population, since there needs to be enough currency to spread amongst the population, otherwise it will be held in a finite amount of hands, and increase inequality.

You have a lot of learning to do my friend.

Inflation steals purchasing power away from people who contributed their labor to the market in exchange for the money they received.

The cash hoarding that inflation is supposed to solve continues because people want to hold on to their money in risky times.

Smart people are moving away from cash assets and into precious metals and real estate. These are tangible things, unlike fiat currency that keeps losing value over time.

The US dollar in particular has lost more than 90% of its value since abandoning the gold standard in the early 70s.

Really? Is this a joke or one of those terrible 'end-of-the-world' advertisements you hear on Bloomberg radio? Precious metals and real estate haven't done very well compared to equities in the last year or two...

Yes, inflation reduces purchasing power if you assume that wages don't track inflation, but historically they do.

> Yes, inflation reduces purchasing power if you assume that wages don't track inflation, but historically they do.

This is not only factually false, but if it were true it would invalidate the argument being made by the economists quoted in the NYTimes article.

I strongly recommend that you read The Creature from Jekyll Island or other materials on the history of the Fed and its role in US monetary policy.

Come on, you only need to have been alive for the last 10 years to see wages go up.

Minimum wage where I live is 80% higher today than 10 years ago. Average wages are much higher too, though by a lesser percentage.

Here's an inflation adjusted chart of American wages, you'll see that wage increases have actually outpaced inflation slightly...

http://en.wikipedia.org/wiki/File:Median_US_household_income...

Edit - some more charts for you: http://www.advisorperspectives.com/dshort/updates/Household-...

Sorry, numbers don't lie.

> Minimum wage where I live is 80% higher today than 10 years ago. Average wages are much higher too, though by a lesser percentage.

The way they adjusted for inflation is suspect. [1]

This [2] is how the wages look if you measure in amounts of gold. Of course, gold is not the end-all of monetary policy. But it's way more stable than the USD.

[1] http://business.time.com/2013/03/12/if-theres-no-inflation-w...

[2] http://pricedingold.com/us-wages/

Every fiat currency in history has failed.

http://www.caseyresearch.com/editorial.php?page=articles/tho...

What makes the US$ so special?

And each time, people go back to something tangible to call money. That's usually gold or silver. Not that they're as easy to use as money or anything. That's why gold backed currencies tend to make sense (even though they too are not perfect).

People working at minimum wage would laugh at your "wages historically track inflation" argument.

http://www.advisorperspectives.com/dshort/updates/Household-...

Numbers don't lie.

Fiat currencies have failed because empires and nations have failed. A fiat currency always depends on a guarantor - someone who guarantees its value, usually through projection of military and economic power.

So of course currencies will rise and fall with nations. But the idea of currency has always persisted, from ancient times.

I would invite you to look at gold prices over the last 20 years.

I only wish I could go back in time and tell my 20 year old self to buy lots of it back when it was in the $300/toz range.

Right now it's sitting pretty at $1351/toz.

And oil prices have gone up just as much. Once upon a time oil was a dollar a barrel...

Come on, inflation increases the value of all commodities, gold, silver, oil, corn, wheat, etc...

It's not like gold is special.

Gold is special. It's easier to carry than a barrel of oil, and stays fresher longer than a bunch of corn or wheat. That's why gold tends to get used as money over and over in history.

But you're right about one thing... inflation increases the value of real assets.

Or to put it better, the value of real things doesn't change (a loaf of bread is a loaf of bread) but the value of the dollar weakens in regards to it with inflation. Bringing us back to the beginning of the argument that inflation steals the purchasing power of people.

If I bought gold 20 years back I would have paid $300 for 1 toz. That same 1 toz of gold today costs me $1351. The gold hasn't changed. The US$'s purchasing power has.

[EDIT: I should mention that inflation isn't the sole reason it takes more money to buy gold than 20 years ago. There are of course some other factors.]

> [EDIT: I should mention that inflation isn't the sole reason it takes more money to buy gold than 20 years ago. There are of course some other factors.]

Alot of other factors. Like the fact that gold is widely used in electronic circuits, and not just for bling now. This of course will increase demand for it, beyond its use as a 'hard' currency...

>Bringing us back to the beginning of the argument that inflation steals the purchasing power of people.

It does, but wages have historically followed inflation, as historic data shows, leaving the average person no worse off (unless their only asset is a pile of cash under their mattress...).

