Don Quixote’s Thought for the Day: So, where’s the inflation?
Don Quixote on Jan 16 2010 at 8:56 am | Filed under: Uncategorized
When the stimulus package passed, two of the smartest people I know told me it would result in hyper-inflation. The price of oil has doubled and we see the effects at the pump, but, outside of that, there seems to be very little inflation at all. So, where is the hyper-inflation my smart friends (and many others) predicted? Is it on the way, or is there something else at work here? Any ideas?
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23 Responses to “Don Quixote’s Thought for the Day: So, where’s the inflation?”
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Be patient. It is coming.
You don’t have to have a PHD in economics (and I do not), to know that there are only two ways to pay for government deficit spending. Taxes are politically unpalatable. Devaluation of currency is more insidious–at first.
I heartily concur with Oldflyer.
People are walking away from their mortgages in droves, and municipalities, even entire states, CA and NY, e.g., are flat broke. A small city in the midwest — can’t remember which — recently had all of its police cars reposessed, and had to lay off much of the force. As more people lose their jobs, there will be more foreclosures, and municipal propetyt tax receipts, sales tax receipts, etc. will plummet. Stock market performance has been because companies maintained their bottom lines by laying off workers, but their revenues are flat, sliding, or soon will with rising unemployment. Please note that “unemployment” does not mean the number of unemployed; it means the number actively looking for work; not those who’ve given up. Unemployment benefits will soon run out, and that will further affect sales. The whole thing is imploding.
The govt is doing a very, very good imitation of people bent on destroying our economy. The solutions to this are well known, and well tested: Lower taxes, cut out wasteful govt. spending, and needless govt. regulations on business. It has ALWAYS worked. But this bunch wants to RAISE taxes, which is precisely what FDR and his congress did in the Depression, thus making it worse.
You do NOT stimulate an economy by taking money from one person who would otherwise spend it or save it, and giving it to another person who will spend it or save it. In case you were educated in an American public school, saved money ALSO gets spent when the bank it is saved in lends it out for people to buy cars and houses. These “stimulus” packages are simply bailing a bucket of water from one side of the dock and pouring it off the other side of the dock — and calling THAT adding water to the lake while spilling a good deal ON the dock to evaporate (govt waste). Idiots.
What, are you in a hurry?
Inflation’s generally an effect, not a cause – it lags a bit. It’ll be here. fear not.
I’ve been reading the economic blogs – trying to educate myself. I understand what Don Quixote is wondering about, but it isn’t that simple. There are so many factors… The other possibility is severe depression, with a depression of the value of the dollar. Or, the government could pull a North Korea, and issue a new form of paper money on a limited basis per person. I see the possibility – even probability – of the economy going back to a barter system…under the table cash, no taxes paid. The idea of investing in gold is appealing – although some say that silver is a better investment at the moment – on the basis that if we have massive inflation, the value of the precious metals will also increase. But if the dollar becomes almost worthless, it’s going to be a bit difficult to use precious metals for your everyday purchases (envisioning the gold rush days of weighing out gold for you purchase!). And then, you have the power of the government that could be used to seize property – real or otherwise. If there are bank failures and your money is lost – because apparently there isn’t enough in the FDIC to cover all deposits – what do you do? If you keep your money under the mattress, as it were, you’re vulnerable to thieves.
I’ve seen it suggested that hoarding foodstuff is the best defense – you have food, and others will pay for what you have – but timing is everything. Food goes bad. Even canned foods have a somewhat limited life. Dry goods like flour, sugar (well, maybe not sugar), pasta, beans and rice have a less limited life, in the sense that even if they don’t taste as good, they won’t hurt you. Still subject to theft, though.
Of course, a lot of the world is in the same straits…so maybe the dollar will be fine in a relative sense. Rising – and falling – waters lift – or lower – all boats, after all.
I definitely need a new crystal ball.
Remember, inflation is basically a function of the *product* of two factors: monetary quantity and monetary velocity (how fast money passes from hand to hand). Right now, economic activity is somewhat depressed, and banks are reluctant to make loans…both these factors act to depress velocity and hence keep inflation down. The Fed has stated its intent to begin withdrawing money as inflation becomes a threat, but this may be difficult for both technical and political reasons. Severe inflation is extremely destructive to a society. Sebastian Haffner, who wrote a very important book about Germany between the wars, described the process eloquently: By the end of 1922, prices had already risen to somewhere between 10 and 100X the pre-war peacetime level, and a dollar could purchase 500 marks. It was inconvenient to work with the large numbers, but life went on much as before.
But the mark now went on the rampage…the dollar shot to 20,000 marks, rested there for a short time, jumped to 40,000, paused again, and then, with small periodic fluctuations, coursed through the ten thousands and then the hundred thousands…Then suddenly, looking around we discovered that this phenomenon had devastated the fabric of our daily lives.
