An incisive blogpost about a contested issue in economics. Part of what makes Arnold Kling a most reliable public intellectual is his sure grasp of 'knowledge problems' in society.
Compare Bryan Caplan's recent blogpost about inflation:
"What’s so bad about inflation, anyway? Economists have struggled to come up with a good answer. The best story, in my view, is that inflation causes recessions via politics: Voters hate inflation so much that politicians willingly endure severe recessions to get it under control. So while there’s a long-run trade-off between inflation and unemployment at low inflation rates, high inflation is a leading cause of high unemployment."
I find persuasive Arnold Kling's answer to the question, What's so bad about inflation?:
"Our economic environment is now filled with noise, making it harder to extract signals. The harms that this causes will never be calculated. The process of calculation itself is what has been damaged."
Arnold Kling harnesses the economics of information. Bryan Caplan appeals to behavioral political economy: rational, self-interested politicians adapt to irrational beliefs of voters about inflation.
To accommodate “a wealthy Russian, a wealthy Chinese, or a wealthy Iranian, [who] want[s] to have dollars in American banks, ‘just in case’,” are there not banks in other countries that offer dollar accounts? The American government tries to impose its sanctions on foreign countries, too, but there must be some with a history of resisting—perhaps Luxemburg, the Cayman Islands, or Singapore would be small enough to fly under the U.S. radar.
Was the dollar stable from 1960-1980? What was stable? The assumption that currency must be a stable media isn't supported historically, how stable your media is, whatever it is, is going to be tied to the stability of economic outcomes.
I've been watching the spread between 10 yr TIPS and the 10 yr T and it has widened as of today to about 2.7% from about 1.2% back in June of '20. To me this says that the market still expects inflation to be transitory. https://fred.stlouisfed.org/graph/?g=N4fR Thoughts?
“Second, the promiscuous use of debt financing by the American government has finally unleashed inflation that is rapid and unpredictable.”
You are wrong, however. By the time Paul Volcker left the Fed (1987), the federal government’s deficit was still large (see https://www.thebalance.com/us-deficit-by-year-3306306) but had changed its financing: from the inflation tax to debt financing. Since 1987, there has been two periods (2009-12 and 2020-21) in which the deficit was much larger and financed by borrowing, not by the inflation tax. Indeed, no government can continue financing its deficits by borrowing forever. Sooner or later, the cost of borrowing will increase high enough to make a fiscal adjustment necessary (relax, I’m not going to tell you about Argentina in the past 75 years or in the past seven days, or in the past few hours). So far, the huge deficit (a flow) and the service of the huge debt (a stock) have not unleashed inflation but we cannot ignore the high probability that the spending promises of your senile President and his barbarians will lead soon to a much higher cost of borrowing and therefore to your senile President starting to play Argentina’s games to finance the huge deficit.
Like or not, the accumulated increases in price indexes during the past 12 months —in your country and in Chile and other countries— have been the result of large changes in relative prices, in particular the higher prices of energy. You still prefer to ignore how relative prices lead to changes in nominal prices (some increase a lot, but only a few decrease enough to offset the increases).
Hopefully the Fed's FAIT will be the stabilizer - if they stick to it. They have a clearer mission, more effective tools, and fewer constraints than Congress. They even chose FAIT as their own regime. I'm still (maybe naively) hopeful.
> This raises the cognitive load for you in trying to evaluate how much to save and in what assets, when to buy a house, or whether you need to look for a better-paying job.
Also, the inflationary process becomes self-fulfilling through a winner's curse dynamic. The people who look at the "save" or "spend" question and choose "spend" are the people who expect inflation to be the highest. They think their money will go further now, so they're willing to spend more now. But... that bids prices up and reinforces the inflationary trend.
An incisive blogpost about a contested issue in economics. Part of what makes Arnold Kling a most reliable public intellectual is his sure grasp of 'knowledge problems' in society.
Compare Bryan Caplan's recent blogpost about inflation:
"What’s so bad about inflation, anyway? Economists have struggled to come up with a good answer. The best story, in my view, is that inflation causes recessions via politics: Voters hate inflation so much that politicians willingly endure severe recessions to get it under control. So while there’s a long-run trade-off between inflation and unemployment at low inflation rates, high inflation is a leading cause of high unemployment."
Link: https://betonit.blog/2022/03/15/inflationary-austerity/
I find persuasive Arnold Kling's answer to the question, What's so bad about inflation?:
"Our economic environment is now filled with noise, making it harder to extract signals. The harms that this causes will never be calculated. The process of calculation itself is what has been damaged."
Arnold Kling harnesses the economics of information. Bryan Caplan appeals to behavioral political economy: rational, self-interested politicians adapt to irrational beliefs of voters about inflation.
To accommodate “a wealthy Russian, a wealthy Chinese, or a wealthy Iranian, [who] want[s] to have dollars in American banks, ‘just in case’,” are there not banks in other countries that offer dollar accounts? The American government tries to impose its sanctions on foreign countries, too, but there must be some with a history of resisting—perhaps Luxemburg, the Cayman Islands, or Singapore would be small enough to fly under the U.S. radar.
Was the dollar stable from 1960-1980? What was stable? The assumption that currency must be a stable media isn't supported historically, how stable your media is, whatever it is, is going to be tied to the stability of economic outcomes.
I've been watching the spread between 10 yr TIPS and the 10 yr T and it has widened as of today to about 2.7% from about 1.2% back in June of '20. To me this says that the market still expects inflation to be transitory. https://fred.stlouisfed.org/graph/?g=N4fR Thoughts?
You assert:
“Second, the promiscuous use of debt financing by the American government has finally unleashed inflation that is rapid and unpredictable.”
You are wrong, however. By the time Paul Volcker left the Fed (1987), the federal government’s deficit was still large (see https://www.thebalance.com/us-deficit-by-year-3306306) but had changed its financing: from the inflation tax to debt financing. Since 1987, there has been two periods (2009-12 and 2020-21) in which the deficit was much larger and financed by borrowing, not by the inflation tax. Indeed, no government can continue financing its deficits by borrowing forever. Sooner or later, the cost of borrowing will increase high enough to make a fiscal adjustment necessary (relax, I’m not going to tell you about Argentina in the past 75 years or in the past seven days, or in the past few hours). So far, the huge deficit (a flow) and the service of the huge debt (a stock) have not unleashed inflation but we cannot ignore the high probability that the spending promises of your senile President and his barbarians will lead soon to a much higher cost of borrowing and therefore to your senile President starting to play Argentina’s games to finance the huge deficit.
Like or not, the accumulated increases in price indexes during the past 12 months —in your country and in Chile and other countries— have been the result of large changes in relative prices, in particular the higher prices of energy. You still prefer to ignore how relative prices lead to changes in nominal prices (some increase a lot, but only a few decrease enough to offset the increases).
Hopefully the Fed's FAIT will be the stabilizer - if they stick to it. They have a clearer mission, more effective tools, and fewer constraints than Congress. They even chose FAIT as their own regime. I'm still (maybe naively) hopeful.
> This raises the cognitive load for you in trying to evaluate how much to save and in what assets, when to buy a house, or whether you need to look for a better-paying job.
Also, the inflationary process becomes self-fulfilling through a winner's curse dynamic. The people who look at the "save" or "spend" question and choose "spend" are the people who expect inflation to be the highest. They think their money will go further now, so they're willing to spend more now. But... that bids prices up and reinforces the inflationary trend.