Gold is shiny though. How could it not be special?

Yeesh, goldbugs make me giggle sometimes.

It is a pretty cool (pun) metal though, I'll give them that.

Just don't go too far and look at gold prices from 35 years ago.

http://static.seekingalpha.com/uploads/2010/3/19/saupload_go...

I don't really know much about gold, but that chart is a little questionable: from 1934 to ~1975 private ownership or trade of gold was restricted by law in the US.

how does that make the 1980's gold bubble "questionable"?

>The US dollar in particular has lost more than 90% of its value since abandoning the gold standard in the early 70s.

The supply and demand for gold have essentially nothing to do with real economic value.

Now, admittedly, you've drawn near to an actual critique of our current monetary system, but that would require you to critique capitalism itself, too. Here, let me do that for you:

Capitalism optimizes for the production and accumulation of capital. Therefore, the monetary base does actually matter, because money is the most liquid form of capital. Thus, capitalism will optimize society for the production and accumulation of money, however money is defined. Define money as some commodity, like gold, and you'll get people sailing across the world to rig up mining infrastructure and haul back a rock of zero ultimate worth, simply because that's the optimization criterion of the economy they live in. Admittedly, all that hauling and sailing does actually require getting something done, so you do see real economic development under such a system, but the same thing can be enforced with fiat currency via exchange-rate controls and the rest of the Bretton-Woods package (which was, in fact, deliberately concocted to make trade count more than finance!).

Whereas, in contrast, if you set the definition of money as being debt, your capitalist economy will become a debt-maximizing machine. Which is what we see now, since the early '70s when the capital controls, exchange-rate controls, trade regime, and gold standard of Bretton-Woods were all abandoned.

There.

> and increase inequality. Because quantitative easing is totally pro-equality?

> Because quantitative easing is totally pro-equality?

Quantitative easing increases the money supply. Which does favour the lower classes more than the already wealthy (decreasing the money supply would favour the wealthy). So yes, economists would say it does favour equality. Keep in mind this is on a macro scale...

So depositing the QE money directly into Donald Trump's bank account would "favour the lower classes more than the already wealthy" because it increases the money supply? :)

Depends how much of it Mr. Trump spends.

Seriously though, it doesn't work quite like that...

Edit - thought I'd be more helpful:

QE is when the Fed engages in open market transactions, buying bonds, and thus putting reserve money into the market. It's not free money for anyone, certainly not for Mr. Trump, and it doesn't involve printing money...

"Rising prices help companies increase profits"

I don't see how that could be true. If prices are rising, all of a company's expenses rise along with their revenues: raw materials, salaries, benefits, rents, etc. (Unless the company wants to screw their employees and give them raises that are less than the rate of inflation.)

Inflation does benefit debtors, the biggest being the U.S. government: they can repay their debts with dollars that are worth less than the dollars that they borrowed.

Exactly. Inflation is a painless (for the government) way out of the debt problem the government itself has created. That's why they favor it, nobody has to make any hard choices, and the middle and lower income families get screwed, again, because everything now costs more.

The price of labor is a price and should rise with everything else. Average income should track inflation.

Average income grows faster than inflation because of real economic growth.

In the U.S. we've had positive inflation numbers for most of the last 80 years, which has coincided with significant across-the-board improvements in standard of living.

Tell me again about that across the board improvement:

http://www.bloomberg.com/news/2012-10-02/top-1-got-93-of-inc...

Sure, here's a short list off the top of my head of products and services that have become more widely available and affordable within the last 80 years.

- antibiotics

- health insurance

- air conditioning

- telephones

- TVs

- washing machines

- meat

- automobiles

- air travel

- medical imaging

- computers

Inflation actually favours the middle and lower income families if they own a house, have any debt, or any investments. Which of course is most of them.

Whether it helps or hurts someone depends on how much debt they have compared to their (rising) expenses. It also assumes that the interest rate on their debt doesn't go up as inflation rises, which it certainly can (e.g., for credit card debt and variable rate mortgages).

For investments, it depends on the type of investment. For example, if you own bonds, the interest rate is paid based on the purchase price of the bond in pre-inflation dollars, and the higher the rate of inflation, the less your interest payments will be worth. By the time the bond matures, the amount you may have gotten back in principal and interest may be less in real dollars than what you paid for it (and you'll still need to pay taxes on the interest). Same for savings accounts: if they don't pay an interest rate that's above inflation, you'll be losing real dollars after inflation and taxes.

