
In Fed and Out, Many Now Think Inflation Helps - applecore
http://www.nytimes.com/2013/10/27/business/economy/in-fed-and-out-many-now-think-inflation-helps.html?pagewanted=all
======
enoch_r
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...](http://www.clevelandfed.org/research/data/inflation_expectations/archive.cfm?dyear=2013&dmonth=9)

~~~
7Figures2Commas
Here's a question: how many "professional" economists sounded the alarm about
the last bubble?

~~~
jswinghammer
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.

~~~
jayfuerstenberg
[http://en.wikipedia.org/wiki/Peter_Schiff](http://en.wikipedia.org/wiki/Peter_Schiff)

He saw it in 2007

~~~
judk
That was immediately before the crash.

~~~
dangrossman
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.

------
jswinghammer
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.

~~~
snowwrestler
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.

~~~
jswinghammer
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.

~~~
nhaehnle
> In a free market prices generally fall.

[citation needed]

~~~
logicchains
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.

------
aortega
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.

~~~
jswinghammer
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.

~~~
nazgulnarsil
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.

~~~
dpatru
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.

~~~
nazgulnarsil
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?

~~~
gaius
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.

~~~
nazgulnarsil
No, the _value_ that Joe wishes to exchange for the home is higher.

------
Mikeb85
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://en.wikipedia.org/wiki/Household_income_in_the_United_States)
[http://www.advisorperspectives.com/dshort/updates/Household-...](http://www.advisorperspectives.com/dshort/updates/Household-
Income-Distribution.php)
[http://en.wikipedia.org/wiki/File:Median_US_household_income...](http://en.wikipedia.org/wiki/File:Median_US_household_income.png)

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...

------
pasbesoin
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.

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

------
Mikeb85
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.

~~~
jayfuerstenberg
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.

~~~
Mikeb85
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.

~~~
jayfuerstenberg
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.

~~~
Mikeb85
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.

~~~
jayfuerstenberg
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.]

~~~
Mikeb85
> [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...).

------
greenyoda
_" 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.

~~~
ams6110
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.

~~~
Mikeb85
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.

~~~
lsc
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...](http://dspace.mit.edu/bitstream/handle/1721.1/29839/05915220.pdf)

speech in which he makes the 'helicopter' comment:
[http://www.federalreserve.gov/boardDocs/speeches/2002/200211...](http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm)

~~~
nostrademons
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.

~~~
lsc
>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.

------
hudibras
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...](http://www.brookings.edu/~/media/projects/bpea/1998%202/1998b_bpea_krugman_dominquez_rogoff.pdf)

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.

~~~
jayfuerstenberg
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.

~~~
hudibras
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](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.

------
noonespecial
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.

------
ams6110
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?

~~~
jswinghammer
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.

------
nwj
Scott Sumner over at
[http://www.themoneyillusion.com/](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.

~~~
nazgulnarsil
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.

------
Houshalter
>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.

------
drakaal
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.

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

~~~
drakaal
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.

~~~
jafaku
> 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).

~~~
drakaal
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.

------
kriro
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.

------
dpatru
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.

------
johnnyg
Debt is not prosperity.

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

------
ndesaulniers
Too bad my pay check is sticky. [0]

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

------
acslater00
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]

~~~
clarky07
>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.

~~~
nhaehnle
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.

------
penguindev
"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?

------
emperorhadrian
Great news for bitcoin owners.

------
codex
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.

~~~
jayfuerstenberg
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.

------
dgregd
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%.

------
netpenthe
[https://www.youtube.com/watch?v=30DGoRz1rLo#t=41](https://www.youtube.com/watch?v=30DGoRz1rLo#t=41)

------
hannibal5
No shit sherlock. US has been in liquidity trap half a decade. There is need
for inflation or it turns into decade.