Anyone who had savings in a bank, bonds, or gilts, saw their value disappear overnight. Soon it did not matter whether it ws a penny put away for a rainy day or a vast fortune. everything was obliterated…the cost of living had begun to spiral out of control. ..A pound of potatoes which yesterday had cost fifty thousand marks now cost a hundred thousand. The salary of sixty-five thousand marks brought home the previous Friday was no longer sufficient to buy a packet of cigarettes on Tuesday.
Every minor official, every employee, every shift-worker became a shareholder. Day-to-day purchases were paid for by selling shares. On wage days there was a general stampede to the banks, and share prices shot up like rockets…Sometimes some shares collapsed and thousands of people hurtled towards the abyss. In every shop, every factory, every school, share tips were whispered in one’s ear.
The old and unworldy had the worst of it. Many were driven to begging, many to suicide. The young and quick-witted did well. Overnight they became free, rich, and independent. It was a situation in which mental inertia and reliance on past experience was punished by starvation and death, but rapid appraisal of new situations and speed of reaction was rewarded with sudden, vast riches. The twenty-one-year-old bank director appeared on the scene, and also the sixth-former who earned his living from the stock-market tips of his slighty older friends. He wore Oscar Wilde ties, organized champagne parties, and supported his embarrassed father.
Haffner believes that the great inflation–particularly by the way it destroyed the balance between generations and empowered the inexperienced young–helped pave the way for Naziism.
Btw, did DQ start putting his name in the title because he got tired of people confusing him with…. other identities?
+1 for David.
It’s worth remembering that the Crash of ’09 had the effect of both destroying a lot of wealth, and causing people to move their money to the safest and often least liquid forms. The effect is that the “money supply” crashed, which causes deflation, which is a Bad Thing because it then encourages people to withdraw more money from circulation, a vicious cycle.
Pouring money into money supply is like giving plasma to keep BP high in shock. We haven’t seen inflation because so far we haven’t added “too much”.
Somewhere recently I saw a chart of money supply, which has dropped precipitously after a big growth. Can’t find it right now, but if that trick continues, then we don’t have to have hyperinflation at all.
No, I just hadn’t posted for a while and wanted to make sure nobody confused my scribbles with Bookworm’s fine and thoughtful posts.
When I first heard the predictions of hyper-inflation, they went along with a timeline of about a year or a little more, which would be how long it would take for all the dominoes to fall. I hope it doesn’t come about, but there’s definitely still time.
David (#5): My Dad was a child during the hyperinflation period. He still remembers his dingbat mother getting dollars from her husband in America. Rather than hanging on to the money, she immediately converted the whole thing to marks — the result being that, by the end of a day or two, the money was worthless.
Inflation is about the “real” cost of goods versus the nominal cost of goods. It makes itself apparent when the price of goods skyrockets and when credit no longer becomes available. There are already signs of inflation in the following manner:
1) The “real” price of goods is already skyrocketing for people who’s earning powers have been slashed, either by lost jobs, furloughs or slashed salaries (which appears to be the norm rather than than the exception where I live). So, with income deflation, the nominal dollar price of a good may remain the same or slightly up, but the ability of an individual to buy that good will have substantially decreased.
2) Despite ups and downs, the “real” value of the dollar has been falling against worldwide currencies, which means that it is more valuable to keep your assets overseas where they increase in value against the dollar.
3) Selective prices of assets are already inflating, despite decreasing demand. DQ mentioned oil and precious metals, but the real wholesale prices of many products are increasing despite retailers desperately trying to offer discounts and deals to move them out of the door.
4) Although the Federal government has tried to combat “real” inflation by keeping credit rates artificially low, the banks must respond to the “real” cost of capital by restricting the availability of credit.
Book and the other posters here are right: eventually economic realities will reassert themselves and the government will run out of tricks and be unable to hide a resurgence in inflation.
Bill Smith, the city to which you referred is Cairo, Illinois.
Just ran across this…I have no idea of the validity of it:
http://www.daily.pk/fake-gold-bars-in-bank-of-england-and-fort-knox-14477/
If I assume that it’s true, what does it mean? We have “fiat” currency – meaning that there is basically nothing backing it. So if there is gold in Fort Knox or there is _not_ gold in Fort Knox, what difference does it make? If it makes no difference, why would anyone have used fake gold bars? The fact that someone would means to me that there is an underlying dishonesty of some sort – what is it? We’re talking inter-nation transfers here…if a nation is dealing in fake gold bars, things are likely to fall apart, I think. Something more to listen up for…
I read something somewhere (Patterico.com?) that I’d like to share. I *might* not be remembering this correctly, so I apologize in advance if I have it wrong. I’d love it if someone with better economic knowledge than mine could confirm, as to this reason why we’re not seeing the inflationary effect so quickly.