This is why when you invest, if your goal is merely wealth preservation (and keeping pace with inflation), you invest in a wide portfolio and hedge your bets. A combination of bonds, equities, commodities and real assets will do that.

If you have a smaller amount of wealth, simply buying a house and investing in some index funds can be enough, maybe some short-term GICs (which will often put you on par with inflation).

Trading bonds, IMO, is best left to institutional investors.

On the other hand, if your goal is income (which is why I trade), you need to be more sophisticated, learn to time the market (to a certain degree, predicting it isn't an exact science), and to be picky...

Why is this down-voted? Higher inflation has historically been considered a populist idea. The idea being that the poor had fixed-interest rate debt, and if you have fixed-interest debt, inflation is very good for you (and deflation is brutal)

I mean, there are counter arguments, but the idea that inflation favors the poor has been the standard, conventional wisdom for as long as I am aware, and this discussion has been going on for a long time. Read up on bimetallism (the most interesting part, I think, is the 'free silver' movement, which was the 'helicopter[1]' Bernanke of it's day.)

[1]Now, we haven't had significant inflation on Bernanke's watch, and really, he is pretty mild. I just... well, had to make a joke about free silver, and the hard money folks are awful riled at Bernanke. When Bernanke was appointed, it was thought that he would be much more aggressive than he has been. His PhD thesis focused on how to deal with the zero lower bound (which is to say, how to increase the money supply when interest rates are already at zero.) This caused some people to fear that he would cause massive inflation. He has also talked about ways to expand the money supply as the fed chairman, in which he references Friedman's "helicopter drop"

his thesis: http://dspace.mit.edu/bitstream/handle/1721.1/29839/05915220...

speech in which he makes the 'helicopter' comment: http://www.federalreserve.gov/boardDocs/speeches/2002/200211...

It's the standard, conventional wisdom, but it also misses some subtlety that Warren Buffett's tried to bring up a few time in Berkshire Hathaway annual reports:

Inflation isn't distributed equally. When the money supply rises, firms in strong bargaining positions with few substitutes are in the best place to raise prices, because their customers can't readily switch to competitors. So basically, Google will come out of it like a bandit, because they're the only game in town for search advertising, and their auction pricing means they don't have to take any active effort to raise prices. Walmart will come out of it pretty well, since in many communities they're the only game in town. Software engineers, skilled managers, and other workers with in-demand skills will do okay. The folks competing for all the unskilled labor positions? They're going to get screwed.

So it's only partially true that the poor benefit from inflation. They'll benefit from cheaper debt payments and possibly higher employment. But they're unlikely to see much of the added money supply in wages, and they're going to take it in the chin on prices.

>So it's only partially true that the poor benefit from inflation. They'll benefit from cheaper debt payments and possibly higher employment. But they're unlikely to see much of the added money supply in wages, and they're going to take it in the chin on prices.

The theory is that inflation will decrease wages for anyone making above market wages. That's one of the mechanisms by which economists theorize that inflation stimulates the economy. Downward nominal wage rigidity, and all that.

If you are arguing that minimum wage workers are making above market wages (and that argument is supported by the evidence of the high unemployment rate) well, That's certainly a valid point. But those making $10/hr at mcdonalds? (the California minimum is $8.00 and McDonalds will pay you a little more than that after you've been there for a while.) - are those folks making market-clearing wages? I'd argue that they are.

However, the other side of this is that inflation is generally thought to increase the demand for labor in general. I mean, my personal take on it is that we have vastly more unskilled labor than we have demand for. We need more demand. More demand for labor would mean that companies wouldn't be so picky. That's the thing, companies whine about not having skilled labor, but when the economy gets hot? Companies train. I think I've written before how I got a programming/sysadmin gig when I was 17... in 1997, and how that would have been nearly impossible four years later. Meanwhile, I turned those four years into enough experience to remain employed through the crash. I became a dramatically more valuable employee during those four years, and I don't think that this increase in value is because I'm some extra special super-virtuous worker. I think most people in that situation would have become dramatically more valuable.

So yeah; I think we need to create demand. The private sector could do this by coming up with new industries (like the service sector in the '80s.) or the government could do this directly through WPA style projects. Inflation, I think, can be seen as part of an attempt by the government to stimulate the private sector into doing it. But either way, I think demand is key. Demand is the problem.

