Why we may Not Have Inflation-A Theory

Your reasoning is correct, as far as it goes. But I think the same thing happens in real estate.

Sometimes a particular neighborhood is stable. No one moving in or out. When prices are changing rapidly elsewhere, up or down, this neighborhood will be seen as holding a steady value, because all prices are based on comparable sales, and this neighborhood doesn't have any.

Even if they have one or two sales, these sales may happen somewhere between the old price and what the new price would be if there had been more sales taking place - in other words, the price change is in slow motion in this neighborhood.

So, back to your theory: people may be socking the money away now. It sits in the bank and no one borrows it. This will only last so long before people get used to the bad news, and start spending again. As soon as they start to spend this cheap, free money (and why not; it isn't earning any interest), the prices will start to reflect that the value of the dollar has dropped. And then the race will be on to spend it before it can't buy anything at all.

IMissLiberty
Voting for the Lesser Evil? http://www.inductionworks.com/iw/form/qamap.php/ElectLesserEvil

Note: This is not in HTML - I'll edit it later or you can read it on my website, http://www.axiomaticeconomics.com/inevitable_collapse.php

In my [url=http://www.axiomaticeconomics.com/montagne.php][i]Critique of Mathematically Perfected Economy[/i][/url], I write:

[i]“The basic flaw in the logic of modern socialists (Montagne, Cook, Zarlenga, etc.) is confusion between motivation and capability. ‘[/i]He’s privately controlled![i]’ the socialist sneers at the Federal Reserve chairman, the unspoken assumption being that, were the socialist put in charge, he would immediately open the floodgates of wealth and prosperity for us all. It would be a veritable socialistic paradise, if only the Benevolent One were given the authority to print money! But, the fact is, the Fed is in a box. If a socialist were put in charge, he would be in the same box.”[/i]

In my [url=http://www.axiomaticeconomics.com/critiques.php][i]Critique of Austrian Economics[/i][/url], I write:

[i]“Rothbard discusses an inevitable ‘distortion-reversion process’ but says little about how it actually plays out. Apparently forgetting his master’s regression theorem, he declares ‘the continuance of confidence in the banks is something of a psychological marvel’ (1970, p. 867).

“Garrison (2001, p. 44) redefines the Production Possibilities Frontier, PPF, to be [/i]sustainable[i] combinations of investment and consumption, but says nothing about what is so unsustainable about a credit expansion. Since he defines consumption on the PPF (which is real) to be the same as consumption on the Hayekian triangle (which is nominal), the unsustainability [/i]cannot[i] have anything to do with a devaluation of the currency.

“So we see that Mises, writing in 1949, was really the last Austrian to make much of an effort to explain or predict interest rate spikes. After that, their discussion of this issue, including Mises’ later writings, increasingly took on the tone of a morality play, with the greedy bankers getting their ‘inevitable’ comeuppance.”[/i]

Clearly, the socialists and the Austrians are at opposite ends of the spectrum of views on inevitability. Socialists believe that the Federal Reserve can turn on a dime, veering away from economic collapse towards a socialistic paradise simply by giving the right person the chairmanship. And how would the Benevolent One accomplish this feat? According to the Debt Virus Theory, it is as simple as printing money and spending it directly into the economy, rather than buying Treasury Bills. On the other hand, the Austrians believe that a “distortion-reversion process” is inevitable. Credit expansion is unsustainable and this, apparently, is true no matter how benevolent the chairman of the Fed may be.

Is hyperinflation the inevitable result of inflation? In America we have only had one bout with hyperinflation and, over 200 years later, the phrase “not worth a Continental” is still part of our language. “In conclusion,” I write in my [url=http://www.axiomaticeconomics.com/montagne.php][i]Critique of Mathematically Perfected Economy[/i][/url], “to Montagne, Cook, Zarlenga and anyone else who claims that they can open the floodgates of prosperity by spending paper money directly into the economy, I say: [i]‘The Debt Virus Theory is not worth a Continental!’[/i]” Debt Virus Theorists’ followers are mostly laymen (for obvious reasons) and, when I wrote this, I fully expected any American with a passing interest in economics to be familiar with the expression, “not worth a Continental.”

Indeed, the collapse of the Continental [i]was[/i] inevitable because, having spent Continentals directly into the economy (mostly for soldiers’ wages), the Continental Congress had nothing in their portfolio with which they could buy them back. They were, in fact, benevolent men who had no desire to see their newly-won nation racked with hyperinflation, but they could no more recall the paper money that they had printed than Frankenstein could recall his monster.

But surely the Federal Reserve is smarter than the Continental Congress! Until as recently as last year (2007), I would have responded to this question with a begrudging “yes.” As much as I dislike the United States having a central bank (I advocate free banking), I will admit that, by buying only Treasury Bills, the Federal Reserve has given themselves a portfolio with which they can buy back dollars in the event that inflation should threaten to turn into hyperinflation. Unless the Federal Government itself collapses – by losing a war, for instance – there will always be a market for T-Bills. Selling T-Bills for cash and destroying the cash is a painful, recession-inducing process, as evidenced by our experience during Reagan’s first term, but it can be done. Contra Rothbard, hyperinflation is [i]not[/i] inevitable under a central bank.