The two big infusions by Obama were TARP and the Porkulus Spendulus Bill. You would think that both of them resulted in massive cash infusion into the economy, which should lead to inflation relatively quickly. But they played games with the TARP part.
First of all the TARP money was a response to the *liquiditty crisis* that supposedly was going to bring down the world economy completely within 48 hours. Remember the screams of “emergency! emergency! emergency!” We all rolled over, the big banks and investment firms received this massive influx of cash… and then instead of freeing up liquidity and restoring the various indicators, they… SAT ON THE MONEY. What liquidity crisis? What emergency?
But I think it got weirder. They really didn’t just sit on the money. That would have kept it within the economy, as a massive infusion. Instead it went out the back door, into the Federal Reserve, who are *holding it in reserve* as a sort of IOU to the banks and investment firms. Yes, the banks and investment firms have it – in the sense that it is available – but it’s off the books. It doesn’t affect our monetary supply until the Federal Reserve actually releases it to the banks and firms. And from what I can tell, they’re content to let the Reserve keep it til they need it. Therefore, all that money in TARP is not really out there, but CAN be out there in an instant when called upon. Therefore, no inflationary pressure UNTIL it is called upon and released by the Federal Reserve.
That’s what I remember reading…
I’m getting aheadache….
More to ponder…
http://mises.org/story/1378
DQ The increase in inflation is in the same place as the admistration’s promised increase in employment.
That’s the $64k question.
It may be hyperbole to think we’re going to see hyperinflation soon as demonstrated in Zimbabwean or Weimar hyperinflation, even though it is generally accepted that we will be reduced to monetary inflation as a way of dealing with the huge government debt.
It seems we’re still deflating the economy, and increases in money supply are merely replacing toxic bank assets, not entering the economy. So at this point it appears the inflation is still relatively low– if you consider 6% inflation low.
Since oil prices shouldn’t reflect demand, I assume it reflects the falling dollar. Since China is still pegging its currency to the dollar, we haven’t seen inflation on consumer goods.
Even though we’ll never reach the levels of hyperinflation, a return to the inflation of the 70′s will wreak havoc on most Americans. Given the policies of the fed it seems that the staglation of the 70′s and 80′s may be the economic model we have to look forward to. High inflation and high interest rates.
Assuming that hyperinflation is only something theoretical on the horizon, will we all be grateful when inflation is merely 10% a year?
Here’s a good synopsis of how we got to this point:
“But the crisis of the past two and a half years has exposed vulnerabilities across the entire global economy. During the fat years in the middle of the decade, clear warning signs of trouble ahead were ignored. Ultimately, the global imbalances did matter. Ultimately, the build-up of personal debt did matter. Ultimately, the willingness of banks and other financial institutions to take ever bigger risks in search of high returns did matter.
The economics profession thought otherwise. It built sophisticated mathematical models showing that markets could not be wrong. Despite the fact that Wall Street and the City of London seemed to be dominated by headstrong young men with far too much money and far too little sense, the chance of a catastrophic blow-out was viewed as alarmist nonsense. When the meltdown occurred, there was a sense of utter disbelief. Chuck Prince, the (former) boss of Citigroup, captured the mood when he said, a couple of weeks before the crash, that while the music was playing he would carry on dancing. If prices in the markets were not signalling problems, how could there possibly be any?
The fact was, however, that trouble had been festering for the past 15 years, and intensified during the noughties. After the collapse of communism, industrial production migrated to Asia, and China in particular. Britain and the United States saw a hollowing out of manufacturing and a concomitant growth in the relative importance of their financial sectors. Producers in Asia (and parts of Europe such as Germany) ran trade surpluses while the Anglo-Saxon economies ran trade deficits. Surplus countries bought assets in debtor countries; the money churning through New York and London kept the dollar and the pound strong, made imports cheaper and allowed policymakers to keep interest rates low. Consumers found their incomes went further and they could borrow cheaply. They spent like it was going out of fashion.
Yet there was a dirty little secret about this supposed perpetual moneymaking machine. It required debt – and lots of it – to work. The real story of the noughties is that of how borrowing was used to plaster over the deep structural problems of modern global capitalism. We have almost reached the end of that road, but not quite.
Dhaval Joshi, the economist at RAB Capital, describes it well when he says that this has been the decade of three borrowing booms. It began with corporations racking up debt during the irrational exuberance of the dotcom bubble. Alan Greenspan dealt with the recession that followed by leaving interest rates low enough for long enough that there was then a boom in borrowing by households, leading to a housing bubble.