Long-term unemployment has brutal long-term consequences that are much worse than simply not earning as much for a while, because not only are you not earning while unemployed, you aren't gaining experience. You aren't becoming more valuable for your future jobs. It's bad on an individual level, but it's also bad on a macro level; there is a real reason why experienced folks get paid more. They are more productive.

> So it's only partially true that the poor benefit from inflation. They'll benefit from cheaper debt payments and possibly higher employment. But they're unlikely to see much of the added money supply in wages, and they're going to take it in the chin on prices.

Maybe in the short run, but over the long-run historical numbers don't support this assertion. Even at the lower income levels wages have historically tracked inflation, or even slightly outpaced it...

Economics is an inexact science (since markets are such fluid, dynamic things - and I don't mean stock markets), and it never assumes that individuals and firms will always make the correct decisions to take advantage of economic policy. However it is able to measure the overall benefits and downsides that economic policy has on a population at large, over the long run...

How does a government pay the interest on the money the fed prints for it though? The government can't print its own money so technically there is no way out of debt, except perhaps its creditors letting it off the hook in full.

The US$ is like all the other fiat currencies in history, doomed to fail in the long run.

Salaries don't rise along with inflation, it's one of the reasons why inflation is being propounded by the Fed. If the inflation rate is 3%, you give all your employees a 2% raise at the end of the year. You've given them a 2% raise but have effectively cut their salary. Of course unions were wise to this in the 1970s, one of the reasons there was such massive inflation then, because wages were keeping up with inflation to some extent. But this is not the 1970s, private company unionization rates are only 6.6%, so wages can be cut in this way in a manner unorganized workers will feel more psychologicially at ease with, since technically they're getting a raise when their salary is cut.

If salaries don't rise with inflation, then two things will happen:

1. Workers will have less disposable income to spend, so economic growth will slow down.

2. Workers will be more likely to leave their jobs if offered a salary that's just a few percent higher. The companies that are having problems finding and retaining workers now will have even more problems if the total worth of the compensation package they're offering (in real dollars) goes down.

You don't need to be a unionized worker to notice that your salary can buy less and less stuff every year.

> Workers will have less disposable income to spend, so economic growth will slow down. Yes, Karl Marx noted this a century and a half ago.

> Workers will be more likely to leave their jobs if offered a salary that's just a few percent higher

The current unemployment rate is 7.2%. From 1987 to 2007, there was a 14 month period circa 1992 where unemployment was 7.2% or higher, otherwise, it was always lower. Unemployment is at historic highs, not really a time when companies have to raise their salaries to attract workers. Also, industrial capacity is at historic lows ( http://monthlyreview.org/2008/12/01/financial-implosion-and-... ). Just think of the anecdotal discussion on HN and elsewhere about the VC crunch. Capital is sitting on the sidelines - just look at the industrial utility chart. Companies aren't using the capacity they have, never mind new investment.

Any comment in this thread that doesn't contain the words "liquidity trap" can safely be ignored.

I know that a lot of HNers don't believe that economics is a real science and would rather go with gut feelings or whatever Ron Paul says, but please take a few minutes to read the seminal paper on liquidity traps: http://www.brookings.edu/~/media/projects/bpea/1998%202/1998...

You may not agree with it, but at least you can understand what the other side of the argument is.

EDIT: Wow, this thread really brought out the goldbugs, bitcoin-ers, and the "FIAT MONEY!" crowds. Just need some mentions of Zimbabwe and wheelbarrows-full-of-Weimar-Republic-marks and I'll win this round of Economics Crackpot Bingo.

I respectfully disagree. The purpose of inflation in this context is to "kill the debt", because the US cannot pay out $17T or even maintain interest payments, with "non-inflated" dollars. That is why all of this is just hand-waving and subversive, mis-directing PR.

The reason Japan is such a bad example is precisely inflation. But its death-nell was asset inflation, not cpi. Housing stocks and Bank loans were massively overinflated and never allowed to correct. The notion that this "inflation" should have been corrected with "other inflation" is one of those laughable bits of rediculousness.

Likewise, the US in a funk caused by Asset inflation. Fighting it with price inflation will be interesting. Take a look at the London property market. Do you think raising the price of consumer goods will help? Wont people just be encouraged to park their cash in property (ie, real goods?). Right now, they are trying to "make housing more affordable" by interest rate subsidies (inflationary). Doesn't seem to be making anything more affordable, though.