So what has Ben Bernanke done to make me question his intelligence, if not his benevolence? He polluted the Fed’s portfolio with AAA-rated securities, which I have mocked as being “about as marketable as the chocolate-covered cotton balls that Milo Minderbinder was trying to foist on people in [i]Catch 22[/i].” Everybody knows that, in spite of their impressive-sounding AAA rating, these securities are really just packages of sub-prime loans that nobody wants – what I defined in my [url=http://www.axiomaticeconomics.com/devils_dictionary.php][i]Devil’s Dictionary of Economics[/i][/url], as “worthless crap.” If people [i]wanted[/i] them, in the sense of being willing to pay cash for them, then we wouldn’t be having a credit crisis in the first place.

Bernanke’s actions have made the question of hyperinflation a murky one. The Austrian’s depiction of hyperinflation as being the inevitable fate of central banking has always been cartoonishly simplistic, and it remains so. However, economists of all schools must now admit that hyperinflation is at least a [i]possibility[/i]. If the dollar appears to be losing its status as the world’s reserve currency, what will the Fed do about it? Sell their AAA-rated securities for cash and destroy the cash? But what if nobody is impressed with the AAA rating and won’t buy their securities at any price? Then the Fed will be in the same position as the Continental Congress: Benevolent men who have no desire to see their beloved nation racked with hyperinflation, but who have no more ability to recall the paper money that they have printed than Frankenstein had to recall his monster.

Of course, not [i]all[/i] of the Fed’s portfolio is in AAA-rated securities and not [i]everything[/i] with an AAA rating is worthless crap. They still have lots of T-Bills and there is a market for at least [i]some[/i] of their AAA-rated securities. This is why the question of hyperinflation has become so murky. The bottom line is that nobody – not even Ben Bernanke – really knows what the Fed’s portfolio is worth these days. For this reason, I would be very leery of any economist, from any school, who speaks confidently about the future of the dollar. Is the collapse of the dollar inevitable, as the Austrians claim? Or are we at the dawn of a socialistic paradise, provided only that we install the Benevolent One in the Federal Reserve’s chair, as the Debt Virus Theorists claim? The answer is certainly somewhere between these extremes, but where [i]exactly[/i] I cannot tell you.

[b]REFERENCES[/b]

Garrison, Roger. 2001. [i]Time and Money: The Macroeconomics of Capital Structure[/i]. New York, NY: Routledge

Rothbard, Murray N. [1962] 1970. [i]Man, Economy and State[/i]. Los Angeles, CA: Nash Publishing

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Shaka, you so crazy! www.sniperflashcards.com

Murray Rothbard deals with that concrete example in "The Mystery of Banking". Its a free download. Google "mises institute".

I should point out that the US government is not so much "printing money" as it is "selling bonds". The big problem comes when the bond holders want to "cash out" rather than re-invest. Google "ponzi scheme".

"That Socialism would be immediately practicable if an omnipotent and omniscient Deity were personally to descend to take in hand the government of human affairs is incontestable." - Ludwig Von Mises.

Over at shadowstats.com a part of the inflation answer is there in the Alternate Data. The M3 supply crashed as the bubble burst and all that fraudulent wealth burst with the bubble. M3 is a measure of those kinds of leveraged assets. Which may be real but in this case they were not.

The M1 shows the FED injection of cash which replaced the phony leveraged assets with fiat money (printing press money) another phony asset. There is no reason for investors to applaud.

According to shadowstat's numbers our economy has been shrinking since 2000 (GNP) and inflation was at 13% but has fallen to 9%. No wonder investors lack confidence. If the exchange of one phony asset for another did work then inflation promises to be at least 9% or higher. (SGS CPI)

If the Federal Reserve were a real bank would they have invested in all those phony assets? If they did they would eventually fail. This would be a good thing since no more investors could be tricked into supporting a losing cause. [commercial break] End the FED.

As SteveMT pointed out, the game is rigged. More war, more welfare and more government all insures that things will only change for the worse.

If I got a stimulus check I would spend it on things that protect my wealth. I would pay off interest bearing loans or make my house and car more energy efficient. Simply because that stimulus check is just making the ditch were falling into a little deeper. Besides if I tried to save that money, dollar debasement would steal back 9% this year at the current “real” rate of inflation.

Keynesians have not considered the possibility that we have all the stuff we need, at least for now. They would try to make us buy stuff we don’t need. They believe in unsubstantiated concepts like velocity of money and paradox of thrift as matters of doctrine. We should not have to suffer for their bilious beliefs or their twisted statistics.

Sunsue, thanks for starting this thread with your pertinent question.

I agree with Ron's comments above.
The real strength of the U.S. economy lies not in monetary policy as much as in fiscal policy. All companies and especially government units (cities, states and the federal government) must learn to live within their means. This will re-instill a sense of confidence by the consumer. It will stabilize jobs and our economy. Practical, common sense solutions are needed, not politically motivated solutions that drain additional confidence and financial resources from our already shaken economy and the world economy.
Stop with the spending, create tax incentives for saving. It will take some time to settle the enormous debts we have incurred, but when we come out on the other end our economy - and the world's economy - will be stronger for it.