When that bubble burst, governments had a choice. They could ever sit and watch a severe recession worsen as companies and individuals repaired their finances by paying off their debts, or they could borrow more themselves. They took the second option, allowing budget deficits to take the strain as growth collapsed and unemployment rose. That was true in the west, but it is also true in the east. China, which perhaps has more to fear from recession-generated political unrest, is the world’s top borrowing nation.”
http://www.guardian.co.uk/business/2009/dec/21/global-economy-decade-boom-bust
>>”China, which perhaps has more to fear from recession-generated political unrest, is the world’s top borrowing nation.””>>
What?? But China has been buying US debt. What are they buying with? If they’re borrowing, who are they borrowing _from_?
And I thought I was confused _before_!!!
China has been buying US debt with the huge imbalance of trade between the two countries.
China has announced they’re not going to do that for a couple of reasons– they already own more US debt than any other country and as the dollar falls or as interest rates rise, the value of their holdings falls. Another reason is as the recession hits consumers, the trade imbalance has fallen, and China has fewer US dollars entering the country.
He’s (Chinese premier Wen Jiabao) right to be concerned; as the article points out, China is the number-one overseas holder of Treasuries (Japan is now second). A trillion dollars is probably understating the extent of Chinese-held US debt. And China began selling off its Fannie Mae and Freddie Mac stock last summer.
The Money & Co blog
The Chinese aren’t alone in that regard. Still, there’s little danger of China selling off its US debt:
Link to last post.
http://blog.hsh.com/?p=2989
One of the perverse reasons we can get away with our spending is the dollars status as the world’s trading currency.
“Chinese Premier Wen Jiabao expressed concern as early as March over the safety of his country’s huge US bond holdings now worth more than 800 billion dollars, making it the largest creditor to the United States.
Then, Chinese central bank governor Zhou Xiaochuan, who supervises more than two trillion dollars worth of dollar reserves, the world’s largest, raised the stakes by calling for a new reserve currency in place of the dollar.
He wanted the new reserve unit to be based on the SDR, a “special drawing right” created by the International Monetary Fund, drawing immediate support from Russia, Brazil and several other nations.
“These countries realize that they would suffer losses if inflation eroded the value of the dollar securities they own,” said Richard Cooper, a professor of international economics at Harvard University.
But he said there were no feasible alternatives to the US dollar as a widely used international currency, discounting even IMF’s synthetic SDR currency, comprising a basket of the dollar, euro, yen and the pound.
“The dollar will remain the dominant world currency, thanks to the stability of our political system and the rule of law that isn’t a feature of many other economies,” said Irwin Stelzer, director of economic-policy studies at the Washington-based Hudson Institute.
Some groups, he said, were buying euros and other currencies from time to time, “but not in amounts that threaten the dollar’s primacy.”
Even the Chinese are stuck with nearly a trillion dollars worth of US bonds and are not likely to drive down the value of that hoard by selling large amounts of dollar-denominated assets, Stelzer said.”
http://patdollard.com/2009/09/dollar-under-fire-the-first-steps-towards-a-new-world-currency/
If we don’t stop the dollar’s fall, at some point this will change.
>>”China, which perhaps has more to fear from recession-generated political unrest, is the world’s top borrowing nation.””>>
I’m not sure what he means either. Huge amounts of money are flowing into China for investment (GDP growth has been around the 10% range for years).
That’s the only thing I can think of.
Here’s another view:
http://globaleconomicanalysis.blogspot.com/2010/01/worry-over-us-and-piigs.html
Interesting comment about China. In all honesty, I can’t say I understand economics. I took the basic course – Econ 101 – and I’ve taken Accounting. That’s about it. It’s apparent that economics is a massive body of information which combines factual material, psychological underpinnings and the effects of international and cultural interactions. I think of today’s economics as watching the stock market – but it’s apparent that that isn’t what it is. In fact, it has become very evident that the more I learn, the less I know.
Can anybody recommend a really good book on the subject? Something readable? (although that might be contradictory…)
“I personally believe that economics is fun and valuable. People who say they found it a nightmare in college just didn’t have a good teacher-professor. I became a good teacher-professor as a result of tenacious mentors during my graduate study at UCLA. Professor Armen Alchian, a very distinguished economist, used to give me a hard time in class. But one day, we were having a friendly chat during our department’s weekly faculty/graduate student coffee hour, and he said, “Williams, the true test of whether someone understands his subject is whether he can explain it to someone who doesn’t know a darn thing about it.” That’s a challenge I love: making economics fun and understandable.”
–Walter E. Williams
A good place to start might be the series of lectures at the very bottom here:
http://economics.gmu.edu/wew/
Professor Williams is my favorite fill-in for Rush, and he DOES make econ fun and understandable.