I live in Japan and the Japanese government, under its Abenomics movement, decided on another round of QE and injected 20% more currency into the market earlier this year.

I get that the yen is too strong and needs to weaken in order to protect the trade balance between itself and other countries.

But the inflation eventually reached us consumers and every day items have gotten that much more expensive.

Now my 10,000 yen only gets me ~8333 yen worth of stuff. If I could go back in time and not contribute the lost 1/6th of my savings in labor I might not be angry, but I can't.

My salary isn't going up either and there is even talk of pay reduction due to a worsening economy.

So to protect myself my choices seem to be:

1. Buy things up before the inflation reaches me as a consumer, passing the purchasing power theft on to the merchants. (possible, but I blow all my money away)

2. Convert that currency to something else that hedges against inflation (and retains its value over time) if I want to not spend it.

I chose #2 in the form of gold.

If you want to call me a goldbug, go ahead.

I'm getting into REITs soon too so maybe you can come up with clever derogatory name for that as well.

I'll try to help you win your bingo round.

The inflation rate in Japan since last year (the "Abenomics" effect) has only moved from -1% to 1%, not exactly a huge effect. http://www.tradingeconomics.com/japan/inflation-cpi

Yet even this small amount of increased inflation (or technically, the expectations of future inflation) is the primary driver behind the recovering economy. The additional currency in the market is irrelevent and is the whole point of this exercise: it does very little or nothing in a liquidity trap.

For what it's worth, I also live in Japan and I haven't seen anything like you have experienced regarding your purchasing power. My rent costs the same, my train and bus tickets are the same, can't tell any difference at the grocery, etc.

Sometimes inflation is good. Sometimes deflation. Sometimes even stagnation. Its all circumstantial.

The starter motor in your car is very good for getting the engine running but pretty terrible if you try to drive around with it engaged all the time.

We seem tragically bad at predicting what we need when and then doing it.

I guess nobody remembers the Jimmy Carter era? "Stag-flation" (Inflation and no growth), 16% interest rates on mortgages, the "misery index" in the news every day?

only the people who wrote the article.

Or Japan.

What you are describing is exactly why Keynesian economics fell out of favor in the first place. For a time it was thought that the business cycle was a solved problem and only a historical memory. Oops.

Study the career as Fed chairman of Arthur F. Burns, chairman from 1970 to 1978, appointed by Richard Nixon, before you blame stagflation on Carter.

Scott Sumner over at http://www.themoneyillusion.com/ has played a big part in changing peoples's views on this.

He is definitely worth reading regularly if you are interested in or want to learn more about monetary policy.

I think some people would say that Paul Krugman might have helped out a bit, too.

http://krugman.blogs.nytimes.com/2013/10/27/the-economics-of...

A good overview of his viewpoint can be found here:

http://en.wikipedia.org/wiki/Market_monetarism

Actually, noticing that inflation and the quantity of dollars in the system have a non-linear interaction is the core of his point if I understand him correctly. He preaches de-emphasizing inflation in favor of NGDP, but this is not the same as saying that inflation should be higher. Rather, he says that NGDP and inflation are more orthogonal than previously thought.

>Rising prices help companies increase profits

I don't get this. It's people spending more because they have more money through inflation that increases profits. Not prices themselves getting higher, that's just the affect. In any case what does it matter since you have more money, but money is worth that much less. The total wealth is the same.

>rising wages help borrowers repay debts.

Right but it's a zero-sum game. The borrower benefits but the lender loses. Also only works once. If lenders know there is a chance of inflation they will proportionally raise their interest rate they are willing to lend at to make up for the risk.

Inflation is just a tax on the entire economy as everyone that owns money loses some of the value of their money. In the case of printing money, all that value goes to whatever group receives the printed money.

If the value of the dollar buys less stuff, that is only good for the economy if the economy benefits from this.

While that may be a "well-duh" statement it is counter intuitive in cases where it also means that it means that "Stuff" becomes more expensive than "Labor".

Often inflation means more people do things because it becomes cheaper to do things that are labor intense than it is to do things that are material intense.

Inflation can be driven by an increase in the cost of labor too however. If we raise the minimum wage then "Labor" will cost more and "stuff" may also cost more an inflation will not be a good thing.

But because so many people can't afford this affordable health care there is a push to up the minimum wage. Doing so will raise the cost of labor at the bottom of the wage pool, which will mean someone who was making 25% more than minimum wage will be barely making minimum wage, and likely won't get a wage increase for several years, so for those people they will live closer to the poverty line.

For things which are more "stuff" than "labor" the price will go up because people earn more and they will raise to match inflation which will mean more profit margin, as a result the companies that do more "stuff" with less "labor" will get richer.

Inflation by its definition means $1 buys less than it did previously. This is almost never a good thing over anything but the shortest of terms.

Stagnation is good. Deflation is better.

Well, deflation sounds like it would be good for anyone with a positive net worth, but the empirics are awful.

a small amount of inflation (2-3%) is generally seen as good and the target of reserve banks around the world... you think they have this target because inflation is BAD?

inflation encourages investment (better invest to beat inflation)

deflation is bad unless you already have a lot of money. it discourages investment (why invest? i can just sit here and the value of my money goes up)

you can call inflation bad, but it is still better than the alternatives.

not just any kind of money -- cash. It's good if you have a lot of liquid assets laying around, neutral or bad for every other type of asset.

How is this a response to me? I just pointed out that deflation generally goes along with terrible circumstances.

> deflation is bad unless you already have a lot of money.

Deflation is bad even when you do already have a lot of money, for the reasons you describe. This is a good place for the argument "a rising tide lifts all boats".

Deflation is actually bad for people with positive net worth, it helps most the people who live pay check to paycheck because their money goes farther.

People with lots of networth are usually hurt by deflation which is the reason it is seen as bad. Deflation means houses and capital assets are worth less than they were before, so people with a positive net worth are "hurt".

Now if you are totally liquid, then deflation only helps if you want to spend that money.

If you entirely bound in something that is not liquid and you need to liquidate it, then you get less dollars, but those dollars go farther.

Basically Deflation narrows the gap between the rich and the poor, Inflation increases it.

> Deflation means houses and capital assets are worth less than they were before, so people with a positive net worth are "hurt".

That's wrong, houses can be bought with less money because the purchasing power of money increased, not because houses are losing value. In a deflationary economy, the owner of a house could be richer if instead he holds money. By holding the house instead of money he has the same wealth (assuming the value of the house didn't change for other reasons).

You countered your own argument.

If your house stays at $100k but there is 5% deflation. You made 5%. If your house is worth $100k but falls to $95k because of deflation, your networth has dropped, and your buying power has stayed the same.

In the first scenario you can do a happy dance, in the second scenario, if the house is 100% paid off you aren't out anything. If you have paid off 75% of the house you are behind, because the unpaid off portion of the home dropped in value, but the debt stayed the same.

This is why they try to keep inflation at 2-3% it means that debt decreased at that rate because your buying power for that financed amount has decreased effectively lowering the amount of debt.

Imagine you buy a house and pay only the interest. If inflation is at 7% and the interest is 3% you are ahead each year. I your interested is 3% and there is 3% deflation you are behind each year.

Other way round; if you have negative net worth, and wage deflation (i.e. your salary is reducing), then your debts stay at the same nominal value but get harder and harder to pay.

If you have a $100k job and $100k house with $100k mortgage, then 10% deflation means you have a $90k job and $90k house but $100k mortgage, which is now underwater and harder to pay off.

I've always wondered about the relation of inflation and innovation. As long as a society is sufficiently innovative inflation is not a big deal because innovation tends to outpace it. This is especially interesting if you measure inflation in relation to some basket of goods that contain a good chunk of "hightech" items. But it's also relevant for more traditional items like bread due to improvements in agriculture tech etc. The interesting question is of course if a policy that tends to favour inflation also tends to favour innovation. It should because (artificially) low interest rates should c.p. lead to more long term R&D type projects being funded. (all imo, I'm not an economist)

I am aware that the Austrian School gets a pretty bad rep these days but as a curious citizen of the world I have read a couple of Austrian books (Human Action, Competition and Entrepreneurship) and even if you disagree on the content I find them very pleasant...aesthetically if that makes any sense.

The big-picture argument this piece is making is that counterfeiting money is good for society. In this case, a central authority (the Fed) is doing the counterfeiting, but nothing in the article explains why the beneficial effects would not also accrue when individuals do the counterfeiting.

Debt is not prosperity.

QE Infinity policies will devastate the US economy and cost us our reserve currency status.

Too bad my pay check is sticky. [0]

[0] http://en.wikipedia.org/wiki/Sticky_%28economics%29

I'm happy to see this article written, and it will hopefully start to change the attitude of evaluating central bank actions through the lens of 'high inflation bad, low inflation good'.

This whole debate is an unfortunate example of what's called "Partial Equilibrium Reasoning" (as opposed to "General Equilibrium Reasoning"). All things being equal, higher inflation is bad. That's clear. But all things aren't equal, and so appeals to logic about how inflation is a hidden tax on 'the people' and so forth are essentially worthless when applied to real-world situations.

Here's why. One weird thing about inflation is that inflation expectations become a self-fulfilling prophecy, because when people predict inflation, they demand escalating prices on things like 10-year leases and labor contracts, and when they don't predict inflation, they don't.

The situation today, in 2013 America, and not fake-year hypothetical-country in your economics textbooks, is that inflation expectations are extremely low. They are low because inflation is essentially a by-product of economic expansion, and most people predict that economic expansion will be weak for the foreseeable future.

As it turns out, the reverse of this is true. If people expected the economy to start growing strongly, their inflation expectations would likely rise, which would probably be enough all-on-its-own to cause inflation to rise. Weird, right?

So it turns out that if the economy were to strengthen, one thing you'd notice in the data would be slightly higher inflation. And you'd go, "Well that's no good, but at least the economy is improving!" And you would be looking at a General Equilibrium in which most people are better off even though inflation is slightly higher, because many other things (Nominal Growth, Real Growth, Unemployment, Long-Term Interest Rates for savers) would be moving in the _good_ direction.

This dynamic is why the Fed needs to break the attitude that its job is to keep inflation as low as possible. The worst thing that could happen in the above scenario is for people to think 'Uh oh, inflation is going up, that means the Fed will probably raise interest rates', which would have the (expected) effect of reducing economic growth. But we need growth! And we need to accept that a few percentage points of inflation will be a by-product of that in a healthy economy.

So to summarize, the issue here is not that inflation is good. It's that there is more to this picture than inflation, and that if you have a dogmatic belief that inflation is evil in all situations and should be avoided, you've probably read too much Hayek and it has melted your brain.

[sorry, had to drop a snipe]

>This dynamic is why the Fed needs to break the attitude that its job is to keep inflation as low as possible.

I'm not sure where you've been the last 5 years, but the current Fed has not in any way had a policy of trying to keep inflation low. Not in the slightest. Bernanke is extraordinarily paranoid about deflation and as such has had 0 interest rates since the crisis started. In addition to that, they are printing 100's of billions of dollars and piping it to the markets. The balance sheet of the Fed is in the trillions now. This is the exact opposite of trying to keep inflation low.

Now, I'm not going to argue for or against this policy here, I'm just pointing out that they haven't been trying to keep inflation low. That being said, there is ample evidence that "high" inflation sucks. There is also ample evidence that deflation sucks.

How can you argue that doctors care about avoiding high blood pressure? I don't know where you've been, but I've been watching those doctors here trying to help a bleeding patient, and not once have they done anything to prevent high blood pressure. They've even given him transfusions to increase his blood pressure. That's the exact opposite of trying to keep blood pressure low.

That assumes that the fed beleives that a big balance sheet of the Fed leads to inflation.

However, they (so far) rightfully do not believe that, and there are next to no inflation to see.

http://libertystreeteconomics.newyorkfed.org/2011/06/will-qu...

"Economists aren't arguing that we should inflate our way out of debt--they are arguing that we should return to the historical norm"

The historical norm IS inflating your way out of debt. You just contradicted yourself. Seriously, do you think debt gets REPAID?

Great news for bitcoin owners.

Mild inflation promotes growth by encouraging money to be put to use rather than sit idly in savings. Banks make more aggressive loans to keep yields high.

Inflation can take a long time to trickle out from the major banks and lending institutions and down to businesses and finally down to average consumers.

What no economist can tell you though is how those irrational consumers will truly behave.

If you throw more money at me, I'm not going to spend more money, I'm probably hold on to it and invest it in other assets.

I guess I'm breaking the system.

It seems that FED is clueless why inflation is low even after QE3.

The real question is how FED is going to stop inflation increase after they reach the goal of 2-3%.

https://www.youtube.com/watch?v=30DGoRz1rLo#t=41

No shit sherlock. US has been in liquidity trap half a decade. There is need for inflation or it turns into decade.

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